10KSB

                     U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB


 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2006

                          Commission file Number 0-4186


                           THE SAGEMARK COMPANIES LTD.
           (Name of small business issuer as specified in its charter)


           New York                                   13-1948169
    (State of incorporation)              (IRS Employer Identification Number)


                     1285 Avenue of the Americas, 35th Floor
                               New York, NY 10019
                    (Address of principal executive offices)


         Issuer's telephone number, including area code: (212) 554-4219


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

      Securities registered pursuant to Section 12(g) of the Exchange Act:
                     Common Stock, par value $0.01 per share
                                (Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

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

The issuer's revenues for the fiscal year ended December 31, 2006 were
$10,391,000.

The aggregate market value of the common equity held by non-affiliates of the
Registrant as of March 28, 2007 was approximately $4,126,000 computed on the
basis of the reported closing price of $.71 per share on said date of such stock
on the National Association of Securities Dealers, Inc.'s Over the Counter
Bulletin Board. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 28, 2007, the Registrant has 7,661,503 shares of its par value $0.01
Common Stock outstanding.

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

Indicate by checkmark whether the Registrant is an accelerated filer as defined
in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [ ] No [X]




                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Introduction

         We own, operate and manage out-patient medical diagnostic imaging
centers that utilize positron emission tomography ("PET") and or computed
tomography ("CT") imaging equipment, collectively referred to as "PET". PET is
an advanced, robust medical diagnostic imaging procedure currently used by
physicians in the diagnosis, staging and treatment of certain cancers, coronary
disease and neurological disorders including Alzheimer's disease.

         As of December 31, 2006, we own and or operate seven PET imaging
centers, and are constructing an eighth PET imaging center in Tamarac, Florida.
We remain in the initial phase of our long-term plan and expect to incur future
losses until such time that our PET imaging centers generate sufficient revenue
to offset our operating expenses. In order to achieve our long-term objectives
of generating profits and positive cash flow, it is critical that we reverse our
historical trend of losses and begin to develop and sustain a trend of
generating working capital that is derived from the operations of our PET
imaging centers.

         We manage our PET imaging centers either through direct ownership or
through Administrative Services Agreements. For the PET imaging centers that we
own and those that we manage we are responsible for obtaining facility leases,
medical diagnostic equipment, equipment maintenance agreements, supply
agreements and personnel and are responsible for obtaining the financing
necessary to establish the PET imaging centers. As a result, both business
models present the same working capital needs and cash inflows and outflows to
us and neither model presents us with more or less favorable working capital or
operating conditions. Accordingly, we evaluate the business of PET imaging
centers that we own and those that we manage under substantially the same
criteria. Management's decision, as to the model under which a new PET imaging
center is established, is based primarily on laws that exist for PET imaging
center ownership in the state in which the PET imaging center is established.

         We own and operate PET imaging centers in Wichita, Kansas and
Parsippany, New Jersey and manage PET imaging centers in Rockville Centre, New
York, Hialeah, Florida, Forest Hills (Queens), New York, East Setauket
(Suffolk), New York and Jacksonville, Florida. The dates on which our PET
imaging centers began operations are as follows:

            Location                                  Start Date
            ----------------------                    ----------
            Wichita, Kansas                           August 2001
            Rockville Centre, New York                October 2002
            Parsippany, New Jersey                    February 2003
            Hialeah, Florida                          February 2003
            Forest Hills (Queens), New York           December 2004
            East Setauket (Suffolk) New York          February 2006
            Jacksonville, Florida                     June 2006
            Tamarac, Florida                          Under construction

         During 2006 and 2005 we earned net patient service revenues from our
PET imaging centers of $3,759,000 and $3,454,000, respectively, lease revenue of
$474,000 and $0, respectively, and management fees of $6,158,000 and $4,247,000,
respectively.

Corporate Information

         The Company was formed in 1961 as a New York corporation. It has
changed its name several times. We changed our name to The Sagemark Companies
Ltd. in 1999.

         Originally, we were engaged in businesses unrelated to medical
diagnostic imaging. We previously held controlling interests in subsidiaries
that were engaged in the telecommunications, smartcard, audio products
distribution, electro-mechanical and electro optical manufacturing, three
dimensional product manufacturing and services, temporary employment outsourcing
and business consulting businesses. We sold or otherwise disposed of our
interests in these businesses approximately seven years ago. In 1994, we decided

                                     Page 2


to concentrate our efforts in the medical diagnostic imaging field and acquired
International Magnetic Imaging, Inc. ("IMI"), a corporation which owned and
operated magnetic resonance imaging ("MRI") diagnostic imaging centers which had
been founded and operated by Stephen A. Schulman M.D., the Chief Executive
Officer of Premier PET Imaging International, Inc. ("Premier") and a member of
our Board of Directors. After operating ten of the MRI centers that we acquired
and four other MRI centers that we established following the acquisition of IMI,
we sold IMI to a major health care company in 1998 and realized a substantial
gain on the sale.

         From March 1999 to May 14, 2001, we operated as a financial services
company. We were a limited partner of Trident Growth Fund L.P., which operates
as a Small Business Investment Company pursuant to a license awarded to it by
the Small Business Administration on May 23, 2000. Trident Growth Fund L.P. has
made investments and loans to companies engaged in various industries. On
September 18, 2001, we agreed to transfer a 27% limited partnership interest to
Technology Acquisitions Ltd. in exchange for 266,667 shares of our common stock
owned by Technology Acquisitions Ltd. The Small Business Administration approved
this transaction on December 21, 2001. Upon consummation of this exchange on
March 12, 2002 we had a 34.5% limited partnership interest in Trident Growth
Fund L.P. Effective January 1, 2004, the partnership received capital
contributions from new partners, reducing our limited partnership interest from
34.5% to 24.1%. On July 10, 2006, the Company sold its ownership interest in
Trident Growth Fund, L.P. for $2,570,000. The purchase price was payable by a
cash down payment of $625,000 into an escrow account which was released to us on
August 14, 2006, and the remaining purchase price of $1,945,000 is payable to us
under a four year secured promissory note. Payments under the note are due in
four annual installments in which the payment amount is the greater of $486,250,
or 75% of the amount of all cash and property distributions received by Trident
Advisors, Inc. from Trident Growth Fund L.P. in each of such years, plus accrued
interest on or before July 9, 2007, 2008, 2009, and 2010. The note accrues
interest at the one year LIBOR rate as published in the Wall Street Journal and
adjusts each anniversary date. The interest rate at the time of closing was
5.68%.

         We returned to the diagnostic imaging business in 2001 utilizing the
same format that had been successfully utilized by us in connection with our
ownership and operation of the MRI centers owned by IMI. Accordingly, on May 14,
2001, we acquired all of the outstanding shares of capital stock of Premier and
Premier Cyclotron International Corp. from the founders of those companies,
pursuant to an agreement which we entered into with such founders on May 14,
2001, at a purchase price consisting of six thousand (6,000) shares of our
common stock which we valued at $2,500 and certain additional stock entitlements
contingent upon the future performance of our then proposed PET imaging centers.
Pursuant to the Stock Purchase Agreement, the founders were entitled to receive
1,917,000 additional shares of our common stock (319,500 shares for each of the
first six PET imaging centers established by Premier P.E.T. Imaging
International, Inc., if and when the PET imaging center achieves positive
earnings before the deduction of interest expense, income taxes, depreciation
and amortization during at least one month during the first eighteen months of
each PET imaging center's operations. On December 30, 2003 the Stock Purchase
Agreement was amended and reduced the number of shares the founders were
entitled to receive by 502,000 shares. Among the shareholders of Premier and
Premier Cyclotron International Corp. were entities owned, in part, by Messrs.
Schulman, Shapiro and Blessey. Following such acquisition, Premier became a
wholly owned subsidiary of the Company and, in connection therewith, Messrs.
Schulman, Shapiro and Blessey became, or continued to serve as, officers and
directors of Sagemark and/or Premier. In June 2004, pursuant to such agreement,
we issued an aggregate of 1,415,000 shares of our common stock to such founders.
We valued such shares at $4,811,000 which represents goodwill. Of such shares,
the entities owned by Messrs. Schulman, Shapiro and Blessey received 400,000,
275,000 and 525,000 of such shares, respectively.

Risk Factors

         You should carefully review and consider the following risks, as well
as all other information contained in this Annual Report or incorporated herein
by reference, including our consolidated financial statements and the notes to
those statements, before you decide to purchase any shares of our common stock.
The following risks and uncertainties are not the only ones facing us.
Additional risks and uncertainties of which we are currently unaware or which we
believe are not material could also nevertheless materially adversely affect our
business, financial condition, results of operations, or cash flows. In any
case, the value of the shares of our common stock could decline and you could
lose all or a portion of your investment in such shares. To the extent any of
the information contained in this Annual Report constitutes forward-looking
statements or information, the risk factors set forth below must be considered
cautionary statements identifying important factors that could cause our actual
results for various financial reporting periods to differ materially from those

                                     Page 3


expressed in any forward-looking statements made by or on our behalf and could
materially adversely affect our financial condition, results of operations or
cash flows. See also, "Statement Regarding Forward-Looking Statements" in Item
6.

Risks Related to our Business

We are likely to continue to experience cash flow deficits and losses
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         Although we have previously been in the medical diagnostic imaging
business, having acquired, operated and thereafter sold a portfolio of MRI
diagnostic imaging centers, we began our PET imaging center operations in 2001.
Therefore, your evaluation of our business and prospects will be based on our
operating history in the PET imaging business since 2001. You must consider our
business and prospects in light of the risks and difficulties we may encounter
in a new and rapidly evolving and regulated market. To the extent we are not
able to successfully address such risks and difficulties, our business and
operating results will continue to be materially adversely affected.

         We generated revenues of $10,391,000 for the year ended December 31,
2006, representing an increase in revenues of approximately 35% as compared to
revenues during the prior year. We incurred losses of $1,815,000 and $1,822,000,
and we had cash flow from operating activities of $264,000 and $92,000, in
calendar years 2006 and 2005, respectively.

         We anticipate that we will continue to incur professional fees and
other operating costs and expenses which will likely exceed our revenues and
continue to result in losses. Furthermore, we anticipate increasing and
supplementing our executive and other support personnel and otherwise increasing
our fixed costs. We cannot provide any assurances as to whether or when we will
reverse the operating losses that we are sustaining during this period. Also,
there can be no assurance as to whether or when our existing portfolio of PET
imaging centers, including any new PET imaging centers that may be established
or acquired by us, will be profitable or generate positive cash flow.

         With the passage of the Deficit Reduction Act of 2005 (the "DRA") in
February 2006, the reimbursement rates for our imaging services provided to
Medicare patients will be significantly reduced beginning January 1, 2007.
Typically, private insurance companies reduce their reimbursement rates in
response to such reductions by government payors and it is anticipated that they
will do so. Therefore it is unlikely that we will generate profits or positive
cash flow in the near future, if ever.

Acceptance of our services by the medical community or by patients may not grow,
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which would impair our future revenues and profitability
- --------------------------------------------------------

         High operating and other costs may interfere with the growing use and
acceptance of PET imaging technology. We have limited resources and will need to
continue to spend additional money on hiring additional sales and marketing
personnel and producing promotional materials to expand the use and acceptance
of our PET imaging services. We believe that PET imaging technology has gained
acceptance as a valid medical diagnostic imaging tool for a number of
significant diseases and disorders, including breast cancer, colorectal cancer,
head and neck cancer, lung cancer, ovarian cancer, pancreatic cancer, thyroid
cancer and Alzheimer's and Parkinson's disease, but there can be no assurance
that the use and acceptance of PET imaging technology will continue to expand to
other diseases and disorders.

The lack of effective marketing may limit our operating revenues
- ----------------------------------------------------------------

         Our future revenues and profitability will depend significantly on our
ability to demonstrate to physicians the potential cost and performance
advantages of PET imaging procedures over traditional diagnostic imaging
procedures, as well as the advantages of our PET imaging centers over the PET
imaging centers operated by others within our target markets. In order to
develop and execute an effective marketing plan, we will hire individuals who
will be responsible for performing the marketing services for our PET imaging
centers. Our ability to achieve and sustain sufficient levels of revenues and
profitability in the future will depend in part on our ability to successfully
market and sell the PET imaging services provided at our PET imaging centers.
There can be no assurance that we will be able to effectively market our
services, or increase the procedure volume significantly enough to compensate
for the substantial reduced reimbursement environment we will face as of January
1, 2007 as a result of the DRA. Failure to substantially increase our procedure
volume will have a material adverse near term effect on our operations.


