================================================================================
                                  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, 2005

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

           For the transition period from ___________ to ____________

           Commission File No.: 0-32523

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

<TABLE>
<CAPTION>

<S>                                                                         <C>
             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)

Issuer's telephone number (201) 760-6464
                          --------------
</TABLE>

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

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. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

State issuer's revenues for its most recent fiscal year.  $303,394

The aggregate market value of the voting and non-voting stock held by
non-affiliates of the issuer was approximately $6,774,000, based on the closing
price of $0.102 per share on February 3, 2006, as quoted by the OTC Bulletin
Board.

As of February 3, 2006, 66,410,598 shares of the issuer's Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  NONE
================================================================================

<PAGE>


                        DOBI MEDICAL INTERNATIONAL, INC.

                         2005 FORM 10-KSB ANNUAL REPORT

                                TABLE OF CONTENTS
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<CAPTION>

                                                                                                                PAGE

                                     PART I

<S>      <C>                                                                                                     <C>
ITEM 1.  DESCRIPTION OF BUSINESS..................................................................................1

ITEM 2.  DESCRIPTION OF PROPERTY..................................................................................5

ITEM 3.  LEGAL PROCEEDINGS........................................................................................5

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................................6

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................................6

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................................................7

ITEM 7.  FINANCIAL STATEMENTS....................................................................................19

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................19

ITEM 8A.  CONTROLS AND PROCEDURES................................................................................19

ITEM 8B.  OTHER INFORMATION......................................................................................19

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS...........................................................................19

ITEM 10.  EXECUTIVE COMPENSATION.................................................................................23

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.........26

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................................27

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.......................................................................28

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................................................29

</TABLE>



<PAGE>


CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

         Our disclosures and analysis in our "Management's Discussion and
Analysis or Plan of Operation" and throughout this Annual Report contain
statements and information based upon "forward-looking statements". Such
forward-looking statements represent management's predictions as of the date of
this report. Forward-looking statements 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 "may," "will,"
"should," "could," "would," "anticipates," "plans," "believes," "expects,"
"projects," "intends," and similar expressions. In particular, these include
statements relating to future performance or results of current and anticipated
products, product development efforts, clinical trial efforts, product
approvals, sales efforts, financing efforts, and projected expenses and
financial results.

         We cannot guarantee that any forward-looking statement will be
realized. 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 from any anticipated, estimated or
projected predictions, whether such predictions are either expressed or implied
by such forward-looking statements. You should bear this in mind as you consider
forward-looking statements and not place undue reliance on them.

         We undertake no obligation to publicly update forward-looking
statements. You are advised to carefully read the "Risk Factors" set forth in
Part II Item 6 below as well as those discussed elsewhere in this report. 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 "Risk
Factors" set forth in this report to be a complete discussion of all potential
risks or uncertainties. Except as otherwise required by law, we expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statement contained in this report to reflect
any change in our expectations or any change in events, conditions or
circumstances on which any of our forward-looking statements are based.


<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, 2005, we have incurred approximately
$11,200,000 in research and development expenses.

         We are a development-stage company with no significant revenues to
date. Our goal is to establish our ComfortScan(R) 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 updates to the first four modules and submit the pivotal
PMA clinical trial research study of the fifth module.

         During 2004, we released ComfortScan version 1.0, renewed our CE Mark,
maintained 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.

         In 2005, we expanded the number of clinical sites participating in our
PMA clinical trial to 23 sites, with an enrollment capacity of more than 200
patients per month. To date, we have enrolled more than 1,200 patients. Clinical
data recently collected from non-PMA sites in connection with the release of
ComfortScan version 2.0 have indicated that, if the Company's current PMA
clinical study is modified, there may be an opportunity to demonstrate more
accurate results in pre-menopausal women. Consequently, the Company plans to
discuss possible changes to its current clinical study protocol with the FDA. In
the event the FDA concurs with this approach, it may be necessary to enroll
additional patients in its clinical study, thus extending the enrollment phase
of the study into the third quarter of 2006. We estimate that it will then take
approximately 90 days after the PMA enrollment and blinded physician reads are
completed to submit the PMA analysis and results to the FDA for its approval,
which cannot be assured.

         Also during 2005, we signed agreements with an additional five
international distributors, and delivered four investigational ComfortScan
systems to distributors in order to commence local clinical studies. We do not
rely on any one particular distributor at this time. To date, we have commenced
a number of clinical studies in international locations and we continue to
expand the number of clinical studies conducted. The purposes include generating
publishable clinical data concerning the efficacy of the ComfortScan system,
obtaining patient data for the continued development of the ComfortScan system,
and obtaining local regulatory approvals. Furthest along in these efforts is our
clinical study in Beijing, China, where the patient recruitment and data
collection process was recently completed. Following this, we provided detailed
image interpretation training for three Chinese physicians who participated in a
blinded read of all the cases. The initial documentation of this study has been
submitted for review by the Chinese State Food and Drug Administration (SFDA),
China's medical device approving authority. We expect to meet with the SFDA in
the near future to discuss questions it may have regarding our ComfortScan
system and the results of this study. After a full review by the SFDA of all
relevant data, the SFDA will determine whether to grant approval for the sale of
ComfortScan systems in China. However, this approval cannot be assured.

         In January 2006 we released ComfortScan version 2.0. The
Windows(R)-based, ComfortScan 2.0 software suite consists of three individual
elements, including ComfortScan acquisition software for patient data
acquisition,


                                       1
<PAGE>


ComfortNet(TM) for image database management, and ComfortView(TM) for image
processing and display, allowing for reading and diagnostic interpretation by
physicians. Highly sophisticated imaging processing and display capabilities
make the image data available to physicians for reading in near real time,
facilitating the diagnostic process. However, we need to improve diagnostic
specificity through continued refinement of ComfortScan reading rules and more
physician training on those reading rules before the PMA submission to the FDA.

         We will continue to seek distribution alliances in international
markets in order to seek local regulatory approval and to acquire patient scans
for use in our research and development efforts.

THE COMFORTSCAN(R) SYSTEM

         DOBI Medical is working to create a new means for the improved
diagnosis of high risk and malignant breast disease through the identification
of abnormal vascularization ("angiogenesis") associated with tumors. Our first
application of the technology is our ComfortScan system, a gentle, noninvasive,
and nonionizing (no x-ray radiation), optical imaging system designed to assist
physicians when used with mammography in the identification and management of
breast disease. The ComfortScan system is intended to achieve this by providing
new, physiology-based (i.e., what is occurring within the tissue in near
real-time) imagery of abnormal vascularization in the breast that is not readily
available today and which may be associated with cancer development. The actual
image acquisition of the DOBI(R) scan takes approximately one minute per breast.
Our current suggested retail price for the ComfortScan system is $140,000. The
ComfortScan system has the CE Mark and UL designations. DOBI Medical is a
certified ISO 9001:2000, ISO 13485:2003 and CAN/CUS ISO 13485 company, which
certificates have been awarded or renewed after periodic independent audits by
TUV-USA, Inc, a European Union certifying registrar. ComfortScan 2.0 is DICOM
3.0 compliant and supports storage class, query/retrieve and worklist
management. We currently sell ComfortScan systems to international distributors
for installation at international clinical trial sites. The ComfortScan system
is not yet commercially available in the U.S., as it is limited by U.S. law to
investigational use as an adjunct to mammography until approved by the FDA,
which cannot be guaranteed.

REIMBURSEMENT

         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 and adoption by physicians and imaging clinics of
our ComfortScan system. In the United States, the Centers for Medicare &
Medicaid Services (formerly the Health Care Financing Administration), known as
CMS, establishes guidelines for the reimbursement of healthcare providers
treating Medicare and Medicaid patients. Under current CMS guidelines, varying
reimbursement levels have been established for mammography and other imaging and
diagnostic procedures. The actual reimbursement amounts are determined by
individual state Medicare carriers and, for non-Medicare and Medicaid patients,
by private insurance carriers. There are often delays between the reimbursement
approvals by CMS and by a state Medicare carrier and private insurance carriers.
Moreover, states as well as private insurance carriers may choose not to follow
the CMS reimbursement guidelines. Many other countries are similarly affected by
reimbursement policies adopted by foreign regulatory and insurance carriers.

         We plan to educate these third-party payers about our ComfortScan
system so that they will reimburse procedures that use our 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 that
coverage of our ComfortScan system is cost-justified and its benefits outweigh
its comparatively low costs. We believe third-party payers could encourage usage
of the ComfortScan system as a low-cost, low-risk procedure that will result in
lower healthcare costs while improving overall patient care and save women's'
lives.

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

     o   Retain reimbursement specialists with expert knowledge and experience
         in federal, state and private payer reimbursement processes;

     o   Seek to obtain a Current Procedural Terminology, or CPT, code for our
         ComfortScan system; and

                                       2


<PAGE>

     o   Continue to conduct clinical trials and seek peer-reviewed papers for
         publication in medical journals.

         We intend to enhance our relationships with a variety of important
women's health and breast cancer awareness groups 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 also have in
place affiliations with a number of recognized scientific and academic research
centers with research scientists in medical imaging and related disciplines. We
have augmented these efforts with our attendance and participation over the past
several years at various medical conferences such as Radiological Society of
North America, American Association for Cancer Research , American Society for
Clinical Oncology, and The Angiogenesis Foundation conferences.

REGULATION

      Our ComfortScan system is a medical device manufactured by us and subject
to regulation by the FDA and, in many instances, by foreign governments. Under
the Federal Food, Drug and Cosmetic Act, known as the FD&C Act, manufacturers of
medical devices must comply with certain regulations governing the design,
testing, manufacturing, packaging, servicing and marketing of medical devices.

      The FDA generally must clear the commercial sale of new medical devices.
Commercial sales of medical devices within the United States must be preceded by
either a premarket notification filing pursuant to Section 510(k) of the FD&C
Act or the granting of a premarket approval. The 510(k) notification filing must
contain information that establishes the device to be substantially equivalent
to a device commercially distributed prior to May 28, 1976. The premarket
approval procedure ("PMA") involves a more complex and lengthy testing and
review process by the FDA than the 510(k) premarket notification procedure and
may require several years to obtain. Our ComfortScan system, since there is no
substantially equivalent device commercially, must follow the more complex and
more time-consuming PMA procedures. Since our light-based technology represents
non-significant risk to the patient, we have obtained an investigational device
exemption, known as an IDE, for our ComfortScan system from a local independent
review board in order to conduct extensive clinical testing of our device to
obtain the necessary clinical data for submission to the FDA. The FDA will
thereafter only grant premarket approval if, after evaluating this clinical
data, it finds that the safety and effectiveness of the product has been
sufficiently demonstrated. This approval and subsequent labeling will set out
the intended claims, uses, and any other conditions for marketing and selling
our device in the United States. This premarket approval, if obtained, will
permit us to begin marketing and sales efforts of our ComfortScan system as an
adjunct to mammography to physicians, imaging clinics, and hospitals within the
United States.

