**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 JUNE 30, 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.**
            **07430****Mahwah,
                NJ**
            (Zip
                Code)(Address
                of principal executive
                offices)




**(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.  o Yes  o
      No





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


Yes o
      No x





As
      of
      September 15, 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.





June
      30,
      2006 Form 10-QSB Quarterly Report





Table
      of
      Contents


PagePart
                  I Financial Information
              
              3Item
                  1.
              Financial
                  Statements
              3Unaudited
                  Condensed Consolidated Balance Sheet at June 30, 2006
              3Unaudited
                  Condensed Consolidated Statements of Operations for the Three
                  andSix
                  Month Periods ended June 30, 2006 and 2005 and for the Period
                  fromSeptember
                  7, 1999 (Inception) to June 30, 2006
              4Unaudited
                  Condensed Consolidated Statements of Cash Flows for the Three
                  andSix
                  Month Periods Ended June 30, 2006 and 2005 and for the Period
                  fromSeptember
                  7, 1999 (Inception) to June 30, 2006
              5-6Notes
                  to Condensed Consolidated Financial Statements
              7-15Item
                  2.
              Management’s
                  Discussion and Analysis or Plan of Operation
              16Item
                  3.
              Controls
                  and Procedures
              23Part
                  II Other Information
              
              24Item
                  1.
              Legal
                  Proceedings
              24Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              25Item
                  3.
              Defaults
                  Upon Senior Securities
              25Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              25Item
                  5.
              Other
                  Information
              26Item
                  6.
              Exhibits
                  and Reports on Form 8-K
              26Signatures
              27


2


Part
      I
      Financial Information





Item
      1.
      Financial Statements




DOBI
      Medical International, Inc. and Subsidiary


(A
        Development Stage Company)
 Condensed
        Consolidated Balance Sheet


June
        30,
        2006
 (Unaudited)


**Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            133,619Accounts
                receivable
            
            
            -Prepaid
                expenses and other current assets
            
            
            81,065Inventory
            
            
            370,879Total
                current assets
            
            
            585,563Property
                and equipment, net
            
            
            446,585Intangible
                assets, net
            
            
            4,728Other
                assets
            
            
            358,996Total
                assets
            
            $
            1,395,872**Liabilities
                and stockholders' deficiency**Current
                liabilities:Accounts
                payable
            
            $
            478,165Accrued
                expenses
            
            
            2,104,765Debentures
                payable
            
            
            375,000Fair-value
                of warrant
            
            
            750,000Fair-value
                of embedded conversion debentures
            
            
            1,500,000Deferred
                revenue
            
            
            12,600Total
                current liabilities
            
            
            5,220,530Stockholders'
                deficiencyPreferred
                stock, $.0001 par value, 10,000,000 sharesauthorized,
                155 issued and outstanding(liquidation
                preference $4,107,431)
            
            
            -Common
                stock, $.0001 par value, 940,000,000 sharesauthorized,
                76,902,721issued and outstanding
            
            
            7,690Additional
                paid-in capital
            
            
            37,431,850Deficit
                accumulated during development stage
            
            
            (41,264,198
            )Total
                stockholders' deficiency
            
            
            (3,824,658
            )Total
                liabilities and stockholders' deficiency
            
            $
            1,395,872


*See
        notes to 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
            
            Six
                months ended
            
            (inception)
                toJune
                30
            
            June
                30
            
            June
                302006
            
            2005
            
            2006
            
            2005
            
            2006RevenueProduct
            
            $
            -
            
            $
            92,300
            
            $
            89,000
            
            $
            137,314
            
            $
            630,110Service
            
            
            6,900
            
            
            18,450
            
            
            25,350
            
            
            35,850
            
            
            108,9006,900
            
            
            110,750
            
            
            114,350
            
            
            173,164
            
            
            739,010Cost
                of salesProduct
            
            
            141,725
            
            
            101,635
            
            
            381,835
            
            
            284,248
            
            
            1,332,133Service
            
            
            49,245
            
            
            67,949
            
            
            120,628
            
            
            130,837
            
            
            404,757190,970
            
            
            169,584
            
            
            502,463
            
            
            415,085
            
            
            1,736,890Gross
                loss
            
            
            (184,070
            )
            
            (58,834
            )
            
            (388,113
            )
            
            (241,921
            )
            
            (997,880
            )Research
                and development expenses
            
            
            507,140
            
            
            469,818
            
            
            1,166,799
            
            
            917,908
            
            
            12,366,033General
                and administrative expenses
            
            
            1,570,530
            
            
            695,829
            
            
            2,759,281
            
            
            1,491,309
            
            
            12,510,215Clinical
                program expenses
            
            
            839,517
            
            
            639,978
            
            
            2,295,136
            
            
            1,025,820
            
            
            8,297,390Sales
                and marketing expenses
            
            
            176,964
            
            
            224,303
            
            
            400,220
            
            
            483,868
            
            
            5,438,108Total
                operating expenses
            
            
            3,094,151
            
            
            2,029,928
            
            
            6,621,436
            
            
            3,918,905
            
            
            38,611,746Operating
                loss
            
            
            (3,278,221
            )
            
            (2,088,762
            )
            
            (7,009,549
            )
            