                                     Page 4


We will require equipment financing in order to expand our business
- -------------------------------------------------------------------

         To date, we have financed the purchase of our PET imaging systems and
ancillary equipment, as well as a substantial portion of the costs incurred in
connection with the build-out of the premises of each of our PET imaging
centers, with DVI Financial Services, Inc., General Electric Capital Corp., and
Siemens Medical Solutions USA, Inc., three independent equipment lenders. There
are a limited number of companies that provide such financing among which are
General Electric Capital Corp., Siemens and Phillips. DVI is in bankruptcy and
no longer represents a potential source of such financing for us. Although
currently, given our financial circumstance and in light of the DRA, we may not
expand our PET imaging center portfolio in the future, however if we decide to
do so our ability to expand our business will be dependent upon our ability to
obtain required equipment financing. Given our history of losses, limited
working capital and reductions in reimbursement rates resulting from the DRA, we
believe that it is unlikely that we will be able to obtain equipment financing
for additional PET imaging centers until such time, if any, that we receive
equity financing or our operating losses are reversed and our PET imaging
centers generate positive cash flow sufficient to exceed our operating and other
expenses. Moreover, in view of the DRA, we are seeking modification of certain
debt service terms of our current equipment financing. If we pursue such
modifications or restructuring, there is no assurance that we will be successful
in such modifications or restructuring. Our debt service will have a material
adverse effect on our operations unless we are successful in arranging such
modification or restructuring.

         In connection with our current equipment financings, we have granted
such lenders liens on each of such PET imaging systems, virtually all of the
other assets of each PET imaging center and our equity interest in each such PET
imaging center. Additionally, we are the obligor with respect to all of such
indebtedness. The financing documents with respect to such financings contain,
and we expect that any future financing documents will contain, certain
specified events of default, the occurrence of any of which will give rise to
rights in favor of such lenders to foreclose their security interests in all of
such assets and bring an action against us to recover all amounts due. Among
such events of default are any breach by us of our obligations to make timely
payment of all required debt service or equipment lease payments, the breach by
us of any of our other obligations, representations or warranties, our failure
to maintain specified cash balances or specified debt to equity ratios, certain
specified acts of bankruptcy or insolvency, any material adverse charge in our
financial condition or business operations or material changes in the ownership
of the Company. Under certain circumstances, an uncured default of the terms of
the financing documents relating to a particular PET imaging center will cause a
default under the financing documents for all of the PET imaging centers
financed by that particular lender. The Company is not in compliance with the
debt to tangible net worth ratio. As such, the applicable loans and capital
lease obligations have been classified as current liabilities in the
accompanying consolidated balance sheet. However, based on our historical
relationship with our senior creditors and given that we are current in all debt
service and lease payments under such agreements, we do not anticipate that a
demand for payment under such loans or leases will be made as long as we remain
current with such debt service payments. Unless we are able to significantly
increase procedure volume, our ability to remain current in our debt service and
lease payments will be effected by the reduction in reimburmsent rates
effectuated by the DRA In the event any such lender should declare a default
under such financing documents and seek to enforce its rights as a secured
creditor thereunder, such enforcement, if successful, would result in the
curtailment of the operations of those PET imaging centers whose assets are
foreclosed upon.

We are highly leveraged and will need to generate positive cash flow to service
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our debt
- --------

         We are highly leveraged. As of December 31, 2006, our total
indebtedness was approximately $14,239,000, inclusive of approximately
$12,250,000 in borrowings under capital leases or loan agreements with
independent equipment lenders, approximately $417,000 of subordinated notes
payable, approximately $155,000 of deferred interest on subordinated notes
payable and approximately $1,417,000 of accounts payable. Our annual debt
service requirements under such leases and loan agreements are currently
approximately $3,616,000, our annual operating expenses are currently
approximately $10,937,000 and we have substantial accounts payable. To the
extent we establish new PET imaging centers, we will be required to obtain
equipment financing to the extent of approximately $2,400,000 for each such
facility. To the extent we acquire any existing PET imaging centers from others
we will require seller or external financing. Accordingly, we anticipate that if
we are able to obtain additional equipment financing, our annual debt service
requirements will increase. Since our working capital is substantially reduced
and quite limited and we are not generating sufficient positive cash flow from
the operations of our PET imaging centers, we will face difficulties in the
future in meeting our overhead and servicing our substantial equipment and
acquisition financing indebtedness. Our ability to make payments on our
equipment and acquisition indebtedness and meet our overhead and pay our
payables, when due, will depend on our ability to generate significantly greater

                                     Page 5


procedure volume and future positive cash flow in amounts sufficient to cover
our operating and other expenses, which is subject, in part, to general
economic, financial, competitive, regulatory and other factors, some of which
are beyond our control. Moreover, our substantial indebtedness could restrict
our operations by, among other things, requiring us to dedicate a substantial
portion of our cash flow from operations to payments of such indebtedness
thereby reducing the availability of our cash flow to fund our limited working
capital and other required expenditures. In addition, such substantial
indebtedness will make it more difficult for us to satisfy our obligations to
our other creditors, will increase our vulnerability to economic downturns and
competitive pressures in our industry, and will place us at a competitive
disadvantage compared to our other competitors that have less indebtedness in
relation to cash flow.

The lack of future financing will affect our operations and limit or curtail any
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expansion plans
- ---------------

         The capital requirements associated with expanding our operations,
including the expansion of our current PET imaging centers as well as
establishing and/or acquiring additional PET imaging centers, have been and will
continue to be substantial.

         Our current working capital and cash flow from operations will not be
sufficient, without additional financing, for us to meet certain of our near
term business plans and to pay our monthly operating expenses which are
currently approximately $915,000. We will require additional financing to
supplement our working capital and, thereafter, if feasible, we would require
approximately $2,400,000 of financing for the purchase of the PET imaging
system, ancillary equipment and leasehold improvements for any new PET imaging
center established by us and, possibly, additional debt or equity financing for
any acquisitions of PET imaging centers from others, if any. No assurance can be
given that we will be able to obtain such additional financing if and when
needed, or that, if available, such financing will be available on terms
acceptable to us. If adequate funds are either not available or not available on
acceptable terms if and when required, our business, revenues, financial
condition and results of operations will suffer. Also, if we raise additional
funds through the issuance of equity or convertible securities, the percentage
ownership of our stockholders will be reduced and any such securities may have
powers, preferences and rights that are senior to those of the rights of the
holders of our common stock.

         Given our history of losses, substantial fixed overhead and accounts
payable, limited working capital and future anticipated reductions in the
reimbursement rates for the imaging services provided at our PET imaging
centers, there can be no assurance that if we were to pursue establishing or
acquiring any additional PET imaging centers, we will be able to obtain adequate
financing for such purposes or that, if available, such financing will be on
favorable terms. In the absence of additional financing, we will be unable to
acquire or establish any additional PET imaging centers.

Existing first refusal rights may impair our ability to obtain capital or
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require us to obtain additional capital
- ---------------------------------------

         Pursuant to the terms of the placement agency agreement between us and
the brokerage firm which conducted a private placement of our securities which
was completed in January 2005, we granted such placement agent an exclusive
right of first refusal to manage any private or public offering of our debt,
equity, or other securities until November 28, 2006 and also agreed to pay
certain cash commissions and other compensation in the event that, at any time
on or before January 12, 2006, we entered into a commitment or received any
financing relating to any offering of our debt or equity securities from any
investor who received offering documents from the placement agent in connection
with such private placement.

We will incur certain costs and face certain obstacles in establishing and/or
- -----------------------------------------------------------------------------
acquiring additional PET imaging centers
- ----------------------------------------

         If we were to decide to pursue establishing or acquiring additional
existing PET imaging centers from others, we will face a variety of risks. In
establishing new PET imaging centers, we analyze the target marketplace
demographics, local competition, referring physician demographics, prospective
contributions of strategic and other partners and other significant factors.
Despite such assessments, there can be no assurance that we will be able to
attract patients from existing established PET imaging centers located within
our target market or any additional PET imaging centers established by us will
operate profitably or generate positive cash flow. We have, in the past,
experienced certain difficulties in estimating the time within which some of our
PET imaging centers would achieve breakeven, as well as the effect of subsequent
new competitors who locate PET imaging centers within our target markets. To the
extent that it takes longer than anticipated to reach breakeven and there is a

                                     Page 6


reduction in future revenues due to reduced reimbursement rates related to the
DRA which was passed by Congress in February 2006, and additional competitive
facilities being established within our target market, we will be required to
invest additional capital in any such PET imaging center to enable it to sustain
its operations. If and to the extent we acquire PET imaging centers from others,
we will be required to rely upon our due diligence investigation and evaluation
of any such acquisition and we will face the customary difficulties encountered
in integrating the operations of any such PET imaging centers with our existing
operations. Likewise, there can be no assurance that if and when we acquire any
such additional PET imaging centers from others, that such PET imaging centers
will operate profitably or generate positive cash flow. Moreover, we will incur
substantial professional and other costs and expenses in connection with
conducting our due diligence and negotiating and documenting all such new PET
imaging centers and/or acquisitions and we may not recoup such costs and
expenses in the event that any such efforts are not consummated.

We depend on a small number of equipment suppliers
- --------------------------------------------------

         In addition to General Electric Company, Siemens, and Phillips, there
may be only one or two other manufacturers of PET imaging systems. If we were to
decide to expand our business, we will be dependent upon such manufacturers, and
their willingness to provide equipment financing to us. If, for any reason, we
are unable to obtain equipment financing from such manufacturers with respect to
the imaging equipment, leasehold improvements and related costs for any
additional PET imaging centers established by us, our growth and expansion plans
will be substantially limited.

We depend on a small number of Fluoro-Deoxy-Glucose ("FDG") suppliers, the loss
- -------------------------------------------------------------------------------
of which could adversely affect our business
- --------------------------------------------

         Every FDG PET procedure requires the injection of FDG, the radioisotope
tracer most commonly used in these procedures. There are a limited number of
qualified FDG suppliers of this essential radioisotope. Currently, we are
dependent upon IBA Eastern Isotopes, Inc., PETNET Pharmaceuticals, Inc., and
PFI, LLC for these isotopes. We have an outstanding past due indebtedness of
$185,000 to PETNET Pharmaceuticals, Inc. which suspended providing this isotope
to our PET imaging center in Wichita, Kansas. We have made arrangements with
another supplier to provide this isotope to this center and, accordingly, the
operations of this center have not been disrupted. While we believe that
alternative suppliers may be found for the FDG used at our PET imaging centers,
if we were to lose either of our current suppliers, there can be no assurance
that any such supplier could be replaced in a timely manner. Any interruptions
or delays in the supply and/or delivery of FDG could materially harm our present
operations by curtailing a PET imaging center's ability to perform PET scans on
its patients and thereby adversely affect our revenues and financial condition.

The PET technology may become obsolete and our business could be harmed
- -----------------------------------------------------------------------

         PET is a relatively new and evolving medical diagnostic imaging
technology. Such technologies are historically subject to rapid technological
change as well as the development of alternative medical diagnostic imaging
technologies, techniques or products. Any such changes could render our PET
imaging systems technologically or economically obsolete, or cause a reduction
in the value of, or reduce the need for, PET imaging systems. Should any such
changes occur, there can be no assurance that we will be able to acquire any new
or improved technologies or equipment which may be required to service patients
at our PET imaging centers.

If managed care and other payor contracts for our PET imaging centers are not
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renewed or are terminated early, our revenues will be reduced
- -------------------------------------------------------------

         In order to maximize the potential profitability of each of our PET
imaging centers, we (or the provider at each such facility) seek to secure as
many contracts with managed care organizations, commercial health insurers,
government agencies and other payors as possible. Typically, approximately 50%
of the net patient service revenues received by our PET imaging centers are
derived from Medicare, approximately 25% from Blue Cross and Blue Shield, and
approximately 25% from various managed care organizations, commercial health
insurers and other payors. Our PET imaging centers are approved providers to
Medicare. Upon the expiration of any of such contracts, each PET imaging center
will be subject to the risk that such payors will not renew their existing
contracts. Substantially all of such contracts with such payors provide for
thirty (30) to one-hundred-eighty (180) days notice by payors to terminate such
contracts "without cause." The loss of our status as an approved Medicare
provider or the termination or non-renewal of a significant number of such

                                     Page 7


contracts for our PET imaging centers will have a material adverse effect on our
business by reducing revenues to, and in some cases below, breakeven levels.

