================================================================================


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

                          Commission File No.: 0-32523

                        DOBI MEDICAL INTERNATIONAL, INC.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)


             DELAWARE                                     98-0222710
------------------------------               -----------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


          1200 MACARTHUR BLVD.
          MAHWAH, NEW JERSEY                               07430
----------------------------------------     -----------------------------------
(Address of principal executive offices)                (Zip Code)


                                 (201) 760-6464
                           ---------------------------
                           (Issuer's telephone number)


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

Securities registered under Section 12(g) of the Exchange Act:  COMMON STOCK,
PAR VALUE $.0001 PER SHARE

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. [ X ] Yes [ ] No

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 Issuer'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. [ ]

The issuer's revenues for its fiscal year ended December 31, 2004 were $321,266.

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the issuer was approximately $29,652,000, based on the closing
price of $0.67 per share on March 7, 2005, as quoted by the OTC Bulletin Board.

As of March 11, 2005 shares of the issuer's Common Stock were outstanding.
44,257,155.

Transitional Small Business Disclosure Format (check one):  Yes [  ]  No [X].

Documents Incorporated by Reference:  None.


================================================================================

<PAGE>


                        DOBI MEDICAL INTERNATIONAL, INC.

                         2004 FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                  PAGE
                                                                                                  ----
                                     PART I
                                     ------
<S>                                                                                                <C>
ITEM 1.    DESCRIPTION OF  BUSINESS                                                                1

ITEM 2.    DESCRIPTION  OF  PROPERTY                                                               3

ITEM 3.    LEGAL PROCEEDINGS                                                                       4

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

                                     PART II
                                     -------

ITEM 5.    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
           BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES                                          4

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                               11

ITEM 7.    FINANCIAL STATEMENTS                                                                    15

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE                                                                    15

ITEM 8A.   CONTROLS AND PROCEDURES                                                                 16

ITEM 8B.   OTHER INFORMATION                                                                       16


                                    PART III
                                    --------

ITEM 9.    DIRECTORS AND  EXECUTIVE OFFICERS, OF THE REGISTRANT                                    16

ITEM 10.   EXECUTIVE COMPENSATION                                                                  20

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
           AND RELATED STOCKHOLDER MATTERS                                                         22

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                          24

ITEM 13.   EXHIBITS, LIST  AND REPORTS ON FORM 8-K                                                 25

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                  27

</TABLE>

<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

OVERVIEW

         Our company, DOBI Medical International, Inc., together with our
wholly-owned subsidiary, DOBI Medical Systems, Inc., is an advanced medical
technology imaging company engaged in the business of developing and
commercializing a new, non-invasive, gentle and cost effective means for the
improved diagnosis of breast cancer and other diseases through the detection of
vascular changes (known as "angiogenesis") associated with malignant tumors.
From inception through December 31, 2004, we have incurred $8,859,510 in
research and development expenses.

         We are a development-stage company with no significant revenues to
date. Our goal is to establish our ComfortScan(TM) system as the new standard of
breast imaging diagnostic care in the United States and international medical
communities. We are in the process of seeking Premarket Approval (PMA) from the
FDA for our ComfortScan system as an adjunct to mammography. We have
successfully completed four of the five required steps in the PMA process, and
anticipate submitting any updates to the first four modules and submit the
pivotal PMA clinical trial research study of the fifth module. This fifth
module, a clinical test seeking 120 malignancies from approximately 900 to 1200
patients, is expected to be submitted to the FDA late 2005 with FDA review
expected to take approximately six months.

         During 2004, we completed the product roll-out process, renewed our CE
Mark, established FDA and quality systems standards, invested in
production-level tooling, established a manufacturing facility compliant with
good manufacturing practices, received our FDA export certificate, finalized
agreements with several international distributors in select countries in Latin
America, Europe and the Asia-Pacific regions, verified and validated our first
release of the ComfortScan system, and sold and shipped 12 revenue-producing
production level ComfortScan investigative units to international markets for
the purpose of conducting local clinical regulatory and marketing studies. In
addition, our PMA clinical trial protocol was accepted by the FDA, we delivered
and installed our ComfortScan system in our first three PMA sites, and we
commenced the collection of patient scan data pursuant to our PMA clinical trial
protocol.

THE COMFORTSCAN(TM) SYSTEM

         The first application of our technology is the ComfortScan system, an
adjunct to mammography and physical exams. The ComfortScan system is a
non-invasive, gentle, relatively quick, non-ionizing medical imaging device
designed to assist physicians in the detection of breast cancer by focusing on
dynamic functional, physiological imaging (i.e., what is occurring within the
tissue in near real-time), rather than a singular morphological image (i.e., a
static anatomical snapshot showing anatomical details at a single point in
time), such as those created by mammography. Our ComfortScan system depicts
dynamic changes in blood volume and oxygen depletion that are associated with
malignancies. ComfortScan is being designed and tested to show that it provides
high levels of specificity in detecting benign lesions within the breast, thus
resulting in reducing the number of false positives generated by current
techniques, and potentially reducing the high number of breast biopsies or other
downstream testing now being performed. These unprecedented images provide the
physician with new, physiologic information which may be associated with cancer
development. The entire ComfortScan procedure typically takes approximately ten
minutes, with the actual image acquisition of the DOBI(R) scan taking
approximately one minute per breast. Our current suggested retail price for the
ComfortScan system is $140,000. Our ComfortScan system is currently limited by
U.S. law to investigational use within the United States. It is not yet
commercially available in the U.S., and its future availability in the U.S.
cannot be assured.


REIMBURSEMENT STRATEGY

         In the United States and some international markets, healthcare
providers that purchase medical equipment, such as the ComfortScan system, often
rely on government and private third-party payers to reimburse much of the cost
of the procedures for which the products are used. Therefore, decisions by
third-party payers concerning reimbursement for use of our products are likely
to affect the attractiveness of our products compared with those of our
competitors. We plan to educate these third-party payers about the ComfortScan
system so that they will


<PAGE>

"cover" (i.e., reimburse) procedures that use the device. In seeking coverage,
we intend to retain experts in the area of coverage of new technologies to
develop a strategy for demonstrating to the third-party payers, including
Medicare, state Medicaid agencies and private health insurers of all types, that
coverage of the ComfortScan system is cost-justified and its significant
benefits outweigh its comparatively marginal costs. We believe third-party
payers could encourage usage of the ComfortScan system as an accurate, low-cost
procedure that will substantially reduce the number of benign biopsies and other
testing, resulting in lower healthcare costs while improving overall patient
care.

         We intend to implement the following strategy to gain coverage of the
ComfortScan procedure:

         o   obtain a Current Procedural Terminology, or CPT, code by building
             on existing adjunctive diagnostic codes;

         o   collaborate with key healthcare administrators and private payer
             organizations that will benefit from the cost effectiveness of the
             ComfortScan system;

         o   retain a dedicated reimbursement specialist with expert knowledge
             of the federal, state and private payer reimbursement processes;

         o   establish a business advisory council composed of highly
             respected business and healthcare executives to work with us and
             various women's and professional organizations, and

         o   conduct further testing in locations where it may be needed.

         We will enhance our relationships with a variety of important women's
health and breast cancer awareness groups around the nation and plan to actively
educate those who can financially benefit from the use of our ComfortScan system
such as health insurers, HMOs, managed care companies and physicians. We will
enhance and expand our relationships with leading physicians at prestigious
cancer institutions worldwide. We also have in place affiliations with leading
scientific research centers, such as the Scripps Research Institute in La Jolla,
California and the Angiogenesis Foundation in Boston, Massachusetts. Our Medical
Advisory Board is composed of well respected and recognized physicians in
radiology, oncology and angiogenesis. We have augmented these efforts with our
attendance and participation over the past several years at various medical
imaging conferences such as Radiological Society of North America, American
Association for Cancer Research and American Society for Clinical Oncology.

DISTRIBUTION NETWORK

         Our form of distributor agreement generally provides that the
distributor, in exchange for discounts against our suggested list price, will
market, sell and service our ComfortScan system in its local territory and
provide first line customer support. In addition, we require that the
distributor purchase an initial ComfortScan system and install it in a clinical
site for the purpose of conducting a local clinical trial to demonstrate its
efficacy and, where applicable, obtain local government approval. We began to
sell our investigational ComfortScan system as an adjunct to mammography in
international markets in the fourth quarter of 2004. We currently have ten
distributors in Latin America, Europe and the Asia-Pacific regions.

COMPETITION

         We are developing a new diagnostic technology based on angiogenesis. We
are not aware of a similar breast imaging product in the marketplace, but we are
aware of several breast imaging products under development utilizing diagnostic
x-ray, magnetic resonance imaging, optical imaging, laser, thermal imaging,
ultrasound and other technologies. We believe that all of these other products
under development are more expensive and more time consuming than our
non-invasive, dynamic functional technology that uses high intensity
light-emitting diodes and gentle external pressure to highlight areas of
vascular development common to malignant tumors in the breast. The market for
breast cancer detection equipment is extremely competitive, with both large,
international diversified manufacturers, including Siemens, Toshiba, GE Medical
Systems, Kodak, Fisher Imaging, Philips, Imaging Diagnostic Systems, Inc.,
Hologic/Lorad, Advanced Research Technologies, Inc., and smaller firms
developing new technologies. These companies, although competitors, may also be
possible strategic partners for us.


                                       2
<PAGE>


INTELLECTUAL PROPERTY

         We own nine issued U.S. patents, five international patents and two
pending foreign patent applications covering a broad range of closely-related
technologies. These include, among others:

         o   optical investigation of physiological components in the human
             body, methods for optical and acoustic diagnosis of internal
             organs, multimodal imaging capability, and

         o   the soft breast holder mechanism.

         We expect to file additional patent applications domestically and
internationally as we continue to improve our existing technology, develop new
releases and make advances to our ComfortScan system.

EMPLOYEES

         As of March 11, 2005, we have 29 full-time employees. We have
experienced good employee relations and are not, and never have been, a party to
a collective bargaining agreement.

ORGANIZATIONAL HISTORY

         DOBI Medical Systems, LLC, a Delaware limited liability company, was
formed in October 1999. In December 1999 it acquired substantially all the
assets of Dynamics Imaging, Inc., including a number of patents and trade
secrets that form the core of our current proprietary technology platform. On
January 1, 2003 DOBI Medical Systems, LLC was incorporated in Delaware and
became DOBI Medical Systems, Inc. We completed a reverse merger transaction on
December 9, 2003 with Lions Gate Investment Limited, a Nevada corporation formed
on October 29, 1999. Until the merger, Lions Gate engaged in oil and gas
exploration activities, which Lions Gate discontinued following the merger and
succeeded to the business of DOBI Medical Systems. The directors and management
of DOBI Medical Systems thereupon became the directors and management of Lions
Gate. For a more complete description of the reverse merger transaction and
accompanying private placement in which we received $5.5 million in gross
proceeds, see our Current Report on Form 8-K, dated December 9, 2003 and filed
with the U.S. Securities and Exchange Commission (SEC) on December 19, 2003.

         On January 30, 2004, we changed our corporate name to DOBI Medical
International, Inc. from Lions Gate Investment Limited and our state of
incorporation to Delaware from Nevada pursuant to an Agreement and Plan of
Merger, dated as of January 29, 2004, between Lions Gate and DOBI Medical
International. This transaction had been approved by the holders of a majority
of the outstanding common stock of Lions Gate by written consent in lieu of a
special meeting of the shareholders of Lions Gate, all as more fully described
in Lions Gate's Definitive Information Statement on Schedule 14C, which was
filed with the SEC on January 9, 2004. DOBI Medical Systems currently remains a
wholly-owned subsidiary of DOBI Medical International, Inc.

         Since our business is that of DOBI Medical only, the historical
information in this report is that of DOBI Medical International as if it and
its predecessor, DOBI Medical Systems, had been the registrant for all the
periods presented in this report. Management's Discussion and Analysis or Plan
of Operation presented in Item 6 and the audited consolidated financial
statements presented in Item 7 of this report include those of DOBI Medical
Systems prior to the reverse merger, as these provide the most relevant
information for us on a continuing basis. For accounting purposes, DOBI Medical
Systems is the acquirer in the transaction, and, consequently, the transaction
is treated as a recapitalization of the company. DOBI Medical System's financial
statements are the historical financial statements of the post-merger entity,
DOBI Medical International.


ITEM 2.  DESCRIPTION OF PROPERTY.

         Our principal executive offices are located in approximately 12,000
square feet of office and assembly space at 1200 MacArthur Boulevard, Mahwah,
New Jersey 07430. We have a five-year lease which expires on September 15, 2009,
subject to renewal rights.


                                       3
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS.

         In the ordinary course of business, the Company may become a party to
legal or regulatory proceedings resulting from litigation, claims, or other
disputes. There can be no assurance that one or more future actions, if they
occur, would not have a material adverse effect on the business. Currently there
is no material litigation threatened or pending matters involving the Company..

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

         None

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         Our shares of common stock are quoted and listed for trading on the OTC
Bulletin Board under the symbol "DBMI.OB."

         The following table sets forth the high and low closing prices for our
common stock for the periods indicated as reported by the OTC Bulletin Board:

                                         Years ended December 31,
                                   ------------------------------------
Quarter                                 2004                  2003
--------                           ----------------     ---------------
                                    High       Low        High      Low
                                    ----      -----     -------   -----
First                              $3.30      2.50      $0.10     $0.00
Second                              3.00      2.30       0.05      0.02
Third                               2.74      0.67       0.20      0.05
Fourth                              1.06      0.50       0.85      0.20
Fourth (December 9 to 31, 2003)       --        --       3.90      1.25

         The market information for the quarter ended December 31, 2003 is
divided at December 9, 2003, the closing date of our reverse merger transaction.
Trading in our shares began in January 2003, at which time it related only to
Lions Gate.

         These bid prices represent prices quoted by broker-dealers on the OTC
Bulletin Board. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual transactions.

         As of March 11, 2005, there were approximately 282 holders of record of
our common stock.

DIVIDEND POLICY

         The holders of our Series A Convertible Preferred Stock are entitled to
receive a quarterly cumulative dividend at the end of each calendar quarter,
commencing October 1, 2004 calculated at a rate of 8% per year of the issue
price of any outstanding share of Series A Convertible Preferred Stock,
commencing July 1, 2004 and continuing for the first three years after the
closing of this issue, 10% per year for the following two years, and 12% per
year for any additional year in which any shares of Series A Preferred
Convertible Stock remains outstanding. At our option, the dividend may be paid
in either cash or registered shares of common stock. In the case of payment in
stock, this stock will be valued at 95% of the average of the closing trading
price of our common stock for the 20 trading days ending on the day prior to the
day on which such payment is due. For the year ended December 31, 2004, we
recorded preferred stock dividends of $206,454, and paid a dividend in the form
of common stock on January 31, 2005.


                                       4
<PAGE>

         We do not expect to pay a dividend on our common stock in the
foreseeable future. Prior to our reverse merger transaction, DOBI Medical paid
dividends pursuant to its class A preferred stock over the last two fiscal years
pursuant to the terms of its certificate of incorporation then in effect. In
connection with the merger, all the class A preferred stock was converted into
shares of our common stock. The payment of dividends on our common stock is
within the discretion of our board of directors, subject to our certificate of
incorporation. We intend to retain any earnings for use in our operations and
the expansion of our business. Payment of dividends in the future will depend on
our future earnings, future capital needs and our operating and financial
condition, among other factors.

EQUITY COMPENSATION PLAN INFORMATION

         Our 2000 Stock Incentive Plan, as amended December 10, 2003, was
approved by a written consent of the holders of a majority of our outstanding
common stock. In connection with our reverse merger transaction, Lions Gate
adopted and assumed all of DOBI Medical Systems' obligations under its 2000
Stock Incentive Plan and increased the number of shares reserved for stock
option grants to 15 % of our common stock outstanding. Based on our common stock
outstanding as of December 31, 2004, 6,562,244 stock options are authorized for
issuance under our 2000 Stock Incentive Plan. As of March 11, 2005, there are
outstanding stock options to purchase 4,980,500 shares of our common stock.

         The following table provides information as of December 31, 2004 with
respect to the shares of common stock that may be issued under our existing
equity compensation plan.

                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                                                                   Number of securities
                                                                                  remaining available for
                                Number of shares of                                future issuance under
                                common stock to be          Weighted-average        equity compensation
                              issued upon exercise of       exercise price of        plans (excluding
                               outstanding options,        outstanding options,    securities reflected in
                                warrants and rights        warrants and rights          column (a))
<S>                                 <C>                          <C>                     <C>
       Plan category                    (a)                        (b)                       (c)

 Equity compensation plans           4,980,500                    $1.59                    1,581,744
   approved by security
          holders


 Equity compensation plans              --                         --                         --
 not approved by security
          holders

           Total                     4,980,500                    $1.59                    1,581,744

</TABLE>

INVESTMENT CONSIDERATIONS

INVESTMENT CONSIDERATIONS RELATED TO OUR BUSINESS AND INDUSTRY

         WE ARE A DEVELOPMENT STAGE COMPANY WITH INSIGNIFICANT REVENUE TO DATE
         AND ARE DEPENDENT ON A SINGLE PRODUCT, WHICH CAN HAVE A DETRIMENTAL
         EFFECT ON THE LONG-TERM CAPITAL APPRECIATION OF OUR STOCK.

         We currently offer only one product, the ComfortScan system, and
anticipate that this product will account for substantially all of our revenues,
if any, for the foreseeable future. For the fiscal year ended December 31, 2004,
we incurred a net loss of $7,010,438 and, as of December 31, 2004, had an
accumulated deficit of $23,750,962 and stockholders' equity of $2,542,844.


                                       5
<PAGE>


         OUR INDEPENDENT PUBLIC ACCOUNTING FIRM INCLUDED A "GOING CONCERN"
         EXPLANATORY PARAGRAPH IN EACH OF ITS AUDIT REPORTS FOR THE LAST FOUR
         YEARS, RAISING DOUBT ABOUT OUR ABILITY TO CONTINUE.

         A "going concern" explanatory paragraph was included by our independent
public accounting firm for the year ended December 31, 2004, and in each of the
audit reports for DOBI Medical Systems for the last four years, as a result of
the risk surrounding our ability to continue in existence as a development stage
company with no revenues and recurring losses and negative cash flows from
operations. These conditions raise substantial doubt about our ability to
continue as a going concern.

         WE WILL HAVE TO SECURE ADDITIONAL FINANCING IN 2005 AS WE DO NOT HAVE
         ADEQUATE CASH TO COMPLETE THE FDA PMA PROCESS AND COMMERCIALIZE OUR
         COMFORTSCAN SYSTEM.

         In order to complete the submission of our FDA PMA Module 5 of our
clinical research trial study and continue our research and development towards
releasing the ComfortScan system as an approved FDA medical device for
commercial sale as an adjunct to mammography, we currently estimate that we will
need approximately $10 million in 2005. Thus, we need to secure additional
financing. We may be unable to obtain financing on satisfactory terms or in a
timely fashion. If we do obtain additional financing, it may be dilutive to
stockholders, and may involve restrictions on our ability to pay dividends on
our capital stock or the manner in which we conduct our business. We currently
have no firm commitments for any additional financings, and there can be no
assurance that any such financings will be available to us or that adequate
funds for our operations will be available when needed or on terms attractive to
us. The inability to obtain sufficient funds may require us to delay, scale back
or eliminate some or all of our research and development, manufacturing, and
clinical trials, or cause us to cease our operations altogether.

