**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**





(Mark
      One)





x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
                FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006





o
            TRANSITION
                REPORT PURSUANT TO 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)




**Delaware**
            
            **98-0222710**(State
                or other jurisdiction of
            
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)**1200
                MacArthur
                Blvd.****Mahwah,
                NJ**
            
            **07430**(Address
                of principal executive
                offices)
            
            (Zip
                Code)**(201)
                760-6464**(Issuer's
                telephone number)


****





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. xYes     
o
      No





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


YesoNo
x





As
      of May
      10, 2006, 76,902,721 shares of the issuer's Common Stock were outstanding.





Transitional
      Small Business Disclosure Format (check one):  Yes o  No
x








DOBI
      Medical International, Inc.





March
      31,
      2006 Form 10-QSB Quarterly Report





Table
      of
      Contents


PagePart
                  I Financial Information
              3Item
                  1. Financial Statements
              3Unaudited
                  Condensed Consolidated Balance Sheet at March 31, 2006
              3Unaudited
                  Condensed Consolidated Statements of Operations for the Three Month
                  Periods ended March 31, 2006 and 2005 and for the Period from September
                  7,
                  1999 (Inception) to March 31, 2006
              4Unaudited
                  Condensed Consolidated Statements of Cash Flows for the Three Month
                  Periods Ended March 31, 2006 and 2005 and for the Period from September
                  7,
                  1999 (Inception) to March 31, 2006
              5-6Notes
                  to Condensed Consolidated Financial Statements
              7-12Item
                  2. Management’s Discussion and Analysis or Plan of
                  Operation
              13Item
                  3. Controls and Procedures
              20Part
                  II Other Information
              21Item
                  1. Legal Proceedings
              21Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              22Item
                  3. Defaults Upon Senior Securities
              22Item
                  4. Submission of Matters to a Vote of Security Holders
              22Item
                  5. Other Information
              22Item
                  6. Exhibits and Reports on Form 8-K
              22Signatures
              23
  2


Part
      I
      Financial Information





Item
      1.
      Financial Statements











DOBI
                Medical International, Inc. and Subsidiary(A
                Development Stage Company)Condensed
                Consolidated Balance SheetMarch
                31, 2006(Unaudited)**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            19,118Accounts
                receivable
            
            
            79,337Prepaid
                expenses and other current assets
            
            
            153,410Inventory
            
            
            269,029Total
                current assets
            
            
            520,894Property
                and equipment, net
            
            
            524,181Intangible
                assets, net
            
            
            5,664Other
                assets
            
            
            55,425Total
                assets
            
            $
            1,106,164**Liabilities
                and stockholders' deficiency**Current
                liabilities:Accounts
                payable
            
            $
            1,406,624Accrued
                expenses
            
            
            1,195,212Deferred
                revenue
            
            
            19,500Total
                current liabilities
            
            
            2,621,336Stockholders'
                deficiencyPreferred
                stock, $.0001 par value, 10,000,000 sharesauthorized,
                155 issued and outstanding
            
            
            -Common
                stock, $.0001 par value, 140,000,000 sharesauthorized,
                66,410,598 issued and outstanding
            
            
            6,641Additional
                paid-in capital
            
            
            36,389,047Deficit
                accumulated during development stage
            
            
            (37,910,860
            )Total
                stockholders' deficiency
            
            
            (1,515,172
            )Total
                liabilities and stockholders' deficiency
            
            $
            1,106,164*See
                notes to condensed consolidated financial statements*





3





DOBI
                Medical International, Inc. and Subsidiary(A
                Development Stage Company)Condensed
                Consolidated Statements of Operations(Unaudited)Period
                fromSeptember
                7,1999Three
                months ended
            
            (inception)
                toMarch
                31,
            
            March
                31,2006
            
            2005
            
            2006RevenueProduct
            
            $
            89,000
            
            $
            45,014
            
            $
            630,110Service
            
            
            18,450
            
            
            17,400
            
            
            102,000107,450
            
            
            62,414
            
            
            732,110Cost
                of salesProduct
            
            
            240,110
            
            
            182,613
            
            
            1,190,408Service
            
            
            71,383
            
            
            62,888
            
            
            355,512311,493
            
            
            245,501
            
            
            1,545,920Gross
                loss
            
            
            (204,043
            )
            
            (183,087
            )
            
            (813,810
            )Research
                and development expenses
            
            
            659,659
            
            
            448,090
            
            
            11,858,893General
                and administrative expenses
            
            
            1,188,751
            
            
            795,480
            
            
            10,939,685Clinical
                program expenses
            
            
            1,455,619
            
            
            385,842
            
            
            7,457,873Sales
                and marketing expenses
            
            
            223,256
            
            
            259,565
            
            
            5,261,144Total
                operating expenses
            
            
            3,527,285
            
            
            1,888,977
            
            
            35,517,595Operating
                income (loss)
            
            
            (3,731,328
            )
            
            (2,072,064
            )
            
            (36,331,405
            )Other
                income (expense)Interest
                expense
            
            
            (2,772
            )
            
            (2,259
            )
            
            (2,184,320
            )Interest
                income
            
            
            5,268
            
            
            4,341
            
            
            325,201Loss
                before income taxes
            
            
            (3,728,832
            )
            
            (2,069,982
            )
            
            (38,190,524
            )Income
                tax benefit
            
            
            -
            
            
            -
            
            
            279,664Net
                loss
            
            
            (3,728,832
            )
            
            (2,069,982
            )
            
            (37,910,860
            )Deemed
                dividend on preferred stock
            
            
            (29,589
            )
            
            (36,877
            )
            
            (971,922
            )Preferred
                Stock dividends
            
            
            (76,978
            )
            
            (93,227
            )
            