            (4,160,826
            )
            
            (39,609,626
            )Other
                income (expense)Interest
                expense
            
            
            (452,152
            )
            
            (2,802
            )
            
            (454,924
            )
            
            (5,061
            )
            
            (2,636,472
            )Change
                in fair value of warrants and embeddedConversion
                option of debentures
            
            
            375,000
            
            
            -
            
            
            375,000
            
            
            -
            
            
            375,000Interest
                and other income
            
            
            2,035
            
            
            54,182
            
            
            7,303
            
            
            58,523
            
            
            327,236Loss
                before income taxes
            
            
            (3,353,338
            )
            
            (2,037,382
            )
            
            (7,082,170
            )
            
            (4,107,364
            )
            
            (41,543,862
            )Income
                tax benefit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            279,664Net
                loss
            
            
            (3,353,338
            )
            
            (2,037,382
            )
            
            (7,082,170
            )
            
            (4,107,364
            )
            
            (41,264,198
            )Deemed
                dividend on preferred stock
            
            
            (29,589
            )
            
            (35,604
            )
            
            (59,178
            )
            
            (72,481
            )
            
            (1,001,511
            )Preferred
                Stock dividends
            
            
            (77,478
            )
            
            (93,228
            )
            
            (154,456
            )
            
            (186,455
            )
            
            (714,318
            )Net
                loss applicable to common stock
            
            $
            (3,460,405
            )
            $
            (2,166,214
            )
            $
            (7,295,804
            )
            $
            (4,366,300
            )
            $
            (42,980,027
            )Basic
                and diluted loss per common share
            
            $
            (0.05
            )
            $
            (0.03
            )
            $
            (0.10
            )
            $
            (0.08
            )Weighted
                average common shares, basic and diluted
            
            
            73,674,375
            
            
            65,374,169
            
            
            70,041,108
            
            
            54,841,197




*See
        notes to consolidated financial statements*
  4
  DOBI
        Medical International, Inc. and Subsidiary


(A
        Development Stage Company)
  Consolidated
        Statements of Cash Flows
 (Unaudited)




Period
                fromSix
                months ended
            
            September
                7,1999June
                30
            
            (inception)
                to2006
            
            2005
            
            June
                30, 2006Operating
                activitiesNet
                loss
            
            $
            (7,082,170
            )
            $
            (4,107,364
            )
            $
            (41,264,198
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            134,919
            
            
            114,710
            
            
            705,422Amortization
                of financing costs
            
            
            72,698
            
            
            -
            
            
            927,041Loss
                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
            
            
            661,714
            
            
            1,135
            
            
            1,113,079Accrued
                interest converted to equity
            
            
            -
            
            
            -
            
            
            340,454Accretion
                of discount on debt
            
            
            375,000
            
            
            -
            
            
            1,183,113Change
                in fair value of warrants and embedded conversion
                debentures
            
            
            (375,000
            )
            
            -
            
            
            (375,000
            )Common
                stock warrants in connection withthe
                conversion of notes payable
            
            
            -
            
            
            -
            
            
            61,806Changes
                in assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            31,585
            
            
            (51,000
            )
            
            -(Increase)
                in inventory
            
            
            (22,227
            )
            
            (236,653
            )
            
            (370,879
            )(Increase)
                decrease in other current assets
            
            
            45,084
            
            
            (38,810
            )
            
            (80,843
            )(Increase)
                decrease in other assets
            
            
            (4,499
            )
            
            -
            
            
            38,497Increase
                (decrease) in accounts payable
            
            
            (60,625
            )
            
            (33,672
            )
            
            743,640Increase
                in accrued expenses
            
            
            975,602
            
            
            2,794
            
            
            1,520,730Increase
                (decrease)in deferred revenue
            
            
            (11,850
            )
            
            (11,400
            )
            
            12,600Net
                cash used in operating activities
            
            
            (5,259,769
            )
            
            (4,360,260
            )
            
            (34,432,055
            )Investing
                activitiesPurchase
                of business, net of cash received
            
            
            -
            
            
            -
            
            
            (500,000
            )Purchase
                of property and equipment
            
            
            (16,644
            )
            
            (81,052
            )
            
            (1,028,011
            )Patent
                costs
            
            
            -
            
            
            -
            
            
            (43,022
            )Proceeds
                from sale of equipment
            
            
            14,574
            
            
            -
            
            
            14,824Net
                cash used in investing activities
            
            
            (2,070
            )
            
            (81,052
            )
            
            (1,556,209
            )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
            
            
            (381,666
            )
            
            -
            
            
            (1,101,151
            )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 debentures
            
            
            2,625,000
            
            
            -
            
            
            2,625,000Proceeds
                from sale of common stock
            
            
            839,370
            
            
            10,500,000
            
            
            24,465,519Net
                proceeds from sale of preferred stock
            
            
            -
            
            
            -
            
            
            4,208,167Repayment
                of notes payable
            
            
            -
            
            
            -
            
            
            (229,300
            )Net
                cash provided by financing activities
            
            
            3,082,704
            
            
            9,665,000
            
            
            36,121,883Increase
                in cash and cash equivalents
            
            
            (2,179,135
            )
            