Complying with federal and state regulations is an expensive and time consuming
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process, and any failure to comply could result in substantial penalties
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         We are subject to extensive regulation by both the federal government
and the states in which we conduct our business. There are numerous health care
and other laws and regulations that we are required to comply with in the
conduct of our business. These laws may be materially changed in the future or
new or additional laws or regulations may be adopted with which we will be
required to comply with. The cost of compliance with current and future
applicable laws, rules and regulations may be significant.

         Both federal and state laws regulate referrals by physicians. The
Federal physician self-referral law, commonly referred to as "Stark II,"
prohibits a physician from referring a patient covered under a federal health
care program such as Medicare or Medicaid, to an entity for certain "designated
health services" if the physician or a family member has a financial interest in
the entity. The Centers for Medicare & Medicaid Services ("CMS") revised the
list of designated health services to include diagnostic nuclear medicine
services and therapeutic nuclear medicine services. Thus, PET, as a nuclear
medicine service, became under the purview of Stark II upon the effective date
of this regulatory change. However, while the new fee schedule, which includes
reductions in reimbursement rates, became effective January 1, 2006, the final
rule extends the deadline for compliance with this change by one year - making
the effective date for compliance January 1, 2007. CMS delayed the effective
date for this regulatory change until January 1, 2007 because CMS recognized
that the inclusion of nuclear medicine as a designated health service may have
an effect on some current arrangements under which patients are receiving
medical care, and that some financial arrangements may need to be restructured.
Consequently, Stark II will apply to PET imaging beginning in 2007 which may,
depending on the structure of the current arrangement, restrict some physicians
from referring such patients to our PET imaging centers or require us to acquire
some of the physicians' minority equity interests in certain of our PET imaging
centers which are held by physicians. We have determined that it will be
necessary to acquire certain of such minority equity interests from physicians
in two of our PET imaging centers. The inability to restructure these
contractual relationships could have a material adverse effect on us.

         The Federal anti-kickback law prohibits any person from offering or
receiving any remuneration for the referral of patients or the inducement of the
purchase of a service covered by Medicare, Medicaid, or other federal healthcare
programs, including the referral of patients to imaging centers. Several of the
states in which we operate also have anti-kickback and anti-referral laws that
could apply to us. Violations of these laws and other similar statutes could
result in significant penalties, including exclusion from participation in
Federal health care programs, any of which could have a material adverse effect
on us.

         Some of the states in which we operate prohibit the practice of
medicine by non-physicians (including entities such as the Company), prohibit
the employment of physicians by non-professional entities, and prohibit the
rebate or division of fees between physicians and non-physicians. Since we will
only be performing non-professional services in such states, we do not exercise
control over the practice of medicine by physicians. Also, we will not employ
any physicians; rather, we will contract with independent licensed radiologists
for professional medical services such as the interpretation of PET imaging
studies and related diagnoses.

         The laws restricting the corporate practice of medicine have been
subject to limited judicial and regulatory interpretation and, therefore, there
is no assurance that, upon review, our activities will not be found to be in
violation of such laws. If such a claim were made and successfully upheld
against us, we could be subject to penalties and could be required to
restructure our contractual relationships. Such results, or the inability to
restructure our contractual relationships, could have a material adverse effect
on us.

         The Health Insurance Portability and Accountability Act of 1996 is a
Federal health care fraud statute which prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program, including private
payors. This statute prohibits knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false, fictitious or
fraudulent statement in connection with the delivery of or payment for health
care benefits, items or services. A violation of this statute may result in
severe penalties. This statute also requires us to follow certain Federal

                                     Page 8


privacy standards for individually identifiable health information and computer
security standards for all health information.

         Another trend affecting the healthcare industry is the increased use of
the Federal False Claims Act and, in particular, actions under the Act's
"whistleblower" provisions. Those provisions allow a private individual to bring
actions on behalf of the government alleging that the defendant has defrauded
the federal government. After the individual has initiated the lawsuit, the
government must decide whether to intervene in the lawsuit and to become the
primary prosecutor. If the government declines to join the lawsuit, then the
individual may choose to pursue the case alone, in which case the individual's
counsel will have preliminary control over the prosecution, although the
government must be kept apprised of the progress of the lawsuit. Whether or not
the federal government intervenes in the case, it will receive the majority of
any recovery. In addition, various states are considering or have enacted laws
modeled after the Federal False Claims Act. Even in instances when a
whistleblower action is dismissed with no judgment or settlement, we may incur
substantial legal fees and other costs relating to an investigation. Future
actions under the Federal False Claims Act may result in significant fines and
legal fees, which would adversely affect our financial performance and our
ability to operate our business.

         If our operations are found to be in violation of any of such laws or
the other governmental rules and regulations to which patients or we are
subject, we may be subject to the applicable penalties associated with any such
violations and, possibly, the curtailment of our operations. Any penalties,
damages, fines, sanctions or curtailment of activities would adversely affect
our financial results and ability to operate our business. The risk of our being
found in violation of these laws, rules and regulations is increased by the fact
that many of them have not been fully interpreted by the regulatory authorities
or the courts and their provisions are open to a variety of interpretations. Any
action against us for violation of these laws, even if we successfully defend
against it, could cause us to incur significant costs and expenses and divert
our management's attention from the operation of our business.

         We anticipate that the substantially reduced reimbursement rates
mandated by the DRA will materially adversely affect our operations.

The loss of any of our executive officers or key personnel could adversely
- --------------------------------------------------------------------------
affect our business
- -------------------

         Our future success will depend, to a significant extent, on the
continued services of our executive officers and key personnel. The loss of
services for any reason of Theodore B. Shapiro, our Chief Executive Officer,
President and Director, George W. Mahoney, our Chief Financial Officer, or
Michael Fagien, M.D., our Chief Medical Officer, could have a material adverse
effect on our present and proposed business. Our PET imaging center operations
rely significantly on the expertise and experience of Stephen A. Schulman, M.D.,
the Chief Executive Officer of Premier P.E.T. Imaging International, Inc., our
wholly owned subsidiary, and a Director of the Company. The loss of Dr.
Schulman's services for any reason could also have a significant adverse impact
on the operations of our PET imaging centers. Messrs. Shapiro, Schulman and
Fagien are parties to employment agreements with the Company or Premier. The
agreements with Messrs. Shapiro and Schulman expires on March 24, 2010 and Dr.
Fagien's employment agreement runs to October 24, 2010. Each of such employment
agreements provide for early termination upon the occurrence of, among other
things, any uncured breach by the Company or such officers of their respective
obligations and covenants thereunder, bankruptcy or insolvency of the Company,
death or disability of such officers, or upon a change of control of the Company
as defined in such agreements. We do not maintain key man life insurance on the
lives of any of our executives.

The failure to hire additional personnel will impair the operations of the
- --------------------------------------------------------------------------
Company
- -------

         Our success will also depend on, among other factors, the recruitment
and retention of qualified marketing and administrative personnel and
technologists for each of our PET imaging centers, as well as additional
executives and key employees of the Company. It is difficult to predict the
availability of qualified marketing and administrative personnel and
technologists or such additional executive or key personnel or the compensation
levels that will be required to hire and retain them. In particular, there is a
very high demand for qualified technologists who are necessary to operate the
PET imaging systems in our PET imaging centers. While we have thus far been able
to secure the services of qualified technicians at prevailing levels of
compensation for each of our PET imaging centers when we needed to do so, we may
not be able to do so if the need arises and in the future we may be required to
pay bonuses and higher salaries to our technologists which would increase our
operating expenses. The loss of the services of any member of our senior

                                     Page 9


management or our inability to hire or retain qualified marketing and
administrative personnel and skilled technologists or any such additional
executive or key personnel at economically reasonable compensation levels could
adversely affect our ability to operate our business as well as the financial
results of our business.

If we fail to compete successfully, our revenues and operating results will be
- ------------------------------------------------------------------------------
adversely affected
- ------------------

         As the acceptance and use of PET imaging technology increases,
competition from hospitals and others will likewise increase. Each of our PET
imaging centers services a target market which consists principally of referring
physicians located within a specific radius of each such center. Competition
differs within each target market and generally consists of hospitals with their
own PET imaging systems and other fixed site PET imaging centers or mobile PET
imaging system operators. There are a number of large publicly and privately
owned companies which are engaged in the operation of fixed site PET imaging
centers or mobile PET imaging systems, among which are Alliance Imaging,
Insight, U.S. Oncology and Molecular Imaging Corporation. Our current annual
revenues and number of PET imaging centers are substantially less than those of
such publicly owned companies. Many of our competitors have established fixed
site PET imaging centers or mobile PET imaging system operations within our
target markets and have substantially greater financial and marketing resources
and experience than us. Furthermore, we expect that other companies will enter
the mobile and fixed site PET imaging business, particularly if PET imaging
procedures continue to gain increasing market acceptance. Our competitors may be
able to develop technologies, procedures or products that are more effective or
economical than ours or that would render our PET imaging system obsolete or
noncompetitive. In addition, if competitors establish other fixed site PET
imaging facilities or offer mobile PET imaging systems and services within the
target market of our PET imaging centers it will likely reduce the revenues of
our PET imaging centers in such markets. The hospital and insurance industries
have been experiencing a trend towards consolidation. If such trend continues,
it is likely to increase competition for patients within the target market of
our PET imaging centers. Such continuing trend will make it difficult for us to
increase our procedure volume to offset the substantial reduced Medicare
reimbursement rates imposed by the DRA.

A successful liability claim against us in excess of our insurance coverage
- ---------------------------------------------------------------------------
would harm our business
- -----------------------

         We currently maintain commercial general liability insurance in the
amount of $1 million per incident and $2 million in the aggregate, excess
liability insurance in the amount of $5 million per incident and in the
aggregate, and medical professional liability insurance in the amount of $3
million per incident and $10 million in the aggregate. Such insurance is
expensive, subject to various coverage exclusions and deductibles and may not be
obtainable in the future on terms acceptable to us. Such insurance currently
costs us approximately $473,000 annually. While we have not been subjected to
any claims to date, we do not know if any claims that may be asserted against us
in the future arising from the use of the PET imaging systems at our PET imaging
centers will be successfully defended or that our insurance will be sufficient
to cover liabilities arising from any such claims. A successful claim against us
in excess of our insurance coverage could materially harm our business.

Hurricane wind and hail damage insurance policy deductibles may have a material
- -------------------------------------------------------------------------------
impact on the Company's ability to conduct business in its Florida locations
- ----------------------------------------------------------------------------

         Hurricane wind and hail damage insurance deductibles at our Florida
locations have increased significantly and may have a material impact on our
revenues and financial condition due to the inability to fund the deductibles.

Our PET imaging services require the use of radioactive materials, which could
- ------------------------------------------------------------------------------
subject us to regulation, related costs and delays and potential liabilities for
- --------------------------------------------------------------------------------
injuries or violations of environmental, health and safety laws
- ---------------------------------------------------------------

         The imaging services provided at our PET imaging centers involve the
controlled storage, use and disposal of material containing radioactive
isotopes. While this material has a short half-life, meaning it quickly breaks
down into inert or non-radioactive substances, use of these materials presents a
risk of accidental environmental contamination and physical injury.

         We are subject to various federal, state, and local laws and
regulations governing the use, storage, handling and disposal of such materials
and waste products. Although we believe that our insurance coverage and safety
procedures for handling and disposing of these hazardous materials are adequate,
in the event of an accident or injury to a patient as a consequence of

                                    Page 10


administering such isotopes, we could be held liable for any damages, and any
liability could exceed the limits or fall outside the coverage of our insurance.
We may not be able to maintain such insurance on acceptable terms, or at all. We
could incur significant costs and the diversion of our management's time and
efforts in order to comply with current or future environmental, health, and
safety laws and regulations relating to these materials.

We are currently dependent upon Medicare, various managed care organizations,
- -----------------------------------------------------------------------------
various commercial health insurance carriers and other payors for our revenues
- ------------------------------------------------------------------------------
and accounts receivable
- -----------------------

         Substantially all net patient service revenues and accounts receivable
from the operations of our PET imaging centers, other than management fees
received by us from the operations of such centers, are revenues received and
receivables due from patients' health insurance carriers, Medicare, Blue Cross
and Blue Shield and various managed care organizations, commercial health
insurers other payors. In 2006, $1,868,000, or 50%, of our net patient service
revenues were derived from Medicare and $958,000, or 25%, of such revenues were
derived from Blue Cross and Blue Shield. As of December 31, 2006, $313,000, or
49%, of our total accounts receivable were due from Medicare and $92,000, or
14%, of our total accounts receivable, were due from Blue Cross and Blue Shield.
In 2005, $1,749,000, or 51%, of our net patient service revenues were derived
from Medicare and $703,000, or 20%, of such revenues were derived from Blue
Cross and Blue Shield. At December 31, 2005, $82,000, or 21%, of our total
accounts receivable were due from Blue Cross and Blue Shield and $203,000, or
51%, of our total accounts receivable, were due from Medicare. This
concentration of revenues and accounts receivable is a risk of our business.