      The ComfortScan system has the CE Mark and UL designations, and DOBI
Medical is a certified ISO 9001:2000, ISO 13485:2003 and CAN/US 13485 company.
We currently sell our ComfortScan system to international distributors for
installation at international clinical trial sites. The ComfortScan system is
not yet commercially available in the U.S. as it is limited by U.S. law to
investigational use until approved by the FDA, which cannot be guaranteed. Our
ComfortScan system is also subject to approval by certain foreign regulatory and
safety agencies.

      Our manufacturing processes and facilities are subject to continuing
review by the FDA and foreign governments or their representatives. Adverse
findings could result in various actions against us, including withdrawal of
approvals and product recall.

      We cannot assure that the FDA or foreign regulatory agencies will give the
requisite approvals or clearances for our ComfortScan system on a timely basis,
if at all. Moreover, after clearance is given, these agencies can later withdraw
the clearance or require us to change the device or its manufacturing process or
labeling, to supply additional proof of its safety and effectiveness, or to
recall, repair, replace or refund the cost of the medical device, if it is shown
to be hazardous or defective. The process of obtaining clearance to market
products is costly and time-consuming and can delay the marketing and sale of
our products.

      As a manufacturer of medical devices, we are subject to additional FDA
regulations, Federal, state and foreign regulations regarding the manufacture
and sale of medical devices are subject to future change. We cannot predict what
impact, if any, such changes might have on our business.


                                       3
<PAGE>


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 nine
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
believe there are several breast imaging products under development utilizing
diagnostic x-ray, magnetic resonance imaging, optical imaging, laser, thermal
imaging, ultrasound and other technologies. As far as other products under
development that we know of, we believe they are more expensive and are more
time-consuming procedures than our ComfortScan system. The market for breast
cancer detection equipment is extremely competitive, with both large,
international diversified manufacturers, including Siemens, Toshiba, GE Medical
Systems, Kodak, Philips, Imaging Diagnostic Systems, Inc., Hologic/Lorad,
Advanced Research Technologies, Inc., and other entities that we may not be
aware of who may be developing new or improved medical imaging devices. These
companies, although competitors, may also be possible strategic partners for us.

INTELLECTUAL PROPERTY

         We own a number of issued U.S. patents and international patents and
have 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 may 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 January 23, 2006, we have 37 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 stockholders of Lions Gate, all as more fully described
in Lions Gate's Definitive


                                       4
<PAGE>

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 that expires on June 30, 2009,
subject to renewal rights.

ITEM 3.  LEGAL PROCEEDINGS.

         In the ordinary course of business, we 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 us except for the
following:

         On April 15, 2005, we filed suit in the Supreme Court of the State of
New York, County of New York, Index No. 601348/05, against Brian Vodicka, a
former member of our Board of Directors, alleging breach of contract and breach
of fiduciary duty and seeking specific performance and injunctive relief
preventing the disclosure and requiring the return of certain confidential and
proprietary documents. On July 11, 2005, the New York Supreme Court issued an
order preliminarily enjoining Mr. Vodicka from using documents or information
provided to Mr. Vodicka by us wrongfully and in violation of the confidentiality
agreement between Mr. Vodicka and us. Mr. Vodicka's attorney has withdrawn from
the case and Mr. Vodicka is representing himself pro se. The court order against
Mr. Vodicka remains in effect.

         On July 13, 2005, Mr. Vodicka filed a complaint with the U.S.
Occupational Safety and Health Administration of the Department of Labor
("OSHA") under the employee protection provisions of Title VIII of the
Sarbanes-Oxley Act of 2002 ("SOX") alleging that we had harassed him by filing
the above referenced New York lawsuit against him. On September 9, 2005, the
Secretary of Labor, acting through her agent, the Region VI Regional
Administrator of OSHA, announced that she had investigated the complaint and
determined that it had no merit, that it should be dismissed, and that there was
no reasonable cause to believe that the Company had violated SOX. Mr. Vodicka
filed an appeal of these findings in the US Department of Labor's Office of
Administrative Law Judges. On December 23, 2005 a Labor Department
administrative law judge granted DOBI's motion for summary judgment dismissing
Vodicka's OSHA complaint. In doing so, the administrative law judge held that
Vodicka's argument that DOBI had violated SOX by filing the New York lawsuit was
"conclusory and unpersuasive." Mr. Vodicka has, in turn, appealed the
administrative law judge's decision to the Administrative Review Board of the
Labor Department. We share the views of the regional administrator and the
administrative law judge that Mr. Vodicka's allegations are without merit and
intend to continue to vigorously defend against the Vodicka claims.

         On July 15, 2005, we were served with a complaint that had been filed
in the United States District Court for the Western District of Texas on July 5,
2005 by Steve Aubrey and a group of other stockholders, many of whom are
associated with Mr. Vodicka, alleging, among other things, that we and certain
of our officers and directors, as well as two of our previous advisors, had
violated federal and state securities laws and seeking damages, interest, and
attorneys' fees and costs. On July 28, 2005 Mr. Vodicka himself filed a
complaint against the same defendants in the same court containing substantially
the same allegations and claims. On September 24, 2005 we received an Amended
Complaint consolidating the Aubrey and Vodicka suits. On October 6, 2005
plaintiffs filed self-executing


                                       5
<PAGE>


papers in the Western District of Texas voluntarily dismissing their claims
without prejudice. Shortly thereafter, several plaintiffs moved to withdraw or
vacate their voluntary dismissals. In addition, plaintiffs' counsel petitioned
the court to withdraw from the case. Plaintiffs' motions to withdraw or vacate
their voluntary dismissals were denied and plaintiffs' counsel's motion to
withdraw was dismissed as moot on November 28, 2005. Vodicka's counsel in the
Western District of Texas thereupon withdrew from representing Vodicka and the
other plaintiffs. On December 27, 2005, a group of plaintiffs represented by new
counsel re-initiated litigation in the Western District of Texas alleging
substantially the same claims as to us and certain officers and directors as
those contained in the prior complaint which had been dismissed without
prejudice. The plaintiffs have claimed that we and certain of its officers and
directors made material omissions and/or misrepresentations and that this caused
plaintiffs to privately purchase shares of our stock at allegedly
artificially inflated prices.

         We believe that the allegations are without merit and that they stem
from plaintiffs' dissatisfaction with the current market price of our stock. We
intend to continue to vigorously defend against plaintiffs' claims. However, we
are unable to predict the outcome of the claims and accordingly, no amounts have
been provided for in the financial statements.

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                    2005                  2004
            --------                   -----                 ----
                                  HIGH        LOW       HIGH        LOW
                                  ----        ---       ----        ---
            First                $1.26      $0.60      $3.30      $2.50
            Second                0.75       0.41       3.00       2.30
            Third                 0.50       0.40       2.74       0.67
            Fourth                0.49       0.19       1.06       0.50

         From January 1, 2006 through February 3, 2006, the high and low closing
prices for our common stock were $0.22 and $0.10, respectively.

         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 January 23, 2006, there were approximately 318 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%


                                       6
<PAGE>


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 years ended December 31, 2005 and
2004, we recorded preferred stock dividends of $353,408 and $206,454. To date,
we have paid all of these dividends in the form of common stock. On January 15,
2006, the preferred dividend in the amount of $77,977, if paid in cash, or
approximately 365,405 shares, if paid in common shares, was due, and we intend
to pay the dividend using registered common stock. Since we have an insufficient
amount of common stock registered for this purpose, we are in the process of
preparing a registration statement. There are no liquidated damages or similar
provisions associated with a failure to timely pay dividends.

         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, 2005, stock options to purchase 9,958,727 shares
of common stock are authorized for issuance under our 2000 Stock Incentive Plan.
As of January 30, 2006, there are outstanding stock options to purchase
6,739,250 shares of our common stock.

         The following table provides information as of December 31, 2005 with
respect to the shares of common stock that may be issued under our existing
equity compensation plan.

<TABLE>
<CAPTION>

                      EQUITY COMPENSATION PLAN INFORMATION

---------------------------- -------------------------- -------------------------- --------------------------
                                NUMBER OF SHARES OF         WEIGHTED-AVERAGE         NUMBER OF SECURITIES
                                COMMON STOCK TO BE          EXERCISE PRICE OF       REMAINING AVAILABLE FOR
                              ISSUED UPON EXERCISE OF     OUTSTANDING OPTIONS,       FUTURE ISSUANCE UNDER
                               OUTSTANDING OPTIONS,        WARRANTS AND RIGHTS        EQUITY COMPENSATION PLAN
                             WARRANTS AND RIGHTS PLANS                            (EXCLUDING SECURITIES REFLECTED
                                                                                          IN COLUMN (A))
       PLAN CATEGORY                    (A)                        (B)                        (C)
---------------------------- -------------------------- -------------------------- --------------------------
<S>                                  <C>                          <C>                      <C>
 Equity compensation plans           6,739,250                    $1.16                    3,219,477
   approved by security
          holders
---------------------------- -------------------------- -------------------------- --------------------------
 Equity compensation plans
 not approved by security               --                         --                         --
          holders
---------------------------- -------------------------- -------------------------- --------------------------
           Total                     6,739,250                    $1.16                    3,219,477
---------------------------- -------------------------- -------------------------- --------------------------
</TABLE>


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


                                       7
<PAGE>


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 is 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 development-stage company with no significant revenues to
date. Our goal is to establish our ComfortScan(R) 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 updates to the first four modules and submit the pivotal
PMA clinical trial research study of the fifth module.

         During 2004, Released Comfortscan Version 1.0, renewed our CE Mark,
maintained 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.