            5,223,688
            
            
            133,619Cash
                and cash equivalents at beginning of year/period
            
            
            2,312,754
            
            
            2,454,608
            
            
            -Cash
                and cash equivalents at end of year/period
            
            $
            133,619
            
            $
            7,678,296
            
            $
            133,619





*See
        notes to consolidated financial statements*
  5
  DOBI
        Medical International, Inc. and Subsidiary  (A
        Development Stage Company)


Consolidated
        Statements of Cash Flows (continued)
 (unaudited)




Period
                fromSix
                months ended
            
            September
                7,1999June
                30
            
            (inception)
                to2006
            
            2005
            
            June
                30, 2006Supplemental
                disclosures of cash flow informationCash
                paid during the period for interest
            
            $
            7,226
            
            $
            5,061
            
            $
            113,728Income
                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
            
            $
            206,454
            
            $
            2,595,346Preferred
                stock dividends
            
            $
            154,456
            
            $
            186,454
            
            $
            714,318Deemed
                dividends to preferred stock shareholders
            
            $
            59,178
            
            $
            72,481
            
            $
            1,001,511Share
                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


1.
      Organization of Business





The
      condensed 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





On
      June
      13, 2006, DOBI Medical International, Inc. (the “Company”) furloughed all its
      officers and employees, including its Interim Chief Executive Officer and Chief
      Financial Officer, because it had insufficient funds to continue to make payroll
      beyond June 13, 2006.  The Company is actively seeking alternatives in
      order to resume operations as soon as possible; however, no assurance can be
      given that it will be able to do so.





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 and six month periods ended June 30, 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
      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.





The
      Company is currently insolvent, and is actively seeking both financing and
      a
      strategic partner. 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 or unable to, we will have to cease our
      operations. These factors raise substantial doubt about the Company’s ability to
      continue its existence as a going concern. There is no assurance that the
      Company will be able to timely obtain financing or a strategic partner before
      it
      exhausts its liquid resources and files for bankruptcy. 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 $274,780 and $647,743 for the three and six months
      ended June 30, 2006 respectively and decreased basic and diluted earnings per
      share by less than $0.01 per share.




7





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
          2000
          Stock Incentive Plan incentive plan permits total share awards of the greater
          of
          25,000,000 or 15% of issued and outstanding common shares. No option will
          have a
          term of in excess of 10 years.





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 and six months ended June 30, 2005.





3
                months
            
            6
                monthsNet
                loss applicable to common stock, as reported
            
            
            ($2,166,214
            )
            
            ($4,366,300
            )Add
                total stock-based compensation, as reported
            
            $
            718
            
            $
            1,135Deduct
                total stock-based compensation determinedunder
                fair value based method for all awards
            
            
            ($255,854
            )
            
            ($428,968
            )Pro
                forma net loss applicable to common stock
            
            
            ($2,421,350
            )
            
            ($4,794,133
            )Basic
                and diluted loss per common share - as reported
            
            
            ($0.03
            )
            
            ($0.08
            )Pro
                forma loss per share basic and diluted
            
            
            ($0.04
            )
            
            ($0.09
            )





During
      the six months ended June 30, 2006, the Board of Directors granted stock options
      to purchase 10,331,250 shares of the Company’s stock. Of these options granted,
      9,931,250 were awarded to members of the Board of Directors. These options
      have
      various exercise prices from $.02 to $.50 per share and they expire between
      5
      and 10 years from the date of grant. On May 1, 2006, the Board of Directors
      authorized the modification of all previously granted options to employees,
      board of directors and certain consultants. 9,772,375 options have been modified
      to reflect option prices from $0.08 per share to $0.20 per share. This resulted
      in an additional charge of $113,939 representing the incremental fair value
      of
      the modification during the three months ended June 30, 2006. On June 13, 2006,
      the Company furloughed all of its officers and employees. Pursuant to the terms
      of the option plan, unvested options were immediately forfeited.




8





The
      following table summarizes the Company’s stock options for the six months ended
      June 30, 2006.





Weightedaverage
            
            AggregateExercise
            
            IntrinsicShares
            
            Price
            
            ValueOutstanding
                -beginning of period
            
            
            6,739,250
            
            $
            1.16
            
            $
            -Granted
            
            
            10,331,250
            
            $
            0.13
            
            $
            -Exercised
            
            
            -
            
            $
            -
            
            $
            -Forfeited
            
            
            (2,902,000
            )
            $
            (0.13
            )
            $
            -Outstanding-end
                of period
            
            
            14,168,500
            
            $
            0.17
            
            $
            -Exercisable-end
                of period
            
            
            8,011,417
            
            $
            0.37
            
            $
            -





The
      fair
      value of such options was determined based on the Black-Scholes pricing model.
      During the six months ended June 30, 2006, the Company granted 10,331,250
      options to purchase common stock. During the six month period, the Company
      assumed a risk-free interest rate of 5.0%, expected lives of 2 years, expected
      volatility of 132% and an expected dividend yield of 0%.





A
      summary
      of the status of the Company’s nonvested shares as of June 30, 2006 and changes
      during the six month period ending June 30, 2006 is as follows.