There is uncertainty relating to third-party reimbursement for PET imaging
- --------------------------------------------------------------------------
services which is critical to market acceptance of our services and future
- --------------------------------------------------------------------------
profitability
- -------------

         Our PET imaging services are generally billed to various third-party
payors, such as government programs and private insurance plans. Third-party
payors carefully review, and are increasingly challenging, in general, the
prices charged for medical services, and are generally continually assessing
whether to cover new services and evaluating the level of reimbursement for
covered services. Payors may deny coverage and reimbursement for PET imaging
procedures if they determine that the procedure was not reasonable and necessary
for the purpose for which it was used, was investigational or not
cost-effective. As a result, we cannot be assured that reimbursement from
third-party payors for our services will be available in all cases, or, if
available, that reimbursement will not be less than the amount billed. If
third-party reimbursement of fees for these procedures is reduced or
unavailable, it will be more difficult for us to generate positive cash flow and
to earn profits.

         Moreover, initiatives are periodically proposed which, if implemented,
would have the effect of substantially decreasing reimbursement rates for future
PET diagnostic imaging services. In February 2006, Congress passed the DRA which
materially reduces reimbursement rates for imaging procedures performed on
Medicare patients as of January 1, 2007, which will materially adversely affect
our ability to generate positive cash flow and future revenues from our PET
imaging centers. The DRA imposes caps on Medicare payment rates for certain
imaging services, including PET and PET/CT, furnished in physician's offices and
other non-hospital based settings. Under the cap, payments for specified imaging
services cannot exceed the hospital outpatient payment rates for those services.
The limitation is applicable to the technical component of the services only,
which is the payment the Company receives for the services for which the Company
bills directly under the Medicare Physician Fee Schedule. The technical
reimbursement under the Medicare Physician Fee Schedule generally allows for
higher reimbursement than under the hospital outpatient prospective payment
system ("HOPPS"). Currently, the national average Medicare reimbursement for the
technical component of a PET and a PET/CT procedure is $1,800 and $1,950,
respectively, whereas the reimbursement under HOPPS is $1,150 and $1,250,
respectively. Typically, private insurance companies reduce their reimbursement
rates in response to such reductions by government payors. In view of such
legislation, we are currently evaluating the criteria and structure of our PET
imaging centers to enable such centers to achieve positive cash flow and
profitability. We cannot guarantee that these or similar initiatives will not be
adopted in the future or, if so, that we will be successful in restructuring our
PET imaging centers or be able to achieve positive cash flow or profitability in
view of any such new requirements. Any reduction in the rates of or change of
the conditions for reimbursement for such services will have a material adverse
effect on our revenues and financial results. Because we have many fixed
expenses both at the Company level and at each of our PET imaging centers,
relatively small reductions in reimbursement rates will have a disproportionate
effect on our operating and financial results and decreased revenues from lower
scan volumes per PET imaging center will significantly adversely affect our
business.

                                    Page 11


         We contemplate that reimbursement rates under managed contracts wherein
pricing may or may not be based on Medicare reimbursement rates will also be
subject to reduction during future periods. On November 1, 2006, the Centers for
Medicare and Medicaid Services ("CMS") issued a final determination of Medicare
Part B HOPPS reimbursement rates for PET and PET/CT imaging procedures. The
national rate for PET scans will be reduced from the current rate of $1,150 per
scan to $855 per scan effective January 1, 2007. The national rate for PET/CT
scans will be reduced from the current rate of $1,250 per scan to $950 per scan
effective January 1, 2007. At a minimum, we will be required to significantly
increase procedure volume at our PET imaging centers to offset the adverse
effects of such reduced reimbursement rates. There can be no assurance that we
will be able to substantially increase such procedure volume.

The application or repeal of state certificate of need regulations could make it
- --------------------------------------------------------------------------------
difficult to establish PET imaging centers in other jurisdictions
- -----------------------------------------------------------------

         Some states require a Certificate of Need or similar regulatory
approval prior to the acquisition of high-cost capital items, including
diagnostic imaging equipment, or the provision of diagnostic imaging services.
We currently do not operate in any state which requires a Certificate of Need
nor are we currently planning to do so. In many cases, a limited number of these
certificates are available in a given state. If, however, we decide in the
future to establish a PET imaging center in a jurisdiction that has such
requirements and we are unable to obtain the applicable certificate or approval
or additional certificates or approvals necessary to establish such facilities,
these regulations may limit or preclude our operations in the relevant
jurisdictions. Conversely, the repeal of Certificate of Need regulations will
lower barriers to entry for competition in any such jurisdictions.

If we fail to comply with various licensing, certification and accreditation
- ----------------------------------------------------------------------------
standards, we may be subject to loss of licensing, certification or
- -------------------------------------------------------------------
accreditation, which would adversely affect our operations
- ----------------------------------------------------------

         Each of the states in which our PET imaging centers operate requires
that the imaging technologists that operate our PET imaging systems be licensed
or certified. In the healthcare industry, various types of organizations are
required to be accredited in order to meet certain Medicare certification
requirements, expedite third-party payments and fulfill state licensure
requirements. Also, each of our PET imaging centers must continue to meet
various requirements in order to receive payments from the Medicare program.
Some managed care providers prefer to contract with accredited organizations.
There can be no assurances that, if required, we will be able to obtain
accreditation with the applicable organizations. Any failure to obtain such
accreditation or comply with any such requirements, or any lapse in our
licenses, certifications or accreditations, or those of our technologists, could
increase our costs and result in material reductions in our revenues.

Managed care organizations may prevent healthcare providers from using our
- --------------------------------------------------------------------------
services, which would adversely affect our revenues
- ---------------------------------------------------

         Healthcare providers participating as providers under managed care
plans may be required to refer patients which require diagnostic imaging tests
to specific imaging service providers depending on the plan in which each
covered patient is enrolled. In some cases, these requirements currently
restrict healthcare providers from using our diagnostic imaging services. The
proliferation of managed care may prevent an increasing number of healthcare
providers from using the services of our PET imaging centers in the future,
which would cause our revenues to decline.

We may be unable to effectively maintain our PET imaging systems or generate
- ----------------------------------------------------------------------------
revenues when our PET imaging systems are not working
- -----------------------------------------------------

         Customarily, service to the PET imaging systems in our PET imaging
centers, when required, has been timely provided pursuant to service contracts
we obtain from the equipment manufacturers for each of the PET imaging systems
in our PET imaging centers. Currently, we maintain service contracts with
General Electric and Siemens. It is customary for manufacturers of PET imaging
systems to provide service contracts for the PET imaging systems sold by them as
inducements for customers to purchase their equipment. While we are aware that
there are independent service providers, we are currently dependent on our
current service providers. Although our service providers are established
companies, there can be no assurance that major repairs to our PET imaging
systems, if and when required, will be performed timely and effectively. Timely
and effective service is essential to maintaining our reputation and high
utilization rates for our PET imaging systems. Our manufacturers' warranties,

                                    Page 12


maintenance contracts, and our business interruption insurance, may not fully
compensate us for loss of revenue if our PET imaging systems are not in service.
The principal components of the operating costs of our PET imaging centers
include equipment and premises lease expenses, depreciation, radiology reading
fees, salaries for technologists and other PET imaging center personnel, annual
PET imaging system maintenance costs and insurance. Because the majority of
these costs are fixed, a reduction in the number of procedures performed at a
PET imaging center due to out-of-service equipment will result in lower revenues
and margins. Thus, if we experience greater than anticipated PET imaging system
malfunctions or if we are unable to promptly obtain the service necessary to
keep our PET imaging systems functioning effectively so that we can perform PET
scans, our revenues will be reduced.

Our current officers and directors maintain effective voting control over us
- ----------------------------------------------------------------------------

         Our officers and directors beneficially own approximately seventeen
percent 17% of the currently outstanding shares of our common stock (excluding
options or warrants exercisable within sixty (60) days after December 31, 2006).
While such ownership will not provide such persons with the absolute ability to
cause shareholder votes to be determined in accordance with their desires, we
are not aware of any other group that controls a block of votes equal or greater
to the votes controlled by our officers and directors. Consequently, as a
practical matter it may be difficult for other shareholders to determine the
outcome of a shareholder vote in a manner different from that desired by our
officers and directors.

         Moreover, because there is no cumulative voting for directors, our
executive officers and directors will be in a position to influence the election
of all the directors of the Company and to thereby control the business of the
Company through their stock ownership.

We are not in compliance with rules requiring the adoption of certain corporate
- -------------------------------------------------------------------------------
governance measures. This may result in shareholders having limited protections
- -------------------------------------------------------------------------------
against interested director transactions, conflicts of interest and similar
- ---------------------------------------------------------------------------
matters
- -------

         The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and
enacted by the SEC and The NASDAQ Stock Market as a result of Sarbanes-Oxley
requires the implementation of various measures relating to corporate
governance. These measures are designed to enhance the integrity of corporate
management and the securities markets. Some of these new requirements are
reflected in the NASDAQ listing requirements. Because we are not yet required to
comply with many of the corporate governance provisions (the applicable
compliance date for companies in our category has been extended to January 1,
2008) and because we chose to avoid incurring the substantial additional costs
associated with such compliance any sooner than necessary, we have not yet
adopted all of these measures. We are in compliance with the requirement
relating to the adoption of a corporate Code of Ethics, we are not in compliance
with the requirement relating to the establishment of an audit committee
consisting of all independent board members and the requirement to have
independent members on the Board of Directors. We have not established a
Compensation Committee. We are not yet in compliance with requirements relating
to the distribution to stockholders of annual and interim reports, solicitation
of proxies, the holding of stockholders meetings, quorum requirements for such
meetings and the rights of stockholders to vote on certain matters. Because we
intend to have our common stock listed on NASDAQ, we will be required to comply
with all of these corporate governance practices that are applicable to us and
incur the initial and ongoing costs associated with such compliance.
Furthermore, until we comply with such corporate governance measures, the
absence of such standards of corporate governance may leave our shareholders
without protections against interested director transactions, conflicts of
interest and similar matters. There can be no assurance as to whether or when
our common stock will be listed on NASDAQ.

Failure to achieve and maintain effective internal controls in accordance with
- ------------------------------------------------------------------------------
Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on
- -----------------------------------------------------------------------------
our business and operating results. In addition, current and potential
- ----------------------------------------------------------------------
stockholders could lose confidence in our financial reporting, which could have
- -------------------------------------------------------------------------------
a material adverse effect on our stock price
- --------------------------------------------

         Effective internal controls are necessary for us to provide reliable
financial reports and effectively prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, our operating results could be harmed.

         We will be required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires increased control over financial reporting
requirements, including annual management assessments of the effectiveness of
such internal controls and a report by our independent certified public
accounting firm addressing these assessments. We must be in compliance with
these requirements for our 2008 calendar year. In preparing to meet such

                                    Page 13


deadline we may identify deficiencies that we may not be able to remediate in
time to meet the deadline. In addition, if we fail to maintain the adequacy of
our internal controls, as such standards are modified, supplemented or amended
from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and
maintain an effective internal control environment could also cause investors to
lose confidence in our reported financial information, which could have a
material adverse effect on our stock price.

We do not intend to pay any dividends on our common stock in the foreseeable
- ----------------------------------------------------------------------------
future
- ------

         We currently intend to retain all future earnings, if any, to finance
our current and proposed business activities and do not anticipate paying any
cash dividends on our common stock in the foreseeable future. Although there are
only a small number of shares of our preferred stock outstanding, the holders of
our preferred stock have rights senior to the holders of our common stock with
respect to any dividends. We may also incur indebtedness in the future in
connection with equipment financings, acquisitions or otherwise that may
prohibit or effectively restrict the payment of cash dividends on our common
stock.