         In 2005, we expanded the number of clinical sites participating in our
PMA clinical trial to 23 sites, with an enrollment capacity of more than 200
patients per month. To date, we have enrolled more than 1,200 patients. Clinical
data recently collected from non-PMA sites in connection with the release of
ComfortScan version 2.0 have indicated that, if the Company's current PMA
clinical study is modified, there may be an opportunity to demonstrate more
accurate results in pre-menopausal women. Consequently, the Company plans to
discuss possible changes to its current clinical study protocol with the FDA. In
the event the FDA concurs with this approach, it may be necessary to enroll
additional patients in its clinical study, thus extending the enrollment phase
of the study into the third quarter of 2006. We estimate that it will then take
approximately 90 days after the PMA enrollment and blinded physician reads are
completed to submit the PMA analysis and results to the FDA for its approval,
which cannot be assured.

         Also, during 2005, we have signed agreements with an additional five
international distributors, and delivered four investigational ComfortScan
systems to distributors in order to commence local clinical studies. We do not
rely on any one particular agreement of distributor at this time. To date, we
have commenced a number of clinical studies in international locations and we
continue to expand the number of clinical studies. The purposes include
generating publishable clinical data concerning the efficacy of the ComfortScan
system, obtaining patient data for the continued development of the ComfortScan
system, and obtaining local regulatory approvals. Furthest


                                       8
<PAGE>


along in these efforts is our clinical study in Beijing, China, where the
patient recruitment and data collection process was recently completed.
Following this, we provided detailed image interpretation training for three
Chinese physicians who participated in a blinded read of all the cases. The
initial documentation of this study has been submitted for review by the Chinese
State Food and Drug Administration (SFDA), China's medical device approving
authority. We expect to meet with the SFDA in the near future to discuss
questions it may have regarding our ComfortScan system and the results of this
study. After a full review by the SFDA of all relevant data, the SFDA will
determine whether to grant approval for the sale of ComfortScan systems in
China. However, this approval cannot be assured.

         In January 2006 we released ComfortScan version 2.0. The
Windows(R)-based, ComfortScan 2.0 software suite consists of three individual
elements, including ComfortScan acquisition software for patient data
acquisition, ComfortNet(TM) for image database management, and ComfortView(TM)
for image processing and display, allowing for reading and diagnostic
interpretation by physicians. Highly sophisticated imaging processing and
display capabilities make the image data available to physicians for reading in
near real time, facilitating the diagnostic process. However, we need to improve
diagnostic specificity through continued refinement of ComfortScan reading rules
and more physician training on those reading rules before the PMA submission to
the FDA.

         We will continue to seek distribution alliances in international
markets in order to seek local regulatory approval and to acquire patient scans
for use in our research and development efforts.

         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 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.


                                       9
<PAGE>


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

         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. We have 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 $8,700,000 is
provided.

         As of December 31, 2005, we have approximately $22,000,000 of federal
net operating losses available to offset future taxable income, which if not
utilized will expire in 2025. 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 in the
event of a 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 five-year operating lease
requiring monthly lease payments of approximately $20,000 per month through June
2009. We have no other material off-balance sheet arrangements or liabilities.

RESULTS OF OPERATIONS

COMPARISON OF 12 MONTHS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004

         Revenues for the year ended December 31, 2005 were approximately
$303,000, compared to $321,000 for the prior year, a decrease of approximately
6%. Although we are shipping revenue producing ComfortScan systems, they are
investigational units primarily being used for clinical trials. As a result,
these systems have been discounted and do not reflect the expected revenues per
unit once approvals are obtained.

         Cost of sales increased over the prior year by approximately $467,000,
or 122%, for year end December 31, 2005, to approximately $851,000. Our
manufacturing facility was established during the third quarter of 2004 and
reflected only a partial year's cost, whereas a full year of the cost to operate
these facilities are included for the year ended December 31, 2005.

         Research and development expenses increased approximately $382,000, or
20%, from $1,957,000 to approximately $2,340,000 for the 12 months ended
December 31, 2005 compared to the prior year. Approximately $215,000 in
production and production facility costs that were within the research and
development group in 2004 have been reassigned to manufacturing. We expended
approximately $674,000 more for the year ended December 31, 2005 compared to the
prior year for additional personnel and consulting services in connection with
the continued development of the ComfortScan system. In addition, we expended an
additional $128,000 over the prior year's corresponding period to obtain
clinical scans solely for research and development purposes and reduced
prototype development expenditures by $158,000.


                                       10
<PAGE>


         General and administrative expenses increased approximately $1,089,000,
or 51%, from $2,147,000 to approximately $3,236,000 for the year ended December
31, 2005 compared to same period in the prior year. This increase was primarily
due to higher personnel costs, including other compensation to the Chief
Executive Officer totaling $125,000 and a performance bonus to the Chief
Financial Officer of approximately $48,000 and other payroll of approximately
$270,000 related to the increase in staffing and consulting costs of
approximately $130,000. In addition, our legal costs increased approximately
$625,000 over the same period last year, principally to defend us against the
legal proceedings described under the heading "Legal Proceedings" above.

         Clinical program expenses increased approximately $2,429,000, to
$3,358,000, for the 12 months ended December 31, 2005 compared to the prior year
due to the expansion of the PMA clinical trials related to our applying for FDA
approval for the ComfortScan system at its conclusion. The PMA clinical trial
costs totaled $2,634,000 during the year ended December 31, 2005. Costs included
equipment costs, site costs, consulting costs, and travel expenses.

         Sales and marketing expenses of approximately $1,349,000 for the twelve
months ended December 31, 2005 reflect a decrease of approximately $570,000
compared to the prior year's expenditures. This was primarily due to the
decreased costs of approximately $685,000 in investor relations programs and
personnel costs of approximately $166,000. This was offset by increases in the
cost of marketing programs of approximately $318,000, of which approximately
$260,000 was devoted to our efforts in opening up the China market.

         Interest expense for the twelve months ended December 31, 2005 and 2004
consisted of minor financing of operational costs.

         We obtained a corporation business tax benefit certificate pursuant to
New Jersey law which allows the sale of unused state net operation losses. For
the year ended December 31, 2005, we recorded a benefit of $280,889.

LIQUIDITY AND CAPITAL RESOURCES

         We have financed our operations since inception through private
issuances of equity securities, generating approximately $38,500,000 and
$33,000,000 in gross and net proceeds to date, respectively, described
chronologically below.

         Prior to its merger into a publicly-traded company in December 2003,
DOBI Medical raised approximately $14.58 million in gross proceeds through the
sale of common stock, preferred stock and convertible debt, which were converted
into shares of the publicly-traded company DOBI Medical International, Inc. in
December 2003.

         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 an exercise price of $3.00 per share. In
connection with the closing of the second tranche of the December 2003 private
placement and the March 2005 private placement, the number of common shares into
which the Series A preferred stock is convertible was increased to approximately
3,839,496 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.

         On March 30, 2005, we completed a private placement of 21,000,000
shares of our common stock at a price of $0.50 per share, and warrants to
purchase 10,500,000 shares of our common stock at an exercise price of


                                       11
<PAGE>


$0.75 for the first 5,250,000 warrant shares and $1.25 for the next 5,250,000
warrant shares, resulting in aggregate gross cash proceeds of $10,500,000 and
approximate net cash proceeds of $9,665,000.

         As of December 31, 2005 we had cash and cash equivalents of
approximately $2,312,000. Net cash used in operating activities during the
twelve months ended December 31, 2005 totaled approximately $9,636,000, and
capital expenditures totaled approximately $176,000. For 2006, we have no
significant capital expenditure commitments. We expect net cash used in
operating activities for 2006 to be approximately $10,500,000, which includes
approximately $2,500,000 in PMA clinical trial project costs and approximately
$3 million in research and development costs, including $1,100,000 in costs
associated with the continued development of a screening version of our
ComfortScan breast imaging system.

         We are 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. These factors raise
substantial doubt about 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.

                                  RISK FACTORS

An investment in our common stock involves a high degree of risk. This annual
report contains forward-looking statements that involve risks and uncertainties,
such as statements relating to our objectives, expectations and intentions. The
cautionary statements made in this report should be read as applicable to all
forward-looking statements wherever they appear. Our actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed below, as well as those discussed
elsewhere in this report, all of which you should carefully consider before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely suffer
and actual results may differ materially. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of your
investment.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

         WE ARE A DEVELOPMENT STAGE COMPANY WITH INSIGNIFICANT REVENUE TO DATE
AND ARE DEPENDENT ON A SINGLE PRODUCT THAT IS STILL IN DEVELOPMENT AND WHICH, IF
WE ARE NOT SUCCESSFUL, 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, 2005,
we incurred a net loss of $10,431,066 and, as of December 31, 2005, had an
accumulated deficit of $34,182,028 and stockholders' equity of $1,910,882.

         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, 2005, 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 2006 AS WE DO NOT HAVE
ADEQUATE CASH TO COMPLETE THE FDA PMA PROCESS AND COMMERCIALIZE OUR COMFORTSCAN
SYSTEM.


                                       12
<PAGE>


         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 2006. 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 will 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 financing, and there can be no
assurance that any such financing 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.

         WE MAY NEED TO INCREASE OUR AUTHORIZED SHARES OF COMMON STOCK IN ORDER
TO COMPLETE THE ADDITIONAL FINANCING IN 2006 NECESSARY TO COMPLETE THE FDA PMA
PROCESS AND COMMERCIALIZE OUR COMFORTSCAN SYSTEM. IF WE FAIL TO OBTAIN
STOCKHOLDER APPROVAL FOR THIS, WE WILL LIKELY HAVE TO DISCONTINUE OPERATIONS.

         Unless our stock price increases substantially, in order to continue to
finance our operations we will need to seek stockholder approval to obtain
additional authorized shares of common stock as we only have approximately 28
million authorized but unissued shares remaining out of our current 140 million
authorized shares of common stock on a fully diluted basis. It is anticipated
that we will seek stockholder approval of up to an additional 100 million
shares. If the stockholders fail to approve additional authorized shares, we
will be unable to continue to finance our operations and will likely have to
discontinue operations.

         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 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
trial 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 2007. Final FDA approval is contingent upon
the timely execution of our clinical trial 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. 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 is 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 ANY APPLICABLE 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 or local approval has been obtained. We have a number
of clinical trials pending in several countries, however, we have not yet
received any approvals. 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. 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


                                       13
<PAGE>


network outside the United States. Our re-certification audits for compliance
with ISO 9000:2000, ISO 13485: 2003 CAN/CSA ISO 13485, and our renewal of our CE
Mark, UL certificate and FDA Export Certificate for our ComfortScan system are
necessary for international sales, together with compliance with any local
regulations. 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, which include:

     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   Export and 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, subject to any additional local regulations as
outlined above. 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.