Weighted
                AverageShares
            
            Fair
                ValueNonvested-
                beginning of period
            
            
            4,139,625
            
            $
            0.49Granted
            
            
            10,331,250
            
            $
            0.01Vested
            
            
            (5,562,000
            )
            $
            (0.01
            )Forfeited
            
            
            (2,751,792
            )
            $
            (0.01
            )Nonvested-
                end of period
            
            
            6,157,083
            
            $
            0.01








The
      following table presents options outstanding as of June 30, 2006 and their
      exercise prices and contractual remaining lives. The options have exercise
      prices ranging from $.08 per share to $3.46 per share and a weighted average
      remaining contractual life of 6.17 years.




9





RemainingExercise
            
            LifeShares
            
            Price
            
            in
                years983,188
            
            $
            0.08
            
            
            0.21491,594
            
            $
            0.14
            
            
            0.21491,594
            
            $
            0.20
            
            
            0.2134,750
            
            $
            1.48
            
            
            0.8387,500
            
            $
            0.08
            
            
            2.4443,750
            
            $
            0.14
            
            
            2.4443,750
            
            $
            0.20
            
            
            2.4425,000
            
            $
            0.08
            
            
            2.5912,500
            
            $
            0.14
            
            
            2.5912,500
            
            $
            0.20
            
            
            2.5912,500
            
            $
            0.08
            
            
            3.276,250
            
            $
            0.14
            
            
            3.276,250
            
            $
            0.20
            
            
            3.2725,000
            
            $
            0.08
            
            
            3.4512,500
            
            $
            0.14
            
            
            3.4512,500
            
            $
            0.20
            
            
            3.45650,000
            
            $
            0.08
            
            
            3.83325,000
            
            $
            0.14
            
            
            3.83325,000
            
            $
            0.20
            
            
            3.8362,500
            
            $
            0.08
            
            
            4.0031,250
            
            $
            0.14
            
            
            4.0031,250
            
            $
            0.20
            
            
            4.0025,000
            
            $
            0.45
            
            
            4.1940,625
            
            $
            0.08
            
            
            4.2020,313
            
            $
            0.14
            
            
            4.2020,313
            
            $
            0.20
            
            
            4.2097,500
            
            $
            2.31
            
            
            4.2032,500
            
            $
            2.31
            
            
            4.472,000,000
            
            $
            0.08
            
            
            4.651,000,000
            
            $
            0.14
            
            
            4.651,000,000
            
            $
            0.20
            
            
            4.6539,000
            
            $
            3.46
            
            
            4.70125,000
            
            $
            0.02
            
            
            5.0030,875
            
            $
            1.38
            
            
            6.005,000
            
            $
            0.89
            
            
            8.633,003,125
            
            $
            0.08
            
            
            10.001,501,563
            
            $
            0.14
            
            
            10.001,501,563
            
            $
            0.20
            
            
            10.00





*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, convertible preferred shares or
      convertible debentures which were required to be included in the calculation
      of
      diluted loss per share for the periods presented since their inclusion would
      be
      anti-dilutive. The total number of stock options, warrants, common shares
      underlying convertible preferred shares, and common shares underlying
      convertible debentures outstanding as of June 30, 2006 was 14,168,500,
      234,852,780, 10,469,734, and 37,500,000 shares, respectively.





The
      total
      number of shares underlying warrants issued to holders in connection with the
      sale of the convertible debentures is 187,500,000 shares. The shares underlying
      the convertible debentures are based on the initial conversion price of $.08
      per
      share, although the debentures may be converted at 80% of the five-day volume
      weighted average price of the shares prior to conversion with a floor price
      of
      $.02 per share. In the event that the debentures outstanding as of June 30,
      2006
      were converted at a conversion price of $.02 per share, the Company would issue
      150,000,000 shares of common stock. Pursuant to the terms of the convertible
      debenture and the warrants, holders may own no more than 4.99 per cent of the
      Company’s common stock through conversion of debentures or exercise of warrants.
      As a consequence of this limitation the total number of shares which may have
      been required to be issued to holders of the debentures through the conversion
      of the debentures or the sale of the warrants was approximately 99,306,000
      shares.




10





*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.





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 has adopted View A as discussed in Note 4.





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.




11





In
      February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
      No.
      155, which is an amendment of SFAS No. 133 and 140. This Statement; a) permits
      fair value re-measurement for any hybrid financial instrument that contains
      an
      embedded derivative that otherwise would require bifurcation, b) clarifies
      which interest-only strip and principal-only strip are not subject to the
      requirements of SFAS 133, c) establishes a requirement to evaluate interests
      in
      securitized financial assets to identify interests that are freestanding
      derivatives or that are hybrid financial instruments that contain an embedded
      derivative requiring bifurcation, d) clarifies that concentrations of credit
      risk in the form of subordination are not embedded derivatives, e) amends SFAS
      140 to eliminate the prohibition on a qualifying special-purpose entity from
      holding a derivative financial instrument that pertains to a beneficial interest
      other than another derivative financial instrument. This Statement is effective
      for financial statements for fiscal years beginning after September 15, 2006.
      Earlier adoption of this Statement is permitted as of the beginning of an
      entity’s fiscal year. The
      adoption of this pronouncement did not have a material impact on the Company’s
      financial statements.