            (636,840
            )Net
                loss applicable to common stock
            
            $
            (3,835,399
            )
            $
            (2,200,086
            )
            $
            (39,519,622
            )Basic
                and diluted loss per common share
            
            $
            (0.06
            )
            $
            (0.05
            )Weighted
                average common shares, basic and diluted
            
            
            66,407,841
            
            
            44,308,225*See
                notes to condensed consolidated financial statements*


4





DOBI
                Medical International, Inc. and Subsidiary(A
                Development Stage Company)Condensed
                Consolidated Statements of Cash Flows(Unaudited)Period
                fromThree
                months ended
            
            September
                7,1999March
                31,
            
            (inception)
                to2006
            
            2005
            
            March
                31, 2006Operating
                activitiesNet
                loss
            
            $
            (3,728,832
            )
            $
            (2,069,982
            )
            $
            (37,910,860
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            66,496
            
            
            54,423
            
            
            636,999Amortization
                of financing costs
            
            
            -
            
            
            -
            
            
            854,343Loss
                on sale of equipment
            
            
            -
            
            
            -
            
            
            3,583Write-off
                of purchased in-process research and development costs
            
            
            -
            
            
            -
            
            
            1,023,525Interest
                receivable in connection with share subscriptionnotes
                charged to equity
            
            
            -
            
            
            -
            
            
            (14,625
            )Stock
                based compensation
            
            
            379,755
            
            
            417
            
            
            831,120Accrued
                interest converted to equity
            
            
            -
            
            
            -
            
            
            340,454Accretion
                of discount on Series 1and 2 convertible notes
            
            
            -
            
            
            -
            
            
            808,113Common
                stock warrants in connection withthe
                conversion of notes payable
            
            
            -
            
            
            -
            
            
            61,806Changes
                in assets and liabilities:(Increase)
                in accounts receivable
            
            
            (47,752
            )
            
            (50,000
            )
            
            (79,337
            )(Increase)
                decrease in inventory
            
            
            79,623
            
            
            (144,818
            )
            
            (269,029
            )(Increase)
                decrease in other current assets
            
            
            (27,261
            )
            
            63,161
            
            
            (153,188
            )(Increase)
                decrease in other assets
            
            
            (9,896
            )
            
            -
            
            
            33,100Increase
                (decrease) in accounts payable
            
            
            867,834
            
            
            (24,699
            )
            
            1,672,099Increase
                in accrued expenses
            
            
            143,527
            
            
            321,477
            
            
            688,655Increase
                (decrease)in deferred revenue
            
            
            (4,950
            )
            
            (9,250
            )
            
            19,500Net
                cash used in operating activities
            
            
            (2,281,456
            )
            
            (1,859,271
            )
            
            (31,453,742
            )Investing
                activitiesPurchase
                of business, net of cash received
            
            
            -
            
            
            -
            
            
            (500,000
            )Purchase
                of property and equipment
            
            
            (12,180
            )
            
            (9,712
            )
            
            (1,023,547
            )Patent
                costs
            
            
            -
            
            
            -
            
            
            (43,022
            )Proceeds
                from sale of equipment
            
            
            -
            
            
            -
            
            
            250Net
                cash used in investing activities
            
            
            (12,180
            )
            
            (9,712
            )
            
            (1,566,319
            )Financing
                activitiesProceeds
                from founding members
            
            
            -
            
            
            -
            
            
            525,000Cash
                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
            
            
            -
            
            
            -
            
            
            940,020Dividends
                - Class A redeemable convertible preferred units
            
            
            -
            
            
            -
            
            
            (132,689
            )Proceeds
                from share subscription note - related party
            
            
            -
            
            
            -
            
            
            239,625Proceeds
                from Series 1 and Series 2 Convertible Notes - net
            
            
            -
            
            
            -
            
            
            4,386,000Proceeds
                from notes payable, net
            
            
            -
            
            
            -
            
            
            3,113,799Proceeds
                from sale of common stock
            
            
            -
            
            
            10,500,000
            
            
            23,626,149Net
                proceeds from sale of preferred stock
            
            
            -
            
            
            -
            
            
            4,208,167Repayment
                of notes payable
            
            
            -
            
            
            -
            
            
            (229,300
            )Net
                cash provided by financing activities
            
            
            -
            
            
            9,665,000
            
            
            33,039,179Increase
                in cash and cash equivalents
            
            
            (2,293,636
            )
            
            7,796,017
            
            
            19,118Cash
                and cash equivalents at beginning of year/period
            
            
            2,312,754
            
            
            2,454,608
            
            
            -Cash
                and cash equivalents at end of year/period
            
            $
            19,118
            
            $
            10,250,625
            
            $
            19,118*See
                notes to condensed consolidated financial statements*





5





DOBI
                Medical International, Inc. and Subsidiary(A
                Development Stage Company)Consolidated
                Statements of Cash Flows (continued)(unaudited)Period
                fromThree
                months ended
            
            September
                7,1999March
                31,
            
            (inception)
                to2006
            
            2005
            
            March
                31, 2006Supplemental
                disclosures of cash flow informationCash
                paid during the period for interest
            
            $
            2,772
            
            $
            2,259
            
            $
            109,274Income
                taxes paid
            
            $
            -
            
            $
            -
            
            $
            -Purchase
                of business, net of cash received:Fair
                value of assets purchased
            
            
            -
            
            
            -
            
            $
            (109,693
            )Acquisition
                of in-process research and development costs
            
            
            -
            
            
            -
            
            
            (1,023,525
            )Assumption
                of promissory notes
            
            
            -
            
            
            -
            
            
            417,877Transaction
                costs
            
            
            -
            
            
            -
            
            
            56,250Issuance
                of shares
            
            
            -
            
            
            -
            
            
            159,091Net
                cash used to acquire business
            
            $
            -
            
            $
            -
            
            $
            (500,000
            )Non-cash
                investing and financing activities:Conversion
                of notes payable and accrued interest to common stock
            