         THE COMMERCIALIZATION OF OUR COMFORTSCAN SYSTEM AS AN ADJUNCT TO
         MAMMOGRAPHY IN THE UNITED STATES IS SUBJECT TO FDA APPROVAL. IF WE FAIL
         TO OBTAIN SUCH APPROVAL, WE WILL NOT BE ABLE TO SELL IT IN THE UNITED
         STATES AND THUS OUR FUTURE REVENUES WILL BE NEGATIVELY IMPACTED.

         Our ComfortScan system version 1.0 is an investigational device. As
such, we cannot sell the ComfortScan system in the United States and some
markets internationally without FDA approval and/or local regulatory approval.
Clinical testing for our fifth and final FDA premarket approval commenced in
late 2004. FDA approval for our ComfortScan system as an adjunct to mammography,
including any updates that may be required to the four modules previously
accepted by the FDA, should be in mid-2006. Final FDA approval is contingent
upon the timely execution of our clinical trial plan and successful trial
outcomes that meet the FDA clinical trial protocol as accepted by the FDA, and
any other requirements that the FDA may subsequently request. However, there can
be no assurance that the clinical trial will be executed in a timely fashion,
that the outcomes will meet the accepted protocol, that the FDA will not require
further data and supporting evidence, that FDA approval of the ComfortScan
system will be received or, if received, that it will be received within the
time frames that we estimate. If we or the FDA fail to meet these time frames,
we will either seek additional funds or discontinue operations. In addition, the
FDA enforces its quality system regulations through pre-approval and
post-approval inspections. If we are unable to pass any of these inspections,
the FDA could suspend or terminate our clinical trials. The FDA also retains
jurisdiction over post-approval market surveillance and medical device
reporting. If it at any point determined by the FDA that our manufacturing
practices and document control quality standards, or the ComfortScan system
itself, are deficient, the FDA could suspend or withdraw its pre-market
approval.

         WHILE ATTEMPTING SALES TO INTERNATIONAL MARKETS WHERE FDA APPROVAL IS
         NOT REQUIRED, WE WILL NEED TO COMPLY WITH LOCAL FOREIGN QUALIFICATIONS
         FOR SALE IN SUCH MARKETS, WHICH ARE UNFAMILIAR TO US AND SOMETIMES
         DIFFICULT TO OBTAIN.

         Unless and until we receive FDA approval, we will be wholly dependent
on international sales of our ComfortScan system to those markets where FDA
approval is not required. Such dependence will expose us to foreign and
political risks, including the burden of complying with a variety of quality
system regulations and other foreign regulatory requirements as well as currency
exchange rate fluctuations, any of which could result in lower sales or profits.
International sales will be an important aspect of our growth strategy in 2006
and beyond. The time required to obtain approval for international sales may be
longer or shorter country by country than that required for FDA approval, and
each country's requirements may differ significantly. To date, we have limited
experience in international markets. Among other requirements, we will need to
enter into additional distribution partnerships in international markets and
further develop our independent distribution network outside the United States.
Our re-certification audit for compliance with ISO 9000:2000, ISO 13485
MDD93/42/EEC and the Canadian Medical Device Regulations, and our renewal of our
CE Mark, UL certificate and FDA Export Certificate, all necessary for


                                       6
<PAGE>

international sales, have all been approved. There is no assurance that we will
be able to successfully penetrate markets outside the United States. Our
reliance on international sales will expose us to related risks and
uncertainties, including:

o    Maintaining quality regulation systems so as to ensure compliance with
     applicable industry and FDA requirements to export outside the United
     States, all of which we must maintain in order to sell our products in the
     European Union and other foreign countries that do not require FDA
     approval,
o    Complying with differing foreign and domestic regulatory requirements,
o    Trade restrictions and changes in tariffs,
o    Import and export license requirements and restrictions,
o    Dependence on independent distribution partners,
o    Difficulties in shipping to international markets,
o    Difficulties in staffing and managing international operations,
o    Difficulties in collecting receivables and longer collection periods, and
o    Fluctuations in currency exchange rates.

     The primary regulatory authority in Europe is the European Union, which
currently consists of 25 member countries encompassing most of the major
economies of Europe. The European Union has adopted numerous directives and
standards regulating the design, manufacturing, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear a CE Mark,
indicating that the device conforms to the essential requirements of the
applicable directive and, accordingly, can be commercially distributed
throughout the European Union. Our CE Mark, FDA Export Certificate and UL
Certificate subject us, our ComfortScan system, our manufacturing processes,
quality systems and facilities to comprehensive inspections from time to time.
If we failed or had a material deficiency, we could lose any one or all of these
marks and certificates, and consequently the right to market and sell our
ComfortScan system in European Union countries and those other countries where
exportation of an unapproved medical device is permitted under FDA regulations.

         WE WILL NOT BE ABLE TO RELEASE COMFORTSCAN SYSTEM 2.0 AS AN
         INVESTIGATIONAL DEVICE UNLESS AND UNTIL ITS DESIGN AND MANUFACTURING
         PROCESS IS VERIFIED AND VALIDATED IN ACCORDANCE WITH QUALITY SYSTEM
         REGULATIONS.

         Verification and validation (as defined and described in 21 Code of
Federal Regulations, Part 820) are part of the quality system regulations
intended to ensure that finished devices will be safe and effective and
otherwise in compliance with the United States Federal Food, Drug and Cosmetic
Act of 1976, ISO 13485 and CE Mark. In November 2004, after successful
completion of verification and validation testing in accordance with current
quality systems regulations, and with outside, independent physicians as
readers, we released our first production level version 1.0 ComfortScan system
as an investigational device. In late 2004 we sold and shipped 12 revenue
producing, production level ComfortScan investigational systems to international
distributors for conducting local clinical studies. Subsequently, in January
2005, in connection with the development of version 2.0 of our ComfortScan
system, internal testing by non-physician employees raised concerns about scan
acceptance rates, repeatability performance, and overall diagnostic accuracy.
Prior to releasing version 2.0, we are aggressively addressing these issues, and
have engaged leading academic and clinical experts to assist us. We believe
these concerns arise within the scope of the ordinary course of medical device
product development efforts and we are confident that within a reasonable period
of time we will successfully resolve these recent concerns. However, while we
currently do not believe it to be so, it is possible that the solutions may
involve changes to our software and changes to our hardware that may require
reinitiating our PMA clinical trial. If there is a delay, our best estimate is
that our PMA submission to the FDA may be delayed by up to six months.

         WE ARE DEPENDENT ON OUR PMA CLINICAL TRIAL SITES AND ON OUR THIRD-PARTY
         PROVIDERS AND CONSULTANTS TO ADVANCE OUR COMPANY, AND IF THEY ARE NOT
         RESPONSIVE TO US, WE WILL NEED TO FIND ALTERNATIVE OUTSIDE SOURCES OR
         ADD THESE FUNCTIONS INTERNALLY, WHICH MAY DIVERT OUR RESOURCES AND
         DELAY OUR TIMEFRAMES.

         We rely on a number of third-party clinical consultants and medical
institutions to advance our clinical and FDA approval processes, including our
PMA clinical trial sites. We will also rely on third-party manufacturers and
parts suppliers for parts and materials necessary to complete assembly of the
ComfortScan system. Internationally, we rely on distributors to market, sell and
service our ComfortScan system. These distributors, as well as domestic
distributors that we may later select, often handle other products and services,
which may be in competition with our products and which may be of greater
significance to them than our products. Should we be unable to enter into


                                       7
<PAGE>


satisfactory arrangements with these parties, or in the event of the failure of
a distributor or any third-party manufacturer, supplier, consultant, researcher
or other provider to timely perform their obligations or commitments, our
timetable toward commencing our clinical trials, obtaining FDA approval, or
international commercialization and sales could be delayed.

         EXISTING OR NEW COMPETITORS MAY DEVELOP COMPETING OR SUPERIOR
         DIAGNOSTIC TECHNOLOGIES WHICH COULD RESULT IN OUR SYSTEM BECOMING
         OBSOLETE AND NO LONGER IN DEMAND.

         We are not aware of any similar breast imaging product in the
marketplace, but we are aware of several breast imaging products under
development utilizing other technologies such as lasers. While we believe our
advanced technology to be superior to others in this segment, the market for
breast cancer detection equipment is extremely competitive, dominated by
international diversified manufacturers including Siemens, Toshiba, GE Medical
Systems, Philips, Imaging Diagnostic Systems, Inc., Hologic/Lorad, and Advanced
Research Technologies, Inc. In general, these manufacturers will have
significantly greater access to capital and marketing resources that we can
expect. In particular, these and other large manufacturers have the capital,
technology, personnel and marketing strength to support their existing products
and develop new products to meet the market's needs for safer, more effective,
and more affordable breast cancer detection systems. There is no assurance that
competing diagnostic technologies will not emerge that may be superior or
cheaper than ours, or that similar technologies may render our ComfortScan
system uncompetitive or obsolete and prevent us from achieving or sustaining
profitable operations.

         OUR PATENT PORTFOLIO AND TRADE SECRETS DO NOT ASSURE THAT COMPETITORS
         AND OTHERS CANNOT DEVELOP TECHNOLOGIES SIMILAR OR SUPERIOR TO OUR
         COMFORTSCAN SYSTEM, FOR WHICH WE MAY HAVE NO RIGHTS TO SUE FOR
         INFRINGEMENT.

         We have compiled trade secrets and a patent portfolio in the United
States and Europe, have an allowed patent in Canada, and have several patent
applications pending. We believe our trade secrets and patent position are
extensive enough to protect against unwarranted duplication of our technology by
competitors. As we develop and commercialize our products, others may attempt to
discover our trade secrets or challenge our patents. The cost of such defense
may exceed our financial resources, and there can be no assurance that we would
prevail in any trade secret or patent litigation. Further, there can be no
assurance that our dynamic functional imaging technology cannot be modified by
others to circumvent our patents or reverse engineer our devices or those
competitors will not develop competitive or superior technologies without
knowledge of our trade secrets or without infringing our patents. While we
generally obtain confidentiality agreements before disclosing proprietary,
non-public information to third parties, such agreements may be difficult to
enforce in certain domestic and foreign jurisdictions.

         HMOS, HEALTH INSURERS, MANAGED CARE PROVIDERS AND OTHER THIRD-PARTY
         PAYERS ARE LARGELY UNFAMILIAR WITH OUR COMFORTSCAN SYSTEM, MAKING THEIR
         ADOPTION OF OUR PRODUCT UNCERTAIN.

         A major portion of all medical care is paid for by third-party payers
rather than by patients directly (i.e., HMOs, health insurers, managed care
providers, Medicare and Medicaid, and their equivalent organizations in
countries outside the United States). In order to achieve our sales targets in
the jurisdictions in which we intend to sell the ComfortScan system, we must
educate these third-party payers and otherwise market the ComfortScan system to
the third-party payers and establish our ComfortScan system as a recognized
adjunctive diagnostic imaging procedure for which the third-party payers will
pay a reasonable fee. There can be no assurance that these efforts will be
successful.

         ONCOLOGISTS, GYNECOLOGISTS, RADIOLOGISTS, OTHER PHYSICIANS AND SURGEONS
         AND THEIR TECHNICAL ASSISTANTS ARE ALSO LARGELY UNFAMILIAR WITH OUR
         COMFORTSCAN SYSTEM, MAKING THEIR ACCEPTANCE AND ADOPTION OF OUR PRODUCT
         UNCERTAIN.

         Because the ComfortScan diagnostic breast imaging system is a new
system, no oncologists, radiologists or other healthcare professionals have been
trained in the use of the ComfortScan system as an adjunctive diagnostic tool
(other than those performing clinical tests). We will therefore have to spend
considerable amounts of time and money to educate and train these professionals
in the use of the ComfortScan system. There can be no assurance that our
ComfortScan system will be accepted and adopted by physicians or that we will be
able to convince sufficient numbers of professionals to devote the necessary
time to learning this new adjunctive diagnostic tool and to accept the results
of this diagnostic tool over more familiar diagnostic procedures, such as
biopsies.


                                       8
<PAGE>


         WE MAY BE SUED FOR PRODUCT LIABILITY IN THE FUTURE AND OUR LIABILITY
         INSURANCE MAY NOT BE ADEQUATE IN A CATASTROPHIC SITUATION.

         We may be held liable if any product we develop in the future, or any
product which is made with the use of any of our technologies, causes injury or
is found otherwise defective during product testing, manufacturing, marketing or
sale. Although we have product liability insurance, we may not have insurance
coverage sufficient in amount and scope against potential liabilities, or the
claims may be excluded from coverage under the terms of the policy. Further,
product liability insurance is expensive. As a result, we may not be able to
obtain sufficient amounts of insurance coverage, obtain additional insurance
when needed, or obtain insurance at a reasonable cost, which could prevent or
inhibit the commercialization of our products or technologies. If we are sued
for any injury caused by our products or technology, our liability could exceed
our total assets. Any claims against us, regardless of their merit or eventual
outcome, could have a serious and adverse effect upon our business.

         PROPOSED HEALTHCARE REFORMS AND OTHER REGULATORY CHANGES COULD
         EFFECTIVELY PRECLUDE SOME CUSTOMERS FROM USING OUR COMFORTSCAN SYSTEM
         WHICH COULD NEGATIVELY IMPACT PHYSICIAN ADOPTION AND PATIENT USE OF OUR
         COMFORTSCAN SYSTEM.

         The United States government and many states are investigating a
variety of alternatives to reform the healthcare delivery system. These reform
efforts include proposals to limit and further reduce and control healthcare
spending on healthcare items and services, limit coverage for new technology and
limit or control the price healthcare providers, drug and device manufacturers
may charge for their services and products. If adopted and implemented, these
reforms could cause healthcare providers to limit their use of the ComfortScan
system or decline to use it at all. Changes in any other laws, rules,
regulations, procedures or industry practices that impact upon our ComfortScan
system could adversely affect the commercial viability of our ComfortScan
system.

INVESTMENT CONSIDERATIONS RELATED TO OUR COMMON STOCK

         OUR COMMON STOCK IS QUOTED OVER THE COUNTER AND CONSIDERED A "PENNY
         STOCK" MAKING IT DIFFICULT TO SELL WHEN DESIRED.

         The SEC has adopted regulations which generally define "penny stock" to
be an equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock is less than $5.00 per share and therefore may
be designated as a "penny stock" according to rules of the SEC. This designation
requires any broker or dealer selling these securities to disclose certain
information concerning the transaction, obtain a written agreement from the
purchaser and determine that the purchaser is reasonably suitable to purchase
the securities. These rules may restrict the ability of brokers or dealers to
sell our common stock and may affect the ability of our stockholders to sell
their shares. In addition, since our common stock is currently quoted on the OTC
Bulletin Board, stockholders may find it difficult to obtain accurate quotations
of our common stock, and may experience a lack of buyers to purchase such stock
or a lack of market makers to support the stock price.

         A SIGNIFICANT NUMBER OF OUR SHARES WILL BE ELIGIBLE FOR SALE AND THEIR
         SALE OR POTENTIAL SALE MAY DEPRESS THE MARKET PRICE OF OUR COMMON
         STOCK.

         Lock-up agreements associated with our December 9, 2003 private
placement and reverse merger covering approximately 19,420,000 shares of common
stock will continue to unlock at 10% each month until all become unlocked on
July 9, 2005. In addition, lock-up agreements expire for certain founders
covering approximately 15,625,000 shares of common stock expire on December 9,
2005. Thus, the supply of our common stock available for sale may increase,
which could decrease its price. All of the founders' shares of common stock may
be offered from time to time in the open market pursuant to Rule 144, and these
sales may have a depressive effect on the market for our shares of common stock.
In general, a person who has held restricted shares for a period of one year
may, upon filing with the SEC a notification on Form 144, sell into the market
common stock in an amount equal to the greater of 1% of the outstanding shares
or the average weekly number of shares sold in the last four weeks prior to such
sale. Such sales may be repeated once each three months, and any of the
restricted shares may be sold by a non-affiliate after they have been held two
years.


                                       9
<PAGE>




         OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS OWN A SUBSTANTIAL AMOUNT OF
         OUR COMMON STOCK AND ARE CAPABLE OF INFLUENCING OUR AFFAIRS, WHICH MAY
         NOT ALWAYS BE IN THE BEST INTERESTS OF ALL STOCKHOLDERS.

         Our officers, directors and principal stockholders control
approximately 53% of our outstanding common stock. If these stockholders act
together, they may be able to exert significant control over our management and
affairs requiring stockholder approval, including approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market
price of our common stock. This concentration of ownership may not be in the
best interests of all our stockholders.

         INVESTORS SHOULD NOT ANTICIPATE RECEIVING CASH DIVIDENDS ON OUR COMMON
         STOCK.

         We have never declared or paid any cash dividends or distributions on
our common stock. While, we currently pay an 8% per year dividend on our series
A preferred convertible stock, we intend to retain our future earnings to
support operations and to finance expansion, and therefore, we do not anticipate
paying any dividends on our common stock in the foreseeable future.

         CERTAIN EXISTING AND ALL FUTURE STOCKHOLDERS WILL SUFFER DILUTION, AND
         POTENTIALLY A REDUCTION IN THE VALUE OF THEIR INVESTMENT, IF WE SELL
         ADDITIONAL SHARES OF OUR COMMON STOCK OR SECURITIES CONVERTIBLE INTO
         OUR COMMON STOCK AT A PRICE OR CONVERSION PRICE LOWER THAN $1.78 PER
         COMMON SHARE.

         In connection with our July 2004 private placement, we granted to the
private placement investors "weighted average" anti-dilution protection with
respect to the series A convertible preferred stock acquired by these investors.
The anti-dilution provisions are triggered by a subsequent stock offering by us
within two years of the closing of the July 2004 private placement at a lower
price per share than the protected price level ($1.78 per share) and take into
account both the lower price and the number of shares issued at the lower price.


                                       10
<PAGE>


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

         We completed a reverse merger transaction on December 9, 2003 with
Lions Gate Investment Limited, a Nevada corporation formed on October 29, 1999.
Until the merger, Lions Gate engaged in oil and gas exploration activities,
which Lions Gate discontinued following the merger and succeeded to the business
of DOBI Medical Systems, Inc. The directors and management of DOBI Medical
Systems thereupon became the directors and management of Lions Gate. On January
30, 2004, we changed our corporate name from Lions Gate Investment Limited to
DOBI Medical International, Inc. and changed our state of incorporation from
Nevada to Delaware pursuant to an Agreement and Plan of Merger, dated as of
January 29, 2004, between Lions Gate and DOBI Medical International. DOBI
Medical Systems currently remains a wholly-owned subsidiary of DOBI Medical
International.

         DOBI Medical Systems, LLC was formed as a Delaware limited liability
company in October 1999. (In December 1999, DOBI Medical Systems, LLC acquired
substantially all the assets of Dynamics Imaging, Inc., including a number of
patents and trade secrets that form the basis for its current proprietary
technology position.  On January 1, 2003, DOBI Medical was incorporated in
Delaware and became DOBI Medical Systems, Inc.