The liability of our officers and directors is limited
- ------------------------------------------------------

         The applicable provisions of the New York Business Corporation Law and
our Certificate of Incorporation limit the liability of our officers and
directors to the Company and our shareholders for monetary damages for breaches
of their fiduciary duties, with certain exceptions, and for other specified acts
or omissions of such persons. In addition, the applicable provisions of the New
York Business Corporation Law and of our Certificate of Incorporation and
By-Laws provide for indemnification of such persons under certain circumstances.
In addition, we entered into an indemnification agreement with our chief
executive, financial and medical officers and our directors which provides for
expanded indemnification rights for such individuals. As a result of the
foregoing, shareholders may be unable to recover damages against our officers
and directors for actions taken by them which constitute negligence, gross
negligence or a violation of their fiduciary duties and may otherwise discourage
or deter our shareholders from suing our officers or directors even though such
actions, if successful, might otherwise benefit us and our shareholders.
Notwithstanding the foregoing, insofar as indemnification for liabilities
arising under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions or agreement, or
otherwise, we have been advised that, in the opinion of the Commission, any such
indemnification is against public policy as expressed in the securities laws and
is, therefore, unenforceable.

We may maintain cash deposits in excess of federally insured limits with various
- --------------------------------------------------------------------------------
banks
- -----

         The Federal Deposit Insurance Corporation (the "FDIC") insures deposits
up to $100,000 in virtually all United States banks and savings associations. In
the event an FDIC-insured bank fails and depositors lose their money, the FDIC
pays depositors up to $100,000 of the money lost. Although our funds are
deposited in accounts with FDIC insured banks, the amounts of cash in these
accounts may exceed federally insured limits. In the event of a failure of one
of the banks where our funds are deposited, we would only be able to recover
from the FDIC up to $100,000 of any funds which are lost.

Risks Related to our Securities and Capital Structure

The limited public trading market may cause volatility in the price of our
- --------------------------------------------------------------------------
common stock
- ------------

         Our common stock is currently traded on the Over the Counter Bulletin
Board ("OTCBB") under the symbol "SKCO." The quotation of our common stock on
the OTCBB does not assure that a meaningful, consistent and liquid trading
market currently exists, and in recent years such market has experienced extreme
price and volume fluctuations that have particularly affected the market prices
of many smaller companies like ours. Our common stock is thus subject to this
volatility. Sales of substantial amounts of our common stock, or the perception
that such sales might occur, could adversely affect prevailing market prices of
our common stock. Approximately 7,601,503 shares of our common stock, or
approximately 99% of our outstanding shares of common stock, are freely tradable
securities and trading volumes for our shares of common stock is limited. We
intend to apply to list our shares on the NASDAQ Stock Market. There can be no
assurance as to whether or when our shares of common stock will be so listed.

                                    Page 14


         During 2005, the shares of our common stock have traded on the OTCBB at
prices ranging from a low of $1.35 per share to a high of $4.70 per share and
during 2006 at prices ranging from a low of $.42 per share to a high of $1.85
per share. The market price of the shares of our common stock, like the
securities of many other over-the-counter publicly traded companies, may be
highly volatile. Factors such as changes in applicable laws and governmental
regulations, changes in the medical diagnostic imaging industry, loss of key
company executives, sales of large numbers of shares of our common stock by
existing stockholders and general market and economic conditions may have a
significant effect on the market price of our common stock. In addition, U.S.
stock markets have experienced extreme price and volume fluctuations in the
past. This volatility has significantly affected the market prices of securities
of many medical diagnostic imaging and other health care companies, for reasons
frequently unrelated or disproportionate to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock.

         The OTCBB is an inter-dealer, over-the-counter market that provides
significantly less liquidity than NASDAQ, and quotes for stocks included on the
OTCBB are not listed in the financial sections of newspapers, as are those for
the NASDAQ Stock Market. The trading price of our common stock is expected to be
subject to significant fluctuations in response to variations in quarterly
operating results, changes in analysts' earnings estimates, announcements of
innovations by us or our competitors, general conditions in the industry in
which we operate and other factors. These fluctuations, as well as general
economic and market conditions, may have a material or adverse effect on the
market price of our common stock.

Trading in our common stock over the last 12 months has been limited, so
- ------------------------------------------------------------------------
investors may not be able to sell as many of their shares as they want at
- -------------------------------------------------------------------------
prevailing prices
- -----------------

         Shares of our common stock are traded on the OTCBB. Approximately
238,000 shares were traded on an average monthly basis for the year ended
December 31, 2006 and 15,212 for the year ended December 31, 2005. If limited
trading in our common stock continues, it may be difficult for investors who
purchase shares of our common stock to sell such shares in the public market at
any given time at prevailing prices. Also, the sale of a large block of our
common stock could depress the market price of our common stock to a greater
degree than a company that typically has a higher volume of trading of its
securities.

         We cannot predict whether an active market for our common stock will
develop in the future. In the absence of an active trading market:

         o        Investors may have difficulty buying and selling or obtaining
                  market quotations;
         o        Market visibility for our common stock may be limited; and
         o        Lack of visibility for our common stock may have a depressive
                  effect on the market price for our common stock.

Penny stock regulations may impose certain restrictions on marketability of the
- -------------------------------------------------------------------------------
Company's securities
- --------------------

         The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. As a result,
our common stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our securities and may affect the
ability of investors to sell our securities in the secondary market and the
price at which such purchasers can sell any such securities.


                                    Page 15


         Shareholders should be aware that, according to the Commission, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include:

         o        Control of the market for the security by one or a few
                  broker-dealers that are often related to the promoter or
                  issuer;
         o        Manipulation of prices through prearranged matching of
                  purchases and sales and false and misleading press releases;
         o        "Boiler room" practices involving high pressure sales tactics
                  and unrealistic price projections by inexperienced sales
                  persons;
         o        Excessive and undisclosed bid-ask differentials and markups by
                  selling broker-dealers; and
         o        The wholesale dumping of the same securities by promoters and
                  broker-dealers after prices have been manipulated to a desired
                  level, along with the inevitable collapse of those prices with
                  consequent investor losses.

         Purchasers of penny stocks may have certain legal remedies available to
them in the event the obligations of the broker-dealer from whom the penny stock
was purchased violates or fails to comply with the above obligations or in the
event that other state or federal securities laws are violated in connection
with the purchase and sale of such securities. Such rights include the right to
rescind the purchase of such securities and recover the purchase price paid for
them.

Additional authorized shares of our common stock available for issuance may
- ---------------------------------------------------------------------------
adversely affect the market
- ---------------------------

         We are authorized to issue 25,000,000 shares of common stock. As of the
date of this Annual Report, there were 8,008,261 shares of our common stock
issued and outstanding (including 346,758 shares of common stock held in the
Company's treasury). However, the total number of shares of our common stock
issued and outstanding does not include shares reserved for issuance upon the
exercise of outstanding options or warrants or shares reserved for issuance
under the Company's 1999 Long-Term Incentive Stock Option Plan (the "Plan") or
shares reserved for issuance pursuant to certain anti-dilution provisions in the
warrants issued to investors and the placement agent in the private placement of
our securities which was completed in January 2005. As of December 31, 2006, the
Company had outstanding stock options and warrants to purchase an aggregate of
4,110,625 shares of our common stock, of which 2,000,625 are exercisable at
$4.00 per share and 2,110,000 are exercisable at prices ranging from $1.60 per
share to $3.91 per share. We have reserved shares of our common stock for
issuance in connection with the potential exercise of such options and warrants.
In addition, as of December 31, 2006, there were 435,000 shares of our common
stock reserved for issuance under the Plan. To the extent additional shares of
our common stock are issued or options and warrants are exercised, investors
will experience further dilution. In addition, in the event that any future
financing should be in the form of, or be convertible into or exchangeable for,
equity securities, upon the issuance of such equity securities, our shareholders
will experience additional dilution. There are many circumstances, including
equity financings, acquisitions or other business combinations, and other
transactions between the Company and its vendors, suppliers, employees,
consultants, and others, in which our management can approve the issuance of
additional shares of our common stock without being required to obtain
shareholder approval for such issuances.

Shares eligible for future sale may adversely affect the market
- ---------------------------------------------------------------

         From time to time, certain of our shareholders may be eligible to sell
all or some of their shares of our common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, subject to certain
limitations. Of the 7,661,503 shares of our common stock outstanding (which does
not include 346,758 shares held in the Company's treasury) 60,000 shares have
been issued for less than one year and are, therefore, not eligible for sale
under Rule 144, 1,020,500 shares have been issued for more than one year and
less than two years and are eligible for sale in compliance with Rule 144,
subject to the volume and other limitations thereof, and 6,581,003 shares have
been issued for more than two years and are eligible for sale in compliance with
Rule 144(k), without regard to the volume limitations thereunder.

         In general, pursuant to Rule 144, a stockholder (or stockholders whose
shares are aggregated) who has satisfied a one-year holding period may, under
certain circumstances, sell within any three-month period a number of securities
which does not exceed the greater of 1% of the then outstanding shares of common
stock or the average weekly trading volume of the class during the four calendar
weeks prior to such sale. Rule 144 also permits, under certain circumstances,
the sale of securities, without any limitation, by a non-affiliate of the
Company that has satisfied a two-year holding period. Any substantial sale of
our common stock pursuant to Rule 144 may have an adverse effect on the market
price of our publicly traded securities.


                                    Page 16


There are certain provisions in our Certificate of Incorporation and By-Laws
- ----------------------------------------------------------------------------
that may entrench management and make their removal from office more difficult
- ------------------------------------------------------------------------------

         Our Articles of Incorporation authorize the Board of Directors to issue
preferred stock in classes or series, and to determine voting, redemption and
conversion rights and other rights related to such class or series of preferred
stock that, in some circumstances, if approved by our Board, could have the
effect of preventing a merger, tender offer or other takeover attempt which the
Board of Directors opposes. Such provisions could also exert a negative
influence on the value of the shares of our common stock and of a shareholder's
ability to receive the highest price for the shares of our common stock owned by
them in a transaction that may be hindered by the operation of these provisions.
In the event of the issuance of any shares of our preferred stock which contain
any of the above features, such features may serve to entrench management and
make their removal more difficult.

General

         Through its wholly-owned subsidiary, Premier P.E.T. Imaging
International, Ltd., the Company owns, operates and manages state-of-the-art
outpatient medical diagnostic imaging centers that utilize positron emission
tomography ("PET"), combination PET and computed tomography ("CT") and related
equipment and technology.

         PET is an advanced non-invasive medical diagnostic imaging procedure
that produces images of the body's metabolic and biologic functions. This
imaging modality is currently used by physicians for the diagnosis, staging and
treatment of certain cancers, coronary disease and neurological disorders,
enabling physicians to more accurately diagnose and treat certain illnesses and
diseases earlier than ever before.

         With the competitive requirements of the marketplace requiring a
greater need to address cost issues while at the same time optimizing patient
management and care, PET is regarded in the medical community as the most
advanced, accurate and cost effective medical diagnostic imaging procedure
currently available.

         We have seven operating PET imaging centers in our portfolio with the
opening of our East Setauket (Suffolk), New York center in February 2006 and
Jacksonville, Florida Center in June 2006. In the fourth quarter of 2006, we
expanded our operations at the Rockville Centre PET imaging center by adding a
PET/CT imaging system. We began construction on our eighth PET imaging center in
Tamarac, Florida in January 2007.

         Premier, through majority owned subsidiaries, currently derives a
portion of its revenues from management and administrative services rendered by
such subsidiaries pursuant to agreements with professional corporations which
conduct their medical practices at the Company's PET imaging centers. In some
instances, the radiologists who own the professional corporations are also
equity owners in our majority owned subsidiaries. Such subsidiaries provide a
variety of management and administrative services pursuant to agreements that
typically have a ten year term with renewal options and provide for the payment
of monthly management fees by such professional corporations. In addition to
providing such services, such subsidiaries provide the facilities, medical and
other equipment, and furniture and furnishings for each such PET imaging center.

About the PET Imaging Industry

         The market for PET and PET/CT medical diagnostic imaging services is
highly fragmented and shared by a growing number of medical diagnostic clinics,
imaging companies and hospitals. PET imaging services are performed in both
fixed sites, such as ours, and mobile units, to accommodate demand.

         The capabilities of PET as a diagnostic and treatment tool continue to
gain greater recognition in the clinical community. Medicare coverage for PET
continues to expand and now includes coverage for a growing number of medical
indications including breast cancer, cervical cancer, colorectal cancer,
esophageal cancer, head and neck cancers, lung cancer (non-small cell),
lymphoma, melanoma, solitary pulmonary nodule, thyroid cancer and Alzheimer's
disease as well as myocardial viability, myocardial perfusion and refractory
seizures.