            $
            -
            
            $
            -
            
            $
            8,026,451Conversion
                of preferred shares to common stock
            
            $
            25,000
            
            $
            500,000
            
            $
            2,595,346Preferred
                stock dividends
            
            $
            76,978
            
            $
            93,227
            
            $
            636,840Deemed
                dividends to preferred stock shareholders
            
            $
            29,589
            
            $
            36,877
            
            $
            971,922Share
                subscription note
            
            $
            -
            
            $
            -
            
            $
            239,625Issuance
                of common warrants for consulting
            
            $
            -
            
            $
            -
            
            $
            398,548Accretion
                of Class A redeemable convertible preferred shares
            
            $
            -
            
            $
            -
            
            $
            364,334*See
                notes to consolidated financial statements*








6


DOBI
        Medical International, Inc. and Subsidiary
 (A
        Development Stage Company)
 
 Notes
        to
        Condensed Consolidated Financial Statements
 (unaudited)


1.
      Organization of Business





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





The
      Company was formed to acquire and further develop a new technology for imaging
      of the human body, referred to as Dynamic Optical Breast Imaging (“DOBI”
®).





2.
      Basis
      of Presentation





The
      accompanying interim unaudited financial statements have been prepared in
      accordance with generally accepted accounting principles for interim financial
      information and the instructions to Form 10-QSB. Accordingly, they do not
      include all the information and footnotes required by generally accepted
      accounting principles for complete financial statements. In the opinion of
      management, all adjustments (which include only normal recurring adjustments)
      necessary to present fairly the financial position, results of operations and
      cash flows for all periods presented have been made. The results of operations
      for the three month periods ended March 31, 2006 are not necessarily indicative
      of the operating results that may be expected for the year ending December
      31,
      2006.




These
      consolidated financial statements should be read in conjunction with the
      consolidated financial statements and related notes included in the Company’s
      2005 Annual Report on Form 10-KSB filed with the Securities and Exchange
      Commission.




The
      Company’s principal activities to date have been in the research and development
      of a medical diagnostic system known as the ComfortScan® 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 fourth quarter of
      2004.





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 its continued existence is dependent upon its ability to resolve
      its liquidity problems, principally by obtaining additional debt and/or equity
      financing. The Company has yet to generate a positive internal cash flow, and
      unless or until meaningful sales of our product begin, we are totally dependent
      upon debt and equity funding.





In
      the
      event that the Company is unable to obtain debt or equity financing or unable
      to
      obtain such financing on terms and conditions that are acceptable to the
      Company, we may have to cease or severely curtail our operations. These factors
      raise substantial doubt about the Company’s ability to continue as a going
      concern. Management has so far been able to raise the capital necessary to
      reach
      this stage of product development and has been able to obtain funding for
      operating requirements to date, but there can be no assurance that the Company
      will be able to continue to do so. There is no assurance that, if and when
      FDA
      premarket approval is obtained, the ComfortScan system as an adjunct to
      mammography will achieve market acceptance to achieve meaningful sales or
      profitability. The accompanying financial statements do not include any
      adjustments that might be necessary should the Company be unable to continue
      as
      a going concern.





The
      Company adopted SFAS 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”),
      effective January 1, 2006. SFAS 123R requires all share-based payments to
      employees, including grants of employee stock options, to be recognized in
      the
      statement of operations based on their fair value. Pro forma disclosure is
      no
      longer an alternative. The adoption of this standard increased loss from
      operations for options issued to employees, not previously required to be
      expensed, in the amount of $372,962 and increased basic and diluted earnings
      per
      share by less than $0.01 per share.





7
 
 DOBI
            Medical International, Inc. and Subsidiary
 (A
            Development Stage Company)
 
 Notes
            to
            Condensed Consolidated Financial Statements
 (unaudited)


3.
      Summary of Significant Accounting Policies





*Equity-Based
      Compensation*





Effective
      January 1, 2006, the Company adopted SFAS 123R which replaces SFAS 123,
“Accounting for Stock-Based Compensation” and supersedes Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the financial statements based on their
      fair
      values. Under SFAS 123R, the pro forma disclosures previously permitted under
      SFAS 123 are no longer an alternative to financial statement
      recognition.





The
      Company has selected the Black-Scholes method of valuation for share-based
      compensation and has adopted the modified prospective transition method under
      SFAS 123R, which requires that compensation cost be recorded, as earned, for
      all
      unvested stock options outstanding as the beginning of the first quarter of
      adoption of SFAS 123R. As permitted by SFAS 123R, prior periods have not been
      restated. The charge is generally recognized as non cash compensation on a
      straight-line basis over the remaining service period after the adoption date
      based on the options’ original estimate of fair values. The non cash
      compensation expense for the quarter ended March 31, 2006 was $379,755,
      including $6,793 of expenses for consultants. As of March 31, 2006, there was
      $959,849 of total unrecognized compensation cost related to nonvested
      share-based compensation arrangements granted under the Plan that is
      expected  be recognized between April 2006 through February
      2010.





Prior
      to
      the adoption of SFAS 123R, the Company applied the intrinsic-value-based method
      of accounting prescribed by APB 25 and related interpretations, to account
      for
      its stock options to employees. Under this method, compensation cost was
      recorded only if the market price of the underlying stock on the date of grant
      exceeded the exercise price. As permitted by SFAS 123, the Company elected
      to
      continue to apply the intrinsic-value-based method of accounting described
      above, and adopted only the disclosure requirements of SFAS 123. The
      fair-value-based method used to determine historical pro forma amounts under
      SFAS 123 was similar in most respects to the method used to determine
      stock-based compensation expense under SFAS 123R.