         Since our future business will be that of DOBI Medical only, the
information in this Annual Report is that of DOBI Medical International as if
DOBI Medical Systems. had been the registrant for all the periods presented in
this report. Management's Discussion and Analysis or Plan of Operation presented
in this Item 6 and the audited consolidated financial statements presented in
Item 7 of this report include those of DOBI Medical Systems prior to the reverse
merger, as these provide the most relevant information for us on a continuing
basis.

         For accounting purposes DOBI Medical Systems was the acquirer in the
reverse merger transaction, and consequently the transaction is treated as a
recapitalization of the company. DOBI Medical's financial statements are the
historical financial statements of the post-merger entity, DOBI Medical
International.

OVERVIEW

         We are a developmental-stage company with no significant revenues. Our
goal is to establish the ComfortScan(TM) system as the new standard of breast
imaging diagnostic care in the United States and international medical
community. The first steps in attaining this goal are to receive U.S. Federal
Food and Drug Administration ("FDA") approval for our ComfortScan(TM) system as
an adjunct to mammography and establish our ComfortScan system as a recognized
and widely utilized technology to aid physicians in the effective diagnosis of
breast cancer.

         During 2004, we completed the product roll-out process, renewed our CE
Mark, established FDA and quality systems standards, invested in
production-level tooling, established a manufacturing facility compliant with
good manufacturing practices, received our FDA Export Certificate, finalized
agreements with several international distributors in select countries in Latin
America, Europe and the Asia-Pacific regions, verified and validated our first
release of the ComfortScan system, and sold and shipped 12 revenue-producing and
production level ComfortScan investigative units to international markets for
the purpose of conducting local clinical regulatory and marketing studies. In
addition, our PMA clinical trial protocol was accepted by the FDA, we delivered
and installed our first ComfortScan system in our first three PMA sites, and we
trained and commenced the collection of patient scan data pursuant to our PMA
clinical trial protocol.

         In 2005, we intend to complete our PMA clinical trial and submit our
PMA application to the FDA, sell 20 systems through our international
distributors in order to generate clinical results supporting the use of our
ComfortScan system as an adjunct to mammography. We plan to continue to seek
distribution alliances in international markets in order to obtain local
regulatory approval and acquire patient scans in our research and development
efforts. We will continue to develop and enhance our ComfortScan system by
releasing new versions of our software and perhaps hardware to the international
marketplace. We intend to place added emphasis internationally in developing
luminary clinical research sites with noted physicians, and have them publish
peer review clinical papers so as to better seed the international market and
more quickly gain physician adoption once the ComfortScan system obtains local
regulatory approval for commercial sale as a medical device.

         In November 2004, after successful completion of verification and
validation testing in accordance with current quality systems regulations, and
with outside, independent physicians as readers, we released our first


                                       11
<PAGE>

production level version 1.0 ComfortScan system as an investigational device. In
late 2004, we sold and shipped 12 revenue producing, production level
ComfortScan investigational systems to international distributors for conducting
local clinical studies. Subsequently, in January 2005, in connection with the
development of version 2.0 of our ComfortScan system, internal testing by
non-physician employees raised concerns about scan acceptance rates,
repeatability performance, and the overall diagnostic accuracy. Prior to
releasing version 2.0, we are aggressively addressing these issues, and have
engaged leading academic and clinical experts to assist us. We believe these
concerns arise within the scope of the ordinary course of medical device product
development efforts. We are confident that within a reasonable period of time we
will successfully resolve these recent concerns. However, while we currently do
not believe it to be so, it is possible that the solutions may involve changes
to our software and hardware that may require reinitiating our PMA clinical
trial. If there is a delay, our best estimate is that our PMA submission to the
FDA may be delayed by up to six months.

         In connection with our 2005 goals, we expect our expenses to be
approximately $1.6 million per quarter. In addition, we expect that PMA clinical
trial project costs, including PMA site fees, clinical research organization
fees, PMA site monitoring fees, and physician fees will be approximately $3.0
million. While we believe that we will achieve these goals, there can be no
assurance that we will do so.

         We have generated insignificant ComfortScan system revenues to date,
and therefore can draw no conclusions regarding the seasonality of our business.

         The accompanying financial statements in Item 7 of this report have
been prepared assuming that we will continue as a going concern. We are
currently a development stage enterprise and, as such, our continued existence
is dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt or equity financing. We have yet to generate a
positive internal cash flow, and until meaningful sales of our product begin, we
are totally dependent upon debt and equity funding.

         In the event that we are unable to obtain debt or equity financing or
we are unable to obtain financing on terms and conditions that are acceptable to
us, we may have to cease or severely curtail our operations. This would
materially impact our ability to continue as a going concern. So far we have
been able to raise the capital necessary to reach this stage of product
development and have been able to obtain funding for operating requirements, but
there can be no assurance that we will be able to continue to do so. Moreover,
there is no assurance that if and when FDA premarket approval is obtained, that
our ComfortScan system will achieve market acceptance or that we will achieve a
profitable level of operations. The accompanying financial statements in Item 7
of this report do not include any adjustments that might be necessary should we
be unable to continue as a going concern.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

         We generally recognize revenue upon the shipment of our product to our
customers except for the initial maintenance component. That component is
deferred and is recognized on a straight-line basis over the initial maintenance
term.

         In order to achieve our goals, we incur research and development
expenses, general and administrative expenses, clinical expenses and sales and
marketing expenses.

         Research and development expenses consist primarily of compensation,
benefits and related expenses for personnel engaged in research and development
activities, outside contract and consulting expenses, material and supplies, and
personnel costs to produce prototype units and develop manufacturing processes,
methods and templates.

         General and administrative expenses consist of compensation, benefits
and related expenses for personnel engaged in general management, finance and
administrative positions. They also include expenses for financial advisory,
legal and accounting fees, medical and scientific advisory board expenses,
insurance and other expenses.

         Clinical program expenses consist of compensation, benefits and related
expenses for personnel engaged in clinical related activities. These expenses
also include costs of developmental studies, consultants, and that portion of
travel and general corporate expenses allocated to that department.


                                       12
<PAGE>

         Sales and marketing expenses consist of compensation, benefits and
related expenses for personnel engaged in sales, marketing, and related business
development activities. These expenses also include consultants, printing of
promotional materials, trade shows and that portion of travel and general
corporate expenses allocated to that department.

         We account for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS No. 109). SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statements and tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
primarily from tax loss carry forwards. The Company has established a valuation
allowance related to the benefits of net operating losses for which utilization
in future periods is uncertain. We believe it is more likely than not that we
will not realize the benefits of these deductible differences in the near future
and therefore a full valuation allowance of approximately $4,900,000 is
provided.

         As of December 31, 2004, we have approximately $12,000,000 of federal
net operating losses available to offset future taxable income, which if not
utilized will expire in 2024. No provision for income taxes has been recorded in
the financial statements as a result of continued losses. Any benefit for income
taxes as a result of utilization of net operating losses may be limited as a
result of change in control.

         The preparation of financial statements are in conformity with
accounting principles generally accepted in the United States and requires
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. As a development stage enterprise, we have not had to make
material estimates which have an effect on financial presentation.

OFF-BALANCE SHEET ARRANGEMENTS

         Our office facilities are subject to a 5-year operating lease requiring
monthly lease payments of approximately $20,000 per month. We have no other
material off-balance sheet arrangements or liabilities.

RESULTS OF OPERATIONS

COMPARISON OF 12 MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003

         Revenue for the year ended December 31, 2004 was approximately
$321,000. We shipped our first revenue producing ComfortScan systems in the
quarter ended December 31, 2004.

         Cost of sales was approximately $384,000 for the year ended December
31, 2004. Combined with the revenue for this period, we had a gross loss of
approximately $63,000 which was due to the limited initial sales combined with
establishing current good manufacturing practices and facilities in accordance
with FDA medical device quality system regulations.

         Research and development expenses increased approximately $803,000, or
70%, from $1,154,000 to approximately $1,957,000 for the 12 months ended
December 31, 2004 compared to the prior year. This reflects an increase in
engineering personnel, building additional prototypes of the ComfortScan system
for developmental testing and refining the engineering of the hardware and
software.

         General and administrative expenses increased approximately $677,000,
or 46%, from $1,470,000 to approximately $2,147,000 for the 12 months ended
December 31, 2004 compared to the prior year. This increase was mainly due to
costs associated with the addition of financial and administrative personnel of
approximately $360,000, higher insurance costs of approximately $192,000,
consulting costs of approximately $184,000 and investor relations costs of
approximately $146,000. This was offset by costs of approximately $178,000 in
the prior year for unsuccessful attempts to raise capital.

         Clinical program expenses increased approximately $628,000, to
$929,000, or 209%, for the 12 months ended December 31, 2004 compared to the
prior year. These costs were mainly attributable due to the increased number of
personnel recruited to manage clinical programs in the United States,
predominately associated with the start of the PMA trials related to the Company
applying for FDA approval for the ComfortScan system at its


                                       13
<PAGE>

conclusion. These additional costs included equipment costs, site costs,
consulting costs, personnel costs, and travel expenses.

         Sales and marketing expenses of approximately $1,919,000 for the twelve
months ended December 31, 2004 reflect an increase of approximately $1,498,000.
This increase was primarily in consulting costs to initiate a capital markets
program for the purpose of creating an awareness of the Company and its
products, totaling approximately $733,000, additional personnel costs of
approximately $534,000, additional consulting costs related to establishing
overseas markets of approximately $118,000 and participation in various exhibits
and shows of approximately $99,000, compared to the prior year.

         Interest expense for the twelve months ended December 31, 2004
consisted of minor financing of operational costs. For the year ended December
31, 2003, interest expense of approximately $1,808,000 was primarily for Series
1 and 2 Convertible Promissory Notes, substantially all of which were converted
into common stock in December 2003.

LIQUIDITY AND CAPITAL RESOURCES

         We have financed our operations since inception through the private
issuances of equity and debt securities, generating approximately $28,000,000 in
gross proceeds to date, described chronologically as follows.

         During the year 2000, DOBI Medical Systems, LLC, a predecessor of DOBI
Medical, completed its first private placement of shares, issuing 3,170,069
common shares at an issuance price of $2.31 per share, generating gross proceeds
of approximately $7,316,000. In 2001, DOBI Medical Systems, LLC completed a
private placement of 2,211,491 units of its class A convertible preferred shares
at an issuance price of $1.00 per lot (each lot consisting of one unit of class
A convertible preferred shares and one warrant to purchase common shares),
generating gross proceeds of approximately $2,211,000. In 2003, DOBI Medical
Systems, Inc. completed the sale of its series 1 convertible 8% notes and
warrants in the amount of $3,373,000. Later in 2003, we completed the sale of
our series 2 convertible 12% notes and warrants in the amount of $1,680,000.

         In December 2003, DOBI Medical Systems merged into a publicly-traded
company, Lions Gate Investment Limited, which became the surviving entity (in
January, 2004 Lions Gate changed its corporate name to DOBI Medical
International, Inc.), and simultaneously completed the first tranche of a
two-tranche private placement in which we issued 5,500,000 shares of common
stock at a price of $1.00 per share and three-year warrants to purchase
2,750,000 shares of common stock at an exercise price of $1.54 per share,
generating gross proceeds of $5,500,000.

         In July 2004, we completed the private placement of approximately $5.16
million in shares of our series A preferred convertible stock and associated
warrants. The shares of series A preferred stock sold in the private placement
carry a dividend of 8% per year and were initially convertible into 2,580,667
shares of common stock. We also issued four-year investor warrants to purchase
2,580,667 shares of common stock at a price of $3.00 per share. In connection
with the closing of the second tranche of the December 2003 private placement,
the number of common shares into which the series A preferred stock is
convertible was increased to approximately 2,903,000 shares, reflecting
anti-dilution adjustments.

         At the closing of the performance milestone-based second tranche in
December 2004, we issued 6,000,002 shares of common stock at a price of $.50 per
share, generating gross proceeds of approximately $3,000,000. In that
connection, we issued three-year warrants to purchase 3,000,000 shares of common
stock at an exercise price of $1.54 per share.

         As of December 31, 2004, we had cash and working capital of
approximately $2,454,000 and $1,836,000, respectively. Net cash used in
operating activities during the year totaled approximately $6,500,000, and
capital expenditures totaled approximately $720,000. As we enter 2005, we have
no significant capital expenditure commitments. Our goals for 2005 are to submit
our PMA application for the ComfortScan system as an adjunct to mammography to
the FDA by the end of 2005 and sell 20 ComfortScan systems through our
international distributors. In connection with our 2005 goals, we expect our
expenses to be approximately $1.6 million per quarter. In addition, we expect
that PMA clinical trial project costs, including PMA site fees, clinical
research organization fees, PMA site monitoring fees, and physician fees will be
approximately $3.0 million. While we believe that we will achieve these goals,
there can be no assurance that we will do so. We expect that the


                                       14
<PAGE>

achievement of our 2005 goals will require that we raise an additional $10
million.

         In March 2005, we engaged a financial advisor on a best efforts basis
to raise up to $10 million through the sale of our securities, and we have
granted this financial advisor the exclusive right to do so through April 30,
2005. The financial advisor's undertaking is subject to several factors,
including market conditions and no adverse change in our business and prospects.

         We have yet to generate any material cash flow from operations, and
until the meaningful sales of our product begin, we are totally dependent upon
debt and equity funding from outside investors. In the event that we are unable
to obtain debt or equity financing or we are unable to obtain such financing on
terms and conditions that are acceptable to us, we may have to cease or severely
curtail our operations. This would materially impact our ability to continue as
a going concern.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

         Our disclosures and analysis in this "Management's Discussion and
Analysis or Plan of Operation" and throughout our Annual Report contain some
statements and information based upon "forward-looking statements" relating to
our business. From time to time, we also provide forward-looking statements in
other materials we release to the public, as well as oral forward-looking
statements. Such forward-looking statements represent management's current
judgment and assumptions, and can be identified by the fact that they do not
relate strictly to historical or current facts. Forward-looking statements are
frequently accompanied by the use of such words as "anticipates," "plans,"
"believes," "expects," "projects," "intends," and similar expressions. In
particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses and financial results.

         We cannot guarantee that any forward-looking statement will be
realized, although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, and potentially inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could differ
materially from past results and those anticipated, estimated or projected. You
should bear this in mind as you consider forward-looking statements.

         We undertake no obligation to publicly update forward-looking
statements. You are advised to carefully read the "Investment Considerations"
set forth above in this report and any further disclosures we make on related in
our Form 10-QSB and 8-K reports to the SEC, and our press releases. You should
understand that it is not possible to predict or identify all factors that may
affect future results. Consequently, you should not consider the "Investment
Considerations" set forth in Part II of this 2004 Form 10-KSB to be a complete
discussion of all potential risks or uncertainties.

ITEM 7.  FINANCIAL STATEMENTS.

         Our audited financial statements for the year ended December 31, 2004
are included as a separate section of this Annual Report beginning on page F-1.

ITEM     8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

         We have had no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures with
any of our accountants for the year ended December 31, 2004.

         On July 15, 2003, and prior to our reverse merger transaction, the
board of directors of Lions Gate dismissed its independent accountant, Dohan &
Company, P.A., and engaged the firm of Moore Stephens Ellis Foster Ltd. as its
new independent accountant. In October 2003, the independent accountant of DOBI
Medical Systems, Ernst & Young LLP, resigned as the independent accountant. On
December 10, 2003, our shareholders ratified the appointment of Marcum &
Kliegman LLP as our new certifying public accountants for the fiscal year ending
December 31, 2004.

         We have not had any other changes in nor have we had any disagreements,
whether or not resolved, with our accountants on accounting and financial
disclosures during our two recent fiscal years or any later interim


                                       15
<PAGE>


period. Since we are a developmental company with limited revenues, each of our
independent public accountants included a "going concern" explanatory paragraph
in each of its audit reports for the last four years.

ITEM 8A.  CONTROLS AND PROCEDURES.

         As of December 31, 2004 and within 90 days prior to the date of this
Annual Report, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)),
under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer. Based upon this
evaluation, our chief executive officer and our chief financial officer
concluded that there was no reasonably apparent deficiency in our disclosure
controls and procedures such that the controls and procedures should not be
expected to operate effectively. We are not aware of any significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of the most recent evaluation of such controls
by us.


ITEM 8B.  OTHER INFORMATION.

         None.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS.

DIRECTORS AND EXECUTIVE OFFICERS

     Each Director holds office until our next annual meeting of our
     stockholders or until his death, resignation or removal, if earlier. The
     following table shows the positions held by our board of directors and
     executive officers, and their ages as March 11, 2005:


NAME                                AGE     POSITION
----                                ---     --------
Robert M. Machinist                 52       Chairman of the Board
Phillip C. Thomas                   56       Co-Founder, Chief Executive Officer
                                             and Director
David H. Clarke                     63       Co-Founder and Director
Brad Baker                          45       Director
William Li, M.D.                    42       Director
Webb W. Turner                      67       Director
Michael R. Jorgensen                52       Executive Vice President and Chief
                                             Financial Officer

         ROBERT M. MACHINIST became a director of DOBI Medical Systems in
October 2003 and became a member of our board in December 2003. Mr. Machinist
has served as Chairman and managing partner of MB Investment Partners in New
York since August, 2004, and as managing partner of M Capital, LLC, a private
equity investment firm based in Rye, New York, since January 2002. From November
1998 to December 2001, Mr. Machinist served as Managing Director and Head of
Investment Banking for the Bank of New York and its Capital Markets division.
Mr. Machinist received a B.A. degree from Vassar College and did graduate work
at the Weizmann Institute in Rehovot, Israel. He is the Chairman of the American
Committee for the Weizmann Institute of Science and a member of its
International Board of Governors. Mr. Machinist is also a member of the board of
directors of Traffix, Inc., a NasdaqNM on-line marketing and advertising
company.

         PHILLIP C. THOMAS is a co-founder of DOBI Medical Systems and became a
member of our board and our Chief Executive Officer in December 2003. Mr. Thomas
has been the Chief Executive Officer and a director of DOBI Medical Systems
since December 1999, and for more than one year prior thereto, he was the Chief
Executive Officer of Dynamics Imaging, Inc., a Delaware corporation from which
DOBI Medical Systems acquired the DOBI


                                       16
<PAGE>


technology and its other non-financial assets. Over the past 25 years,Mr. Thomas
has served in a number of public and private high technology senior executive
positions. From September 1992 to January 1997, Mr. Thomas was the Chief
Executive Officer for Medication Delivery Devices, Inc. ("MDD"), a medical
device start-up. MDD was sold to Baxter Healthcare in 1997, four years after its
inception. Mr. Thomas received his B.A. degree from Brigham Young University and
has completed executive development courses at Harvard Business School and
Stanford Business School.

         DAVID H. CLARKE is a co-founder of DOBI Medical Systems and became a
member of our board in December 2003. Mr. Clarke had been a director of DOBI
Medical Systems since December 1999. Mr. Clarke is the controlling stockholder
of Lake Worth Ventures, Inc., which was the largest stockholder of DOBI Medical
Systems and, as a result of the merger, is our largest single stockholder. Since
1995, Mr. Clarke has been the Chairman and Chief Executive Officer of Jacuzzi
Brands, Inc, a New York Stock Exchange-listed company. Prior to joining Jacuzzi
Brands, Mr. Clarke was Deputy Chairman and Chief Executive Officer of Hanson
Industries, Inc., as well as Vice Chairman of Hanson plc. Mr. Clarke also serves
on the Board of Fiduciary Trust Company International and serves as an Advisory
Director for Sterling Financial Group of Companies, Inc., an investment banking
firm which served as the placement agent in the private placement which we
completed in connection with the reverse merger and served DOBI Medical Systems
as placement agent in four previous private placements. Mr. Clarke also serves
on the board of United Pacific Industries Limited, a manufacturing company
listed on the Hong Kong stock exchange.