                                    Page 17


The Advantages of PET Imaging

         PET imaging offers significant advantages over other diagnostic imaging
modalities (i.e., magnetic resonance imaging, computerized axial tomography and
conventional radiographic imaging) as it provides a direct measure of
alterations in the body's biochemistry and functional/metabolic activities.
Prior to the introduction of PET technology, only anatomical imagery was
available. In most cases, the precursors to all disease are biochemical in
nature and initially affect function, as opposed to structure. PET imaging,
which has the ability to create a diagnostic image of early metabolic changes,
can significantly reduce the time required for diagnosis, reduce costs and
improve patient outcomes for numerous indications for oncology, cardiology and
neurology.

         PET reduces or eliminates ineffective or unnecessary surgery and
hospitalization in many instances. In addition, it offers the following
substantial advantages over current medical diagnostic imaging procedures:

         --       Replaces the need for multiple, costly medical testing with a
                  single imaging procedure
         --       Displays a 3D image of all of the organ systems of the body
                  with one examination
         --       Diagnoses and detects diseases, in most instances before
                  detection by other tests
         --       Monitors the path and progress of disease as well as response
                  to treatment
         --       Reduces redundant medical costs and reduces discomfort to the
                  patient

         As a result of the cost efficiency and clinical effectiveness of PET,
we believe that hospitals and other healthcare providers are experiencing an
increased demand from their patients to provide PET imaging and related
services. Increasingly, many of such healthcare providers are utilizing third
parties like us, to provide PET imaging services.

         Clinical applications of PET imaging have the most impact on three
specializations: oncology, cardiology and neurology.

The PET Imaging Procedure

         Commercial diagnostic PET imaging systems are comprised of high-speed
computers, an examination table and a large imaging detector mechanism
(collectively, the "PET scanner"), which are used to acquire and produce
detailed PET images of the human body's metabolic functions.

         Performing an actual PET scan involves first introducing an isotope
into the patient's blood stream prior to the PET procedure. An isotope is a
substance which when diffused into a patient's system enables the PET scanner to
create an image of the body's metabolic functions. After the isotope is diffused
into the patient's body, the patient is placed on an examination table which is
moved into the center of the PET scanner, which is cylindrical and has a wide
opening, or gantry. The wide gantry and relatively short length of the imaging
mechanism help minimize patient discomfort.

         The PET imaging system detects signals emitted by the isotope as it
moves through the body and is attracted to any metabolic activity. Cells with
abnormal activity, such as cancerous cells, are highly metabolic and are
detected by the PET imaging procedure. A high-speed computer reconstructs the
signals into three-dimensional images that display normal or abnormal metabolic
function.

The Company's PET Imaging Centers

         To date, we have established seven PET imaging centers, and an
additional imaging center is under construction in Tamarac, Florida. We own,
operate or administer the operations of PET imaging centers in the following
areas:

   Wichita, Kansas
   Rockville Centre, New York
   Hialeah, Florida
   Parsippany, New Jersey
   Forest Hills (Queens), New York
   East Setauket (Suffolk), New York
   Jacksonville, Florida

                                    Page 18


Government Regulation

         We are subject to extensive regulation by both the federal government
and the states in which we conduct our business. There are numerous healthcare
and other laws and regulations we are required to comply with in the conduct of
our business. Among the statutes that we are required to comply with are the
federal physician self-referral law, commonly referred to as "Stark II," which
prohibits physicians from referring patients covered under federal healthcare
programs to an entity for certain "designated health services" if the physician
or a family member has a financial interest in the entity. Effective January 1,
2007, PET imaging, as a nuclear medicine service, will be considered as a
designated health service under Stark II. Consequently, Stark II may, depending
on the structure of current arrangements, restrict some physicians from
referring such patients to our PET imaging centers on and after January 1, 2007.
We anticipate being required to acquire some of the physicians' minority equity
interests in certain of our PET imaging centers which are held by physicians.
Additionally, we are subject to the federal anti-kickback law which prohibits
any person from offering or receiving any remuneration for the referral of
patients, or the inducement of the purchase of a service, covered by federal
healthcare programs, including the referral of patients to imaging centers.
Several of the states in which we operate also have anti-kickback and
anti-referral laws that may apply to us. Some of the states in which we operate
prohibit the practice of medicine by non-physicians (including entities such as
ours), prohibit the employment of physicians by non-professional entities, and
prohibit the rebate or division of fees between physicians and non-physicians.
We are also subject to the Health Insurance Portability and Accountability Act
of 1996 and the Federal False Claims Act which proscribes actions designed to
defraud federal healthcare programs. Any violation of any of the laws, rules or
regulations to which our business is subject could have a material adverse
effect upon us. See "Risk Factors-Risks Related to our Business."

Sales and Marketing

         Direct marketing of our services to physicians plays a primary role in
our ability to increase patient procedures at our PET imaging centers. Our
marketing specialists focus on developing increased procedure volumes by
introducing the availability of our PET services to physicians, keeping the
medical community regularly apprised as new indications are approved for
coverage and keeping physicians updated on our PET imaging and patient service
capabilities.

         In addition, continuing physician education of PET capabilities and
indications keep referring physicians aware of current applications and uses for
PET imaging. Coupled with the work of our national management team, certain key
members of our management team spend a portion of their time marketing our
services and our PET imaging centers.

Suppliers

         In order to perform a PET scan on a patient, a radioactive isotope is
administered to each patient prior to the scan. Such isotopes are manufactured
by a small number of suppliers, which includes such national suppliers IBA
Eastern Isotopes and PETNET Pharmaceuticals, Inc. ("PET NET"), and maintain
their effectiveness for not more than one day. Because of the short period of
time that these isotopes maintain their effectiveness, it is important to
utilize suppliers proximate to each PET imaging center. Currently, we purchase
the isotopes used by our Rockville Centre, Forest Hills (Queens) and East
Setauket (Suffolk), New York, Parsippany, New Jersey and Hialeah, Florida PET
imaging centers from IBA Eastern Isotopes, Inc. and the isotopes used buy our
Jacksonville, Florida center from PET NET, and the isotopes used by our Wichita,
Kansas PET imaging center from PFI, LLC. The loss of availability of these
suppliers with respect to the PET imaging centers which are served by such
suppliers could adversely affect the operations of such PET imaging centers.

Competition

         The market for diagnostic imaging services is highly competitive. Our
competition comes from companies that have deployed mobile PET imaging systems,
other fixed site out-patient medical diagnostic imaging centers, and hospitals
that have their own in-house PET imaging systems. However, we strive to
strategically locate our imaging centers in areas in which PET services are not
currently provided, as well as areas where we can take advantage of untapped or
under developed physician referral bases.

                                    Page 19


Employees

         We currently employ 32 people, including our officers. Our employees
are not subject to a collective bargaining agreement. We believe that relations
with our employees are good.

Transfer Agent and Registrar

         The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038.

ITEM 2.  DESCRIPTION OF PROPERTY

         Our executive offices are located at 1285 Avenue of the Americas, 35th
Floor, New York, New York 10019 and are leased on a month to month basis from
New York Executive Suites, an unaffiliated landlord, at an annual all-inclusive
rental of approximately $10,000. Sagemark and Premier occupy offices at 4710
N.W. Boca Raton Boulevard, Boca Raton, Florida 33431 pursuant to a five year
lease with an unaffiliated landlord. The monthly rent for such offices is
$4,175, plus a proportionate amount of the real estate taxes and common area
maintenance charges. Each of our PET imaging centers is leased from independent
third parties pursuant to separate lease agreements, except for our PET imaging
center in Wichita, Kansas which is leased from Premier Health Imaging, Inc., an
entity owned by Dr. Schulman at an annual rent of $54,000, and our Hialeah and
Suffolk centers which are rented from a related parties at annual rentals of
$43,000 and $68,000, respectively, plus a proportionate amount of real estate
taxes and common area maintenance charges. We believe that such rents are
comparable to the rent that we would have to pay to an independent landlord for
similar premises.

ITEM 3.  LEGAL PROCEEDINGS

         As of the date hereof, we are not a party to any legal proceedings and,
to our knowledge, none are threatened against us.

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

         No matters were submitted during the fiscal year covered by this Annual
Report to a vote of security holders, through the solicitation of proxies, or
otherwise.


                                    Page 20


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

         Our common stock is traded in the over-the-counter market on the NASDAQ
OTC Bulletin Board under the symbol "SKCO." The following table sets forth, for
the periods indicated, the quarterly range of the high and low closing bid
prices per share of our common stock as reported by the National Daily Quotation
Service and the Over-The-Counter Bulletin Board. Quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not represent
actual transactions.

                                                                BID
                                                         -----------------
Quarter Ended                                             High       Low
- ------------------------------------------------------   ------     ------
March 31, 2006                                           $ 1.75     $ 1.05
June 30, 2006                                            $ 1.35     $ 1.01
September 30, 2006                                       $ 1.25     $  .45
December 31, 2006                                        $  .70     $  .25

March 31, 2005                                           $ 4.70     $ 3.00
June 30, 2005                                            $ 3.35     $ 2.00
September 30, 2005                                       $ 2.15     $ 1.20
December 31, 2005                                        $ 2.00     $ 1.20

         On March 31, 2007, there were approximately 4,969 holders of record of
our common stock.

Description of Capital Stock

         The following summary is qualified in its entirety by reference to the
Company's Restated Articles of Incorporation ("Articles") and its By-Laws. The
Company's authorized capital stock consists of 25,000,000 shares of common
stock, $.01 par value per share and 2,000,000 shares of preferred stock, $1.00
par value per share.

Common Stock

         As of December 31, 2006, 8,008,261 shares of our common stock have been
issued, of which 7,661,503 shares are outstanding and 346,758 shares are held in
the Company's treasury. Each share of common stock entitles the holder of record
thereof to cast one vote on all matters acted upon at the Company's stockholder
meetings. Directors are elected by a plurality vote. Because holders of common
stock do not have cumulative voting rights, holders or a single holder of more
than 50% of the outstanding shares of common stock present and voting at an
annual stockholders meeting at which a quorum is present can elect all of the
Company's directors. Holders of common stock have no preemptive rights and have
no right to convert their common stock into any other securities. All of the
outstanding shares of our common stock are fully paid and non-assessable, and
the shares of our common stock to be issued in connection with the exercise of
options under the Option Plan and outstanding common stock purchase warrants,
will be fully paid and non-assessable when issued.

         Holders of shares of our common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors in its sole discretion from funds legally available therefor. In the
event the Company is liquidated, dissolved or wound up, holders of our common
stock are entitled to share ratably in the assets remaining after liabilities
and all accrued and unpaid cash dividends are paid.

Preferred Stock

         As of December 31, 2006, the authorized number of shares of preferred
stock, par value $1.00 per share, is 2,000,000 shares of which 2,962 shares of
several series of preferred stock are issued and outstanding as of December 31,
2006.

                                    Page 21


         Our Board of Directors has the authority to divide the authorized
preferred stock into series and the shares of each series will have such
relative rights, powers and preferences as shall be fixed and determined by the
Board of Directors. The provisions of a particular series of authorized
preferred stock, as designated by the Board of Directors, may include
restrictions on the payment of dividends on our common stock. Such provisions
may also include restrictions on the ability of the Company to purchase shares
of our common stock or to purchase or redeem shares of a particular series of
our authorized preferred stock. Depending upon the voting rights granted to the
holders of any series of authorized preferred stock, the issuance thereof could
result in a reduction in the voting power of the holders of shares of our common
stock. In the event of any dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, the holders of our preferred stock
will receive, in priority over the holders of shares of our common stock, a
liquidation preference established by the Board of Directors, together with
accrued and unpaid dividends. Depending upon the consideration paid for
authorized shares of our preferred stock, the liquidation preference of
authorized preferred stock and other matters, the issuance of authorized shares
of our preferred stock could result in a reduction in the assets available for
distribution to the holders of shares of our common stock in the event of the
liquidation of the Company.

         As of December 31, 2006, there are 2,962 shares of our preferred stock
issued and outstanding, of which 170 shares are designated as Series B Preferred
Stock, 92 shares are designated as Series E Preferred Stock, and 2,700 shares
are designated as Series F Preferred Stock.