In
      March
      2006, the FASB issued SFAS No. 156, which amends FASB Statement No. 140. This
      Statement establishes, among other things, the accounting for all separately
      recognized servicing assets and servicing liabilities. This Statement amends
      SFAS No. 140 to require that all separately recognized servicing assets and
      servicing liabilities be initially measured at fair value, if practicable.
      This
      Statement permits, but does not require, the subsequent measurement of
      separately recognized servicing assets and servicing liabilities at fair value.
      An entity that uses derivative instruments to mitigate the risks inherent in
      servicing assets and servicing liabilities is required to account for those
      derivative instruments at fair value. Under this Statement, an entity can elect
      subsequent fair value measurement to account for its separately recognized
      servicing assets and servicing liabilities. By electing that option, an entity
      may simplify its accounting because this Statement permits income statement
      recognition of the potential offsetting changes in fair value of those servicing
      assets and servicing liabilities and derivative instruments in the same
      accounting period. This Statement is effective for financial statements for
      fiscal years beginning after September 15, 2006. Earlier adoption of this
      Statement is permitted as of the beginning of an entity's fiscal year, provided
      the entity has not yet issued any financial statements for that fiscal year.
      The
      adoption of this pronouncement did not have a material impact on the Company’s
      financial statements.





4.
      Debentures Payable





On
      April
      28, 2006, the Company entered into a 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 was to be funded 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.




12





The
      warrants and the embedded conversion option were accounted for under EITF issue
      No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company's Own Stock" and EITF 05-4, View A "The effect
      of a Liquidated Damages Clause on a Freestanding Financial Instrument." Due
      to
      certain factors and the liquidated damage provision in the registration rights
      agreement, the Company determined that the embedded conversion option and the
      warrants are derivative liabilities. Accordingly, the warrants and the embedded
      conversion option will be marked to market through earnings at the end of each
      reporting period. The debentures and the conversion option are valued using
      the
      Black-Scholes valuation model. For the period ended June 30, 2006, the Company
      reflected a gain of $375,000 representing the change in the value of the
      warrants and conversion options. During the six months ended June 30, 2006,
      the
      Company charged to interest expense $375,000 for the accretion of the debentures
      associated with the debt discount. Included in the income associated with the
      option of the debenture is a gain of $1,875,000 associated with warrants issued
      in connection with the debenture, offset by a charge of $1,500,000 for the
      embedded conversion option.





The
      Registration Rights Agreement includes a liquidated damages clause, which
      stipulates if the registration statement is not filed by the filing date or
      declared effective by the effective date (September 25, 2006), then upon failure
      of either event the subscribers shall be entitled to liquidated damages, payable
      in cash, in the sum of one and a half percent (1 1⁄2%) of the principal amount of
      the debentures to a maximum of 36%. This
      amount is greater than the difference between a registered and an unregistered
      share of common stock.




Simultaneous
      with this financing, the Company closed a warrant reset offering. Common stock
      holders of Company warrants were equally offered to exercise their warrants
      at
      an exercise price of $.08 per share plus warrants as described below. In that
      connection, the Company issued to all participating warrant holders an aggregate
      of 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.




Subsequent
      to June 30, 2006, the Company was in default of its Convertible Debentures
      due
      August 2007. The outstanding principal amount of this Debenture is $3 million.
      In the event of a default, the principal amount, plus liquidated damages and
      other amounts owing in respect thereof through the date of acceleration, shall
      become, at the Holder’s election, immediately due and payable in cash at the
      mandatory default amount, or 130% of the principal amount.





5.
      Common
      Stock





During
      the six months ended June 30, 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. At its shareholders
      meeting held June 28, 2006, the Company’s shareholders approved an amendment to
      the Company’s certificate of incorporation to increase the number of authorized
      shares of common stock to 940 million shares.





6.
      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 $59,178 and $72,481 for the six month periods ended June
      30,
      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. The Series A preferred shares are subject to weighted
      average anti-dilution provisions. On April 28, 2006, the conversion price of
      the
      Series A preferred shares were reduced to $0.37 per share in conjunction with
      the warrant reset pursuant
      to anti-dilution rights of holders . No
      deemed
      dividend was required to be recorded as the new conversion price was above
      the
      market price of the Company’s common stock as of the transaction
      date.




13





7.
      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 the following
      is
      pending.





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 contained sufficient allegations to allow the case to proceed
      to
      the discovery phase. On July 28, 2006, plaintiffs served a second amended
      complaint adding four additional plaintiffs to the action. On September 1,
      2006,
      plaintiffs served a motion for leave to serve a third amended complaint adding
      two additional individual defendants allegedly affiliated with one of DOBI’s
      previous advisors and an alleged corporate successor in interest to that advisor
      to the action. This motion is currently pending. The Company believes that
      the
      plaintiffs’ 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.




14




During
      late 2005 and early 2006, a dispute arose 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 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. On July 21,
      2006
      the action against North River was settled and the lawsuit dismissed, and North
      River has agreed to provide coverage in accordance with the terms of the policy
      and the settlement agreement.