         BRAD BAKER joined the DOBI Medical Systems board of directors in
October 2003 and became a member of our board in December 2003. From April 2000
to February 2002, Mr. Baker served as head of the online division of Sterling
Financial Investment Group, an investment company banking firm which served as
the placement agent in the private placement which the Company completed in
connection with the merger. From September 1989 to January 1990, Mr. Baker
served as Corporate Secretary and one of four members of the Executive Board of
the Resolution Trust Corporation, a federal agency formed to restructure and
reorganize the thrift industry. At various times since 1989, Mr. Baker has
served as the Acting Executive Secretary of the United States Treasury
Department.

         WILLIAM LI, M.D. joined the DOBI Medical Systems board of directors in
October 2003 and became a member of our board in December 2003. Dr. Li is also a
member of our Scientific Advisory Board. Dr. Li is a co-founder of the
Angiogenesis Foundation in Cambridge, Massachusetts, of which he has been the
President since April 1990 and Medical Director since December 1994. Dr. Li has
extensive expertise in tumor angiogenesis, in vivo angiogenesis models,
angiogenesis therapeutic development, and clinical trial analysis. He trained
with Dr. Judah Folkman, who pioneered the field of angiogenesis research. Dr. Li
works in association with the National Institutes of Health, the Veteran's
Administration and other major governmental and academic institutions on
angiogenesis-related programs. Dr. Li received an M.D. degree from University of
Pittsburgh School of Medicine. He completed his clinical training in internal
medicine at the Massachusetts General Hospital in Boston. Dr. Li also serves on
the faculties of Harvard Medical School, Tufts University School of Veterinary
Medicine and the teaching staff at Dartmouth Medical School.

         WEBB W. TURNER joined the DOBI Medical Systems board of directors in
June 2000 and became a member of our board in December 2003. Mr. Turner is the
Chairman of the Board of Dynamics Imaging, Inc. Since November 2003, Mr. Turner
has been self employed as a financial consultant. From July 2003 to October,
2003, Mr. Turner was Senior Area Manager for International Profit Associates, a
Chicago-based management consulting firm. From September 1998 to May 2001, Mr.
Turner was a consultant with Spencer Trask & Company, an investment banking
firm. Mr. Turner has over 20 years' experience with investment banking and
advisory firms, and 10 years' experience as the chief executive officer of a
furniture manufacturing company. Mr. Turner holds an A.B. degree in economics
from Duke University.

         MICHAEL R. JORGENSEN became Executive Vice President and Chief
Financial Officer of DOBI Medical Systems in February 2003, and our Executive
Vice President and Chief Financial Officer in December 2003 following the
completion of the reverse merger. In February 1997, he joined AXS-One, Inc., a
multinational financial software company, as Executive Vice President and Chief
Financial Officer, Treasurer and Secretary and became its Executive Vice
President, North America, in March 2001 and Executive Vice President, Chief
Administrative Officer in June 2001 until February 2003.


                                       17
<PAGE>

SIGNIFICANT EMPLOYEES

         Our other significant employees include:

         SAL LUCIA, 54, joined us as Director, Operations, in December 2003. Mr.
Lucia was a private consultant from September, 2002, and from 1994 to September,
2002, he served as Director of Operations for Lorad, a subsidiary of Hologic
Corporation, a medical device imagining where he directed manufacturing
operations. Prior to this, he held management positions with several industry
leading firms, including Unimation, a division of Westinghouse. Mr. Lucia has
over 20 years operational experience in the medical imaging and capital
equipment industries. He holds a BA in Economics from Clemson University and is
past president and current board member of the National Association of
Purchasing Management, Seven Counties Affiliate.

         FRANK M. PUTHOFF, 59, joined DOBI Medical Systems as General Counsel in
February 2003 and became our General Counsel and Secretary in December 2003. Mr.
Puthoff was Executive Vice President, Chief Legal Officer and Secretary of
ProxyMed, Inc., a healthcare claims electronic transaction NasdaqNM public
company, from 1996 to 2001. From 1994 to 1996, he was Vice President, General
Counsel and Secretary for Miami Subs Corporation, a NasdaqNM public company.
Prior to this, he held executive positions with Ground Round Restaurants, Inc.
and NasdaqNM public company and an affiliate of Hanson PLC, PepsiCo, Inc. and
Marriott Corporation. He holds a B.A. degree in Philosophy from Borromeo
College, a J.D. degree from the University of Toledo, and an M.A. degree from
Barry University. He is a licensed attorney in Ohio and the District of
Columbia.

         MICHAEL S. SILVER, PH.D., 49, joined us as Vice President, Clinical
Research in January 2005. Dr. Silver has over 25 years of experience in various
aspects of the medical and pharmaceutical industries. Of this time, ten years
were in the pharmaceutical and medical device industries, implementing
biomarkers in clinical trials for oncology, CNS, and cardiovascular
therapeutics. Additionally, he has over fifteen years experience in medical
imaging systems research and development, working with several international
medical device manufacturers on MR applications and development. He received his
masters degree in biophysics in 1979 and his Ph.D. in Electrical Engineering and
Computer Science in 1985, both from Johns Hopkins University. Dr. Silver has
co-authored over 40 peer-reviewed publications and presentations.

         A. ROBERT SOHVAL, PHD., 55, joined us as Vice President, Research and
Development in March 2004. Dr. Sohval has worked in the diagnostic imaging
industry for more than 25 years and has held executive leadership positions in
several private and public companies. Dr. Sohval has been involved in system
design and product development of innovative digital radiography detectors,
advanced breast imaging systems, and high performance CT scanners, and holds 10
patents in medical imaging. He received a B.S. degree and Ph.D. in Physics from
Massachusetts Institute of Technology and has completed the Advanced Management
Program at the Harvard Business School.

         There are no family relationships among our directors and executive
officers. No director or executive officer has been a director or executive
officer of any business which has filed a bankruptcy petition or had a
bankruptcy petition filed against it. No director or executive officer has been
convicted of a criminal offense or is the subject of a pending criminal
proceeding. No director or executive officer has been the subject of any order,
judgment or decree of any court permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking activities. No director or officer has been found by a
court to have violated a federal or state securities or commodities law.

         In connection with the engagement of Sterling Financial Investment
Group, Inc. as placement agent in two private placements of DOBI Medical
securities in 2000 and 2001, we agreed to nominate one person designated by
Sterling Financial to our board of directors so long as stockholders introduced
to us by Sterling Financial own at least 10% of all our outstanding equity
securities. Mr. Baker is the current director designee of Sterling Financial.

BOARD COMMITTEES

       AUDIT COMMITTEE. The Audit Committee of our board of directors consists
of Brad Baker, Chairman, and Robert Machinist. The board determined that Mr.
Baker is "financially sophisticated" and an "audit committee financial
expert," as those terms are defined by the American Stock Exchange ("Amex")
Section 121 of its Company Guide and by Regulation S-B of the Securities
Exchange Act of 1934, respectively. Our Audit


                                       18
<PAGE>


Committee is composed of directors who are, in the opinion of our board of
directors, free from any relationship which would interfere with the exercise of
independent judgment and who possess an understanding of financial statements
and generally accepted accounting principles. Thus, each member is an
"independent" director, as that term is defined by Amex and by the regulations
of the Securities Exchange Act of 1934. Pursuant to our Audit Committee Charter,
which is filed as Exhibit 99.1 to our 2003 Annual Report, our Audit Committee's
Charter specifies the scope of the Audit Committee's responsibilities and the
means by which it carries out those responsibilities; the outside auditor's
accountability to the board and the Audit Committee; and the Audit Committee's
responsibility to ensure the independence of the outside auditors, including
their recommendations to improve the system of accounting and internal controls.

         COMPENSATION COMMITTEE. The Compensation Committee of the board of
directors consists of Webb Turner, Chairman, and William Li, M.D. Pursuant to
our Compensation Committee Charter, which is filed as Exhibit 99.2 to the 2003
Annual Report, the Compensation Committee is responsible for reviewing and
approving the salary and benefits policies, including compensation of our Chief
Executive Officer and the other executive officers. Our Compensation Committee
also administers the 2000 Stock Incentive Plan as adopted and assumed by us, and
recommends and approves grants of stock options under that plan. Both Mr. Turner
and Dr. Li are, in the opinion of our board of directors, "independent"
directors, as that term is defined under Amex rules and by the regulations of
the Securities Exchange Act of 1934.

         NOMINATIONS AND CORPORATE GOVERNANCE COMMITTEE. The Nominations and
Corporate Governance Committee was formed in October, 2004 and consists of Brad
Baker, Chairman, and Robert Machinist. Pursuant to the Nominations and Corporate
Governance Committee Charter, which is filed as Exhibit 99.1 to this Annual
Report, the Nominations and Corporate Governance Committee is responsible for
board member qualification and nomination to the full board as well as matters
relating to corporate governance. Both Mr. Baker and Mr. Machinist are, in the
opinion of our Board of Directors, "independent" directors, as that term is
defined under Amex rules and by the regulations of the Securities Exchange Act
of 1934.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 requires our
officers and directors, and persons who own more than 10% of our common stock,
to file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than 10% shareholders are required by SEC regulations 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, we believe that
during the year ended December 31, 2004, all filing requirements applicable to
our executive officers and directors and greater than 10% shareholders were
complied with, except that Mr. Clarke in March 2004, July 2004 and December 2004
failed to timely file a Form 4, but subsequently timely filed a Form 5
disclosing such transactions, and Mr. Vodicka in December 2004 failed to timely
file a Form 4, but subsequently timely filed a Form 5 disclosing such
transaction. On February 7, 2005 we received notice from Mr. Vodicka that he
resigned from the board. Mr. Vodicka failed to timely file a Form 5, and we
believe he has yet not done so, following notice.

CODES OF ETHICS

         Our Code of Ethics for the CEO and Senior Financial Executives and Code
of Business Conduct and Ethics were filed as Exhibits 14.1 and 14.2 to our 2003
Annual Report. We expect to shortly post these Codes on our website
www.dobimedical.com.

                                       19
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION.


         The following table sets forth, for the years indicated, all cash
compensation paid, distributed or accrued for services, including salary and
bonus amounts, rendered to us by our Chief Executive Officer and all other
executive officers in such years who received or are entitled to receive
remuneration in excess of $100,000 during the stated periods.

<TABLE>
<CAPTION>

                                                                                       Long Term
                                                                     Other Annual       Awards -
                                                                     Compensation      Securities
                                                                          ($)          Underlying
Name and Principal Position      Year     Salary ($)   Bonus ($)         (1)        Options / SARs
--------------------------------------------------------------------------------------------------

<S>                            <C>        <C>          <C>            <C>             <C>
Phillip C. Thomas              2004       248,462         -               -               -
Chief Executive Officer        2003       210,888     12,231              -              75,000
                               2002       180,938     67,713              -               -

Michael R. Jorgensen (2)       2004       200,000         -               -             250,000
Executive Vice President and   2003       179,428     10,962              -             387,500
Chief Financial Officer        2002        37,500         -               -               -

Denis O'Connor (3)             2004       166,734                       33,336          250,000
Senior Vice President          2003             -         -               -             200,000
Sales and Marketing            2002             -         -               -                   -

Robert Sohval (4)              2004       186,539    50,000               -             500,000
Vice President                 2003             -         -               -                   -
Research and Development       2002             -         -                                   -


</TABLE>


    (1) Other compensation does not include the cost for health and welfare
    benefits received by the above named officers. The aggregate amounts of such
    personal benefits did not exceed the lesser of $50,000 of 10% of the total
    annual compensation of such officer, other than Mr. O'Connor.

    (2) Mr. Jorgensen joined us as a consultant in November 2002 and became an
    employee in February 2003.


    (3) Mr. O'Connor joined us December 2003. Mr. O'Connor resigned effective
    March 11, 2005 to take a CEO position at another publicly traded medical
    device company.

    (4) Mr. Sohval joined us in March 2004.

COMPENSATION OF DIRECTORS

         Directors are expected to timely and fully participate in all regular
and special board meetings, and all meetings of committees that they serve on.
Commencing January 1, 2004, we pay each non-employee director a retainer fee of
$1,000 per quarter, plus a participation fee of $500 for each regular and
special meeting of the board of directors, not to exceed $1,000 per quarter,
regardless of the number of meetings. We also pay a committee participation fee
of up to $250 for each meeting of a committee of the board, not to exceed $500
per quarter, regardless of the number of meetings. In addition, the board voted
in September, 2004 to pay Mr. Machinist $3,500 per month and in December, 2004
awarded him an option to purchase 50,000 shares of common stock at $0.74 per
share, on identical terms as all other director options, as additional
compensation for his considerable and additional time and efforts required for
his continuing to serve as our non-employee, independent Chairman of the Board.
Fees are accrued and paid annually, in arrears, following the end of each year's
audit. We will also reimburse each director for reasonable accommodations, coach
travel and other miscellaneous expenses relating to each director's attendance
at board meetings and committee meetings promptly upon submission of actual
receipts to the Chief Financial Officer and approval by the Chairman of the
Board or the Chief Executive Officer.


                                       20
<PAGE>


         Non-employee directors were awarded an initial grant of non-qualified
stock options to purchase 25,000 shares. Due to anticipated greater levels of
oversight and work effort, the Chairman of the Board received an initial grant
of 100,000 shares, and each committee chair received an initial grant of 25,000
shares. Such option awards have an exercise price equal to the fair market value
of the common stock, based on the closing price at the end of trading on the
date of the award, vest on the first anniversary date of the grant if the
director has continued to serve until that date, and have a term of five years
from the date of award. Thereafter, upon each subsequent annual stockholders
meeting in which a director has been reelected, each non-employee director will
be awarded an annual non-qualified option to purchase additional shares equaling
50% of the initial number of shares granted upon election to the Board. These
options will be for our common stock under the same terms as indicated above,
subject to any adjustments as may be necessary. Other terms and conditions of
the option grants are on the standard terms and conditions as those option
grants to employees.

         Our Compensation Committee reviews director compensation plan annually,
and adjusts it according to then current market conditions and good business
practices.

EMPLOYMENT AGREEMENTS

         Phillip C. Thomas, Co-Founder, Director and Chief Executive Officer,
entered into an employment agreement with us dated December 9, 2003 to continue
serving as Chief Executive Officer for a term of three years through December 8,
2006, with automatic one-year extensions on each anniversary of the commencement
date under certain conditions. Pursuant to the employment agreement, Mr. Thomas
will devote all of his business time and efforts to us and will report directly
to the board of directors. The employment agreement provides that as long as Mr.
Thomas serves as Chief Executive Officer, the board of directors will nominate
him for election to the Board.

         The employment agreement currently provides that Mr. Thomas will
receive a fixed base salary at an annual rate of $260,000. On March 10, 2005,
Mr. Thomas' employment agreement was amended. For the years 2004 and 2005, he
has agreed to waive his annual "cost-of-living" increases and his annual
incentive bonus which for 2004 would have been $130,000. Mr. Thomas' employment
agreement provides that if and upon FDA approval of the ComfortScan system, Mr.
Thomas will participate significantly in a bonus pool of $500,000 to key
employees as determined by the Compensation Committee.

         Mr. Thomas' employment agreement also provides for termination by us
upon death or disability (defined as 180 days of incapacity during any 365 day
period) or upon conviction of a felony crime of moral turpitude or a material
breach of his obligations to us. In the event Mr. Thomas' contract is terminated
by the Company without cause or for disability, he will be entitled to
compensation for the greater of two years or the balance of the term, plus
health and disability and life insurance. In the event of a "change of control,"
as that term is defined under Mr. Thomas's employment agreement, all his options
shall vest, and if he is terminated three months before or 24 months after such
event, he and his spouse shall be entitled, under specified circumstances, to
receive health, disability and life insurance benefits for 24 months after such
event,. If he voluntarily terminates as an employee after 12 months after the
change of control, he will be entitled to the same post-termination benefits as
if he had been terminated by the acquirer within the first 24 months. Payments
made or to be made Mr. Thomas under his employment agreement are not intended to
be non-deductible to us by reason of the operation of Section 280G of the
Internal Revenue Code of 1986, relating to golden parachute payments. Should any
such payment otherwise be taxable to Mr. Thomas, we have agreed to gross up such
payments. By amendment to Mr. Thomas' employment agreement, we and Mr. Thomas
also agreed to eliminate any payments that may have been due him under his
employment agreement upon a change of control event in consideration for a cash
payment to Mr. Thomas of $125,000, payable within five business days after the
completion of the financing (discussed in Item 6 )and the grant of an option to
purchase 75,000 shares of common stock at $0.66, the closing price of our stock
on the date this amendment was approved by our board of directors.

         The employment agreement also contains covenants (a) restricting Mr.
Thomas from engaging in any activities competitive with our business during the
term of his employment agreement and for two years thereafter, (b) prohibiting
him from disclosure of confidential information regarding us, and (c) confirming
that all intellectual property developed by him and relating to our business
constitutes our sole and exclusive property.

         Since he first commenced service to us and our predecessors as Chief
Executive Officer, our board of directors has also awarded him options to
purchase an aggregate of 302,500 shares of common stock under our 2000 Stock
Incentive Plan at exercise prices from $1.00 to $2.31 per share, as adjusted in
accordance with the terms of the merger.


                                       21
<PAGE>


         All our other employees are employees at will under law, most of whom
would receive separation pay if terminated without cause ranging from one month
to 12 months. Separation pay would not be deemed to be material. In November
2004, our board of directors approved a resolution providing that upon a change
of control event of the company (as defined our 2000 Stock Incentive Plan), all
options issued pursuant to that Plan will immediately vest.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

         The following table sets forth information regarding the number of
shares of our common stock beneficially owned on December 31, 2004 by:

         O  each person who is known by us to beneficially own 5% or more of our
            common stock;
         O  each of our directors and executive officers; and
         O  all of our directors and executive officers as a group.

         Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Shares of our common stock which may be acquired upon exercise of
stock options or warrants which are currently exercisable or which become
exercisable within 60 days after the date indicated in the table are deemed
beneficially owned by the optionees. Subject to any applicable community
property laws, the persons or entities named in the table above have sole voting
and investment power with respect to all shares indicated as beneficially owned
by them.