The
      following table illustrates the pro forma effect on the Company’s net loss
      applicable to common stock and loss per share as if the company had adopted
      the
      fair-value-based method of accounting for stock-based compensation under SFAS
      123 for the three months ended March 31, 2005.





Net
                loss applicable to common stock, as reported
            
            $
            (2,200,086
            )Add
                total stock-based compensation, as reported
            
            
            417Deduct
                total stock-based compensation determinedunder
                fair value based method for all awards
            
            
            (173,114
            )Pro
                forma net loss applicable to common stock
            
            $
            (2,372,783
            )Basic
                and diluted loss per common share - as reported
            
            $
            (0.05
            )Pro
                forma loss per share basic and diluted
            
            $
            (0.05
            )








8





DOBI
        Medical International, Inc. and Subsidiary
 (A
        Development Stage Company)
 
 Notes
        to
        Condensed Consolidated Financial Statements
 (unaudited)


During
      the three months ended March 31, 2006, the Board of Directors granted stock
      options to purchase 4,400,000 shares of the Company’s stock. Of these options
      granted, 4,000,000 were awarded to the Chairman and Vice Chairman of the Board
      of Directors. The Company was unable to issue 1,113,910 of these stock options,
      as they were in excess of the amount allowed by the 2000 Stock Incentive Plan
      (“Option Plan”). These options will be issued once there are sufficient shares
      of common stock outstanding in accordance with the provisions of the Option
      Plan. These options have various exercise prices from $.10 to $.50 per share
      and
      they expire between 5 and 10 years from the date of grant. Subsequent to March
      31, 2006, the Board of Directors authorized the modification of all previously
      granted options to employees, board of directors and certain consultants.
      Approximately 10,000,000 options have been modified to reflect option prices
      from $0.08 per share to $0.20 per share. This will result in certain additional
      charges in future periods beginning in the quarter ended June 30, 2006. At
      this
      time, the amount of these expenses has not yet been determined.





*Net
      Loss Per Common Share*





Basic
      net
      loss per common share is computed using the weighted average number of common
      shares outstanding during the periods presented. There were no common stock
      equivalents consisting of options, warrants and convertible preferred shares
      which were required to be included in the calculation of diluted loss per share
      for the periods presented since their inclusion would be antidilutive. The
      total
      number of stock options, warrants and convertible preferred shares outstanding
      as of March 31, 2006 was 9,961,590, 34,231,719 and 2,957,130
      respectively.





*Recently
      Issued Accounting Standards*





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. The adoption of this pronouncement did not have an effect on the
      Company’s financial statements.





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 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
      did not 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.





9
 
 DOBI
          Medical International, Inc. and Subsidiary
 (A
          Development Stage Company)
 
 Notes
          to
          Condensed Consolidated Financial Statements
 (unaudited)


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. The adoption of this pronouncement did not
      have an impact on the Company’s consolidated financial statements.





4.
      Common
      Stock





During
      the three months ended March 31, 2006, the Company issued 19,084 shares of
      common stock to a Series A preferred stockholder converting one share of
      outstanding Series A preferred shares into shares of common stock.





5.
      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 were
      $4,208,167, net of fees. The Company also issued 2,580,667 four-year investor
      warrants to purchase common stock at an exercise price of $3.00 per share.
      Deemed dividends of $29,589 and $36,877 for the three month periods ended March
      31, 2006 and 2005, respectively, consisted of imputed dividends resulting from
      increasing rate preferred stock in accordance with Staff Accounting Bulletin
      ("SAB") Topic 5.Q, "Increasing Rate Preferred Stock." In connection with the
      December 17, 2004 sale of 6,000,000 shares of common stock and the March 30,
      2005 sale of 21,000,000 million shares of common stock, we reduced the
      conversion price of the Series A preferred shares from $2.00 per share to $1.31
      per share. The anti-dilution provisions for the Series A preferred shares
      expires on July 30, 2006. Subsequent to March 31, 2006, the conversion price
      of
      the Series A preferred shares were reduced to $0.37 per share in conjunction
      with the warrant reset. See Subsequent Events note below.





6.
      Legal
      Proceedings





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





10
 
 DOBI
          Medical International, Inc. and Subsidiary
 (A
          Development Stage Company)
 
 Notes
          to
          Condensed Consolidated Financial Statements
 (unaudited)


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 and requiring the return of all
      confidential and proprietary documents held by Mr. Vodicka. On March 29, 2006,
      the New York Supreme Court issued an order and judgment permanently enjoining
      Mr. Vodicka from using documents or information provided to him by the Company
      wrongfully and in violation of his confidentiality agreement and requiring
      the
      return of all confidential and proprietary documents still in his
      possession.





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
      U.S. Department of Labor’s Office of Administrative Law Judges. On December 23,
      2005 a Labor Department administrative law judge granted the Company’s motion
      for summary judgment dismissing Vodicka’s OSHA complaint. In doing so, the
      administrative law judge held that Vodicka’s argument that the Company 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. Mr. Vodicka’s counsel in the Western District of Texas thereupon
      withdrew from representing Mr. Vodicka and the other plaintiffs. On December
      27,
      2005, Mr. Vodicka and several other plaintiffs represented by new counsel
      re-initiated litigation in the Western District of Texas alleging substantially
      the same allegations as to the Company and certain officers and directors as
      those contained in the prior complaint which had been dismissed without
      prejudice. Defendants filed motions to dismiss the complaint in its entirety.
      In
      response to the defendants’ motions, the Court granted plaintiffs permission to
      file one last amended complaint wherein plaintiffs could address the
      deficiencies detailed in defendants’ motions to dismiss. On March 29, 2006,
      plaintiffs filed their amended complaint against the Company and some but not
      all of the individual officers and directors named in the December, 2005
      complaint. (The other Company officers and directors were voluntarily dropped
      from the litigation, as was one of the Company’s previous advisors.) 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. On April 12, 2006 the United States District
      Court
      for the Western District of Texas ruled that the March 29, 2006 version of
      the
      complaint now contained sufficient allegations to allow the case to proceed
      to
      the discovery phase. 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.