         OUR SUCCESS DEPENDS ON CONTINUED PRODUCT DEVELOPMENT OF OUR COMFORTSCAN
SYSTEM, INCLUDING IMPROVING THE SPECIFICITY AND THE PHYSICIAN READING RULES FOR
THE FDA PMA SUBMISSION.

         We have a continuing research and development program designed to
enhance and improve our ComfortScan 2.0 system and to develop new applications
in the areas of therapy monitoring and screening. We are expending significant
resources on these programs. The successful development of our products and
product enhancements are subject to numerous risks, both known and unknown,
including:

     o   Inability to improve specificity and physician reading rules for the
         PMA submission to the FDA;

     o   Unanticipated delays;

     o   Lack of access to capital;

     o   Budget overruns;

     o   Technical problems; and

     o   Other difficulties that could result in the abandonment or substantial
         change in the design, development and commercialization of our
         ComfortScan system and related product enhancements, including changes
         requested by the FDA.

         Given the uncertainties inherent with product development and
introduction, we cannot assure that any of our product development efforts will
be successful on a timely basis or within budget, if at all. Our failure to


                                       14
<PAGE>


develop product enhancements and new applications for our ComfortScan system on
a timely basis or within budget could harm our business and prospects.

         OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUE TO VERIFY AND VALIDATE
ENHANCEMENTS AND IMPROVEMENTS TO OUR DESIGNS, MANUFACTURING PROCESSES AND
CLINICAL TESTING RELATED TO OUR COMFORTSCAN SYSTEM 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 13485:2003 and CE Mark. In January, 2006, after successful
completion of verification and validation testing in accordance with current
quality systems regulations, and with outside, independent physicians as readers
blinded to patient pathology reports, we released version 2.0 ComfortScan system
as an investigational device. In 2005, we sold and shipped four revenue
producing, production level version 1.0 ComfortScan investigational systems to
international distributors for conducting local clinical studies. In January
2006, we released version 2.0 of our ComfortScan system as an investigational
device as an adjunct to mammography. We believe that further enhancements and
improvements will increase physician adoption and sales for our medical device,
but we have not yet demonstrated this by actual sales.

         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
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 THAT 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 rely primarily on a combination of trade secrets, patents, copyright
and trademark laws and confidentiality procedures to protect our technology.
Despite these precautions, unauthorized third parties may infringe copy or
reverse engineer portions of our technology. We do not know if current or future
patent applications will be issued with the scope of the claims sought, if at
all, or whether any patents issued will be challenged or invalidated. In
addition, we have obtained or applied for corresponding patents and patent


                                       15
<PAGE>


applications in several foreign countries for some of our patents and patent
applications. There is a risk that these patent applications will not be granted
or that the patent or patent application will not provide significant protection
for our products and technology. Our competitors may independently develop
similar technology that our patents do not cover. In addition, because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to our technology. 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. Moreover, there is a risk
that foreign intellectual property laws will not protect our intellectual
property rights to the same extent as United States intellectual property laws.
In the absence of significant patent protection, we may be vulnerable to
competitors who attempt to copy our products, processes or technology.

         OUR BUSINESS COULD BE HARMED IF WE INFRINGE UPON THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.

         There has been substantial litigation in the medical device and related
industries regarding patent and other intellectual property rights. While we
know of no threatened or pending infringement claims against us, it is possible
that we may in the future be notified that we may be infringing intellectual
property rights possessed by third parties, and we may be forced to expend
substantial resources to defend any such claims.

         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.

         IF OUR COMFORTSCAN SYSTEM IS APPROVED FOR SALE AS AN ADJUNCT TO
MAMMOGRAPHY TO END USERS IN THE U.S OR OTHER COUNTRIES, WE MAY BE DEPENDENT ON
THIRD PARTY REIMBURSEMENT FOR MARKET ACCEPTANCE OF OUR PRODUCTS. FAILURE OF
THIRD PARTY PAYERS TO PROVIDE APPROPRIATE LEVELS OF REIMBURSEMENT FOR USE OF OUR
PRODUCTS COULD HARM OUR BUSINESS AND PROSPECTS.

         Sales of medical products largely depend on the reimbursement of
patients' medical expenses by government healthcare programs and private health
insurers. The costs of our products are substantial, and market acceptance of
our products depends upon our customers' ability to obtain appropriate levels of
reimbursement from third-party payers for use of our products. In the United
States, the Centers for Medicare & Medicaid Services, known as CMS, establishes
guidelines for the reimbursement of healthcare providers treating Medicare and
Medicaid patients. Under current CMS guidelines, varying reimbursement levels
have been established for mammography, ultrasound and other imaging and
diagnostic procedures. The actual reimbursement amounts are determined by
individual state Medicare carriers and, for non-Medicare and Medicaid patients,
private insurance carriers. There are often delays between the reimbursement
approvals by CMS and by a state Medicare carrier and private insurance carriers.
Moreover, states as well as private insurance carriers may choose not to follow
the CMS reimbursement guidelines. The use of our products outside the United
States may also similarly be affected by reimbursement policies adopted by
foreign regulatory and insurance carriers. A reduction or other adverse change
in reimbursement policies for the use of our products could harm our business
and prospects.

         At this time, it is premature to seek CMS rembursement levels for our
ComfortScan system as it is still an investigational medical device. Hence,
since it is not approved for sale to end uses as a medical device, it has not
been approved anywhere for reimbursement by government or private payers.

         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


                                       16
<PAGE>


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.

         OUR DELAY OR INABILITY TO OBTAIN ANY NECESSARY UNITED STATES OR FOREIGN
REGULATORY CLEARANCES OR APPROVALS FOR OUR PRODUCTS COULD HARM OUR BUSINESS AND
PROSPECTS.

         Our ComfortScan system is a medical device that is the subject of a
high level of regulatory oversight both in the U.S and in many foreign
countries. Our delay or inability to obtain any necessary United States or
foreign regulatory clearances or approvals could harm our business and
prospects. The process of obtaining clearances and approvals can be costly and
time-consuming.

         There is a risk that any approvals or clearances, once obtained, may be
withdrawn or modified. Medical devices cannot be marketed in the United States
without clearance or approval by the FDA. Medical devices sold in the United
States must also be manufactured in compliance with FDA Good Manufacturing
Practices, which regulate the design, manufacture, packing, storage and
installation of medical devices. Moreover, medical devices are required to
comply with FDA regulations relating to investigational research and labeling.
States may also regulate the manufacture, sale and use of medical devices.

         WE INTEND TO SELL OUR COMFORTSCAN SYSTEM IN CERTAIN FOREIGN COUNTRIES,
WHICH EXPOSES US TO A NUMBER OF DIFFICULTIES IN COORDINATING OUR INTERNATIONAL
ACTIVITIES AND DEALING WITH MULTIPLE REGULATORY ENVIRONMENTS.

         We intend to market and sell our ComfortScan system to customers in
foreign countries, subject to our compliance with local regulations. Our
business may be harmed by difficulties in obtaining qualified distributors and
managing operations in multiple locations, greater difficulties in obtaining
letters of credit and trade accounts receivable collection, possible adverse tax
consequences; governmental currency controls; changes in various regulatory
requirements, political and economic changes and disruptions, export/import
controls, and tariff regulations.

         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.

RISKS RELATED TO OUR COMMON STOCK

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


                                       17
<PAGE>


         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.

         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 38% 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 $1.31 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 ($1.31 per share) and take into
account both the lower price and the number of shares issued at the lower price.

         In connection with our March 2005 private placement, we granted to the
private placement investors "weighted average" anti-dilution protection with
respect to the common shares purchased by them. The anti-dilution provisions are
triggered by a subsequent stock offering by us within one year of the closing of
the March 2005 private placement at a lower price per share than the protected
price level ($.50 per share) and take into account both the lower price and the
number of shares issued at the lower price.

         OUR STOCK PRICE IS VOLATILE.

         The market price of our common stock has been, and may continue to be,
highly volatile. We believe that a variety of factors could cause the price of
our common stock to fluctuate, perhaps substantially, including: announcement
and rumors of developments related to our business or industry in which we
compete, quarterly fluctuations in our actual or anticipated operating results
or orders for devices, general conditions in the worldwide economy,
announcements of technological innovations; new products or product enhancements
by us or our competitors, development in patents or other intellectual property
right and litigation, and development in our relationships with our customers,
suppliers, and distributors.

         In addition, in recent years the stock market in general and the
markets for shares of small capitalization and "high-tech" companies in
particular, have experienced extreme price fluctuations which have often been
unrelated to


                                       18
<PAGE>


the operating performance of affected companies. Any such fluctuations in the
future could adversely affect the market price of our common stock, and the
market price of our common stock may decline.

ITEM 7.  FINANCIAL STATEMENTS.

         Our audited financial statements for the year ended December 31, 2005
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, 2005.

         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 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, 2005 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 January 23, 2006:

NAME                                AGE       POSITION
----                                ---       --------
Robert B. Machinist                 53       Chairman of the Board
Phillip C. Thomas                   57       Co-Founder, Chief Executive Officer
                                              and Director
David H. Clarke                     64       Co-Founder and Director
Brad Baker                          46       Director
Steve M. Barnett                    64       Director
William Li, M.D.                    43       Director
Webb W. Turner                      68       Director


                                       19
<PAGE>


NAME                                AGE       POSITION
----                                ---       --------

Michael R. Jorgensen                53       Executive Vice President and Chief
                                              Financial Officer

         ROBERT B. 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, CEO, and managing partner of MB Investment Partners in
New York since August, 2004. From March 2002 through January 2006, he was a
managing partner of M Capital, LLC, a private equity investment firm based in
Rye, New York. 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, as well as a member of the board of directors of
Deerfield Triarc Capital Corp.

         PHILLIP C. THOMAS is co-founder, a member of our board and our Chief
Executive Officer since the inception of DOBI Medical International, Inc. Prior
to this time, Mr. Thomas was Chief Executive Officer and a director of DOBI
Medical Systems since December 1999; 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 early forms of the DOBI
Medical 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 1992 to 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, approximately 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 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 we 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 Oversight Board, a federal agency formed to
restructure and reorganize the thrift industry. In 1988 to 1989, Mr. Baker
served as a White House Fellow.