<TABLE>
<CAPTION>
                                                                                   PERCENTAGE OF SHARES
                                                         NUMBER OF SHARES           BENEFICIALLY OWNED
                                                       BENEFICIALLY OWNED                   (1)
                                                       --------------------        ----------------------
<S>                                                        <C>                                <C>
 Dynamics Imaging, Inc.
 400 East 50th Street
 New York, NY 10022                                        2,600,003 (3)                      6.0%

 Lake Worth Ventures, Inc.
 c/o Mr. David H. Clarke
 777 South Flagler Drive - Suite 1100
 West Palm Beach, FL. 33401                                8,292,255 (2)                     18.2%

 David H. Clarke
 777 South Flagler Drive
 Suite 1112
 West Palm Beach, FL 33401                                10,841,105 (2)                     23.8%

 Brad Baker                                                   38,000                             *

 William Li, M.D.                                             63,000                             *

 Robert M. Machinist                                         310,189                             *

 Phillip C. Thomas                                         3,177,503                          7.2%

 Webb W. Turner
 400 East 50th Street
 New York, NY 10022                                        2,689,003 (3)                      6.1%

 Michael R. Jorgensen                                        367,500                             *

 Gibralt Capital
 2600-1075 West Georgia St.
 Vancouver, B.C. V6E 3C9
 Canada                                                    3,460,456 (4)                      7.6%

</TABLE>


                                       22
<PAGE>


<TABLE>
<CAPTION>
                                                                                   PERCENTAGE OF SHARES
                                                         NUMBER OF SHARES           BENEFICIALLY OWNED
                                                       BENEFICIALLY OWNED                   (1)
                                                       --------------------        ----------------------
<S>                                                        <C>                                <C>
 Martin Solomon
 1643 Brickell Ave.
 Suite 4902
 Miami, FL 33129                                           4,463,636 (5)                    10.0%

 Winton Capital
 PO Box 32002 SMB
 Grand Cayman
 Cayman Islands, BWI                                       2,875,456 (6)                     6.4%

 Strauss Zelnick
 c/o Zelnick Media
 650 Fifth Ave.
 New York, NY 10019                                        2,940,456                         6.6%

 All directors and executive officers as a
group (7 persons)                                         17,486,300                        37.6%
</TABLE>

_____________________________
         *Less than 1% of outstanding shares.

(1)      Based upon 43,748,294 shares of common stock outstanding on December
         31, 2004, as calculated in accordance with Rule 13d-3 under the
         Securities Exchange Act of 1934. Unless otherwise indicated, this
         includes shares owned by a spouse, minor children and any entities
         owned or controlled by the named person. It also includes shares that
         any named person has the right or option to acquire within 60 days of
         the date of this Annual Report. Unless otherwise noted, shares are
         owned of record and beneficially by the named person.

(2)      Includes 6,499,486 shares of common stock, series a preferred stock
         convertible into 28,122 shares of common stock and warrants to purchase
         1,764,647 shares of common stock owned by Lake Worth Ventures, Inc.,
         and 19,500 shares of common stock owned by affiliates of Lake Worth
         Ventures, which are controlled by David H. Clarke. Includes 922,400
         shares of common stock owned by Mr. Clarke's spouse, of which Mr.
         Clarke disclaims beneficial ownership.

(3)      Includes 2,600,003 shares of common stock owned by Dynamics Imaging,
         Inc. Mr. Turner is the Chairman of the Board of Dynamics Imaging, Inc.

(4)      Sam Belzberg is a principal of Gibralt Capital, which is the registered
         holder of the shares of common stock. Mr. Belzberg, as a principal of
         Gibralt Capital, has voting and disposition power over the shares owned
         by Gibralt Capital.

(5)      Includes 1,745,454 shares of common stock and warrants to purchase
         486,364 shares of common stock owned by Haslemere Partners LTDA, of
         which Mr. Solomon is the general partner.

(6)      Marc Belzberg is a principal of Winton Capital, which is the registered
         holder of the shares of common stock. Mr. Belzberg, as a principal of
         Winton Capital, has voting and disposition power over the shares owned
         by Winton Capital.

         Except as otherwise set forth above, the address of each of the persons
listed is c/o DOBI Medical International, Inc., 1200 MacArthur Boulevard,
Mahwah, New Jersey 07430.


                                       23
<PAGE>


CHANGE IN CONTROL

         There are no arrangements currently in effect which may result in our
"change in control," as that term is defined by the provisions of Item 403(c) of
Regulation S-B.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Lake Worth Ventures, Inc., or LWVI, was the largest single stockholder
of DOBI Medical Systems prior to the reverse merger (based on information filed
with the SEC), and continues to be our largest stockholder. From time to time
since January 1, 2001, it lent funds to DOBI Medical Systems pursuant to demand
notes, which bore interest at rates ranging from 1.2% to 6.0% per year. The
aggregate principal amount lent was $1,443,299, none of which was repaid in
cash, and all of which, including accrued interest, was exchanged for capital
stock and warrants of DOBI Medical Systems at prices equal to the offering
prices in DOBI Medical Systems then pending private placements. No cash interest
was paid on account of such loans. LWVI also lent $250,000 to DOBI Medical
Systems shortly before the merger by purchasing Series 2 Notes and Series 2
Warrants, which have been converted into common stock and warrants of Lions Gate
in the merger. David H. Clarke, a director of DOBI Medical Systems who became a
member of our board at the effective time of the merger, is the controlling
stockholder of LWVI. In connection with a conversion of $370,837 of demand notes
held by LWVI in December 2002 into 370,837 shares of DOBI Medical Systems common
stock, LWVI was granted "weighted average" anti-dilution protection with respect
to such common stock, and we are obligated to provide such anti-dilution
protection to the such common stock held by LWVI for which such DOBI Medical
Systems common stock was exchanged in the merger. The anti-dilution provisions
are triggered by a subsequent stock offering by us at a lower price per share
than a protected price level ($1.00 per share) and take into account both the
lower price and the number of shares issued at the lower price. The
anti-dilution protection with respect to LWVI expires at the earlier of 18
months after the merger or upon the closing of a $5.0 million equity financing.
Additionally, in the event of a secondary public offering of our securities in
which we receive gross proceeds of at least $10.0 million, LWVI may exercise a
limited waiver from its lock-up restrictions under specified circumstances. In
the event of a secondary public offering of our securities to the public
pursuant to an effective registration statement, LWVI may sell a limited number
of shares of its common stock up to a maximum of $5.0 million in such offering,
conditioned on (I) the written approval of the underwriter selected by us for
any such offering, provided such approval is not unreasonably withheld, (ii) us
receiving gross proceeds of at least $10.0 million from any such offering and
(iii) compliance with applicable securities laws.

         Mr. Thomas was indebted to DOBI Medical Systems pursuant to a limited
recourse promissory note which was paid in full in December 2002. As of January
1, 2001, the principal amount of the note was $225,000, and from inception to
payment of the note in full, the note bore interest at the annual rate of 6%,
payable annually in arrears. The original amount of the note, $225,000, was used
by Mr. Thomas to purchase 2,925,003 shares of the common stock of DOBI Medical
Systems.

         In connection with the merger, Mr. Jorgensen, our Chief Financial
Officer, agreed not to sell 50,000 of his shares of his common stock received in
the merger for 24 months.

         From August 2000 to October 2003, Alexis C. Korybut, the President of
Sterling Financial Investment Group, was a director of DOBI Medical Systems.
Sterling Financial has served as placement agent and provided investment banking
and financial advisory services to DOBI Medical Systems from time to time over
the past four years on a cash and equity fee basis. Cash fees paid to Sterling
Financial amounted to $1,420,855, and Sterling Financial and/or its designees
(including a former director of DOBI Medical Systems, Mr. Alexis Korybut) have
received warrants to purchase DOBI Medical Systems securities which have been
exchanged in the merger for warrants to purchase an aggregate of 2,062,494
shares of our common stock. Certain officers and directors of Sterling Financial
own shares of our common stock and/or warrants to purchase our common stock,
aggregating less than 5% of its outstanding shares. Sterling Financial also
served as placement agent for us in connection with the private placement of our
common stock and warrants that closed at the same time as the merger. Sterling
Financial received cash fees and expense reimbursements or allowances of
$155,000, and Sterling Financial and its designees received warrants to purchase
an aggregate of 340,000 shares of our common stock, at an exercise price of
$1.54 per share, for a term of three years.


                                       24


<PAGE>


         In connection with the engagement of Sterling Financial as placement
agent in two private placements of securities in 2000 and 2001, DOBI Medical
Systems agreed to nominate one person designated by Sterling Financial to the
Board of Directors of DOBI Medical so long as stockholders introduced to DOBI
Medical by Sterling Financial own at least 10% of all outstanding equity
securities of the DOBI Medical. That agreement now applies to us under the terms
of the Merger Agreement. Brad Baker is the current designee of Sterling
Financial.

         Brad Baker, a director of DOBI Medical Systems who became a member of
our board, was designated for nomination to the Board pursuant to the
above-described agreement with Sterling Financial. From April 2000 to February
2002, Mr. Baker served as an officer of Sterling Financial, which was the
placement agent in our private placement of common stock and warrants in
December 2003. Sterling Financial was also a financial advisor to DOBI Medical
and acted as a placement agent in connection with four offerings of the
securities of DOBI Medical in the period from April 2000 through October 2003.

         At the closing of the reverse merger, we entered into an investor
relations/public relations services agreement with Strategic Initiatives, Inc.
pursuant to which we (i) issued an option to Strategic Initiatives to purchase
up to 250,000 shares of our common stock at a price of $1.54, for a term of
three years, and (ii) advanced an aggregate of $750,000 to Strategic Initiatives
to cover costs and expenditures which Strategic Initiatives, anticipates it will
incur during the one-year term of the agreement. Keith A. Ebert, a former
director, is a principal of Strategic Initiatives.

         Immediately prior to the closing of the reverse merger and the private
placement, we purchased all 1,000,000 shares of common stock held by Mr. Ebert,
a director and formerly the Chief Financial Officer, Treasurer and Secretary of
Lions Gate Investment Limited, for $143,805.27. At the same time, we also
purchased 738,462 shares of our common stock owned by Graham Crabtree, Beverly
Strench and Renata Kubicek for an aggregate consideration of $106,194.73. All
shares were then cancelled at the closing of the reverse merger. Funds to effect
such redemptions were provided by a capital contribution from Verus Support
Services Inc. At the same time, N. Desmond Smith also agreed to the cancellation
of 400,000 shares of the company's common stock owned by him in consideration
for the release of an assignment of a number of oil and gas leases by Mr. Smith
to the company, and the termination of receivables due from Mr. Smith to the
company in the amount of $10,109.

         Dynamics Imaging, Inc., a holder of more than 5% of the our common
stock following the merger, agreed not to sell its common stock for up to two
years following the merger, provided that Dynamics Imaging, Inc., will be
permitted to sell its shares of its common stock at a rate of 1% per month of
the total number of shares of common stock issued in the merger, subject to
applicable securities laws, from six months until 12 months after the merger;
thereafter, the applicable percentage increases to 1.3% of those shares per
month until 24 months after the merger. Mr. Turner, a member of our board, is
the Chairman of the Board and Chief Executive Officer of Dynamics Imaging, Inc.

         We have no policy with respect to entering into transactions with
members of management or affiliated companies. Any non-arm's length transaction
we consider will be reviewed and voted on by disinterested members of our board
of directors and be in accordance with our certificate of incorporation, by-laws
and Delaware law.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a)      EXHIBITS.

         The exhibits listed in the following Exhibit Index are filed as part of
this Annual Report.

<TABLE>
<CAPTION>

Exhibit Number and Description
------------------------------
<S>       <C>
3.1       Certificate of Incorporation.(1)
3.2       By-Laws.(1)
10.1      Amendment No. 1 to Employment Agreement between DOBI Medical
          International, Inc. and Phillip C. Thomas.
14.1      Code of Business Conduct and Ethics.(2)
14.2      Code of Ethics for CEO and Senior Financial Officers.(2)
</TABLE>


                                       25
<PAGE>



<TABLE>
<CAPTION>

Exhibit Number and Description
------------------------------
<S>       <C>
21.1      Subsidiaries of DOBI Medical International, Inc.
23.1      Independent Registered  Public Accounting Firms Consent
31.1      Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certificate Pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002.
99.1      Audit Committee Charter. (2)
99.2      Compensation Committee Charter. (2)
99.3      Nominations and Corporate Governance Charter.

</TABLE>

--------------------
(1)      Filed with the Current Report on Form 8-K, dated January 30, 2004 and
         filed with the SEC on February 2, 2004.

(2)      Filed with the Annual Report on 10-KSB for the year ended December 31,
         2004 on February 18, 2004.

         (b)      REPORTS ON FORM 8-K.

                  1. We filed a Form 8-K on March 3, 2005 regarding the
resignation of Denis O'Connor as Senior Vice President, Marketing, Sales and
Services to accept a CEO position with another publicly traded medical device
company.

                  2. We filed a Current Report on Form 8-K on February 9, 2005
regarding the departure of Brian Vodicka from our Board of Directors.

                  3. We filed a Current Report on Form 8-K on January 25, 2005
regarding our product shipment guidance for 2005.

                  4. We filed a Current Report on Form 8-K on December 23, 2004
regarding the closing of the second tranche of our December 2003 private
placement.

                  5. We filed a Current Report on Form 8-K on December 3, 2004
amending the description of our securities.

                  6. We filed a Current Report on Form 8-K on November 5, 2004
with respect to our third quarter, 2004 earning press release.

                  7. We filed a Current Report on Form 8-K on October 12, 2004
with respect to Brian Vodicka's appointment to our Board of Directors.

                  8. We filed a Current Report on Form 8-K on October 1, 2004
with respect to the departure of Angelo Secci, M.D. as Vice President, Clinical
Research.


                                       26
<PAGE>


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         For the year ended December 31, 2004 and 2003, we incurred audit fees
totaling $98,000 and $132,000, respectively, and incurred fees for tax services
totaling $22,000 and $5,000, respectively, payable to Marcum & Kliegman LLP, our
auditors.


                                       27
<PAGE>


                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated:  March 11, 2005                 DOBI MEDICAL INTERNATIONAL, INC.


                                       By:   /s/Phillip C. Thomas
                                             -----------------------------------
                                             Phillip C. Thomas
                                             Chief Executive Officer
                                             (principal executive officer)

                                       By:   /s/Michael R. Jorgensen
                                             -----------------------------------
                                             Michael R. Jorgensen
                                             Executive Vice President and Chief
                                             Financial Officer
                                             (principal financial and accounting
                                             officer)


         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.

NAME                            TITLE                             DATE
----                            -----                             ----

/s/Robert M. Machinist
-----------------------
Robert M. Machinist          Chairman of the Board of Directors   March 11, 2005


/s/Phillip C. Thomas
-----------------------
Phillip C. Thomas            Director                             March 11, 2005


/s/David H. Clarke
-----------------------
David H. Clarke              Director                             March 11, 2005


/s/Brad Baker
-----------------------
Brad Baker                   Director                             March 11, 2005


/s/William Li, M.D.
-----------------------
William Li, M.D.             Director                             March 11, 2005


/s/Webb W. Turner
-----------------------
Webb W. Turner               Director                             March 11, 2005


<PAGE>


CERTIFICATION OF C.E.O. PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002

The undersigned, in the capacity and date indicated below, hereby certifies
that:

1.       I have reviewed this annual report on Form 10-KSB of DOBI Medical
         International, 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 small business issuer as of, and for, the periods presented in
         this report;

4.       The small business issuer's other certifying officer(s) and I are
         responsible for establishing and maintaining disclosure controls and
         procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d))
         and internal control over financial reporting (as defined in Exchange
         Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer 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 small
         business issuer, 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) designed such internal control over financial reporting,
         or caused such internal control over financial reporting to be designed
         under our supervision, to provide reasonable assurance regarding the
         reliability of financial reporting and the preparation of financial
         statements for external purposes in accordance with generally accepted
         accounting principles;

                  (c) evaluated the effectiveness of the small business issuer's
         disclosure controls and procedures and presented in this report our
         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

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

5.       The small business issuer's other certifying officer(s) and I have
         disclosed, based on our most recent evaluation of internal control over
         financial reporting, to the small business issuer's auditors and the
         audit committee of the small business issuer'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 small business
         issuer'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 small
         business issuer's internal control over financial reporting.


March 11, 2005

                                                         /s/Phillip C. Thomas
                                                         -----------------------
                                                         Phillip C. Thomas
                                                         Chief Executive Officer

<PAGE>


CERTIFICATION OF C.F.O. PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002

The undersigned, in the capacity and date indicated below, hereby certifies
that:

1.       I have reviewed this annual report on Form 10-KSB of DOBI Medical
         International, 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 small business issuer as of, and for, the periods presented in
         this report;

4.       The small business issuer's other certifying officer(s) and I are
         responsible for establishing and maintaining disclosure controls and
         procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(d))
         and internal control over financial reporting (as defined in Exchange
         Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer 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 small
         business issuer, 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) designed such internal control over financial reporting,
         or caused such internal control over financial reporting to be designed
         under our supervision, to provide reasonable assurance regarding the
         reliability of financial reporting and the preparation of financial
         statements for external purposes in accordance with generally accepted
         accounting principles;

                  (c) evaluated the effectiveness of the small business issuer's
         disclosure controls and procedures and presented in this report our
         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

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

5.       The small business issuer's other certifying officer(s) and I have
         disclosed, based on our most recent evaluation of internal control over
         financial reporting, to the small business issuer's auditors and the
         audit committee of the small business issuer'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 small business
         issuer'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 small
         business issuer's internal control over financial reporting.


March 11, 2005


                                    /s/Michael R. Jorgensen
                                    --------------------------------------------
                                    Michael R. Jorgensen
                                    Executive Vice President and Chief Financial
Officer


<PAGE>

                DOBI MEDICAL INTERNATIONAL, INC. AND SUBSIDIARY

                                   FORM 10-KSB

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent  Registered Public Accounting Firm             F-1
Consolidated Balance Sheet at December 31, 2004                      F-2
Consolidated Statements of Operations for the years ended
    December 31, 2004 and 2003 and the period September 7, 1999
    (inception) to December 31, 2004                                 F-3
Consolidated Statements of Stockholder's Equity for the period from
    September 7, 1999 (inception) to December 31, 2004               F-4 - F-7
Consolidated Statements of Cash Flows for the years ended
    December 31, 2004 and 2003 and the period
    September 7, 1999 (inception) to December 31, 2004               F-8 - F-9
Notes to Consolidated Financial Statements                           F-10 - F-24


<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------

To the Board of Directors and Stockholders of
DOBI Medical International, Inc. and Subsidiary


We have audited the accompanying consolidated balance sheet of DOBI Medical
International, Inc. and Subsidiary (a developmental stage company) as of
December 31, 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2004 and for the period from September 7, 1999 (inception) to
December 31, 2004. 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. The consolidated financial statements
of the Company for the period from inception (September 7, 1999) to December 31,
2002 were audited by other auditors whose report, dated July 11, 2003, expressed
an unqualified opinion on those statements and included an explanatory paragraph
regarding the Company's ability to continue as a going concern. The consolidated
financial statements for the period from inception (September 7, 1999) to
December 31, 2002 reflect a net loss of $11,589,121 of the total inception to
date net loss of $23,750,962. The other auditors' report has been furnished to
us, and our opinion, insofar as it related to the amounts included for such
prior periods, is based solely on the report of such other auditors.

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, based on our audits and the report of other auditors of the
cumulative information for the period from inception (September 7, 1999) to
December 31, 2002, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DOBI Medical
International, Inc. and Subsidiary as of December 31, 2004, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 2004, and for the period from inception (September 7,
1999) to December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.

The accompanying financial statements have been prepared assuming that DOBI
Medical International, Inc. and Subsidiary will continue as a going concern. As
more fully described in Note 2, the Company has not yet generated positive cash
flow from operations or meaningful sales of its product and has incurred
significant operating losses since inception. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not reflect the possible effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.