11
 
 DOBI
          Medical International, Inc. and Subsidiary
 (A
          Development Stage Company)
 
 Notes
          to
          Condensed Consolidated Financial Statements
 (unaudited)


A
      dispute
      has arisen between the Company and one of its insurance carriers, North River
      Insurance Company (“North River”), concerning the carrier’s duty to defend and
      indemnify the Company and its officers and directors in connection with
      litigation matters. Due to conflicting positions taken by North River regarding
      the scope of its contractual coverage obligations, the Company has initiated
      an
      action in the Superior Court of the State of New Jersey to compel North River
      to
      defend and indemnify the Company and its officers and directors in accordance
      with its insurance policy. The action against North River is in its early
      stages, and we are, accordingly, unable to predict the outcome of the
      matter.




6.
      Subsequent Events





On
      April
      28, 2006, the Company entered into the Securities Purchase Agreement in which
      the Company sold Convertible Debentures in the aggregate face or principal
      amount of $6,000,000, or $5,250,000 in aggregate cash subscription amount
      reflecting a 12.5% discount, half of which subscriptions were funded at closing
      and the other half will be funded shortly following the effective date of the
      Company’s first registration statement filed in connection therewith.





The
      Debentures have a term of 16 months and come fully due on August 28, 2007.
      The
      Debentures are convertible at the option of the holder at any time and from
      time
      to time into shares of common stock of the Company at a conversion price equal
      to the lower of $.08 per share of common stock (initially 75,000,000 shares
      of
      common stock) or 80% of the five-day volume weighted average price of the shares
      prior to conversion with a floor price of $.02 per share. The Debentures are
      callable under certain circumstances and are secured by substantially all the
      assets of the company.





Pursuant
      to the Securities Purchase Agreement, the Company also issued three series
      of
      Common Stock Purchase Warrants to the Purchasers (the “Warrants”). The Series A
      and Series B Common Stock Purchase Warrants are exercisable until April 28,
      2009
      to purchase initially up to 112,500,000 shares of common stock, 75,000,000
      shares at an exercise price of $.15 per share and 37,500,000 shares at an
      exercise price of $.50 per share (the “Exercise Prices”). These warrants contain
      provisions to adjust the Exercise Prices in the event that the Company issues
      common stock in a financing transaction at a price less than the then respective
      Exercise Price, in which case the Exercise Price shall be reduced to the price
      at which such common stock was issued. The Series C Common Stock Purchase
      Warrant is exercisable until the earlier of (i) the later of December 31, 2006
      or the one-month anniversary of the effective date of the first registration
      statement or (ii) May 28, 2007, to purchase up to 75,000,000 shares of common
      stock at an exercise price of $.08 per share. The Series A and Series C warrants
      are callable under certain circumstances.




Simultaneous
      with this financing, the Company closed a warrant reset offered to all existing
      warrant holders. Participating warrant holders were allowed to exercise their
      warrants at an exercise price of $.08 per share. In that connection, the Company
      issued 10,492,000 shares of registered common stock, and issued three-year
      warrants to purchase 10,492,000 shares of common stock at an exercise price
      $.15
      per share, as well as three-year warrants to purchase 5,246,000 shares of common
      stock at an exercise price $.50 per share. The Company realized net cash
      proceeds of approximately $839,000 in the transaction. No placement agent fees
      were associated with this warrant reset. The Company also reduced the conversion
      price of its Series A Preferred Stock from $1.31 per share to $.37 per
      share.




12




Item
      2.
      Management’s Discussion and Analysis or Plan of Operation





We
      completed a reverse merger transaction on December 9, 2003 with Lions Gate
      Investment Limited, a Nevada corporation formed on October 29, 1999. Until
      the
      merger, Lions Gate engaged in oil and gas exploration activities, which Lions
      Gate discontinued following the merger and succeeded to the business of the
      Company Medical Systems. 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 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.





On
      January 1, 2003, DOBI Medical was incorporated in Delaware and became DOBI
      Medical Systems. Since the reverse merger transaction on December 9, 2003,
      DOBI
      Medical Systems has been a wholly-owned subsidiary of DOBI Medical
      International.





Since
      our
      post-merger business is that of DOBI Medical only, the information in this
      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 2 and the
      unaudited consolidated financial statements presented in Item 1 of this report
      include those of DOBI Medical Systems prior to the reverse merger, as these
      provide the most relevant information for us on a continuing basis.





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





**Overview**





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





During
      2004, we released version 1.0 of our ComfortScan system, renewed our CE Mark,
      implemented FDA and quality systems standards, invested in production-level
      tooling, established a manufacturing facility compliant with good manufacturing
      practices, received our FDA Export Certificate, finalized agreements with
      several international distributors in
      select countries in Latin America, Europe and the Asia-Pacific
      regions ,
      verified and validated our first release of the ComfortScan system, and sold
      and
      shipped 12 revenue-producing and production level ComfortScan investigative
      units to international markets for the purpose of conducting local clinical
      regulatory and marketing studies. In addition, our Premarket Approval (“PMA”)
      clinical trial protocol was accepted by the FDA, we delivered and installed
      our
      ComfortScan system in our first three PMA sites, and we trained those sites
      and
      commenced the collection of patient scan data pursuant to our PMA clinical
      trial
      protocol. The PMA clinical trial protocol requires the enrollment of patients
      between the ages of 18 and 50 for the purpose of conducting a blinded read
      of
      120 benign cases and 120 malignant cases comparing the diagnostic results
      achieved by a combination of ComfortScan® and mammography against the diagnostic
      results of mammography alone, both comparing to biopsy results.