         STEVE M. BARNETT joined the DOBI Medical Systems board of directors in
April 2005. He is an investor in, as well as an advisor to senior management of,
marketing, manufacturing and distribution companies on improving operations. For
more than two decades, Mr. Barnett has been President and Chairman of CDC, Inc.
whose principal activity is the acquisition and management of small- to
mid-sized manufacturing and distribution companies. Since April 2000, Mr.
Barnett has served as a Director and Chairman of the Audit Committee of UCN,
Inc., a technology-based telephone company specializing in automated call
distribution and call-center management, including a wide range of long
distance, data transmission and related communication services. As well, since
October 2004, Mr. Barnett has served as a Director of Medis Technologies Ltd., a
company specializing in advanced technology regarding unique fuel cell power
packs for portable electronic devices. Mr. Barnett has also served as an advisor
to senior management of Grayhill, Inc., a manufacturer of electrical systems,
since May 1993, and Joseph A. Freed & Associates, a national real estate
development company, since June 1998. He has been a Director of Bank Leumi USA
since October 2001. He has also served as Vice-Chairman of the Board and
Director of Chicago's Jewish


                                       20
<PAGE>


Federation since 1997 and as a member of the Board of Governors for the
Reconstructionist Rabbinical College since 2003. Mr. Barnett received a J.D.
degree from the University of Chicago Law School and holds a bachelor's degree
in Chemistry and Biology from Carleton College.

         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 2000 and Medical Director since December 1994. Dr. Li has
extensive expertise in the field of angiogenesis and its therapeutic development
and clinical applications. He trained with Dr. Judah Folkman, who pioneered the
field of angiogenesis research. Through the Angiogenesis Foundation, Dr. Li has
worked in association with the National Institutes of Health, and other major
governmental and academic institutions, and industry leaders on
angiogenesis-related programs. Dr. Li received his 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 has also served
on the faculties of Harvard Medical School, Tufts University School of
Veterinary Medicine and 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 15 years' experience with investment banking firms,
and 17 years' as the chief executive officer and chief financial officer of
seven furniture manufacturing companies. 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.

         Significant Employees

         Our other significant employees include:

         SAL LUCIA, 55, 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, 60, joined DOBI Medical Systems as General Counsel in
February 2003 and became General Counsel and Secretary of DOBI Medical
International, Inc. 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. a 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, New Jersey, and the District of Columbia.

         A. ROBERT SOHVAL, PH.D., 56, 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


                                       21
<PAGE>


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 and Steve Barnett as committee
members. The board determined that Mr. Baker and Mr. Barnett each are
"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 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 1 to our 2005
Proxy Statement, 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, William Li, M.D. and Steve Barnett.
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. Mr. Turner, Dr. Li and Mr. Barnett 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 our 2004 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


                                       22
<PAGE>


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, 2005, all filing requirements applicable to
our executive officers and directors and greater than 10% shareholders were
complied with, except for Lake Worth Ventures, Inc. (two late filings).

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 and has been posted on our website www.dobimedical.com.

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>

                                                                              OTHER ANNUAL        LONG TERM AWARDS
                                                                              COMPENSATION           SECURITIES
                                                                                  ($)                UNDERLYING
NAME AND PRINCIPAL POSITION           YEAR     SALARY($)     BONUS($)             (1)               OPTIONS/SARS
---------------------------           ----     ---------     --------             ---               ------------

<S>                                   <C>       <C>                             <C>                    <C>
Phillip C. Thomas                     2005      260,000         -               125,000                75,000
Chief Executive Officer               2004      248,462         -                  -                      -
                                      2003      210,888       12,231               -                   75,000


Michael R. Jorgensen (2)              2005      200,000       48,325               -                      -
Executive Vice President and          2004      200,000         -                  -                   250,000
Chief Financial Officer               2003      179,428       10,962               -                   387,500


Robert Sohval (3)                     2005      200,000         -                  -                      -
Vice President                        2004      186,539       50,000               -                   500,000
Research and Development              2003         -            -                  -                      -
</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. Thomas who was
     paid $125,000 after the completion of the March 30, 2005 financing, per his
     employment agreement as amended.

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

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


DURING 2005, WE GRANTED STOCK OPTIONS UNDER THE DOBI MEDICAL 2000 STOCK
INCENTIVE PLAN TO PURCHASE 2,606,500 SHARES OF COMMON STOCK, INCLUDING THE
OPTIONS DESCRIBED IN THE TABLE BELOW.


                                       23
<PAGE>


<TABLE>
<CAPTION>

                                    Number of     Percent of total
                                   securities      options / SARs
                                   underlying          granted          Exercise or
                                 options / SARs     to employees         base price
Name                                 granted       in fiscal year          ($/Sh)           Expiration
----                                 -------       --------------          ------           ----------

<S>                                  <C>                 <C>                <C>              <C>  <C>
Phillip C. Thomas                    75,000              2.9                0.66             3/10/2015
Chief Executive Officer


Michael R. Jorgensen                    0                 0                  0                   -
Executive Vice President and
Chief Financial Officer


Robert Sohval                           0                 0                  0                   -
Vice President
Research and Development
</TABLE>


AGGREGATED OPTION / SAR EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 2005 AND
FISCAL YEAR END OPTION / SAR VALUES

<TABLE>
<CAPTION>

                                                                          Number of
                                                                          Securities          Value of
                                                                          underlying         unexercised
                                                                         unexercised        in-the-money
                                                                                           options / SARs
                                   Shares                             options / SARs at          at
                                  acquired                                FY-end (#)         FY-end ($)
                                     on                 Value           Exercisable /       Exercisable /
Name                            exercise (#)        realized ($)        Unexercisable       Unexercisable
----                            ------------      - -------------       -------------       -------------

<S>                                   <C>                 <C>          <C>       <C>            <C> <C>
Phillip C. Thomas                     0                   0            296,250 / 81,250         0 / 0
Chief Executive Officer

Michael R. Jorgensen                  0                   0           256,250 / 381,250         0 / 0
Executive Vice President
and
Chief Financial Officer

Robert Sohval                         0                   0           125,000 / 375,000         0 / 0
Vice President
Research and Development
</TABLE>


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/or
special meeting of the board of directors. We also pay a committee participation
fee of up to $250 for each meeting of a committee of the board. Fees are accrued
and paid quarterly, in arrears. 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 and/or the Chief Executive Officer.

         Non-employee directors new to the board are awarded an incentive grant
of an option to purchase 250,000 shares of our common stock, and existing
non-employee directors were awarded an option to purchase 250,000


                                       24
<PAGE>


shares, except that the Chairman was awarded an option grant for 300,000 shares
due to anticipated greater levels of oversight and work effort. Thereafter, upon
appointment each new committee chair will receive an initial grant of 50,000
shares. Upon each subsequent annual stockholders' meeting in which a director
has been reelected, each non-employee director will be awarded an option to
purchase 25,000 shares. Upon reappointment, each committee chairman will be
awarded an option to purchase 25,000 shares, and the Chairman of the Board will
be granted an option to purchase 75,000 shares. Such option awards will be
non-qualified and will 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. 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
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 extensions on each anniversary of the commencement date for
an additional one year from the then current expiration date under certain
conditions. Pursuant to the employment agreement, on November 21, 2005 the Board
gave notice that we would not automatically extend his agreement term, and thus
Mr. Thomas' employment agreement will expire on December 8, 2006. Mr. Thomas,
through his legal counsel, has indicated that he believes his employment
agreement expires on December 8, 2007. The matter is currently unresolved.
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
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.


                                       25
<PAGE>


         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 377,500 shares of common stock under our 2000 Stock
Incentive Plan, at exercise prices ranging from $0.66 to $2.31 per share, as
adjusted in accordance with the terms of the merger.

         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, as
amended), 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 February 2, 2006 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
                                                       BENEFICIALLY OWNED             OWNED (1)
                                                       -------------------        -------------------
<S>                                                      <C>                            <C>
   Lake Worth Ventures, Inc.                             8,310,236                      12.2%
   c/o Mr. David H. Clarke
   777 South Flagler Drive - Suite 1100
   West Palm Beach, FL 33401
   David H. Clarke
   777 South Flagler Drive
   Suite 1112
   West Palm Beach, FL 33401                            10,859,086         (2)          15.9%
   Brad Baker                                             88,000                          *
   Steve M. Barnett                                       50,000                          *
   William Li, M.D.                                       69,500                          *
   Robert B. Machinist                                    810,189                       1.2%
   Phillip C. Thomas                                     3,252,503                      4.9%
   Webb W. Turner
   400 East 50th Street
   New York, NY 10022                                    2,689,003         (3)          4.0%
   Michael R. Jorgensen                                   601,875                         *


                                       26
<PAGE>


                                                                                    PERCENTAGE OF
                                                                                        SHARES
                                                        NUMBER OF SHARES             BENEFICIALLY
                                                       BENEFICIALLY OWNED             OWNED (1)
                                                       -------------------        -------------------

   Martin Solomon
   1643 Brickell Ave.
   Suite 4902
   Miami, FL 33129                                       4,633,636         (4)          6.9%

   Basso Private Opportunity
   Holding Fund and Affiliates (5)
   1266 S. Main Street, 4th Floor
   Stamford, CT 06902                                    4,964,450                      7.3%

   All directors and executive officers as              18,420,156                      27.3%
      a group (8 persons)
</TABLE>

         -----------------------------
         *Less than 1% of outstanding shares.


          (1)  Based upon 66,391,514 shares of common stock outstanding on
               January 6, 2006, 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 prospectus. Unless
               otherwise noted, shares are owned of record and beneficially by
               the named person.

          (2)  Includes 6,507,721 shares of common stock and warrants and series
               A preferred stock convertible into 1,802,515 shares of common
               stock owned by Lake Worth Ventures, Inc., 6,500 shares of common
               stock owned by affiliates of Lake Worth Ventures, which are
               controlled by David H. Clarke and stock options to purchase
               73,750 shares of common stock granted to David H. Clarke.

          (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)  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.

          (5)  Basso Capital Management, L.P. or Basso, is the Investment
               manager to each of Basso Multi-Strategy Holding Fund Ltd. and
               Basso Private Opportunity Holding Fund Ltd. Howard I. Fischer is
               a managing member of Basso GP, LLC, the General Partner of Basso,
               and as such has investment power and voting control over the
               securities held by each fund. The funds beneficially own a total
               of 6,430,500 shares or 9.4% of the shares listed in note 1 above.

         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.

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


                                       27
<PAGE>


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.

         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.

         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.

         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) funded approximately $670,000 incurred by Strategic
Initiatives during the one-year term of the agreement. Keith A. Ebert, a former
director, is a principal of Strategic Initiatives.