Marcum & Kliegman LLP
New York, New York
January 27, 2005



                                      F-1
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)
                           Consolidated Balance Sheet
                                December 31, 2004

<TABLE>
<CAPTION>
ASSETS
Current assets:
<S>                                                                                 <C>
     Cash and cash equivalents                                                     $ 2,454,608
     Inventory                                                                         379,412
     Prepaid expenses and other current assets                                         138,061
                                                                                   -----------
Total current assets                                                                 2,972,081

Property and equipment, net                                                            649,905
Intangible assets, net                                                                  11,877
Other assets                                                                            45,529
                                                                                   -----------
Total assets                                                                       $ 3,679,392
                                                                                   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                              $   270,595
     Accrued expenses                                                                  729,458
     Deferred revenue                                                                  136,495
                                                                                   -----------
Total current liabilities                                                            1,136,548

Stockholders' Equity
     Preferred stock, $.0001 par value, 10,000,000 shares
        authorized, 206 shares issued and outstanding                                  -
     Common stock, $.0001 par value, 140,000,000 shares
        authorized, 43,748,294 issued and outstanding                                    4,375
     Additional paid-in capital                                                     26,289,431
     Deficit accumulated during development stage                                  (23,750,962)
                                                                                   -----------
Total stockholders' equity                                                           2,542,844
                                                                                   -----------
Total liabilities and stockholders' equity                                         $ 3,679,392
                                                                                   ===========

See notes to consolidated financial statements

</TABLE>


                                      F-2
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)
                      Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                                                                     Period from
                                                                                                    September 7,
                                                                                                        1999
                                                                                                   (inception) to
                                                                  Year ended December 31,           December 31,
                                                           -------------------------------------
                                                                  2004               2003               2004
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                <C>                <C>
Revenue
   Product                                                 $    316,316       $       -          $    316,316
   Service                                                        4,950               -                 4,950
                                                           ------------------ ------------------ -------------------
                                                                321,266               -               321,266
                                                           ------------------ ------------------ -------------------
Cost of sales
   Product                                                      363,314               -               363,314
   Service                                                       20,518               -                20,518
                                                           ------------------ ------------------ -------------------
                                                                383,832               -               383,832
                                                           ------------------ ------------------ -------------------
   Gross loss                                                   (62,566)               -              (62,566)
                                                           ------------------ ------------------ -------------------


Research and development expenses                             1,957,256           1,154,197          8,859,510
General and administrative expenses                           2,147,228           1,470,237          6,514,454
Clinical program expenses                                       928,512             300,529          2,644,582
Sales and marketing expenses                                  1,918,824             420,612          3,689,367
                                                           ------------------ ------------------ -------------------
   Total operating expenses                                   6,951,820           3,345,575         21,707,913
                                                           ------------------ ------------------ -------------------

Operating income (loss)                                      (7,014,386)         (3,345,575)       (21,770,479)

Other income (expense)
   Interest expense                                              (7,495)         (1,808,085)        (2,173,151)
   Interest income                                               11,443               2,257            192,668
                                                           ------------------ ------------------ -------------------
Net loss                                                     (7,010,438)         (5,151,403)       (23,750,962)
Deemed dividend on preferred stock                             (805,393)          -                   (805,393)
Preferred Stock dividends                                      (206,454)          -                   (206,454)
                                                           ------------------ ------------------ -------------------
Net loss applicable to common stock                        $ (8,022,285)      $  (5,151,403)     $ (24,762,809)
                                                           ================== ================== ===================

Basic and diluted loss per common share                          $ 0.21             $ 0.26
                                                           ================== ==================

Weighted average common shares, basic and diluted            37,924,009         19,981,963
                                                           ================== ==================


See notes to consolidated financial statements
</TABLE>


                                      F-3
<PAGE>


                 DOBI MEDICAL INTERNATIONAL, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                          SERIES A PREFERRED STOCK                  COMMON STOCK
                                                          ------------------------      ----------------------------
                                                          SHARES           AMOUNT         SHARES             AMOUNT
                                                          ------           -------      ----------          --------
<S>                                                                                     <C>                    <C>
Initial capital contribution                                                            10,725,011          $  1,073
Purchase of the net asset of Dynamics
   Imaging, Inc.                                                                         2,275,002               227
Net loss
                                                                                        ----------          --------
BALANCE, DECEMBER 31, 1999                                                              13,000,013             1,300
Conversion of promissory notes to common stock                                             764,118                76
Sale of common stock                                                                     2,405,951               241
Transaction costs in connection with the
   sale of common stock
Stock-based compensation
Interest receivable on share subscription note
Net loss
                                                                                        ----------          --------
BALANCE, DECEMBER 31, 2000                                                              16,170,082             1,617
Conversion of preferred stock for common stock                                           2,211,491               221
Fair value of private placement stock warrants
Transaction costs in connection with the
   sale of common stock
Issuance of consulting stock warrants
Interest receivable on share subscription note
Stock-based compensation
Net loss

BALANCE, DECEMBER 31, 2001                                                              ----------          --------
                                                                                        18,381,573             1,838
Conversion of promissory notes to common stock                                             370,837                37
Transaction costs in connection with the
   sale of common stock
Payment of dividends
Payment of Subscription Note
Issuance of consulting stock warrants
Placement agent stock warrants
Fair value of detachable Series 1 warrants
Stock-based compensation                                                                    37,500                 4
Net loss
                                                                                        ----------          --------
BALANCE, DECEMBER 31, 2002                                                              18,789,910             1,879
Stock-based compensation                                                                    12,500                 1
Placement agent stock warrants
Fair value of detachable Series 1 & 2 warrants
Payment of dividends
Conversion of Series 1 & 2 Notes to stock                                                4,773,764               478
Sale of common stock                                                                     5,500,000               550
Transaction costs in connection with the
   sale of common stock
Outstanding common stock of Lions Gate
   Investment Limited                                                                    8,461,538               846
Net Loss
                                                          ------           -------      ----------          --------
BALANCE, DECEMBER 31, 2003                                                              37,537,712             3,754
Stock-based compensation
Sale of Series A Preferred Stock                             206                 -
Dividends - Series A Preferred Stock
Sale of common stock                                                                     6,011,221               601

</TABLE>

                                      F-4


<PAGE>


<TABLE>
<CAPTION>


<S>                                                                                     <C>                   <C>
Exercise of warrants                                                                        199,361               20
Net Loss
                                                          ------           -------      -----------         --------
BALANCE, DECEMBER 31, 2004                                   206           $    -        43,748,294         $  4,375
                                                          =======          =======      ===========         ========

</TABLE>

See notes to consolidated financial statements


                                      F-5
<PAGE>


                 DOBI MEDICAL INTERNATIONAL, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                           DEFICIT
                                                                                        ACCUMULATED
                                                    ADDITIONAL           SHARE              DURING
                                                      PAID-IN        SUBSCRIPTION        DEVELOPMENT
                                                     CAPITAL             NOTE               STAGE               TOTAL
                                                     -------             ----               -----               -----
<S>                                                   <C>              <C>                                    <C>
Initial capital contribution                         $  748,927       $(225,000)                              $  525,000
Purchase of the net asset of Dynamics
   Imaging, Inc.                                        158,864                                                  159,091
Net loss                                                                                $(1,219,293)          (1,219,293)
                                                      ----------------- --------------- -------------------- ------------------
BALANCE, DECEMBER 31, 1999                              907,791        (225,000)         (1,219,293)            (535,202)
Conversion of promissory notes to common stock        1,763,272                                                1,763,348
Sale of common stock                                  5,551,947                                                5,552,188
Transaction costs in connection with the
   sale of common stock                                (923,499)                                                (923,499)
Stock-based compensation                                  1,213                                                    1,213
Interest receivable on share subscription note                           (1,125)                                  (1,125)
Nero loss                                                                                 (3,012,627)         (3,012,627)
                                                      ----------------- ----------------- -------------------- ------------------
BALANCE, DECEMBER 31, 2000                            7,300,724        (226,125)          (4,231,920)          2,844,296
Conversion of preferred stock for common stock        1,474,106                                                1,474,327
Fair value of private placement stock warrants          737,161                                                  737,161
Transaction costs in connection with the                                                                           -
   sale of common stock                                (414,837)                                                (414,837)
Issuance of consulting stock warrants                    55,000                                                   55,000
Interest receivable on share subscription note                          (13,500)                                 (13,500)
Stock-based compensation                                148,718                                                  148,718
Net loss                                                                                  (4,649,739)         (4,649,739)
                                                      ----------------- ----------------- -------------------- ------------------
BALANCE, DECEMBER 31, 2001
                                                      9,300,872        (239,625)          (8,881,659)           181,426
Conversion of promissory notes to common stock          432,606                                                 432,643
Transaction costs in connection with the
   sale of common stock                                 (59,978)                                                (59,978)
Payment of dividends                                    (88,459)                                                (88,459)
Payment of Subscription Note                                            239,625                                 239,625
Issuance of consulting stock warrants                    11,464                                                  11,464
Placement agent stock warrants                           73,403                                                  73,403
Fair value of detachable Series 1 warrants              458,000                                                 458,000
Stock-based compensation                                 75,273                                                  75,277
Net loss                                                                                  (2,707,462)         (2,707,462)
                                                      ----------------- ----------------- -------------------- ------------------
BALANCE, DECEMBER 31, 2002                            10,203,181        -                (11,589,121)         (1,384,061)
Stock-based compensation                                  87,174                                                  87,175
Placement agent stock warrants                            69,614                                                  69,614
Fair value of detachable Series 1 & 2 warrants           350,112                                                 350,112
Payment of dividends                                     (44,230)                                                (44,230)
Conversion of Series 1 & 2 Notes to stock              4,773,284                                               4,773,762
Sale of common stock                                   5,499,450                                               5,500,000
Transaction costs in connection with the
   sale of common stock                               (1,713,752)                                             (1,713,752)
Outstanding common stock of Lions Gate                                                                               -
   Investment Limited                                       (846)                                                    -
Net Loss                                                                                  (5,151,403)         (5,151,403)
                                                  ----------------- ----------------- -------------------- ------------------
BALANCE, DECEMBER 31, 2003
                                                      19,223,987        -                (16,740,524)          2,487,217
Stock-based compensation                                  66,891                                                  66,891

</TABLE>

                                      F-6
<PAGE>
<TABLE>
<CAPTION>

<S>                                                     <C>            <C>                                       <C>
Sale of Series A Preferred Stock                       4,208,167                                               4,208,167
Dividends - Series A Preferred Stock                    (206,454)                                               (206,454)
Sale of common stock                                   2,996,860                                               2,997,461
Exercise of warrants                                         (20)                                                     -
Net Loss                                                                                  (7,010,438)         (7,010,438)
                                                  ----------------- ----------------- -------------------- ------------------
BALANCE, DECEMBER 31, 2004                        $   26,289,431       $         -    $  (23,750,962)      $   2,542,844
                                                  ================= ================= ==================== ==================

</TABLE>


See notes to consolidated financial statements


                                      F-7
<PAGE>


                 DOBI MEDICAL INTERNATIONAL, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                  Period from
                                                                                                               September 7,1999
                                                                               Year ended December 31,           (inception) to
                                                                                2004             2003          December 31, 2004
                                                                           ------------    ------------        -----------------
OPERATING ACTIVITIES

<S>                                                                        <C>              <C>                 <C>
Net loss                                                                   $ (7,010,438)   $ (5,151,403)        $ (23,750,962)
Adjustments to reconcile net loss to net cash used in operating
   activities:
   Depreciation and amortization                                                116,027          48,310               320,347
   Amortization of financing costs                                                    -           6,924               854,343
   Loss on sale of equipment                                                          -               -                   334
   Write-off of purchased in-process research and development costs                   -               -             1,023,525
   Interest receivable in connection with share subscription
      notes charged to equity                                                         -               -               (14,625)
   Stock based compensation                                                      66,891          87,175               445,738
   Accrued interest converted to equity                                               -         215,258               340,454
   Accretion of discount on Series 1and 2 convertible notes                           -         722,794               808,113
   Common stock warrants in connection with
      the conversion of notes payable                                                 -               -                61,806
   Changes in assets and liabilities:
     (Increase) in inventory                                                   (379,412)              -              (379,412)
      Decrease (increase) in other current assets                               676,096        (781,132)             (137,839)
      Decrease in other assets                                                  (28,556)         84,175                42,996
      Increase (decrease) in accounts payable                                     6,533         (63,749)              536,070
      Increase (decrease) in accrued expenses                                   (29,420)        196,660               171,400
      Increase in deferred revenue                                               92,850          43,645               136,495
                                                                           ------------    ------------         -------------
Net cash used in operating activities                                        (6,489,429)      3,801,343)          (19,541,217)

INVESTING ACTIVITIES
Purchase of business, net of cash received                                            -               -              (500,000)
Purchase of property and equipment                                             (719,478)        (18,465)             (835,582)
Patent costs                                                                          -               -               (43,022)
Proceeds from sale of equipment                                                       -               -                   250
                                                                           ------------    ------------         -------------
Net cash used in investing activities                                          (719,478)        (18,465)           (1,378,354)

FINANCING ACTIVITIES
Proceeds from founding members                                                        -               -               525,000
Cash paid for transaction costs associated with equity transactions                   -      (1,713,752)           (2,008,107)
Cash paid for transaction costs associated with debt transactions                     -        (361,230)             (719,485)
Deferred offering costs                                                               -               -               (75,000)
Proceeds from subscriptions receivable - Class A preferred shares                     -               -               940,020
Dividends - Class A redeemable convertible preferred units                            -         (44,230)             (132,689)
Proceeds from share subscription note - related party                                 -               -               239,625
Proceeds (payments) from Series 1 and Series 2 Convertible Notes               (170,000)      2,266,000             4,386,000
Proceeds from notes payable, net                                                      -         172,500             3,113,799
Proceeds from sale of common stock                                            2,997,461       5,500,000            13,126,149
Net proceeds from sale of preferred stock                                     4,208,167               -             4,208,167
Repayment of notes payable                                                            -               -              (229,300)
                                                                           ------------    ------------         -------------
Net cash provided by financing activities                                     7,035,628       5,819,288            23,374,179
Increase (Decrease) in cash and cash equivalents                               (173,279)      1,999,480             2,454,608
Cash and cash equivalents at beginning of year/period                         2,627,887         628,407                     -
                                                                           ------------    ------------         -------------
Cash and cash equivalents at end of year/period                            $  2,454,608    $  2,627,887         $   2,454,608
                                                                           ============    ============         =============
See notes to consolidated financial statements

</TABLE>

                                      F-8
<PAGE>


                 DOBI MEDICAL INTERNATIONAL, INC. AND SUBSIDIARY
                          (A DEVELOPMENT STAGE COMPANY)

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>

                                                                                                               Period from
                                                                                                             September 7,1999
                                                                             Year ended December 31,          (inception) to
                                                                              2004             2003         December 31, 2004
                                                                        ------------    ------------        -----------------
<S>                                                                           <C>           <C>                  <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest                                   $      7,495    $     89,066         $      98,105
                                                                         ============    ============         =============
Purchase of business, net of cash received:
   Fair value of assets purchased                                                   -               -              (109,693)
   Acquisition of in-process research and development costs                         -               -            (1,023,525)
   Assumption of promissory notes                                                   -               -                417,877
   Transaction costs                                                                -               -                56,250
   Issuance of shares                                                               -               -               159,091
                                                                         ------------    ------------         -------------
Net cash used to acquire business                                        $          -    $          -         $    (500,000)
                                                                         ============    ============         =============

Non-cash investing and financing activities:
   Conversion of notes payable and accrued interest to common stock      $          -    $  4,773,758         $   8,026,451
                                                                         ============    ============         =============
   Conversion of Class A preferred shares to common stock                $          -    $  1,307,846         $   1,307,846
                                                                         ============    ============         =============
   Preferred stock dividends                                             $    206,454    $          -         $     206,454
                                                                         ============    ============         =============
   Deemed dividend to preferred stock shareholders                       $    805,393    $          -         $     805,393
                                                                         ============    ============         =============
   Share subscription note                                               $          -    $          -         $     239,625
                                                                         ============    ============         =============
   Issuance of common warrants for consulting                            $          -    $          -         $     326,348
                                                                         ============    ============         =============
   Accretion of Class A redeemable convertible preferred shares          $          -    $    189,092         $     364,334
                                                                         ============    ============         =============

See notes to consolidated financial statements


</TABLE>

                                      F-9
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


1.  ORGANIZATION OF BUSINESS

The consolidated financial statements include the accounts of DOBI Medical
International, Inc. and its wholly-owned subsidiary. All significant
inter-company balances and transactions have been eliminated.

DOBI Medical International, Inc. (formerly Lions Gate Investment Limited), is
the parent company of DOBI Medical Systems, Inc., (collectively, the "Company")
and which is the surviving entity in a reverse merger closed in December, 2003
(see Note 12, "Reverse Merger"). The Company was organized on September 7, 1999
as a Delaware limited liability company ("LLC"). Effective January 1, 2003, the
Company converted from a Delaware limited liability company to a Delaware
corporation.

The Company was formed to acquire and further develop a new technology for
imaging of the human body referred to as Dynamic Functional Imaging. On December
8, 1999, the Company acquired certain assets, including the research,
technology, all intellectual property rights and other assets and assumed
certain liabilities of Dynamics Imaging, Inc. in exchange for $500,000 in cash
and a 17.5% membership interest (equal to 2,275,002 common shares with a value
of $159,091) in DOBI Medical Systems, LLC. The transaction was accounted for by
the purchase method of accounting. The purchase price has been allocated to the
net assets acquired based on estimated fair values at the date of acquisition.

As part of the allocation of the purchase price, management determined that
intangible assets with an assigned value of $1,023,525 represented purchased
in-process research and development costs since significant additional costs
will be required for clinical trials and Food and Drug Administration ("FDA")
approval prior to marketing a commercial product. The technology purchased has
no alternative use and there can be no assurances that the Company can obtain
FDA approval with the acquired technology before it needs additional funds (see
Note 2). As such, the $1,023,525 of acquired in-process research and development
was charged to research and development expense in 1999.

2. BASIS OF PRESENTATION

The Company's principal activities to date have been in the research and
development of a medical diagnostic system known as the Dynamic Optical Breast
Imaging or DOBI(R) or ComfortScan(TM) System, which is an optically-based
medical device for improved diagnosis of breast cancer as an adjunct to
mammography. The accompanying financial statements have been prepared in
accordance with Statement of Financial Accounting Standards No. 7, Development
Stage Enterprises, since limited, principal operations only began in the second
half of 2004.

Certain retroactive adjustments have been made to the financial statements
presented for the periods prior to January 1, 2003 to reflect the Company as a
corporation (rather than a limited liability company). The term "units" has been
replaced with the terms "shares" or "stock" to reflect the Company's status as a
corporation when referring to various financial and equity instruments. In
addition, the reverse stock split of 1.54 for 1, and the change in par value
from $0.001 to $0.0001 has also been retroactively adjusted to inception.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is currently a development
stage enterprise and the Company's continued existence is dependent upon the
Company's ability to obtain additional debt and/or equity financing. The Company
has yet to generate a positive cash flow from operations, and until meaningful
sales of the Company's product begin, the Company is totally dependent upon debt
and equity funding to finance the Company's operations.