On
      or
      about May 30, 2006, the Company and certain current and former officers and
      directors of the Company received subpoenas from the U.S. Securities and
      Exchange Commission (the "SEC"), dated May 26, 2006, indicating that the SEC
      is
      conducting a formal investigation to determine whether there have been any
      violations of securities laws for the period from January 1, 2004 to the
      present. The Company and its officers and directors intend to continue to fully
      cooperate with and assist the SEC in this fact finding investigation.




15


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





On
      June
      13, 2006, DOBI Medical International, Inc. (the “Company”) furloughed all its
      officers and employees, including its Interim Chief Executive Officer and Chief
      Financial Officer, because it had insufficient funds to continue to make payroll
      beyond June 13, 2006.  The Company is actively seeking alternatives in
      order to resume limited operations as soon as possible; however, no assurance
      can be given that it will be able to do so.




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. The
      Company is currently insolvent and is actively seeking both financing and a
      strategic partner. 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 will have to cease our operations permanently.
      These factors raise substantial doubt about the Company’s ability to continue
      its existence as a going concern. There is no assurance that the Company will
      be
      able to timely obtain financing or a strategic partner before it runs out of
      cash. The accompanying financial statements do not include any adjustments
      that
      might be necessary should the Company be unable to continue as a going
      concern.





In
      the
      first quarter 2006, we released ComfortScan version 2.0. The ComfortScan 2.0
      software suite consists of three individual elements, including ComfortScan
      acquisition software for patient data acquisition, ComfortNetTM for image
      database management, and ComfortView® 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, the Company believes that diagnostic
      specificity still needs improvement before conducting
      a blinded read of the patient data in accordance with the Pre Market Approval
      (PMA) clinical trial protocol and submittal of the results to the FDA. At this
      point, the Company does not have reason to believe that the current
      configuration of the ComfortScan system as required for purposes of the PMA
      clinical study, that diagnostic accuracy can be sufficiently improved to satisfy
      the PMA clinical trial protocol. The
      ComfortScan system is not commercially available in the U.S. as it is limited
      by
      U.S. law to investigational use.




16





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.





In
      June
      2006, in order to preserve our limited cash we furloughed all of our employees
      and shut down the PMA clinical trial. We
      seek
      to recommence limited operations if and when we resolve of our liquidity
      problems, principally by obtaining debt or equity financing or a strategic
      partner. To date, we have been unable to do so. In the event that we are able
      to
      resolve our liquidity problems, we do not intend to reopen the PMA clinical
      trial since we do not believe that the diagnostic specificity of our ComfortScan
      system is sufficient pass the PMA clinical trial protocol. If we obtain
      sufficient funding, we will seek to continue to sell our ComfortScan system
      to
      our international distributors for investigational use for installation at
      clinical trial sites and also seek to market and sell version 2.0 of our
      ComfortScan system as an adjunct to mammography in those international markets
      where we are approved and where physicians are more interested in the
      sensitivity of our ComfortScan system and less concerned about specificity.
      Currently, the Company has no employees. A few former employees have been
      voluntarily performing services without compensation or the expectation of
      any
      compensation for their services, however, there can be no assurance that they
      will continue to do so.




We
      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. We have preliminary indications that the
      SFDA will approve our ComfortScan system as an adjunct to mammography for sale
      in China, however, such final approval and certification cannot be assured
      or
      guaranteed, and even if so approved, there can be no assurances of the
      acceptance, adoption, and use of our ComfortScan system in China by physicians,
      imaging clinics, and patients





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





**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.





Under
      the
      fair value recognition, 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.




17





In
      the
      conduct of our business, we have incurred 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 have consisted 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 have consisted 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 have consisted 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 $11,500,000 is provided.





As
      of
      June 30, 2006, we had approximately $29,400,000 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.





**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 June 30, 2006 and 2005**





Revenues
      for the quarter ended June 30, 2006 were approximately $7,000 compared to
      approximately $111,000 for the quarter ended June 30, 2005. For the three months
      ended June 30, 2006 the Company did not sell any ComfortScan units, whereas
      during the second quarter 2005 two ComfortScan units were sold.




18





Cost
      of
      sales was approximately $191,000 for the three months ended June 30, 2006,
      creating a gross loss of approximately $184,000, due to the lack of any sales
      of
      the company’s ComfortScan units during this period. For the period January 1,
      2006 through June 12, 2006 we maintained 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.





Research
      and development expenses increased approximately $37,000, or 8%, from $470,000
      to approximately $507,000 for the three months ended June 30, 2006 as compared
      to the same period in the prior year. The largest part of this increase was
      attributed to the recording of stock-based compensation during the three months
      ended June 30, 2006 of approximately $47,000.


General
      and administrative expenses increased approximately $875,000, or 126%, from
      $696,000 to approximately $1,571,000 for the three months ended June 30, 2006
      as
      compared to the same period in the prior year. Personnel costs included various
      severance charges related to the termination of the Chief Executive Officer
      in
      April 2006 and certain other employees terminated on June 13, 2006 of
      approximately $630,000 and the recording of $208,000 of stock option expense
      in
      accordance with the adoption of SFAS 123R. In addition, we incurred $252,000
      in
      legal expenses, an increase of $136,000 over the prior year.