         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.

EXHIBIT NUMBER   DESCRIPTION
--------------   -----------
      3.1        Certificate of Incorporation (1)

      3.2        By-Laws (1)

     10.1        CEO Phillip C. Thomas' Employment Agreement (2)

     10.2        Amendment to CEO Phillip C. Thomas' Employment Agreement (3)

     10.3        Form of International Marketing, Sales and Services Agreement

     14.1        Code of Business Conduct and Ethics (3)

     14.2        Code of Ethics for CEO and Senior Financial Officers (3)

     21.1        Subsidiaries of DOBI Medical International, Inc.

     31.1        Certification of C.E.O. Pursuant to Section 302 of the
                 Sarbanes-Oxley Act of 2002


                                       28
<PAGE>

     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 (3)

     99.2        Compensation Committee Charter (3)

     99.3        Nominations and Corporate Governance Charter (2)

-----------------------

(1)  Filed with the Current Report on Form 8-K, dated December 9, 2003, and
     filed with the SEC on December 19, 2003.

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

(3)  Filed with the Annual Report on 10-KSB for the year ended December 31, 2004
     and filed on March 11, 2005, as amended and filed on April 20, 2005.

         (b)      REPORTS ON FORM 8-K.

                  1.  We filed a Current Report on Form 8-K on October 25, 2005
                      regarding an interview by Phillip C. Thomas, CEO of the
                      Company, for the Wall Street Transcript.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

         For the year ended December 31, 2005 and 2004, we incurred audit fees
totaling $86,200 and $98,000, respectively, and incurred fees for tax services
totaling $6,000 and $22,000, respectively, payable to Marcum & Kliegman LLP, our
auditors.


                                       29
<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:  February 10, 2006          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.

<TABLE>
<CAPTION>

<S>                                     <C>                                             <C>
NAME                                    TITLE                                           DATE

/s/ Robert B. Machinist
-----------------------
Robert B. Machinist                     Chairman of the Board of Directors              February 10, 2006


/s/ Phillip C. Thomas
-----------------------
Phillip C. Thomas                       Director                                        February 10 , 2006


/s/ David H. Clarke
-----------------------
David H. Clarke                         Director                                        February 10, 2006


/s/ Brad Baker
-----------------------
Brad Baker                              Director                                        February 10 , 2006


/s/Steve M. Barnett
-----------------------
Steve M. Barnett                        Director                                        February 10 , 2006


/s/ William Li, M.D.
-----------------------
William Li, M.D.                        Director                                        February 10, 2006


/s/ Webb W. Turner
-----------------------
Webb W. Turner                          Director                                        February 10, 2006
</TABLE>


                                       30
<PAGE>


                 DOBI MEDICAL INTERNATIONAL, INC. AND SUBSIDIARY

                                   FORM 10-KSB

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

<S>                                                                                                     <C>   <C>
Report of Independent Registered Public Accounting Firm                                               F-1 - F-2

Consolidated Balance Sheet at December 31, 2005                                                          F-3

Consolidated Statements of Operations for the years ended December 31, 2005 and 2004 and the             F-4
     period September 7, 1999 (inception) to December 31, 2005

Consolidated Statements of Stockholder's Equity for the period from September 7, 1999                 F-5 - F-8
     (inception) to December 31, 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 and the          F-9 - F-11
     period September 7, 1999 (inception) to December 31, 2005

Notes to Consolidated Financial Statements                                                           F-12 - F-27
</TABLE>


             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, 2005, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 2005 and for the period from September 7, 1999 (inception) to
December 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. 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 $34,182,028. 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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, 2005, and the consolidated
results of its operations and its cash flows for each of the two years in the


                                      F-1
<PAGE>


period ended December 31, 2005, and for the period from inception (September 7,
1999) to December 31, 2005, 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
February 2, 2006


                                      F-2
<PAGE>


                 DOBI Medical International, Inc. and Subsidiary
                          (A Development Stage Company)
                           Consolidated Balance Sheet
                                December 31, 2005
<TABLE>
<CAPTION>


ASSETS
Current assets:
<S>                                                                                  <C>
     Cash and cash equivalents                                                     $  2,312,754
     Accounts receivable                                                                 31,585
     Inventory                                                                          348,652
     Prepaid expenses and other current assets                                          126,149
                                                                                   ------------
Total current assets                                                                  2,819,140

Property and equipment, net                                                             577,561
Intangible assets, net                                                                    6,601
Other assets                                                                             45,529
                                                                                   ------------
Total assets                                                                          3,448,831
                                                                                   ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                              $    538,790
     Accrued expenses                                                                   974,709
     Deferred revenue                                                                    24,450
                                                                                   ------------
Total current liabilities                                                             1,537,949

Commitments and Contingencies (Note 9)

Stockholders' Equity
     Preferred stock, $.0001 par value, 10,000,000 shares
        authorized, 156 shares issued and outstanding                                         -
        (liquidation preference $3,900,000)
     Common stock, $.0001 par value, 140,000,000 shares
          authorized, 66,391,514 issued and outstanding                                   6,639
     Additional paid-in capital                                                      36,086,271
     Deficit accumulated during development stage                                   (34,182,028)
                                                                                   ------------
Total stockholders' equity                                                            1,910,882
                                                                                   ------------
Total liabilities and stockholders' equity                                            3,448,831
                                                                                   ============
</TABLE>

See notes to consolidated financial statements


                                      F-3
<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,
                                                           -------------------------------------
                                                                 2005               2004                2005
                                                           ------------------ ------------------      --------------------
Revenue
<S>                                                        <C>                     <C>                   <C>
   Product                                                 $         224,794       $    316,316         $          541,110
   Service                                                            78,600              4,950                     83,550
                                                           ------------------ ------------------      --------------------
                                                                     303,394            321,266                    624,660
                                                           ------------------ ------------------      --------------------
Cost of sales
   Product                                                           586,984            363,314                    950,298
   Service                                                           263,611             20,518                    284,129
                                                           ------------------ ------------------      --------------------
                                                                     850,595            383,832                  1,234,427
                                                           ------------------ ------------------      --------------------
   Gross loss                                                      (547,201)           (62,566)                   (609,767)
                                                           ------------------ ------------------      --------------------

Research and development expenses                                  2,339,724          1,957,256                 11,199,234
General and administrative expenses                                3,236,480          2,147,228                  9,750,934
Clinical program expenses                                          3,357,672            928,512                  6,002,254
Sales and marketing expenses                                       1,348,521          1,918,824                  5,037,888
                                                           ------------------ ------------------      --------------------
   Total operating expenses                                       10,282,397          6,951,820                 31,990,310
                                                           ------------------ ------------------      --------------------

Operating (loss)                                                (10,829,598)        (7,014,386)                (32,600,077)

Other income (expense)
   Interest expense                                                  (8,397)            (7,495)                 (2,181,548)
   Interest income                                                   127,265             11,443                    319,933
                                                           ------------------ ------------------      --------------------
Loss before income taxes                                        (10,710,730)        (7,010,438)                (34,461,692)
   Income tax benefit                                                279,664                  -                    279,664
                                                           ------------------ ------------------      --------------------
Net loss                                                        (10,431,066)        (7,010,438)                (34,182,028)
Deemed dividend on preferred stock                                 (136,940)          (805,393)                   (942,333)
Preferred Stock dividends                                          (353,408)          (206,454)                   (559,862)
                                                           ------------------ ------------------      --------------------
Net loss applicable to common stock                            $(10,921,414)      $ (8,022,285)         $      (35,684,223)
                                                           ================== ==================      ====================

Basic and diluted loss per common share                              $(0.18)            $(0.21)
                                                           ================== ==================
Weighted average common shares, basic and diluted                 60,469,907         37,924,009
                                                           ================== ==================


See notes to consolidated financial statements
</TABLE>


                                      F-4
<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


                                      F-5
<PAGE>


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
Exercise of warrants                                                                               199,361             20
Net Loss
                                                      ---------------- ---------------- ------------------- -----------------
BALANCE, DECEMBER 31, 2004                                        206                -          43,748,294          4,375
Stock-based compensation
Dividends - Series A Preferred Stock
Payment of Series A Preferred Stock dividend with
common stock                                                                                       779,937             78
Sale of common stock                                                                            21,000,000          2,100
Conversion of preferred stock for common stock                   (50)                              863,283             86
Net Loss
                                                      ---------------- ---------------- ------------------- -----------------
BALANCE, DECEMBER 31, 2005                                        156         $      -          66,391,514     $    6,639
                                                      ================ ================ =================== =================

See notes to consolidated financial statements

    See notes to consolidated financial statements
</TABLE>


                                      F-6


<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)
Net 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


                                      F-7
<PAGE>

   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
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
Stock-based compensation                                         5,627                                                     5,627
Dividends - Series A Preferred Stock                         (353,408)                                                 (353,408)
Payment of Series A Preferred Stock dividend with
common stock                                                   481,807                                                   481,885
Sale of common stock                                         9,662,900                                                 9,665,000
Conversion of preferred stock for common stock                    (86)                                                         -
Net Loss                                                                                         (10,431,066)       (10,431,066)
                                                      ----------------- ------------------ ------------------- ------------------

BALANCE, DECEMBER 31, 2005                                $ 36,086,271                  -      $ (34,182,028)        $ 1,910,882
                                                      ================= ================== =================== ==================

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
<TABLE>
<CAPTION>

                                                                                                                 Period from
                                                                                                              September 7,1999
                                                                              Year ended December 31,          (inception) to
                                                                              -----------------------
                                                                               2005             2004          December 31, 2005
                                                                         ----------------- ---------------- ----------------------
OPERATING ACTIVITIES
<S>                                                                        <C>              <C>             <C>
Net loss                                                                   $ (10,431,066)   $  (7,010,438)  $        (34,182,028)
Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization                                                  250,156          116,027                570,503
   Amortization of financing costs                                                      -                -                854,343
   Loss on sale / disposal of equipment                                             3,249                -                  3,583
   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                                                         5,627           66,891                451,365
   Accrued interest converted to equity                                                 -                -                340,454
   Accretion of discount on Series 1and 2 convertible notes                             -                -                808,113
   Common stock warrants in connection with
      The conversion of notes payable                                                   -                -                 61,806
   Changes in assets and liabilities:
     (Increase) in accounts receivable                                           (31,585)                -               (31,585)
      Decrease (Increase) in inventory                                             30,760        (379,412)              (348,652)
      Decrease (Increase) in other current assets                                  11,912          676,096              (125,927)
      Decrease (Increase) in other assets                                               -         (28,556)                 42,996
      Increase in accounts payable                                                268,195            6,533                804,265
      Increase (decrease) in accrued expenses                                     373,728         (29,420)                545,128
      Increase (decrease) in deferred revenue                                   (112,045)           92,850                 24,450
                                                                         ----------------- ---------------- ----------------------
Net cash used in operating activities                                         (9,631,069)      (6,489,429)           (29,172,286)