Currently,
      we have enrolled more than 1,500 patients. We are in the process of examining
      the patient scan data being collected in order to determine whether we have
      a
      sufficient number of acceptable malignant and benign cases in order to conduct
      a
      blinded read in accordance with our PMA clinical trial protocol. When we have
      determined that we have a sufficient number of cases in order to conduct the
      blinded read, we will close enrollment and conduct a blinded read of the patient
      data in accordance with the PMA clinical trial protocol.





13


In
      the
      first quarter 2006, we released ComfortScan version 2.0. The Windows®-based,
      ComfortScan 2.0 software suite consists of three individual elements, including
      ComfortScan acquisition software for patient data acquisition, ComfortNetTM for
      image database management, and ComfortViewTM 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 as a condition to the PMA submission to the
      FDA.





In
      April
      2006 the Russian Federal Service of Health Care and Social Development Control
      granted the Company's ComfortScan® system approval for use in connection with
      the diagnosis of breast cancer for the Russian Federation pursuant to
      certificate number 2006/415. This approval extends for a 10-year period through
      April 2016.





We
      recently completed a clinical study in Beijing, China. 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 recently
      met with a panel of independent physicians selected by the SFDA regarding our
      ComfortScan system and results of our clinical trials, and we have since
      submitted additional data to the SFDA for their consideration. 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.





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 in Item 1 of this report have been prepared
      assuming that we will continue as a going concern. We are currently a
      development stage enterprise and, as such, our continued existence is dependent
      upon our ability to resolve our liquidity problems, principally by obtaining
      additional debt or equity financing. We have yet to generate a positive internal
      cash flow, and until meaningful sales of our product begin, we are totally
      dependent upon debt and equity funding.





In
      the
      event that we are unable to obtain debt or equity financing or we are unable
      to
      obtain financing on terms and conditions that are acceptable to us, we may
      have
      to cease or severely curtail our operations. These factors raise substantial
      doubt about the Company’s 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,
      our
      ComfortScan system will achieve market acceptance or that we will achieve a
      profitable level of operations. The accompanying financial statements in Item
      1
      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.





Effective
      January 1, 2006, the Company adopted SFAS 123R which replaces SFAS 123,
“Accounting for Stock-Based Compensation” and supersedes Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the financial statements based on their
      fair
      values. Under SFAS 123R, the pro forma disclosures previously permitted under
      SFAS 123 are no longer an alternative to financial statement
      recognition.





14


We
      account for stock-based compensation in accordance with the fair value
      recognition provisions of SFAS 123 Accounting for Stock-Based Compensation.
      Under the fair value recognition provisions of SFAS 123, stock-based
      compensation cost is measured at the grant date based on the value of the award
      and is recognized as expense over the vesting period. Determining the fair
      value
      of stock-based awards at the grant date requires judgment, including estimating
      the expected term of stock options, the expected volatility of our stock and
      expected dividends. In addition, judgment is also required in estimating the
      amount of stock-based awards that are expected to be forfeited. If actual
      results differ significantly from these estimates, stock-based compensation
      expense and our results of operations could be materially impacted.





In
      the
      conduct of our business, we incur research and development expenses, general
      and
      administrative expenses, clinical expenses and sales and marketing
      expenses.





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





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


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





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





We
      account for income taxes under Statement of Financial Accounting Standards
      No.
      109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS No. 109 requires the
      recognition of deferred tax assets and liabilities for both the expected impact
      of differences between the financial statements and tax basis of assets and
      liabilities, and for the expected future tax benefit to be derived primarily
      from tax loss carry forwards. The Company has established a valuation allowance
      related to the benefits of net operating losses for which utilization in future
      periods is uncertain. We believe it is more likely than not that we will not
      realize the benefits of these deductible differences in the near future and
      therefore a full valuation allowance of approximately $10,200,000 is provided.





As
      of
      March 31, 2006, we had approximately $26,300,000 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 as a result of
      change in control.





The
      preparation of financial statements are in conformity with accounting principles
      generally accepted in the United States and requires management to make
      estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Actual results could differ from those
      estimates. As a development stage enterprise, we have not had to make material
      estimates which have an effect on financial presentation.





15


**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 Three Months Ended March 31, 2006 and 2005**





Revenues
      for the quarter ended March 31, 2006 were approximately $107,000. Although
      this
      is an increase of 72% over the same period in the prior year, sales have been
      limited to investigational units up to this point in time.





Cost
      of
      sales was approximately $311,000 for the three months ended March 31, 2006,
      creating a gross loss of approximately $204,000, due to the limited sales for
      the period. We maintain a manufacturing facility with a breakeven point of
      approximately 15 devices per quarter. Production volumes of less than 15 units
      per quarter will continue to negatively affect gross profit margins. Production
      in 2006 will be limited to producing units primarily for international sales
      requirements.





Research
      and development expenses increased approximately $212,000, or 47%, from $448,000
      to approximately $660,000 for the three months ended March 31, 2006 as compared
      to the same period in the prior year. We expended approximately $191,000 more
      for the three months ended March 31, 2006 compared to the prior year for
      additional personnel and consulting services in connection with the continued
      development of the ComfortScan system.


General
      and administrative expenses increased approximately $393,000, or 49%, from
      $795,000 to approximately $1,189,000 for the three months ended March 31, 2006
      as compared to the same period in the prior year. Reported personnel related
      costs increased $146,000 for the current period over that of the prior year
      due
      to recording $307,000 of stock option expense to the general and administration
      department during the current year due to the adoption of SFAS 123R, offset
      by a
      decrease in actual payroll related expense of $161,000 compared to the same
      period in the prior year. In addition, we incurred $325,000 in legal expenses,
      an increase of $284,000 over the prior year.