Clinical
      program expenses increased approximately $200,000, to $840,000 for the three
      months ended June 30, 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
      $584,000 during the quarter ended June 30, 2006, an increase of $127,000 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 $73,000 during the three months ended June 30, 2006 over that
      of the same period in the prior year.





Sales
      and
      marketing expenses of approximately $177,000 for the three months ended June
      30,
      2006, reflect a decrease of approximately $47,000 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 June 30, 2006 primarily consisted of
      accretion of the debentures of $375,000 and amortization of financing costs
      of
      $144,000 related to the issuance of the debentures.




**Comparison
      of Six Months Ended June 30, 2006 and 2005**





Revenues
      for the six months ended June 30, 2006 were approximately $114,000 compared
      to
      approximately $173,000 for the quarter ended June 30, 2005. For the six months
      ended June 30, 2006 the Company sold two ComfortScan units, whereas during
      the
      six months ended June 30, 2005, three ComfortScan units were sold.





Cost
      of
      sales was approximately $502,000 for the six months ended June 30, 2006,
      creating a gross loss of approximately $388,000, due to the minimal ComfortScan
      units sold during this period. For the period January 1, 2006 through June
      12,
      2006 we maintained 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.





Research
      and development expenses increased approximately $249,000, or 27%, from $918,000
      to approximately $1,167,000 for the six months ended June 30, 2006 as compared
      to the same period in the prior year. Personnel costs increased approximately
      $220,000, including the recording of stock-based compensation of approximately
      $87,000, as compared to the same period in the prior year.





General
      and administrative expenses increased approximately $1,268,000, or 85%, from
      $1,491,000 to approximately $2,759,000 for the six months ended June 30, 2006
      as
      compared to the same period in the prior year. Personnel costs included various
      severance charges related to the termination of the Chief Executive Officer
      in
      April 2006 and certain other employees terminated on June 13, 2006 of
      approximately $630,000 and the recording of $515,000 of stock option expense
      in
      accordance with the adoption of SFAS 123R. In addition, we incurred $578,000
      in
      legal expenses, an increase of $186,000 over the prior year.




19





Clinical
      program expenses increased approximately $1,270,000 to $2,295,000 for the six
      months ended June 30, 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
      $1,727,000 during the six months ended June 30, 2006, an increase of $1,037,000
      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 $227,000 during the six months ended June 30, 2006
      over that of the same period in the prior year.





Sales
      and
      marketing expenses of approximately $400,000 for the six months ended June
      30,
      2006, reflect a decrease of approximately $84,000 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 June 30, 2006 primarily consisted of
      accretion of the debentures of $375,000 and amortization of financing costs
      of
      $144,000 related to the issuance of the debentures.




**Liquidity
      and Capital Resources**





We
      are a
      developmental stage company with no significant revenues. 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.





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, $2,625,000 of which subscriptions were funded
      at
      closing of the first tranche. The remaining $2,625,000 was to be funded when
      the
      Company’s first registration statement filed in connection with the Securities
      Purchase Agreement is declared effective by the Securities Exchange Commission
      (SEC). The
      Company’s registration statement filed on May 24, 2006 in connection with the
      Securities Purchase Agreement has not been declared effective by the SEC and
      in
      July, 2006 we elected to withdraw the registration statement and will not be
      resubmitting a registration statement for these securities. Therefore, the
      gross
      proceeds totaling approximately $2,625,000 conditioned upon the effectiveness
      of
      the registration of this offering have not been received. The total aggregate
      face amount of debentures for the second tranche in the amount of $3,000,000
      have not been issued, which were to generate net cash proceeds of approximately
      $2,340,000.




20





The
      issued debentures have a term of 16 months and come fully due on August 28,
      2007. These 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, in particular, in the
      event
      that our Operating Losses as defined in the Securities Purchase Agreement exceed
      $750,000 per month on a cumulative basis commencing in the month of May 2006.
      Operating losses as defined in the agreement were $658,894, $718,313, and
      $67,810, respectively, for the months of May 2006, June 2006 and July 2006,
      respectively.





Pursuant
      to the Securities Purchase Agreement, the Company 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, respectively. 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 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.





.As
      of
      June 30, 2006 we had cash and cash equivalents of approximately $133,000. The
      Company’s registration statement filed on May 24, 2006 in connection with the
      Securities Purchase Agreement described above has not been declared effective
      by
      the Securities Exchange Commission and in July, 2006 we elected to withdraw
      the
      registration statement and will not be resubmitting a registration statement
      for
      these securities. Therefore, the gross proceeds totaling approximately
      $2,625,000 conditioned upon the effectiveness of the registration of this
      offering have not been received. As a consequence, we furloughed all of our
      employees and ceased operations as of June 13, 2006.





The
      Company is currently insolvent and is actively seeking both financing and a
      strategic partner. 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 or unable to, we will have to cease our
      operations. These factors raise substantial doubt about the Company’s ability to
      continue its existence as a going concern. There is no assurance that the
      Company will be able to timely obtain financing or a strategic partner before
      it
      runs out of cash and files for bankruptcy. The accompanying financial statements
      do not include any adjustments that might be necessary should the Company be
      unable to continue as a going concern.