INVESTING ACTIVITIES
Purchase of business, net of cash received                                              -                -              (500,000)
Purchase of property and equipment                                              (175,785)        (719,478)            (1,011,367)
Patent costs                                                                            -                -               (43,022)
Proceeds from sale of equipment                                                         -                -                    250
                                                                         ----------------- ---------------- ----------------------
Net cash used in investing activities                                           (175,785)        (719,478)            (1,554,139)

FINANCING ACTIVITIES
Proceeds from founding members                                                          -                -                525,000
Cash paid for transaction costs associated with equity transactions             (835,000)                -            (2,843,107)
Cash paid for transaction costs associated with debt transactions                       -                -              (719,485)
Deferred offering costs                                                                 -                -               (75,000)
Proceeds from subscriptions receivable - Class A preferred shares                       -                -                940,020
Dividends - Class A redeemable convertible preferred units                              -                -              (132,689)
Proceeds from share subscription note - related party                                   -                -                239,625
Proceeds (payments) from Series 1 and Series 2 Convertible Notes                        -        (170,000)              4,386,000
Proceeds from notes payable, net                                                        -                -              3,113,799
Proceeds from sale of common stock                                             10,500,000        2,997,461             23,626,149


                                      F-9


<PAGE>


Proceeds from sale of preferred stock                                                   -        4,208,167              4,208,167
Repayment of notes payable                                                              -                -              (229,300)
                                                                         ----------------- ---------------- ----------------------
                                                                         ----------------- ---------------- ----------------------
Net cash provided by financing activities                                       9,665,000        7,035,628             33,039,179
                                                                         ----------------- ---------------- ----------------------
Increase (decrease) in cash and cash equivalents                                (141,854)        (173,279)              2,312,754
Cash and cash equivalents at beginning of year/period                           2,454,608        2,627,887                      -
                                                                         ----------------- ---------------- ----------------------
Cash and cash equivalents at end of year/period                            $    2,312,754   $    2,454,608  $           2,312,754
                                                                         ================= ================ ======================
See notes to consolidated financial statements
</TABLE>


                                      F-10
<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
                                                                          ----------------------------
                                                                               2005             2004         December 31, 2005
                                                                          --------------- -------------    ----------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest                                     $       8,397   $       7,495    $       106,502
                                                                          =============== ================ ======================
Purchase of business, net of cash received:
<S>                                                                                                         <C>
   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        $            -  $           -    $     8,026,451
                                                                          =============== ================ ======================
   Conversion of preferred shares to common stock
                                                                           $    1,262,500              -    $     2,570,346
                                                                          =============== ================ ======================
   Preferred stock dividends                                               $      353,408  $     206,454    $       559,862
                                                                          =============== ================ ======================
   Deemed dividend to preferred stock shareholders                         $      136,940  $     805,393    $       942,333
                                                                          =============== ================ ======================
   Share subscription note                                                 $            -  $           -    $       239,625
                                                                          =============== ================ ======================
   Issuance of common warrants for consulting                              $       54,000  $      18,200    $       398,548
                                                                          =============== ================ ======================
   Accretion of Class A redeemable convertible preferred shares            $            -  $           -    $       364,334
                                                                          =============== ================ ======================
</TABLE>

See notes to consolidated financial statements



                                      F-11
<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


                                      F-12
<PAGE>


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

                   Notes to Consolidated Financial Statements


and has been able to obtain funding for operating requirements to date. There is
no assurance that, if and when FDA 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-13
<PAGE>


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

                   Notes to Consolidated Financial Statements


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, 2005 and 2004 advertising expense was $20,456 and $42,468,
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.

         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, 2005 and 2004 as follows:


                                      F-14
<PAGE>


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

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>

                                                                2005              2004
                                                          -------------------------------------
<S>                                                         <C>                <C>
Net loss applicable to common stock, as reported            $(10,921,414)      $(8,022,285)
Add total stock-based compensation, as reported                    5,627            66,891
Deduct total stock-based compensation determined              (1,006,713)         (670,899)
  under fair value based method for all awards            -------------------------------------
Pro forma net loss                                          $(11,922,500)      $(8,626,293)
                                                          =====================================
Basic and diluted loss per common share - as reported             $(0.18)           $(0.21)
                                                          =====================================
Proforma loss per share basic and diluted                         $(0.20)           $(0.23)
                                                          =====================================
</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 $8,700,000 is provided. The valuation
allowance increased by $3,800,000 during the year ended December 31, 2005.

         As of December 31, 2005 the Company has approximately $22,000,000 of
federal net operating losses available to offset future taxable income, which if
not utilized will expire in 2025. No provision or benefit for income taxes has
been recorded in the financial statements as a result of continued losses except
that the Company obtained a corporation business tax benefit certificate
pursuant to New Jersey law which allows the sale of unused state net operation
losses. For the year ended December 31, 2005, the company received a benefit of
$280,889. 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.

Fair Value of Financial Instruments

         The recorded amounts of cash and cash equivalents, short-term
borrowings, accounts receivable, 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, 2005 equaled


                                      F-15
<PAGE>


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

                   Notes to Consolidated Financial Statements


6,739,250 and 34,231,719, respectively. As of December 31, 2005, our outstanding
Series A Preferred convertible stock is convertible into 2,976,213 shares of
common stock.

Recently Issued Accounting Standards

         In December 2004, the FASB issued Statement of Financial Accounting
Standards SFAS No. 123 (revised 2004), "Share Based Payment" (SFAS 123R), a
revision to SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123R
supersedes APB No. 25, "Accounting for Stock Issued to Employees," and amends
SFAS No. 95, "Statement of Cash Flows." SFAS 123R requires that the Company
measure the cost of employee services received in exchange for equity awards
based on the grant date fair value of the awards. The cost will be recognized as
compensation expense over the vesting period of the awards. The Company is
required to adopt SFAS 123R effective for annual periods beginning after
December 15, 2005. Under this method, the Company will begin recognizing
compensation cost for equity-based compensation for all new or modified grants
after the date of adoption. In addition, the Company will recognize the unvested
portion of the grant date fair value of awards issued before adoption based on
the fair values previously calculated for disclosure purposes over the remaining
vesting period of the outstanding options and warrants. The adoption of SFAS
123R will have an impact on the financial statements whereby the Company will
record a charge to earnings on prospective issuances of stock options.

         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 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 did not have a 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 did not have a material effect on the Company's
financial statements.

         In May 2005, the FASB issued FASB 154, "Accounting Changes and Error
Corrections," a replacement of APB Opinion No. 20 and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements." This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.

         On September 28, 2005, the FASB ratified the following consensus
reached in EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt
with a Beneficial Conversion Feature"): a) The issuance of convertible debt with
a beneficial conversion feature results in a basis difference in applying FASB
Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income
Taxes. Recognition of such a feature effectively creates a debt instrument and a
separate equity instrument for book purposes, whereas the convertible debt is
treated entirely as a debt instrument for income tax purposes. b) The resulting
basis difference should be deemed a temporary difference because it will result
in a taxable amount when the recorded amount of the liability is recovered or
settled. c) Recognition of deferred taxes for the temporary difference should be
reported as an


                                      F-16
<PAGE>


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

                   Notes to Consolidated Financial Statements


adjustment to additional paid-in capital. This consensus is effective in the
first interim or annual reporting period commencing after December 15, 2005,
with early application permitted. The effect of applying the consensus should be
accounted for retroactively to all debt instruments containing a beneficial
conversion feature that are subject to EITF Issue 00-27, "Application of Issue
No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are still
presented in the financial statements). The adoption of this pronouncement is
not expected to have a material impact on the Company's financial statements.

The Emerging Issues Task Force ("EITF") reached a tentative conclusion on EITF
Issue No. 05-1, "Accounting for the Conversion of an Instrument That Becomes
Convertible upon the Issuer's Exercise of a Call Option" that no gain or loss
should be recognized upon the conversion of an instrument that becomes
convertible as a result of an issuer's exercise of a call option pursuant to the
original terms of the instrument. The application of this pronouncement is not
expected to have an impact on the Company's consolidated financial statements.

In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
'Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, 'Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock'" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered 'conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19. EITF No. 05-2 is effective for new instruments entered into and
instruments modified in periods beginning after June 29, 2005. The Company has
applied the requirements of EITF No. 05-2 since the required implementation
date. The adoption of this pronouncement did not have an impact on the Company's
consolidated financial statements.

EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, 'Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock'" ("EITF No. 05-4") addresses financial instruments, such as stock
purchase warrants, which are accounted for under EITF 00-19 that may be issued
at the same time and in contemplation of a registration rights agreement that
includes a liquidated damages clause. The consensus of EITF No. 05-4 has not
been finalized. The Company does not believe the adoption of this pronouncement
will have an impact on the Company's consolidated financial statements.

In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt. EITF No. 05-7 is effective for the first interim or annual reporting
period beginning after December 15, 2005. The Company is currently in the
process of evaluating the effect that the adoption of this pronouncement will
have on its financial statements.


4. INVENTORIES AT DECEMBER 31, 2005 CONSISTED OF THE FOLLOWING:

Purchased parts, components and supplies             $135,489
Work-in-process                                        46,534
Finished goods                                        166,629
                                                --------------
                                                     $348,652
                                                ==============

5.   PROPERTY AND EQUIPMENT

         Property and equipment at December 31, 2005 consisted of the following:

                                      F-17
<PAGE>

<TABLE>
<CAPTION>

                                                                        Estimated Useful
                                                                          Lives (years)
                                                                       --------------------
<S>                                                          <C>              <C> <C>
Computer software and equipment                              $796,019         3 - 5
Furniture, fixtures and equipment                             115,057           5
Leasehold improvements                                        129,568           5
                                                     -----------------
                                                            1,040,644
Less accumulated depreciation and amortization              (463,083)
                                                     -----------------
Property and equipment, net                                  $577,561
                                                     =================

         Depreciation and amortization expense was $244,880 and $94,083 for the
years ended December 31, 2005 and 2004, respectively.