         The holders of the Series B preferred shares are entitled to annual
dividends of $3.50 per share, provided that the Company has attained annual
after tax earnings of more than $200,000, and have a liquidation preference in
connection with any involuntary liquidation of the Company of $87.50 per share.
The shares of Series B preferred stock are redeemable by the Company at $87.50
per share. There was approximately $1,000 in accrued unpaid dividends on this
Series of preferred stock as of December 31, 2006. No dividends on this Series
of Preferred Stock were declared in 2006 or 2005. The holders of the Series E
preferred shares are entitled to annual dividends of $.10 per share, provided
that the Company has attained after tax earnings of more than $200,000. There
was approximately $18 in accrued unpaid dividends on this Series of preferred
stock as of December 31, 2006. No dividends on this Series of preferred stock
were declared in 2006 or 2005. The holders of the Series F preferred shares are
entitled to annual dividends of $8 per share in any year in which the Company's
net after tax income exceeds $500,000. The shares of Series F preferred stock
are redeemable by the Company at $1 per share. There was approximately $43,000
in accrued unpaid dividends on this series of preferred stock as of December 31,
2006. No dividends on this series of preferred stock were declared in 2006 or
2005.

Dividends

         We have never paid any dividends on our common stock and we do not
anticipate paying or declaring any stock or cash dividends on our common stock
in the foreseeable future.

Private Placement Offerings

         On November 29, 2004 and December 29, 2004 we closed a private
placement of our securities. On January 13, 2005 we closed on a third and final
round of such private placement. In total we sold 3,750,000 shares of common
stock for $2 per share or $7,500,000. The purchasers of the shares received
warrants to buy a total of 1,875,000 shares for $4 per share. Joseph Stevens &
Company, Inc. acted as our placement agent in connection with on the offering
and received a cash commission of 9% of the gross proceeds, a cash consulting
fee of 2% of the gross proceeds, a non-accountable expense allowance equal to 1%
of the gross proceeds and the right to receive warrants to purchase 945,000
shares of common stock for $2.00 per share. In 2005 we issued 131,250 shares of
common stock and warrants to purchase 65,625 of our common shares at an exercise
price of $4.00 per share to the investors in the private placement, as a result
of our not filing a timely registration statement. On August 2, 2005 the
registration statement which we filed with the SEC to register the shares sold
and the shares underlying the warrants in such private placement was declared
effective.


                                    Page 22


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Statement Regarding Forward Looking Disclosure

         This Annual Report of The Sagemark Companies Ltd., including this
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," may contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, but are not limited to, statements that express our
intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and probably will, differ materially
from what is expressed or forecasted in the forward-looking statements due to
numerous factors, including those risks discussed under "Risk Factors" and those
described in any other filings which we make with the SEC, as well as the risk
that at December 31, 2006, the Company was not in compliance with a debt
covenant that requires the Company to maintain a debt to tangible net worth
ratio that does not exceed three to one, reduced reimbursement rates resulting
from the passage of the Federal Deficit Reduction Act of 2005 (the "DRA"), and
increased deductibles pertaining to hurricane wind and hail insurance policies.
In addition, such statements could be affected by risks and uncertainties
related to our financial conditions, the availability of financing, the ability
to generate increased scan volume at our PET imaging centers and other factors
which affect the industry in which we conduct business, market and customer
acceptance, competition, government regulations and requirements, technological
obsolescence, and pricing, as well as general industry and market conditions and
growth rates, and general economic conditions. Any forward-looking statements
speak only as of the date on which they are made, and we do not undertake any
obligation to update any forward-looking statement.

         Investors should evaluate any statements made by us in light of these
important factors.

Introduction

         We own, operate and manage out-patient medical diagnostic imaging
centers that utilize positron emission tomography (PET) and computed tomography
("CT") imaging equipment. PET imaging is an advanced, robust medical diagnostic
imaging procedure currently used by physicians in the diagnosis, staging and
treatment of certain cancers, coronary disease and neurological disorders
including Alzheimer's disease. As of December 31, 2006, we own and or operate
seven PET imaging centers and we are constructing an eighth center in Tamarac,
Florida. We added two new centers in 2006, our Suffolk PET imaging center which
commenced operations in February 2006 and our Jacksonville, Florida PET imaging
center which commenced operations in June 2006.

         We own and operate PET imaging centers in Wichita, Kansas and
Parsippany, New Jersey and manage PET imaging centers in Rockville Centre, New
York; Hialeah, Florida; Forest Hills, New York; East Setauket, New York and
Jacksonville, Florida. Additional details on such facilities are as follows:



Center                                     Managed By                                Location                     Start Date
- ----------------------------------------   ----------------------------------------  --------------------------   ------------------
                                                                                                        
Premier PET Imaging of Wichita, LLC        Premier PET Imaging of Wichita, LLC       Wichita, Kansas              August 2001
Rockville PET Imaging, P.C.                Premier PET of Long Island, LLC           Rockville Centre, New York   October 2002
Premier PET Imaging of New Jersey, Inc.    Morris County PET Management, LLC         Parsippany, New Jersey       February  2003
Premier PET Imaging of Hialeah, Inc,       Hialeah PET Management, LLC               Hialeah, Florida             February 2003
Forest Hills PET Imaging, P.C.             PET Management of Queens, LLC             Forest Hills, New York       December 2004
Advanced PET Imaging                       Suffolk PET Management, LLC               East Setauket, New York      February 2006
Premier PET Imaging of Jacksonville, LLC   Premier PET Imaging of Jacksonville, LLC  Jacksonville, Florida        June 2006
Premier PET Imaging of Tamarac, LLC        Premier PET Imaging of Tamarac, LLC       Tamarac, Florida             Under construction


         We remain in the initial phase of our long-term plan and expect to
incur future losses until such time that our PET imaging centers generate
sufficient revenue to offset our operating expenses.

         The key factor that management uses to evaluate our operating
performance is individual PET imaging center revenue trends. Because we are in
the initial phase of our long-term plan, it is important that we achieve and
sustain increasing revenue trends to generate positive cash flow. The key factor
that management uses to evaluate our financial condition is working capital and

                                    Page 23


the sources of working capital. Management recognizes that during the initial
phase of our long-term plan it is necessary to obtain working capital from
financing activities. However, in order to achieve our long-term objectives of
generating profits and positive cash flow, it is critical that we reverse our
historical trend of losses and begin to develop and sustain a trend of
generating working capital that is derived from the operations of our PET
imaging centers.

         In February 2006, Congress passed the Federal Deficit Reduction Act of
2005 (the "DRA"). The DRA materially reduces reimbursement rates for imaging
procedures performed on Medicare patients which will materially adversely affect
our ability to generate positive cash flow and future revenues from our existing
PET imaging centers and potentially impact our ability to establish or acquire
future PET imaging centers. Typically, private insurance companies reduce their
reimbursement rates in response to such reductions by government payors. In view
of such legislation, we are currently evaluating the criteria and structure of
our current and proposed future PET imaging centers which may require material
changes to comply with any such legislation and to enable such centers to
achieve positive cash flow and profitability. We cannot guarantee that these or
similar initiatives will not be adopted in the future or, if so, that we will be
successful in restructuring our current PET imaging centers or establishing or
acquiring future PET imaging centers or be able to achieve positive cash flow or
profitability in view of any such new requirements. Any reduction in the rates
of or change of the conditions for reimbursement for such services will have a
material adverse effect on our revenues and financial results. Because we have
many fixed expenses both at the Company level and at each of our PET imaging
centers, relatively small reductions in reimbursement rates could have a
disproportionate effect on our operating and financial results and decreased
revenues from lower scan volumes per PET imaging center could significantly
adversely affect our business.

         We manage our PET imaging centers either through direct ownership or
through Administrative Services Agreements. For the PET imaging centers that we
own, as well as for those that we manage, we are responsible for obtaining
facility leases, medical diagnostic equipment, equipment maintenance agreements,
supply agreements and personnel and are responsible for obtaining the financing
necessary to establish the PET imaging centers. As a result, both business
models present the same working capital needs and cash inflows and outflows to
us and neither model presents us with more or less favorable working capital or
operating conditions. Accordingly, we evaluate the business of PET imaging
centers that we own and those that we manage under substantially the same
criteria. Management's decision as to the model under which a new PET imaging
center is established is based primarily on the applicable state health care
laws regarding the ownership of such facility.

Critical Accounting Policies

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management of the
Company to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. We consider our critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of our financial statements, including the
following: recognition of net patient service revenues, including contractual
allowances; recognition of management fee revenues; impairment of long-lived
assets; accounting for expenses in connection with stock options and warrants;
provisions for doubtful accounts; and accounting for income taxes. Management
relies on historical experience and on other assumptions believed to be
reasonable under the circumstances in making its judgment and estimates. Actual
results could differ materially from those estimates. There have been no
significant changes in the assumptions, estimates and judgments in the
preparation of these financial statements from the assumptions, estimates and
judgments used in the preparation of our prior years audited financial
statements.

         Our billing system generates contractual adjustments based on
differences between our standard billing rates and the fees allowed by a
patient's insurance coverage. In addition, a portion of the contractual
allowances are based on estimates that are made using our historical experience
rate by payor class. When applicable, we collect co-payments from patients at
the time that services are provided. Our days sales outstanding for 2006 and
2005 were 60 and 42, respectively. As of December 31, 2006, patient accounts
receivable, net of contractual allowances and allowances for doubtful accounts
is $614,000. Contractual adjustments are recorded based on actual experience.

                                    Page 24


         The following table presents our accounts receivable aging by payor
class as of December 31, 2006:




                                             31-60       61-90       91 days
                               Current       Days        days       or greater     Total
                             ----------   ----------   ----------   ----------   ----------
                                                                  
Managed care                 $  116,000   $   52,000   $   40,000   $   88,000   $  296,000
Medicare/Medicaid                96,000       70,000       50,000       74,000      290,000
Commercial                        9,000       10,000           --        9,000       28,000
                             ----------   ----------   ----------   ----------   ----------
Total                        $  221,000   $  132,000   $   90,000   $  171,000   $  614,000
                             ==========   ==========   ==========   ==========   ==========



         In evaluating the collectability of our accounts receivable the primary
factor is with regards to the aging of the receivable. We use the specific
identification method for determining the amount of bad debt expense and such
evaluation is made manually. Generally, any receivable that is greater than one
year old is written-off. All accounts are written-off prior to going to legal
collection process and as of December 31, 2006, our receivables do not include
any amounts which are in legal collections.

         At December 31, 2006, the Company's contractual allowance balance is
$498,000 which is a $157,000 increase from the balance at December 31, 2005.
$167,000 of the increase resulted from an increase in gross patient accounts
receivable prior to contractual allowances of $372,000 and a decrease of $10,000
related to a change in estimates of prior year net patient service revenue. The
contractual allowance percentage at December 31, 2006 is 45%, compared to 46% at
December 31, 2005. For each one percentage point increase in the contractual
allowance balance percentage, the Company's net patient service revenue would be
decreased by approximately $6,000. Likewise, for each one percentage point
decrease in the contractual allowance percentage the Company's net patient
service revenue would increase by approximately $6,000.

         Long-Lived Assets: We state our furniture, fixtures, equipment and
leasehold improvements at acquisition cost, and equipment held under capitalized
lease obligations at net present value, and compute depreciation for book
purposes by the straight-line method over estimated useful lives of the assets.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of the asset may
not be recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to the future cash flows expected
to be generated by the asset. If the carrying amount of the asset exceeds its
estimated future cash flows, an impairment charge is recognized to the extent
the carrying amount of the asset exceeds the fair value of the asset. These
computations are complex and subjective.

         Goodwill and Intangible Asset Impairment: In assessing the
recoverability of our goodwill and other intangibles, we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the determination
of the fair value of the intangible asset. If the fair value of the intangible
asset is less than its carrying value, an impairment loss will be recognized in
an amount equal to the difference. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets. We adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," (FAS 142) effective January 1,
2002, and are required to analyze goodwill and indefinite lived intangible
assets for impairment on at least an annual basis.

         Off-balance Sheet Arrangements: We have no off-balance sheet
arrangements, financings or other relationships with unconsolidated entities
known as "Special Purpose Entities."