21




**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, our ability to timely and successfully obtain
      financing or a strategic partner, our ability to negotiate work outs with our
      convertible debt holders and creditors, our ability to continue to be listed
      on
      the over the counter exchange, our ability to successfully defend the lawsuits
      and legal proceedings pending against DOBI and certain of its directors and
      officers, the timely and final approval by local foreign governments of our
      ComfortScan system as an adjunct to mammography in various international
      markets; 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.




22


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.




23


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 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
      contained sufficient allegations to allow the case to proceed to the discovery
      phase. On July 28, 2006, plaintiffs served a second amended complaint adding
      four additional plaintiffs to the action. On September 1, 2006, plaintiffs
      served a motion for leave to serve a third amended complaint adding two
      additional individual defendants allegedly affiliated with one of DOBI’s
      previous advisors and an alleged corporate successor in interest to that advisor
      to the action. This motion is currently pending. The Company believes that
      the
      plaintiffs’ 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.




24




During
      late 2005 and early 2006, a dispute arose 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 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. On July 21,
      2006
      the action against North River was settled and the lawsuit dismissed, and North
      River has agreed to provide coverage in accordance with the terms of the policy
      and the settlement agreement.




On
      and
      about May 30, 2006, the Company and certain current and former officers and
      directors of the Company received subpoenas from the U.S. Securities and
      Exchange Commission (the "SEC"), dated May 26, 2006, indicating that the SEC
      is
      conducting a formal investigation to determine whether there have been any
      violations of securities laws for the period from January 1, 2004 to the
      present. The Company and its officers and directors intend to continue to fully
      cooperate with and assist the SEC in this fact finding investigation.





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




None





Item
      3.
      Defaults Upon Senior Securities




The
      Company is currently in default of its Convertible Debentures due August 2007.
      The outstanding principal amount of the Debentures is $3 million. In the event
      of a default, the principal amount, plus liquidated damages and other amounts
      owing in respect thereof through the date of acceleration, shall become, at
      the
      Holder’s election, immediately due and payable in cash at the mandatory default
      amount, or 130% of the principal amount.





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




On
      June
      28, 2006, the Company held its Annual Meeting of Shareholders. The votes for
      the
      four proposals coming before the meeting were as follows:





25





1. Election
                of
                Directors:
            
            For
            
            WithheldBrad
                Baker
            
            
            40,567,008
            
            
            3,879,526Steve
                M. Barnett
            
            
            43,487,011
            
            
            959,523David
                H. Clarke
            
            
            43,492,011
            
            
            954,523William
                Li, MD
            
            
            43,484,011
            
            
            962,523Robert
                B. Machinist
            
            
            43,492,011
            
            
            954,523Webb
                W. Turner
            
            
            40,509,108
            
            
            3,937,426




2.
            Approve an Amendment to the Certificate of Incorporation
                to Increase the Number of Authorized Shares of Common Stock to 940
                Million
                Shares:




For
            
            
            42,729,560Against
            
            
            1,571,610Abstain
            
            
            145,364




3.
              Approve
                  an Amendment to the 2000 Stock Incentive Plan to be Amended to
                  Permit the
                  award of 25,000,000 Shares or 15% of the Issued and Outstanding
                  shares of
                  Common Stock, whichever is greater:




For
            
            
            20,780,219Against
            
            
            1,201,934Abstain
            
            
            1,542,785




4.
              Ratify
                  Appointment of Marcum & Kliegman, LLP as the Company’s independent
                  auditors forthe
                  fiscal year ending December 31, 2006:




For
            
            
            44,011,701Against
            
            
            291,673Abstain
            
            
            143,160





Item
      5.
      Other Information




On
      August
      14, 2006 we filed a notification on Form 12b-25 of a late filing of the
      Company’s Quarterly Report on Form 10-QSB for the fiscal period ending June 30,
      2006. On August 22, 2006 the Company received an OTCBB delinquency notification
      from the NASD that it is not current in its reporting requirements and that
      if
      such delinquency is not cured by September 21, 2006, the Company will no longer
      be eligible for quotation on the OTC Bulletin Board and therefore will be
      removed effective September 25, 2006. The Company expects that the filing of
      this 10-QSB for the period ending June 30, 2006 will cure such delinquency
      and
      that it will continue to be listed on the OTCBB.





Item
      6.
      Exhibits and Reports on Form 8-K




26





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)
              Reportson
                  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.





3. We
          filed
          a Current Report on Form 8-K on June 2, 2006 regarding the formal investigation
          being conducted by the SEC to determine whether there have been any securities
          violations by the Company and certain of its directors and
          officers.





4. We
      filed
      a Current Report on Form 8-K on June 13, 2006 regarding d regarding the furlough
      of all officers and employees.




5. We
      filed
      a Current Report on Form 8-K on June 15, 2006 regarding our net operating loss
      for the month of May, 2006.





6. We
          filed
          a Current Report on Form 8-K on June 26, 2006 regarding the resignation
          of
          William Li, MD as a director of the Company.







**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:
              September 20, 2006
            DOBI
              MEDICAL
              INTERNATIONAL, INC.By:
            /s/ Michael
              R. JorgensenMichael
              R. JorgensenAuthorized
              Representative


27