In the event that the Company is unable to obtain additional debt or equity
financing or the Company is unable to obtain such financing on terms and
conditions acceptable to us, the Company may have to cease or severely curtail
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management has so far been able to raise the
capital necessary to reach this stage of product development and has been able
to obtain funding for operating requirements to date. There is no assurance
that, if and when FDA


                                      F-10
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


marketing clearance is obtained, the ComfortScan system will achieve market
acceptance or that we will achieve a profitable level of operations. The
accompanying financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with financial institutions and money
market instruments. The Company places its cash and cash equivalents with high
quality financial institutions and, to date has not experienced losses on any of
its balances. At times, cash balances held at financial institutions were in
excess of federally insured limits.

Inventory

Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventories include material, labor and manufacturing overhead
costs.

Property and Equipment

Equipment is recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
five years.

Expenditures for routine maintenance and repairs are charged against operations.
Major replacements, improvements and additions are capitalized. Upon sale or
retirement, the cost and related accumulated depreciation are eliminated from
the respective account, and any resulting gain or loss is reported as income or
expense.

Long-Lived Assets

In accordance with Financial Accounting Standards Board ("FASB") Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"),
the Company performs impairment tests on its long-lived assets when
circumstances indicate that their carrying amounts may not be recoverable. If
required, recoverability is tested by comparing the estimated future
undiscounted cash flows of the asset or asset group to its carrying value. If
the carrying value is not recoverable, the asset or asset group is written down
to market value.

Intangible Assets

FASB Statement No. 142, Goodwill and Other Intangible Assets ("FAS 142")
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of FAS 142. This standard also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment.

The Company's intangible assets consist of the costs of filing various United
States and international patents and are amortized on a straight-line basis over
the estimated useful lives of the respective patents, generally five to ten
years.


                                      F-11
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


Deferred Financing and Offering Costs

For the year ended December 31, 2003, the Company recorded $422,685 of financing
costs related to its Series 1 and Series 2 Convertible Notes. Such costs were
capitalized and had been amortized using the straight-line method over the term
of the Series 1 and Series 2 Convertible Notes. Amortization, which is included
in interest expense for the year ended December 31, 2003 totaled $796,924.

During 2002, the Company paid a non-refundable retainer fee of $75,000 to a
placement agent in connection with a proposed financing. In 2003, this proposed
financing was withdrawn and the $75,000 fee was expensed.

Revenue Recognition

The Company generally recognizes revenue upon the shipment of its product to its
customers except for the initial maintenance component. That component is
deferred and is recognized on a straight-line basis over the initial maintenance
term.

Research and Development

Research and development costs are expensed as incurred. The costs of materials
and equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing or sales, are classified as property and equipment and
depreciated over their estimated useful lives.

Advertising Costs

Advertising costs are expensed as incurred. For the years ended December 31,
2004 and 2003 advertising expense was $42,468 and $75,901, respectively.

Equity-Based Compensation

As permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation
("FAS 123"), which establishes a fair value based method of accounting for
equity-based compensation plans, the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25") for recognizing equity-based compensation expense for financial statement
purposes. Under APB 25, no compensation expense is recognized at the time of
option grant if the exercise price of the employee stock option is fixed and
equals or exceeds the fair market value of the underlying common stock on the
date of grant and the number of shares to be issued pursuant to the exercise of
such options are known and fixed at the grant date.

The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of FAS 123 and the Emerging Issues Task Force in
Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or In Conjunction with Selling, Goods or Services which
require that such equity instruments are recorded at their fair value on the
measurement date, which is typically the date the services are performed.

In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure ("FAS 148"). This standard amends the
disclosure requirements of FAS 123 for fiscal years ending after December 15,
2002 to require prominent disclosure in both annual and interim financial
statements about the method used and the impact on reported results. The Company
follows the disclosure-only provisions of FAS 123 which requires disclosure of
the pro forma effects on net income (loss) as if the fair value method of
accounting prescribed by FAS 123 had been adopted, as well as certain other
information.


                                      F-12
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


Option valuation models require the input of highly subjective assumptions
including the expected life of the option. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

The following table summarizes relevant information as to reported results under
the Company's intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition provisions of FAS 123
had been applied for the following years ended December 31, 2004 and 2003 as
follows:

<TABLE>
<CAPTION>
                                                                2004              2003
                                                          -------------------------------------
<S>                                                          <C>               <C>
Net loss applicable to common stock, as reported             $(8,022,285)      $(5,151,403)
Add total stock-based compensation, as reported                    66,891            34,275
Deduct total stock-based compensation determined                (670,899)         (100,145)
  under fair value based method for all awards
                                                          -------------------------------------
Pro forma net loss                                           $(8,626,293)      $(5,217,273)
                                                          =====================================
Basic and diluted loss per common share - as reported             $(0.21)           $(0.26)
                                                          =====================================
Proforma loss per share basic and diluted                         $(0.23)           $(0.26)
                                                          =====================================
</TABLE>

Income Taxes

The Company was treated as a limited liability company ("LLC") for federal and
state income tax purposes through December 31, 2002 and did not incur income
taxes as its earnings and losses were included in the tax returns of the
members. Accordingly, the financial statements do not reflect a provision for
federal or state income taxes through December 31, 2002.

Effective as of January 2, 2003, the Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS No. 109"). SFAS No. 109 requires the recognition of deferred tax assets
and liabilities for both the expected impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived primarily from tax loss carryforwards.
The Company has established a valuation allowance related to the benefits of net
operating losses for which utilization in future periods is uncertain. The
Company believes it is more likely than not that the Company will not realize
the benefits of these deductible differences in the near future and therefore a
full valuation allowance of approximately $4,900,000 is provided.

As of December 31, 2004 the Company has approximately $12,000,000 of federal net
operating losses available to offset future taxable income, which if not
utilized will expire in 2024. No provision for income taxes has been recorded in
the financial statements as a result of continued losses. Any benefit for income
taxes as a result of utilization of net operating losses may be limited as a
result of a change in control.

Management Estimates

The preparation of financial statements are in conformity with accounting
principles generally accepted in the United States and requires 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.


                                      F-13
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


Fair Value of Financial Instruments

The recorded amounts of cash and cash equivalents, short-term borrowings,
accounts payable and accrued expenses as presented in the financial statements
approximate fair value because of the short-term nature of these instruments.

Net Loss Per Common Share

Basic net loss per common share has been computed using the weighted average
number of common shares outstanding during the periods presented plus any
dilutive securities outstanding. There were no common stock equivalents
consisting of options and warrants which were required to be included in the
calculation of diluted loss per share for the periods presented. Total stock
options and warrants outstanding as of December 31, 2004 equaled 4,980,500 and
22,521,719, respectively. As of December 2004 our outstanding series A Preferred
convertible stock is convertible into 2,903,000 share of common stock.

Prior to the reverse merger on December 9, 2003, the Company paid dividends to
the Class A Preferred Stockholders. In addition, the Company accounted for the
accretion to redemption value of the preferred stock. These amounts were not
deducted from loss attributable to Common shareholders, in calculating net loss
per share, as such amounts were determined to have an immaterial impact on the
financial statements for all periods presented.

Recently Issued Accounting Standards

In January 2003, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," provides guidance for identifying a controlling interest
in a variable interest entity ("VIE") established by means other than voting
interest. FIN 46 also required consolidation of a VIE by an enterprise that
holds such controlling interest. In December 2003, the FASB completed its
deliberations regarding the proposed modifications to FIN No., 46 and issued
Interpretation Number 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB 51" ("FIN No. 46 R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIEs or
potential VIEs commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public small business issuers'
entities is required in all interim and annual financial statements for periods
ending after December 15, 2004. The adoption of this pronouncement did not have
a material effect on the Company's financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 123R "Share Based Payment". This statement is a revision of SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123R addresses all forms of share based payment
("SBP") awards including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. Under SFAS 123R,
SBP awards result in a cost that will be measured at fair value on the awards'
grant date, based on the estimated number of awards that are expected to vest.
This statement is effective for public entities that file as small business
issuers--as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005. The Company is currently in the process of
evaluating the effect that the adoption of this pronouncement may have on its
financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 153 "Exchanges of Nonmonetary Assets". This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
Statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is


                                      F-14
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after December 16, 2004. The provisions of this Statement should be applied
prospectively. The adoption of this pronouncement is not expected to have
material effect on the Company's financial statements.

The Emerging Issues Task Force ("EITF") Issue 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share." The EITF reached a
consensus that contingently convertible instruments, such as contingently
convertible debt, contingently convertible preferred stock, and other such
securities should be included in diluted earnings per share (if dilutive)
regardless of whether the market price trigger has been met. The consensus is
effective for reporting periods ending after December 15, 2004. The adoption of
this pronouncement is not expected to have material effect on the Company's
financial statements.


4. Inventories at December 31, 2004 consisted of the following:

Purchased parts, components and supplies       $110,335
Work-in-process                                  66,706
Finished goods                                  202,371
                                                ---------
                                               $379,412
                                                =========

5.  PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2004 consisted of the following:

                                                    Estimated Useful
                                                    Lives (years)
                                                  ------------------

Computer software and equipment        $ 629,535        3 - 5
Furniture, fixtures and equipment        112,514          5
Leasehold improvements                   127,793          5
                                    -------------
                                         869,842
Less accumulated depreciation and
amortization                            (219,937)
                                     -------------
Property and equipment, net            $ 649,905
                                    =============


Depreciation and amortization expense was $94,083 and $27,069 for the years
ended December 31, 2004 and 2003, respectively.

6.  INTANGIBLE ASSETS

Intangible assets at December 31, 2004 consisted of:

       Patents                                                  $ 112,128
       Less accumulated amortization                             (100,251)
                                                        ------------------


                                      F-15
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


       Intangible assets, net                                   $  11,877
                                                        ==================

The weighted-average amortization period for the patents is approximately five
years. Amortization expense for the years ended December 31, 2004 and 2003
related to patents was $21,944 and $21,240 respectively. Amortization expense
for the next five years is estimated as follows:

                   2005                               $5,276
                   2006                                3,130
                   2007                                1,186
                   2008                                1,186
                   Thereafter                          1,099

7.  NOTES PAYABLE

As part of the acquisition of Dynamics Imaging, Inc., the Company assumed
approximately $418,000 of Series Promissory Notes ("Notes") with a member of the
Board of Directors. These Notes bore interest at 10% per year, were payable on
demand or within 180 days of issuance and were collateralized by all of the
Company's intellectual property and other assets. As of December 31, 1999,
borrowings totaling $600,498 were outstanding with this director under the
identical terms of the original issue. Subsequent to this acquisition, the
Company borrowed an additional $1,004,000 in 2000 from this director, of which
$899,000 was under the same terms as the Notes and $105,000 was under Unsecured
Demand Promissory Notes ("Unsecured Notes"), which bore interest at 10% per
year. Further, $309,000 was borrowed under the Unsecured Notes from a second
director. As of December 31, 2000, outstanding borrowings totaling $1,763,348
with these related parties, including accrued interest of $79,150, were
converted to common units and $229,300, including accrued interest of $1,500,
was repaid.

During 2001, the Company borrowed $1,098,150 from this director under the same
terms as previous borrowings. As of December 31, 2001, all outstanding
borrowings, including accrued interest of $20,358, were converted to Class A
redeemable convertible preferred shares.

Series 1 Convertible 8% Notes and Series 1 Warrants

In 2002, the Company authorized the private placement of up to $4,000,000 in
"lots", each lot consisting of one Series 1 Convertible 8% Note ("Series 1
Notes") and one Series 1 Warrant ("Series 1 Warrants") exercisable for
securities of the Company having a dollar value equal to 100% of the principal
amount of the corresponding Series 1 Note. Principal and interest related to the
Series 1 Notes are repayable within 10 days following the closing of a qualified
debt or equity financing, as defined, or on their respective maturity dates 13
months from their dates of issuance, which range from July 12, 2002 through
January 31, 2003. In the event of a voluntary or involuntary liquidation, the
Series 1 Notes are senior to all other unsecured indebtedness. The Series 1
Notes are convertible, on the same terms and conditions, into securities the
Company may issue in connection with a qualified financing, or, if no such
qualified financing occurs prior to the maturity date, into common shares of the
Company at $1.85 per share. The Series 1 Warrants, which expire on the earlier
of i) any reorganization or reclassification of the equity securities for the
Company, ii) any consolidation or merger of the Company in which the Company is
not the surviving entity, iii) the sale or disposition by the Company of all or
substantially all of its assets, or iv) August 31, 2009, are exercisable, on the
same terms and conditions, for securities the Company may issue in connection
with a qualified financing, or, if no such qualified financing occurs prior to
the maturity date, into common shares of the Company at $1.85 per share.

The Company sold $3,373,000 of its Series 1 Notes and Series 1 Warrants. In
connection with this financing, the Company incurred and deferred a total of
$610,313 in transaction related expenses which included the issuance of
placement agent unit warrants (the "Series 1 Placement Agent Warrants") to
purchase $500,600 in "lots", each lot


                                      F-16
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


consisting of a Series 1 Note and a Series 1 Warrant. The exercise price of the
Series 1 Placement Agent Warrants was 110% of the price paid by investors ($2.03
per lot). The fair value of the Series 1 Placement Agent Warrants were
approximately $0.21 per warrant, or $109,108 in total, using the Black-Scholes
option pricing model. Amortization of transaction related expenses for the years
ended December 31, 2003 and 2002 totaled $552,894 and $57,419 respectively.

The Series 1 Notes were recorded at their original discounted value, by
deducting and recording in paid-in capital, the estimated fair value, using the
Black-Scholes option pricing model for the Series Warrants totaling $674,600.

On December 9, 2003, $2,878,000 of these notes and $177,761 of accrued interest
were converted into common stock (see footnote 11 "Reverse Merger"). Of the
remaining $495,000 of notes that were not converted into common stock, $325,000
with accrued interest had been paid prior to December 31, 2003 and the remaining
$170,000 was paid in January 2004.

Series 2 Subordinated Convertible 12% Notes and Series 2 Warrants

In 2003, the Company authorized the private placement of up to $3,000,000 in
"lots", each lot consisting of one Series 2 Subordinated Convertible 12% Note
("Series 2 Notes") and one Series 2 Warrant ("Series 2 Warrants") exercisable
for securities of the Company having a dollar value equal to 100% of the
principal amount of the corresponding Series 2 Note. At the election of the
Company, the Series 2 Notes shall be converted into the Company's Common Stock
at a price equal to the price of common shares issued pursuant to a Qualified
Financing. A Qualified Financing is defined as the sale or a series of sales of
equity securities by the Company with gross proceeds of not less than
$5,000,000. A Qualified Financing also includes any merger or consolidation to
which the Company is a party, and in which the party to the merger other than
the Company immediately prior to the effective time of the merger or
consolidation, has cash and cash equivalents, of not less than $5,000,000. The
Series 2 Notes had respective maturity dates 13 months from their dates of
issuance, which range from October 13, 2004 through October 30, 2004. The Series
2 Notes are convertible, on the same terms and conditions, into securities the
Company may issue in connection with a qualified financing, or, if no such
qualified financing occurs prior to the maturity date, into common shares of the
Company at $1.85 per share. The Series 2 Warrants are exercisable at $1.85 per
share for a share of the Company's Common Stock, subject to adjustments under
certain circumstances. The warrants expire on December 31, 2008.

The Company sold $1,680,500 of its Series 2 Notes and Series 2 Warrants. In
connection with this financing, the Company incurred and deferred a total of
$244,030 in transaction related expenses which included the issuance of
placement agent warrants (the "Series 2 Placement Agent Warrants") to purchase
$143,050 in "lots", each lot consisting of a Series 2 Note and a Series 2
Warrant. The exercise price of the Series 1 Placement Agent Warrants is 110% of
the price paid by investors ($2.03 per lot). The fair value of the Series 2
Placement Agent Warrants is approximately $0.27 per warrant, or $25,749 in
total, using the Black-Scholes option pricing model.

The Series 2 Notes were recorded at their original discounted value, by
deducting and recording in paid-in capital, the estimated fair value, using the
Black-Scholes option pricing model for the Series 2 Warrants totaling $133,513.

On December 9, 2003, these notes and $37,501 of accrued interest were converted
into common stock (see footnote 11 "Reverse Merger"). The deferred transaction
costs of $244,030 and warrant costs of $133,513 were recognized as interest
expense in the year ended December 31, 2003.

8.  STOCKHOLDERS' EQUITY

Pursuant to the approval of the holders of common units of the Company at a
Special Meeting of the Holders of the Common Units on December 18, 2002, on
January 1, 2003, the Company converted, from a Delaware limited liability
company to a Delaware corporation. In accordance with the Certificate of
Incorporation approved at that


                                      F-17
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


meeting, the Company was authorized to issue 95,000,000 common shares, 2,500,000
Class A 4% redeemable convertible preferred shares, and 2,500,000 preferred
shares.

Pursuant to the merger the number of shares of common stock authorized was
increased from the 100,000,000 shares of common stock, par value $.0001 per
share authorized under Lions Gate's Articles of Incorporation, to 150,000,000
shares of capital stock, divided into 140,000,000 shares of common stock, par
value $.0001 per share, and 10,000,000 shares of preferred stock, par value
$.0001 per share.

Class A 4% Redeemable Convertible Preferred Shares

On June 25, 2001, the Board of Managers authorized up to 2,500,000 shares of
membership interest to be designated as Class A 4% Redeemable Convertible
Preferred Shares (the "Preferred Shares"). Preferred Shares are non-voting
securities with a liquidation value of $2.25 per unit and are entitled to a
dividend at the rate of four percent (4%) per year on the liquidation value of
each Preferred Share outstanding, in cash, semi-annually on June 30 and December
31 each year. Each Preferred Share outstanding will be redeemed for 100%
liquidation value at the earlier of (i) December 31, 2006, or (ii) the closing
of any transaction in which the common units are redeemable or exchangeable in
full for cash or any combination of cash, securities or other property.

Upon liquidation or dissolution of the Company, the remaining assets of the
Company shall be distributed first, to the payment of all taxes, unpaid wages,
debts and liabilities of the Company (including debts and liabilities to
shareholders); second, to holders of any classes of ownership interests having
rights senior to the rights of the Preferred Shares; third, to the payment of
accrued but unpaid dividends to the Class A shareholders on their outstanding
Preferred Shares; fourth, to the holders of the Preferred Shares, at the
liquidation value per Preferred Share; fifth, to holders of any classes or
groups of shareholder interests in the Company having rights junior to the
Preferred Shares; sixth, to the holders of the common shares.

On December 31, 2001, the Company completed a private placement of its Preferred
Shares. In connection with this private placement, the Company issued 2,211,491
preferred lots at an issuance price of $1.00 per lot. Each lot consists of one
Preferred Share and one warrant to purchase a common share at an exercise price
of $1.00. The warrants are exercisable at any time and expire on December 31,
2006, unless the common shares are listed on NASDAQ (National Market or Small
Cap Market), the American Stock Exchange, or the New York Stock Exchange ("a
major exchange"). If the common shares are listed on a major exchange and the
price of the common shares equals or exceeds $3.375 per share for 20 consecutive
days, the warrants will automatically expire 45 days after the occurrence of
this event.