Clinical
      program expenses increased approximately $1,070,000, to $1,456,000 for the
      three
      months ended March 31, 2006 as compared to the same period in the prior year
      due
      to the expansion of the PMA clinical trials. PMA clinical trial costs totaled
      $1,143,000 during the quarter ended March 31, 2006, an increase of $910,000
      over
      that of the same period in the prior year. These costs included device costs,
      site costs, personnel and consulting costs, and travel expenses. In addition,
      the Company expanded its medical staffing in the clinical department at a cost
      of approximately $69,000 during the three months ended March 31, 2006 over
      that
      of the same period in the prior year.





Sales
      and
      marketing expenses of approximately $223,000 for the three months ended March
      31, 2006, reflect a decrease of approximately $36,000 as compared to the same
      period in the prior year. This was primarily due to the decrease in personnel
      costs.





Interest
      expense for the three months ended March 31, 2006 and 2005 was insignificant.




**Liquidity
      and Capital Resources**





We
      have
      financed our operations since inception through private issuances of equity
      securities, generating approximately $44,500,000 in gross proceeds to date,
      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.





16


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 $.50 per share, and warrants to purchase 10,500,000 shares
      of our common stock at an exercise price of $.75 for the first 5,250,000 shares
      and $1.25 for the next 5,250,000 shares, resulting in aggregate gross cash
      proceeds of $10,500,000 and approximate net cash proceeds of
      $9,665,000.





On
      April
      28, 2006, the Company entered into the Securities Purchase Agreement in which
      the Company sold convertible debentures in the aggregate face or principal
      amount of $6,000,000, or $5,250,000 in aggregate cash subscription amount
      reflecting a 12.5% discount, half of which subscriptions were funded at closing
      and the other half will be funded shortly following the effective date of the
      Company’s first registration statement filed in connection therewith.





The
      debentures have a term of 16 months and come fully due on August 28, 2007.
      The
      debentures are convertible at the option of the holder at any time and from
      time
      to time into shares of common stock of the Company at a conversion price equal
      to the lower of $.08 per share of common stock (initially 75,000,000 shares
      of
      common stock) or 80% of the five-day volume weighted average price of the shares
      prior to conversion, but in no event less than $.02 per share. The Debentures
      are callable under certain circumstances.





Pursuant
      to the Securities Purchase Agreement, the Company is also issuing three series
      of Common Stock Purchase Warrants to the Purchasers (the “Warrants”). The
      Series A and Series B Common Stock Purchase Warrants are exercisable until
      April
      28, 2009 to purchase initially up to 112,500,000 shares of common stock,
      75,000,000 shares at an exercise price of $.15 per share and 37,500,000 shares
      at an exercise price of $.50 per share (the “Exercise Prices”). These warrants
      contain provisions to adjust the Exercise Prices in the event that the Company
      issues common stock in a financing transaction at a price less than the then
      respective Exercise Price, in which case the Exercise Price shall be reduced
      to
      the price at which such common stock was issued. The Series C Common Stock
      Purchase Warrant is exercisable until the earlier of (i) the later of December
      31, 2006 or the one-month anniversary of the effective date of the first
      registration statement file in connection therewith or (ii) May 28, 2007, to
      purchase up to 75,000,000 shares of common stock at an exercise price of $.08
      per share. The Series A and Series C warrants are callable under certain
      circumstances.





Simultaneous
      with this financing, the Company closed a warrant reset offered to all existing
      warrant holders. Participating warrant holders were allowed to exercise their
      warrants at an exercise price of $.08 per share. In that connection, the Company
      issued 10,492,000 shares of registered common stock, and issued three-year
      warrants to purchase 10,492,000 shares of common stock at an exercise price
      $.15
      per share, as well as three-year warrants to purchase 5,246,000 shares of common
      stock at an exercise price $.50 per share. The Company realized net cash
      proceeds of approximately $839,000 in the transaction. No placement agent fees
      were associated with this warrant reset.





17


As
      of
      March 31, 2006, we had cash and cash equivalents of approximately $19,000.
      Net
      cash used in operating activities during the three months ended March 31, 2006
      totaled approximately $2,281,000, and capital expenditures totaled approximately
      $12,000. For the balance of 2006, we have no significant capital expenditure
      commitments. In connection with the financing closed April 2006 financing
      referred to above, we have reduced our operating expenses and expect net cash
      used in operating activities for 2006 to be less than $9 million, which includes
      approximately $2,700,000 in PMA clinical trial project costs.





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 the Company’s 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.




18


**CAUTIONARY
      STATEMENT FOR FORWARD-LOOKING STATEMENTS**







Certain
      statements in this report contain information that include or are based upon,
      certain "forward-looking statements" relating to our business. These
      forward-looking statements represent management's current judgment and
      assumptions, and can be identified by the fact that they do not relate strictly
      to historical or current facts. Forward-looking statements are frequently
      accompanied by the use of such words as "anticipates," "plans," "believes,"
      "expects," "projects," "intends," and similar expressions. Such forward-looking
      statements involve known and unknown risks, uncertainties, and other factors,
      including without limitation, those relating to our ability to timely and
      successfully complete our U.S. FDA premarket approval (“PMA”) clinical trials,
      as well as our other clinical trials being conducted around the world; our
      ability to timely and successfully complete and submit to the FDA our PMA
      application of the PMA clinical trial results; the timely and final approval
      by
      local foreign governments of our ComfortScan system as an adjunct to mammography
      in various international markets; the success and continued improvements of
      our
      product development and research efforts, including without limitation, our
      ability to timely and successfully release version 2.1 and subsequent versions
      of our ComfortScan system; our ability to timely meet U.S. and foreign
      government laws and industry standards; our ability to meet U.S. and foreign
      medical device quality regulation standards required to maintain our CE Mark,
      and ISO, UL and FDA export certifications; our ability to timely deliver our
      products into international markets; the acceptance, adoption, and use of our
      ComfortScan system by physicians, imaging clinics, and patients; and our ability
      to obtain third-party reimbursement from U.S. and foreign governments and
      private payers.