6.   INTANGIBLE ASSETS

         Intangible assets at December 31, 2005 consisted of:

Patents                                                                           $112,128
Less accumulated amortization                                                    (105,527)
                                                                        -------------------
                                                                        -------------------
Intangible assets, net                                                              $6,601
                                                                        ===================
</TABLE>

         The weighted-average amortization period for the patents is
approximately five years. Amortization expense for the years ended December 31,
2005 and 2004 related to patents was $5,276 and $21,944 respectively.
Amortization expense for the next five years is estimated as follows:

                   2005                               $3,130
                   2006                                1,186
                   2007                                1,186
                   2008                                  482
                   Thereafter                            617

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


                                      F-18
<PAGE>


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

                   Notes to Consolidated Financial Statements


         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 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 12 "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.


                                      F-19
<PAGE>


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

                   Notes to Consolidated Financial Statements


         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 12 "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 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
stockholders); 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 stockholder 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


                                      F-20
<PAGE>


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

                   Notes to Consolidated Financial Statements


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
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 7 and Note 11). 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 12, "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 12, "Reverse Merger").

         On March 30, 2005, the Company completed a private placement for
21,000,000 shares of its common stock at a purchase price of $.50 per share, for
gross proceeds of $10,500,000 and net proceeds of approximately $9,665,000 (net
of transaction costs totaling $835,000). The investors also received 5,250,000
five-year warrants to purchase shares of common stock at an exercise price of
$.75 per share and 5,250,000 five-year warrants to purchase shares of common
stock at an exercise price of $1.25. In addition, the placement agent received
840,000 four-year


                                      F-21
<PAGE>


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

                   Notes to Consolidated Financial Statements


warrants to purchase shares of common stock at an exercise price of $.88 per
share. The subscribers to the common stock in this transaction have weighted
average anti-dilution rights in the event that the Company common stock or a
convertible instrument at a purchase price or conversion price lower than $.50
per share. This anti-dilution right expires on March 30, 2006.

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 for the years ended December 31, 2005 and 2004 were $136,940 and
$805,393, respectively, and consisted 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
and the March 30, 2005 sale of 21 million shares of common stock, we reduced the
conversion price of its Series A preferred stock from $2.00 per share to $1.31
per share. The anti-dilution provision for the Series A Preferred shares expires
July 30, 2006.

         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 are 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 years ended December 31, 2005 and 2004, the Company
recorded preferred stock dividends of $353,408 and $206,454, respectively.
Series A preferred convertible stock is convertible at anytime into common stock
at the option of the holder.

         As of December 31, 2005 there were issued and outstanding 34,231,719
warrants to purchase common stock with an exercise prices ranging from $0.50 to
$3.00 and expiring from December 2006 to October 2010. As of December 31, 2005
the Series A Preferred convertible stock were convertible into 2,976,213 shares
of common stock.

9.   COMMITMENTS AND CONTINGENCIES

Leases

         The Company leases office space under an operating lease which expires
in June 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, 2005 are as follows:

             2006                   $261,416
             2007                    293,088
             2008                    308,928


                                      F-22
<PAGE>


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

                   Notes to Consolidated Financial Statements


             2009                    154,464
                         --------------------
                                  $1,017,896
                         ====================

         Rent expense for the years ended December 31, 2005 and 2004 was
$287,514 and $164,949, 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
except for the following:

         On April 15, 2005, the Company filed suit in the Supreme Court of the
State of New York, County of New York, Index No. 601348/05, against Brian
Vodicka, a former member of the Company's Board of Directors, alleging breach of
contract and breach of fiduciary duty and seeking specific performance and
injunctive relief preventing the disclosure and requiring the return of certain
confidential and proprietary documents. On July 11, 2005, the New York Supreme
Court issued an order preliminarily enjoining Mr. Vodicka from using documents
or information provided to Mr. Vodicka by the Company wrongfully and in
violation of the confidentiality agreement between Mr. Vodicka and the Company.
Mr. Vodicka's attorney has withdrawn from the case and Mr. Vodicka is
representing himself pro se. The court order against Mr. Vodicka remains in
effect.

         On July 13, 2005, Mr. Vodicka filed a complaint with the U.S.
Occupational Safety and Health Administration of the Department of Labor
("OSHA") under the employee protection provisions of Title VIII of the
Sarbanes-Oxley Act of 2002 ("SOX") alleging that the Company had harassed him by
filing the above-referenced New York lawsuit against him. On September 9, 2005,
the Secretary of Labor, acting through her agent, the Region VI Regional
Administrator of OSHA, announced that she had investigated the complaint and
determined that it had no merit, that it should be dismissed, and that there was
no reasonable cause to believe that the Company had violated SOX. Mr. Vodicka
filed an appeal of these findings in the US Department of Labor's Office of
Administrative Law Judges. On December 23, 2005 a Labor Department
administrative law judge granted DOBI's motion for summary judgment dismissing
Vodicka's OSHA complaint. In doing so, the administrative law judge held that
Vodicka's argument that DOBI had violated SOX by filing the New York lawsuit was
"conclusory and unpersuasive." Mr. Vodicka has, in turn, appealed the
administrative law judge's decision to the Administrative Review Board of the
Labor Department. The Company shares the views of the regional administrator and
the administrative law judge that Mr. Vodicka's allegations are without merit
and intends to continue to vigorously defend against the Vodicka claims.

         On July 15, 2005, the Company was served with a complaint that had been
filed in the United States District Court for the Western District of Texas on
July 5, 2005 by Steve Aubrey and a group of other stockholders, many of whom are
associated with Mr. Vodicka, alleging, among other things, that the Company and
certain of its officers and directors, as well as two of its previous advisors,
had violated federal and state securities laws and seeking damages, interest,
and attorneys' fees and costs. On July 28, 2005 Mr. Vodicka himself filed a
complaint against the same defendants in the same court containing substantially
the same allegations and claims. On September 24, 2005 the Company received an
Amended Complaint consolidating the Aubrey and Vodicka suits. On October 6, 2005
plaintiffs filed self-executing papers in the Western District of Texas
voluntarily dismissing their claims without prejudice. Shortly thereafter,
several plaintiffs moved to withdraw or vacate their voluntary dismissals. In
addition, plaintiffs' counsel petitioned the court to withdraw from the case.
Plaintiffs' motions to withdraw or vacate their voluntary dismissals were denied
and plaintiffs' counsel's motion to withdraw was dismissed as moot on November
28, 2005. Vodicka's counsel in the Western District of Texas thereupon withdrew
from representing Vodicka and the other plaintiffs. On December 27, 2005, a
group of plaintiffs represented by new counsel re-initiated litigation in the
Western District of Texas alleging substantially the same allegations as to DOBI
and certain officers and directors as those contained in the prior complaint
which had been dismissed without


                                      F-23
<PAGE>


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

                   Notes to Consolidated Financial Statements


prejudice. The plaintiffs have claimed that the Company and certain of its
officers and directors made material omissions and/or misrepresentations and
that this caused plaintiffs to privately purchase shares of the Company's stock
at allegedly artificially inflated prices.

         The Company believes that the allegations are without merit and that
they stem from plaintiffs' dissatisfaction with the current market price of the
Company's stock. The Company intends to continue to vigorously defend against
plaintiffs' claims. However, we are unable to predict the outcome of the claims
and accordingly, no amounts have been provided for in the financial statements.

Employment Agreement

         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 extensions on each anniversary of the commencement date for
an additional one year from the then current expiration date under certain
conditions. Pursuant to the employment agreement, the Board gave notice to not
automatically extend his agreement, and thus, Mr. Thomas' employment agreement
expires on December 8, 2006. Mr. Thomas through his legal counsel has indicated
that he believes his employment agreement expires on December 8, 2007. The
matter is currently unresolved.

         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.

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 15 percent of the common units outstanding calculated on a fully diluted
basis. Upon DOBI Medical Systems LLC becoming a corporation on January 1, 2003,
the Unit Incentive Plan was amended to become the 2000 Stock Incentive Plan. As
of December 31, 2005, the 2000 Stock Incentive Plan was authorized to issue
9,958,727 stock options, based on the common stock outstanding at that date. As
of December 31, 2005 there were issued and outstanding stock options to purchase
6,739,250 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, 2005 and 2004, the Board of Directors
granted 2,606,500 and 2,367,750 options, respectively. These options have an
exercise price of $0.40 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 2005 and 2004
was $0.36 and $0.94, respectively. Options granted to non-employees are
accounted for under SFAS No. 123, whereby compensation


                                      F-24
<PAGE>


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

                   Notes to Consolidated Financial Statements


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, 2005 and 2004:

<TABLE>
<CAPTION>

                                                       2005                                 2004
                                        -----------------------------------  -----------------------------------
                                        WEIGHTED-AVERAGE    NUMBER OF        WEIGHTED-AVERAGE    NUMBER OF
                                         EXERCISE PRICE      OPTIONS         EXERCISE PRICE       OPTIONS
                                        -----------------------------------  -----------------------------------
<S>                                                <C>         <C>                     <C>          <C>
Options outstanding, beginning of year             $1.59       4,980,500               $1.46        2,862,250
   Granted                                          0.58       2,606,500                1.89        2,367,750
   Exercised                                           -               -                   -                -
   Forfeited                                        1.35       (847,750)                2.97        (249,500)
                                        -----------------------------------  -----------------------------------
Options outstanding, end of year                   $1.16       6,739,250               $1.59        4,980,500
                                        ===================================  ===================================
Options exercisable, end of year                   $1.65       2,599,625               $1.70        1,707,141
                                        ===================================  ===================================
</TABLE>

         Stock options outstanding at December 31, 2005 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
  ----------------------------------------------------------------------------
   $0.40 - $1.00      3,926,500           6.4 years                885,000
   $1.01 - $2.00      1,598,425           7.8 years                820,300
   $2.01 - $3.00      1,055,950           6.2 years                740,940
   $3.01 - $4.00        158,375           7.9 years                153,375

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, 2005 and 2004:

Expected life from issue date (in years)                        2 - 5
Risk-free interest rate                                     2.75% - 4.00%
Volatility                                                 35.9% - 102.2%
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.


                                      F-25
<PAGE>


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

                   Notes to Consolidated Financial Statements


         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.

         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.

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.

         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.


                                      F-26
<PAGE>


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

                   Notes to Consolidated Financial Statements


         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 one-for-one 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.


                                      F-27