Additionally, as part of this transaction $1,118,508 of promissory notes and
accrued interest to a related party were converted at $1.00 per share into
1,118,508 Preferred Shares in 2001. The Company incurred approximately $414,800
of transaction related expenses, including cash commissions and non-accountable
expenses totaling $131,158 to the Placement Agent. In addition, the Placement
Agent received 131,422 warrants (the "2001 Placement Agent Warrants") to
purchase preferred lots, each lot consisting of one Preferred Share and one
warrant to purchase a common share for $1.00 per common share. The exercise
price of the 2001 Placement Agent Warrants is $1.10 per lot. These warrants are
exercisable at any time, expire five years from date of issuance and contain
certain anti-dilution provisions.

The Preferred Shares were converted to shares of Company common stock (see Note
12, "Reverse Merger").

Common Shares and Warrants

During 2000, the Company completed a private placement of its common shares. In
connection with this private placement, the Company issued 3,170,069 common
shares at an issuance price of $2.31 per share. As part of this transaction,
approximately $1,680,000 of promissory notes and accrued interest to a related
party were converted at $2.31 per share into 764,118 shares, and approximately
$82,000 of promissory notes and accrued interest due to the


                                      F-18
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


Placement Agent were converted at $2.31 per share into 40,260 shares. The
Company also incurred approximately $923,500 of transaction-related expenses.
Common shares have voting rights equal to one vote for each share held.

As part of the private placement, the Placement Agent received 309,908 warrants
(the "2000 Placement Agent warrants") to purchase common shares at 10% above the
issuance price ($1.57 per share). These warrants are exercisable at any time,
expire four years from the date of issuance and contain certain anti-dilution
provisions.

In August 2001, the Company entered into a financial consulting agreement with
the Placement Agent and granted warrants (the "2001 Consultancy Warrants") to
purchase common shares at the same price and terms as the 2000 Placement Agent
warrants.

During 2002, the Company borrowed $345,149 from a related party under the same
terms as previous borrowings (see Note 6 and Note 10). As of December 31, 2002,
the outstanding borrowings, including accrued interest of $25,688, were
converted to common shares at a price of $1.00 per share. The common shares were
subject to the same anti-dilution provisions as the Preferred Shares. In
connection with this transaction, the Company issued $370,837 in warrants in
substantially the same form as the Series 1 Warrants resulting in a fair value
of $61,806 recorded as interest expense in the 2002 statement of operations.

On December 9, 2003, all outstanding warrants were exchanged on a one-for-one
basis for three-year warrants to purchase common stock at an exercise price of
$1.54 per share (see Note 11, "Reverse Merger").

On December 17, 2004, at the final closing of its December 2003 private
placement, the Company issued 6 million shares of common stock and 1.5 million
warrants to purchase common stock at an exercise price of $1.54, realizing net
proceeds of $2,997,461 (see footnote 11, "Reverse Merger").

Series A Preferred Convertible Shares

On July 30, 2004, the Company completed a private placement financing in which
it sold 206.45 Series A Preferred shares, which are convertible into 2,580,667
shares of common stock, for $25,000 per share. Proceeds from the transaction was
$4,208,167 net of fees. The Company also issued 2,580,667 4-year investor
warrants to purchase common stock at a price of $3.00 per share. Deemed
dividends of $805,393 consists of imputed dividends resulting from increasing
rate preferred stock, issuance of warrants in connection with the transaction,
and the issuance of the preferred stock, at an effective common stock conversion
price which was less than the common stock price at the date of issuance in
accordance with Emerging Issue Task Force ("EITF) 98-5 and Staff Accounting
Bulletin ("SAB") Topic 5.Q "Increasing Rate Preferred Stock". In connection with
the December 17, 2004 sale of 6 million shares of common stock, we reduced the
conversion price of its series A preferred stock from $2.00 per share to $1.78
per share.

The Company incurred cash transaction costs totaling approximately $911,000,
which included placement agent commissions and non-accountable expenses totaling
approximately $671,000. In addition, the Company issued 770,450 4-year placement
agent warrants to purchase common stock at a price of $2.00 per share.

The holders of Series A Preferred Stock shall be entitled to receive a quarterly
cumulative dividend at the end of each calendar quarter, commencing October 1,
2004 (the "Dividend") calculated at a rate of 8% per annum of the issue price of
any outstanding share of Series A Preferred Stock, commencing July 1, 2004 and
continuing for the first three years after the closing of this Offering, 10% per
annum for the following two years, and 12% per annum for any additional year in
which any share of Series A Preferred Stock remains outstanding. At the option
of the Company, the dividend may be paid in either cash or registered shares of
Common Stock. In the case of payment in stock, this stock will be valued at 95%
of the average of the closing trading price of the Common Stock for the 20
trading days ending on the day prior to the day on which such payment is due.
For the year ended December 31, 2004, the Company recorded preferred stock
dividends of $206,454. Series A preferred convertible stock is convertible at
anytime into common stock at the option of the holder


                                      F-19
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


As of December 31, 2004 there were issued and outstanding 22,521,719 warrants to
purchase common stock with an exercise prices ranging from $1.54 to $3.00 and
expiring from December 2006 to July 30, 2008. As of December 31, 2004 the Series
A Preferred convertible stock were convertible into 2,903,000 shares of common
stock.

9.  COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office space under an operating lease which expires in
September 2009. The Company is subject to its proportioned share of common area
maintenance charges and real estate tax increases. Future minimum lease payments
under this non-cancelable lease as of ended December 31, 2004 are as follows:

                2005                    $237,540
                2006                     247,932
                2007                     280,099
                2008                     296,925
                2009                     210,322
                                      ----------
                                      $1,272,818
                                      ==========


Rent expense for the years ended December 31, 2004 and 2003 was $164,949 and
$117,145, respectively.

Litigation

In the ordinary course of business, the Company may become a party to legal or
regulatory proceedings resulting from litigation, claims, or other disputes.
There can be no assurance that one or more future actions, if they occur, would
not have a material adverse effect on the business. Currently there is no
material litigation threatened or pending matters involving the Company.

Employment Agreement

The Company has an employment agreement with its Chief Executive Officer which
expires on December 8, 2006. The agreement includes a current base salary of
$260,000 per year and has certain salary increases and bonuses included, based
on milestones being reached. All other employees are employees at will.

10.  SHARE INCENTIVE PLAN

Effective September 13, 2000, the Board of Managers established a unit incentive
plan, the 2000 Unit Incentive Plan, to provide for the granting of options to
purchase common shares in the Company to the Board of Managers, officers, key
employees and consultants at a price not less than the fair market value at the
date of grant for "incentive" share options and a price not less than 75% of the
fair market value at the date of grant for "non-qualified" options. Under the
provisions of the 2000 Unit Incentive Plan, no option will have a term in excess
of 10 years.

On December 18, 2002, pursuant to the approval at a Special Meeting of the
Holders of the Common Shares, the 2000 Unit Incentive Plan was amended to
increase the number of share options available for issuance under the Share Plan
to the lesser of 15 percent of the common units outstanding calculated on a
fully diluted basis, or 7,000,000 shares. Upon DOBI Medical Systems LLC becoming
a corporation on January 1, 2003, the Unit


                                      F-20
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


Incentive Plan was amended to become the 2000 Stock Incentive Plan. As of
December 31, 2004, the 2000 Stock Incentive Plan was authorized to issue
6,562,244 stock options, based on the common stock outstanding at that date. As
of December 31, 2004 there were issued and outstanding stock options to purchase
4,980,500 shares of our common stock.

The Share Plan is administered by a Committee named by the Board of Directors
and is responsible for determining the individuals to be granted options, the
number of options each individual will receive, the option price per share and
the exercise period of each option. Options granted pursuant to the Share Plan
generally vest over a four-year period and are subject to accelerated vesting
under certain conditions. On December 13, 2004, the Board of Directors voted
that upon a change of control of the Company, as defined in the Plan, all
options granted but not then vested, shall thereupon immediately vest.

During years ended December 31, 2004 and 2003, the Board of Directors granted
2,367,750 and 1,676,000 options respectively. These options have an exercise
price of $0.74 to $3.30 per share and expire from 5 to 10 years from the date of
grant. The average fair value per option granted in 2004 and 2003 was $0.94 and
$0.62, respectively. Options granted to non-employees are accounted for under
SFAS No. 123, whereby compensation measurement of equity awards is based on
their fair value. The fair market value of these options was estimated at the
date of grant using a Black-Scholes option pricing model.

The following table summarizes information about stock options outstanding at
December 31, 2004 and 2003:

<TABLE>
<CAPTION>
                                                         2004                                 2003
                                        ---------------------------------------------------------------------------
                                          WEIGHTED-AVERAGE      NUMBER OF      WEIGHTED-AVERAGE    NUMBER OF
                                           EXERCISE PRICE        OPTIONS       EXERCISE PRICE       OPTIONS
                                        ---------------------------------------------------------------------------
<S>                                                    <C>         <C>                   <C>           <C>
Options outstanding, beginning of year                 $1.46       2,862,250             $2.31         1,787,500
   Granted                                              1.89       2,367,750              1.06         1,676,000
   Exercised                                               -               -                 -                 -
   Forfeited                                            2.97       (249,500)              2.79         (601,250)
                                        ---------------------------------------------------------------------------
Options outstanding, end of year                       $1.59       4,980,500             $1.46         2,862,250
                                        ===========================================================================

Options exercisable, end of year                       $1.70       1,707,141             $2.07           983,931
                                        ===========================================================================

Stock options outstanding at December 31, 2004 for each of the following
classes of options, by exercise price, are summarized as follows:

  EXERCISE PRICE    NUMBER OF       WEIGHTED-AVERAGE     NUMBER OF OPTIONS
                                       REMAINING
                     OPTIONS        CONTRACTUAL LIFE   CURRENTLY EXERCISABLE
  ----------------------------------------------------------------------------
   $0.74 - $1.00      1,845,000           8.6 years                517,500
   $1.01 - $2.00      1,784,925           8.9 years                484,221
   $2.01 - $3.00      1,055,950           7.2 years                633,450
    $3.01 - $4.0        294,625           7.4 years                 71,970

</TABLE>


                                      F-21
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 2004 and 2003:

Expected life from issue date (in years)                         2 - 5
Risk-free interest rate                                      2.75% - 4.00%
Volatility                                                   35.9% - 80.0%
Dividend yield                                                     -

11.  RELATED PARTY TRANSACTIONS

In connection with the organization of the Company, a member of the Board of
Directors of the Company agreed to provide his initial capital contribution and,
from time to time, additional loans and/or equity capital in the form of cash or
cash equivalents in an aggregate amount not to exceed $1,750,000 for the
operations and working capital of the Company. This funding, which was in the
form of notes payable by the Company, has been completed. In accordance with the
funding agreement, $1,681,545, including interest, was converted to common stock
at the completion of the first round of private equity funding in 2000.

During 2001, this same director provided bridge financing to the Company in the
form of notes payable totaling $1,098,150. On December 31, 2001 the loan balance
and accrued but unpaid interest totaling $20,358, was converted into 1,118,508
Class A 4% Redeemable Convertible Preferred Shares and 1,118,805 common share
purchase warrants. No cash interest was paid by the Company on the loans in
2001.

During 2002, the Company borrowed $345,149 from this same director under the
same terms as previous borrowings. In December, 2002, the outstanding borrowings
were converted to common stock at a price of $1.00 per share. The common shares
are subject to the same anti-dilution provisions as the Preferred Shares. In
connection with this transaction, the Company issued $370,837 in warrants in
substantially the same form as the Series 1 Warrants resulting in a fair value
of $61,806 recorded as interest expense in the 2002 statement of operations.

During 2003, the Company borrowed $250,000 from this same director under the
same terms as previous borrowings. As of December 1, 2003, the outstanding
borrowings were converted to purchase $250,000 of Series 2 Notes.

In connection with the Company's 2003 placement of its Series 1 Notes and Series
1 Warrants through January 31, 2003, the Company recorded cash commissions and
non-accountable expenses totaling $337,950 to an investment bank and issued
warrants to purchase $450,600 in lots, each lot consisting of its Series 1 Notes
and its Series 1 Warrants. A former member of the Board of Directors is the
president of the investment bank.

In connection with the Company's placement of its Series 2 Notes and Series 2
Warrants, the Company recorded cash commissions and non-accountable expenses
totaling $171,660 to an investment bank and issued warrants to purchase $143,050
in lots, each lot consisting of its Series 2 Notes and its Series 2 Warrants. A
former member of the Board of Directors is the president of the investment bank.

In connection with the Company's private placement of its Class A 4% Redeemable
Convertible Preferred Shares, which closed on December 31, 2001, the Company
paid cash commissions and non-accountable expenses to an investment bank
totaling $131,158 and issued 131,422 warrants (2001 Placement Agent Warrants) to
purchase a Preferred Unit consisting of one Preferred Share and one common share
purchase warrant to purchase one common


                                      F-22
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


share at an exercise price of $1.00 per share, subject to adjustment in certain
circumstances. The exercise of the 2001 Placement Agent Warrant is $1.10 per
lot. A former member of the Board of Directors is the president of the
investment bank.

In connection with the Company's private placement of its common stock, which
closed on December 29, 2000, the Company paid cash commissions to the Placement
Agent totaling $557,398, and issued warrants (2000 Placement Agent Warrants) to
purchase an aggregate of 309,908 common shares. The exercise price of the 2000
Placement Agent Warrants is $1.57 per share. A former member of the Board of
Directors is the president of the investment bank.

In consideration for consulting services rendered during 2001, the Placement
Agent was granted warrants dated as of August 1, 2001 (2001 Consultancy
Warrants) to purchase 89,090 common shares at an exercise price of $1.54 per
share. In consideration for consulting services rendered during 2002, the
Placement Agent was issued warrants (2002 Consultancy Warrants) to purchase
87,616 lots, each lot consisting of (i) one Class A 4% Redeemable Convertible
Preferred Shares and (ii) one common share purchase warrant. The exercise price
of the 2002 Consultancy Warrants is $1.10 per lot. A former member of the Board
of Directors is the president of the investment bank.

DOBI Medical Systems' chief executive officer and director was indebted to DOBI
Medical Systems pursuant to a limited recourse promissory note which was paid in
full in December 2002. As of January 1, 2001, the principal amount of the note
was $225,000, and from the date of the loan to payment of the note in full, the
note bore interest at the annual rate of 6%, payable annually in arrears. The
original amount of the note, $225,000, was used by the chief executive officer
and director to purchase 2,925,003 shares of common stock of DOBI Medical
Systems.

Immediately prior to the closing of the reverse merger and the private placement
transaction, Lions Gate Investment purchased and redeemed 1,000,000 shares of
common stock held by a director and the former Chief Financial Officer,
Treasurer and Secretary of Lions Gate Investment, for $143,805.27.

The Company had a consulting agreement with one of the equity holders of
Dynamics Imaging, Inc. Under the terms of this agreement, which commenced in
December 1999, the Company paid this individual a monthly fee of $10,106 plus an
additional fee to cover a portion of the cost of certain benefits. The Company
recorded an expense of approximately $33,800 in 2002 for these consulting
services. The agreement terminated on April 1, 2002. A former member of the
Board of Directors is the president of the investment bank.

12. REVERSE MERGER

On December 9, 2003, the Company merged into Lions' Gate Investment, Limited
("Lions Gate"), a publicly listed company, with the Company as the surviving
entity (the "Merger"). At the time of the Merger, Lions Gate had 8,461,538
shares of common stock outstanding.

For accounting purposes the Company is the acquirer in the transaction, and
consequently the transaction will be treated as a recapitalization of the
company.

Prior to the Merger, Lions Gate (i) redeemed and cancelled 1,738,462 shares of
its outstanding common stock from a director and three other persons for a cash
payment of $250,000, and (ii) released to its other director its oil and gas
licenses and certain related receivables due from such other director (valued on
its books at $10,109) in exchange for 400,000 shares of its common stock held by
that director, thereby reducing the total number of shares of common stock
outstanding from 10,600,000 to 8,461,538 shares. Effective immediately prior to
the merger, the Company engaged in a 1.53846:1 reverse stock split of its
outstanding common stock, and made appropriate adjustments to its outstanding
warrants, stock options, convertible debt and equity securities.



                                      F-23
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)

                   Notes to Consolidated Financial Statements


Simultaneous to the Merger, the Company closed a two-tranche private financing
(the "Private Financing") in which the Company received gross proceeds of the
first tranche totaling $5,500,000. In connection with the first tranche of the
Private Financing, the Company issued 5,500,000 shares of common stock and
2,750,000 three-year warrants to purchase common stock at an exercise price of
$1.54 per share (the "Warrants").

On December 17, 2004, the Company completed the final closing of the 2003
Private Placement. At closing, the Company issued 6 million shares of common
stock and 1.5 million warrants to purchase common stock at an exercise price of
$1.54 to investors, realizing net proceeds of approximately $3 million. The
Company also issued 1.5 million warrants to purchase common stock at an exercise
price of $1.54 per share to its financial advisors in connection with the final
closing. DOBI Medical also reduced the conversion price of its Series A
preferred shares from $2.00 per share to $1.78 per share.

Pursuant to the Merger Agreement, at closing Lions Gate issued 23,576,174 shares
of its common stock to the former security holders of the Company, representing
62.8% of the outstanding Lions Gate common stock following the merger, in
exchange for 100% of the outstanding capital stock of the Company and
convertible promissory notes. Included in the shares of capital stock of the
Company outstanding prior to the merger were (i) 16,590,920 shares of common
stock of the Company, which were converted at the merger on a one-for-one basis
into 16,590,920 shares of Lions Gate common stock, and (ii) 2,211,491 shares of
the Company's Class A Convertible Preferred Stock, which were converted at the
merger on a 1-for-1 basis into 2,211,491 shares of Lions Gate common stock.
Convertible promissory notes of the Company outstanding prior to the merger
included (i) $1,680,500 of outstanding indebtedness under the Company's Series 2
Convertible Notes, which represented all of the indebtedness outstanding under
those notes, and which was converted, together with accrued but unpaid interest
thereon, at the merger into 1,718,002 shares of Lions Gate common stock, and
(ii) $2,878,000 of outstanding indebtedness under the Company's Series 1
Convertible Notes, which represented all but $270,000 of the principal
indebtedness outstanding under those notes, and which was converted, together
with accrued but unpaid interest thereon, at the merger into 3,055,761 shares of
Lions Gate common stock. The $270,000 of indebtedness left outstanding, plus
accrued interest thereon, under the Series 1 Notes became an outstanding debt
obligation of the Company following the merger. The company repaid $100,000
subsequent to the merger and the remaining debt was $170,000 as of December 31,
2003.

Pursuant to the Merger Agreement, all outstanding warrants were exchanged on a
one-for-one basis for three-year Warrants to purchase common stock at an
exercise price of $1.54 per share.

In connection with the Private Placement, the Company incurred cash transaction
expenses as follows: (i) placement agent fees totaling $1,020,000, of which
$660,000 were paid on closing and $360,000 are due six months from closing; (ii)
transaction expenses incurred by the Company's financial consultant and
Placement agent totaling $270,000 and: (iii) legal, accounting and other
professional fees and expenses incurred by the Company totaling approximately
$423,000. In addition, the Company issued 3,770,000 Warrants to the placement
agent and its financial advisors in connection with the first tranche.

The Company used the Black-Scholes option pricing model to determine a fair
value of the three-year warrants issued in the Offering. The 3-year warrants
were valued at $.14 per share.



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