Any
      one
      of these or other risks, uncertainties, other factors, and any inaccurate
      assumptions, may cause actual results to be materially different from those
      described herein or elsewhere by us. We caution readers not to place undue
      reliance on any such forward-looking statements, which speak only as of the
      date
      they were made. Certain of these risks, uncertainties, and other factors are
      described in greater detail in our filings from time to time with the Securities
      and Exchange Commission, which we strongly urge you to read and consider,
      including the
      "Risk
      Factors" as set forth in our 2005 Annual Report on Form 10-KSB, which
      may be accessed from our website at www.dobimedical.com. Subsequent written
      and
      oral forward-looking statements attributable to us or to persons acting on
      our
      behalf are expressly qualified in their entirety by the cautionary statements
      set forth above and elsewhere in our reports filed with the Securities and
      Exchange Commission. We expressly disclaim any intent or obligation to update
      any forward-looking statements.


19


Item
      3.
      Controls and Procedures





At
      the
      period end of this Quarterly Report on Form 10-QSB, the Company’s management,
      including the Company’s Interim Chief Executive Officer and Chief Financial
      Officer evaluated the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures. Based on that evaluation, the Company’s
      Interim Chief Executive Officer and Chief Financial Officer have concluded,
      as
      of the end of the quarter covered by this report, that:




The
      Company’s disclosure controls and procedures are designed to ensure that
      information required to be disclosed by the Company in the reports it files
      or
      submits under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified.




The
      Company’s disclosure controls and procedures are effective to ensure that such
      information is accumulated and communicated to the Company’s management, and
      made known to the Company’s Interim Chief Executive Officer and Chief Financial
      Officer, to allow timely decision regarding the required
      disclosure.




There
      have been no changes in the Company’s internal controls over financial reporting
      that have materially affected, or are reasonably likely to materially affect
      the
      Company’s internal controls over financial reporting during the period covered
      by this Quarterly Report.


20


Part
      II
      Other Information




Item
      1.
      Legal Proceedings





In
      the
      ordinary course of business, the Company may become a party to legal or
      regulatory proceedings resulting from litigation, claims, or other disputes.
      There can be no assurance that one or more future actions, if they occur, would
      not have a material adverse effect on the business. Currently there is no
      material litigation threatened or pending 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 and requiring the return of all
      confidential and proprietary documents held by Mr. Vodicka. On March 29, 2006,
      the New York Supreme Court issued an order and judgment permanently enjoining
      Mr. Vodicka from using documents or information provided to him by the Company
      wrongfully and in violation of his confidentiality agreement and requiring
      the
      return of all confidential and proprietary documents still in his
      possession.





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 the Company’s motion
      for summary judgment dismissing Vodicka’s OSHA complaint. In doing so, the
      administrative law judge held that Vodicka’s argument that the Company 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,
      Vodicka and several other plaintiffs represented by new counsel re-initiated
      litigation in the Western District of Texas alleging substantially the same
      allegations as to the Company and certain officers and directors as those
      contained in the prior complaint which had been dismissed without prejudice.
      Defendants filed motions to dismiss the complaint in its entirety. In response
      to the defendants’ motions the Court granted plaintiffs permission to file one
      last amended complaint wherein plaintiffs could address the deficiencies
      detailed in defendants’ motions to dismiss. On March 29, 2006, plaintiffs filed
      their amended complaint against the Company and some but not all of the
      individual officers and directors named in the December, 2005 complaint. (The
      other the Company officers and directors were voluntarily dropped from the
      litigation, as was one of the Company’s previous advisors.) 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. On April 12, 2006, the United States District Court for the Western
      District of Texas ruled that the March 29, 2006 version of the complaint now
      contained sufficient allegations to allow the case to proceed to the discovery
      phase. 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.




21


A
      dispute
      has arisen between the Company and one of its insurance carriers, North River
      Insurance Company (“North River”), concerning the carrier’s duty to defend and
      indemnify the Company and its officers and directors in connection with
      litigation matters. Due to conflicting positions taken by North River regarding
      the scope of its contractual coverage obligations, the Company has initiated
      an
      action in the Superior Court of the State of New Jersey to compel North River
      to
      defend and indemnify the Company and its officers and directors in accordance
      with its insurance policy. The action against North River is in its early
      stages, and we are, accordingly, unable to predict the outcome of the
      matter.




Item
      2.
      Unregistered Sales of Equity Securities and Use of Proceeds


None





Item
      3.
      Defaults Upon Senior Securities


None





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


None





Item
      5.
      Other Information


None





Item
      6.
      Exhibits and Reports on Form 8-K








a)
            31.1
            Certification of C.E.O. Pursuant to
              Section
              302 of the Sarbanes-Oxley Act of 2002  31.2
            Certification
                of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002





32.1
            Certificate
                Pursuant to 10 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley
                Act
                of 2002  b)
            
            Reports on Form 8-K





1.
            We
                filed a Current Report on Form 8-K on May 2, 2006 regarding the close
                on a
                secured convertible debenture financing.  2.
            We filed a Current Report on Form 8-K on May 2,
              2006
              regarding the appointment of Steve M. Barnett as Vice Chairman of
              Operations and Michael R. Jorgensen as Interim Chief Executive Officer,
              and the resignation of Phillip C. Thomas as President, Chief Executive
              Officer and Director.





22












**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.




DOBI
              MEDICAL
              INTERNATIONAL, INC.Date: May
              12,
              2006
            By:
            /s/ Michael
              R. JorgensenMichael
              R. JorgensenInterimChief
              Executive Officer andChief
              Financial Officer


23