         Accounting for Expenses in Connection with Stock Option and Warrant
Issuances: In 2006 we began to recognize expense of options or similar
instruments issued to employees using the fair-value-based method of accounting
for stock-based payments in compliance with SFAS 123(R) "Share-Based Payment".
For the year ended December 31, 2006, we recognized $135,000 of stock
compensation expense related to employee stock options and stock warrants. As of
December 31, 2006, there was approximately $393,000 of total unrecognized
compensation cost related to non-vested stock-based compensation arrangements
granted to employees. That cost is expected to be recognized over a
weighted-average period of 3.6 years. Prior to 2006, the Company elected to use

                                    Page 25


the intrinsic value method of accounting for stock options issued under its
stock option plan and accordingly did not record an expense for such stock
options. If we adopted the accounting requirements of SFAS 123(R) in 2005, our
results of operations would have been negatively affected as disclosed in Note 1
to the December 31, 2006 consolidated financial statements.

         Accounting for Income Taxes: We currently have a net deferred tax asset
of approximately $17.3 million with an offset of a 100% valuation allowance. The
primary component of our deferred tax asset is approximately $17.7 million
related to approximately $50.4 million of net operating loss carryforwards. We
have established the valuation allowance against the entire net deferred tax
asset because we have had a history of tax losses. We may never realize the full
benefit for our net operating loss carryforwards due to the expirations
(currently there is a 20 year life) and limitations (under Section 382 of the
Internal Revenue Code). Section 382 limitations are based on significant changes
in the ownership of the Company, as occurred in June 2004 which limited our
utilization of net operating losses incurred prior to such transactions to
approximately $418,000 per year. It is possible that the future transactions
will further limit the utilization of our net operating loss carryforwards.

Results of Operations

         The following discusses and compares our results of operations for the
years ended December 31, 2006 and 2005.

Revenues

         Our sources of revenues are net patient service revenue from the PET
imaging centers which we own, management fees from the PET imaging centers which
we manage pursuant to service and license agreements, and lease revenue from PET
imaging centers where we lease time on the PET/CT equipment to physician groups.
Total revenues for 2006 represent a net increase of approximately $2,690,000
from 2005 of which $305,000 was an increase in net patient service revenue,
$474,000 was an increase in lease revenue from our PET imaging center in
Jacksonville, Florida and $1,911,000 was an increase in management fees. Of the
$1,911,000 increase in management fees, $1,763,000 was from our two new PET
imaging centers in East Setauket, New York and Jacksonville, Florida, which
became operational in the first and second quarters of 2006, respectively. The
following table presents the changes in the revenues and procedures of our
imaging centers from 2005 to 2006:

                                              Change from 2005 to 2006
                                    -------------------------------------------
                                      Revenue         Revenue        Procedure
                                    Trend ($'s)       Trend (%)       Trend (%)
                                    -----------     -----------     -----------
PET Imaging Center Location
- ---------------------------
Imaging Centers that we
Directly Own:
 Wichita, Kansas                    $   255,000           23%             32%
 Parsippany, New Jersey                  50,000            2%              3%
                                    -----------
                                    $   305,000            9%             11%
                                    -----------
Imaging Centers that we
Manage:
 Rockville Centre, New York         $  (660,000)         (25%)             2%
 Hialeah, Florida                        74,000            6%             15%
 Forest Hills, New York               1,208,000          294%            141%
 East Setauket, New York                728,000            *               *
 Jacksonville, Florida                  561,000            *               *
                                    -----------
                                    $ 1,911,000           45%             61%
                                    -----------
Lease Revenues:
 Jacksonville, Florida              $   474,000            *              **
                                    -----------

 Total                              $ 2,690,000           35%             41%
                                    ===========

*   Commenced operations in 2006, no comparative data.
**  Non-procedure based revenue stream.

                                    Page 26


         The increase in net patient service revenues generated by the PET
imaging centers that we directly own is attributed to an upward tend in the
number of imaging procedures performed by such PET imaging centers. For both of
the PET imaging centers that we directly own, located in Wichita, Kansas and
Parsippany, New Jersey, the rate of increase in revenues was less than the rate
of increase in procedure volume due to a decline in the rate of reimbursements
that we receive for performing Medicare related imaging procedures. During 2006,
$1,868,000, or 50%, of net patient service revenue was from Medicare and
$958,000, or 25% of net patient service revenue was from Blue Cross/Blue Shield.
During 2005, $1,749,000, or 51% of net patient service revenue was from Medicare
and $703,000, or 20% of net patient service revenue was from Blue Cross/Blue
Shield.

         The net increase in management fee revenues generated by the PET
imaging centers which we manage is attributed to (i) an increase from the
commencement of operations in 2006 of two new PET imaging centers located in
East Setauket, New York and Jacksonville, Florida; (ii) an increase from a full
year of operations in 2006 for our PET imaging center located in Forest Hills,
New York, which began generating revenue in the second quarter of 2005; (iii) a
decrease from the impact of a change in how revenues are earned at our PET
imaging center located in Rockville Centre, New York; and (iv) a decrease from a
decline in the rate of reimbursements that our PET imaging centers receive for
performing Medicare related imaging procedures. Our PET imaging center in East
Setauket, New York became operational in the first quarter of 2006 and our PET
imaging center in Jacksonville, Florida became operational in the second quarter
of 2006 and correspondingly, all of their 2006 revenue was an increase from
2005. Our PET imaging center in Forest Hills, New York, became operational in
December 2004 and did not begin generating revenues until the second quarter of
2005 and accordingly the full year management fees for 2006 were substantially
greater than for 2005. Commencing in the second quarter of 2005, management fees
from our PET imaging centers in Rockville Centre, are recognized based on the
net realizable value of the practice groups patient accounts receivable
outstanding as opposed to their net collections, which resulted in a one time
increase of $513,000 from previously unrecognized management fee revenue for
2005. For all of December 31, 2006, the Company records management fee revenue
based upon the net cash (practice groups collections less amounts deducted for
the costs of radiologists and technicians) it receives from the practice groups
as well as the net realizable value of practice groups patient accounts
receivable outstanding. The monthly management fee has ceilings as agreed to by
the Company and the applicable practice group.

         We attribute the overall increase in the number of imaging procedures
performed by all of our centers, and therefore the increase in revenues when
comparing 2006 to 2005, to the success of our marketing efforts and the
increased awareness of our PET imaging centers by the physicians to whom we
market out services. Future period to period increases in procedures performed,
if any, may not result in corresponding increases in revenues due to the DRA,
which, as previously discussed, was passed by Congress in February 2006. The DRA
materially reduces reimbursement rates for imaging procedures performed on
Medicare patients which will materially adversely affect our ability to generate
positive cash flow and future revenues from our existing PET imaging centers and
potentially impact our ability to establish or acquire future PET imaging
centers. Typically, private insurance companies reduce their reimbursement rates
in response to such reductions by government payors. In view of such
legislation, we are currently evaluating the criteria and structure of our
current and proposed future PET imaging centers which may require material
changes to comply with any such legislation and to enable such centers to
achieve positive cash flow and profitability. We cannot guarantee that these or
similar initiatives will not be adopted in the future or, if so, that we will be
successful in restructuring our current PET imaging centers or establishing or
acquiring future PET imaging centers or be able to achieve positive cash flow or
profitability in view of any such new requirements. Any reduction in the rates
of or change of the conditions for reimbursement for such services will have a
material adverse effect on our revenues and financial results. Because we have
many fixed expenses both at the Company level and at each of our PET imaging
centers, relatively small reductions in reimbursement rates could have a
disproportionate effect on our operating and financial results and decreased
revenues from lower scan volumes per PET imaging center could significantly
adversely affect our business.

         On November 1, 2006, the Centers for Medicare and Medicaid Services
("CMS") issued a final determination of Medicare Part B HOPPS reimbursement
rates for PET and PET/CT imaging procedures. The national rate for PET scans
will be reduced from the current rate of $1,150 per scan to $855 per scan
effective January 1, 2007. The national rate for PET/CT scans will be reduced
from the current rate of $1,250 per scan to $950 per scan effective January 1,
2007. Currently, the Company bills directly under the Medicare Physician Fee
Schedule. The reimbursement under the Medicare Physician Fee Schedule generally
allows for higher reimbursement than under HOPPS. Currently, the national
average Medicare reimbursement for the technical component of a PET and a PET/CT
procedure is $1,800 and $1,950, respectively, whereas the reimbursement under
HOPPS is $1,150 and $1,250, respectively.

                                    Page 27


         For 2006, the Company estimates that approximately 37% of the Company's
revenue was billed directly to the Medicare program, which has decreased from
approximately 41% for 2005. If the DRA had been in effect for such periods, the
Company estimates the reduction in Medicare revenue due to the DRA reimbursement
rate decrease would have reduced revenue and increased the Company's net loss by
$1,999,000 and $1,637,000 for 2006 and 2005, respectively.

         Lease revenues were all generated by our PET imaging center located in
Jacksonville, Florida; which became operational in the second quarter of 2006
and correspondingly, all of its 2006 lease revenue was an increase from 2005.

Operating Expenses

         Overall, operating expenses increased by $2,544,000, or 30%, of which
$1,908,000 was increased expenses of our PET imaging centers and $636,000 was
increased corporate expenses.

         The most significant increase in the operating expenses of our PET
imaging centers is attributed to those centers that were not operational in 2005
or were operational for less than a whole year in 2005. Our PET imaging centers
located in East Setauket, New York and Jacksonville, Florida became operational
in 2006 and accounted for $1,256,000 of the increase in operating expenses. Our
PET imaging center located in Forest Hills, New York, became operational in the
fourth quarter of 2004 and did not generate revenues until the second quarter of
2005 and accounted for $446,000 of the increase in operating expenses. The
operating expenses of our PET imaging centers that were operational for all of
2006 and 2005 accounted for $206,000 of the increase in operating expenses,
consisting primarily of variable costs which vary relative to increases or
decreases in procedure volumes. To the extent that the reimbursement rates we
receive for imaging procedures decrease in future periods, our fixed and
variable costs will represent a more significant percentage of our revenues.

         The $636,000 increase in corporate operating expenses from 2005 to 2006
is due primarily to an increase in corporate payroll and radiology cost from:
(i) the hiring of our Chief Medical Officer in October 2005, (ii) stock based
compensation expense for stock warrants and stock options granted to our Chief
Medical Officer and our Vice-President of Operations, and (iii) an increase in
depreciation expense relating to equipment and leasehold improvements at our PET
imaging centers in East Setauket, New York and Jacksonville, Florida.

         We anticipate that if we develop new PET imaging centers our fixed
operating costs will increase which would affect our profitability until such
time as any new PET imaging centers generate revenues sufficient to absorb such
fixed costs. We also anticipate the need to hire additional personnel as we
develop new PET imaging centers. Additionally, our operating expenses as a
percentage of revenues will be greater in future periods due to the decreased
reimbursement rates caused by the passage of the DRA.

Interest Expense

         Interest expense increased $186,000 when comparing 2006 to the prior
period. The primary increase in interest expense relates to the interest expense
being incurred on the debt financings relating to our PET imaging centers in
East Setauket, New York and Jacksonville, Florida.

Equity Method Investments

         As of December 31, 2006, we no longer have a limited partnership
interest in Trident Growth Fund L.P. On July 10, 2006, we sold our ownership
interest in Trident Growth Fund, L.P. for $2,570,000 and recorded a loss on sale
of $14,000. Our share of (loss) or earnings related to our limited partnership
investment in Trident Growth Fund L.P. was $(28,000) and $301,000, respectively,
for 2006 and 2005.

                                    Page 28


Minority Interests

         The income of our PET imaging centers that is allocable to the minority
members of our PET imaging centers for 2006 and 2005 was $444,000 and $819,000,
respectively. To the extent that our PET imaging centers in Rockville Centre,
New York; Parsippany, New Jersey; Hialeah, Florida; Forest Hills, New York; and
East Setauket, New York; generate income in the future, such income will be
reduced by the allocable share of any such net income at minority interest
ownerships which range from 10% to 49%.

Financial Condition - Liquidity and Capital Resources

         At December 31, 2006, we had a working capital deficiency of $2,139,000
compared to working capital of $2,286,000 at December 31, 2005. The working
capital deficiency includes $1,514,000 of notes payable and $1,988,000 of
capitalized lease obligations which were classified as current liabilities
because we were not in compliance with our debt covenant relating to debt to
tangible net worth ratio not exceeding three to one. If we were in compliance,
such amounts would have been classified as long-term debt and we would have had
working capital of $1,526,000. The following table details changes in components
of working capital during 2006.



                                                 December 31, 2006   December 31, 2005         Change
                                                 -----------------   -----------------   -----------------
                                                                                
Cash                                             $       2,748,000   $       4,494,000   $      (1,746,000)
Restricted cash                                                 --             172,000            (172,000)
Patients account receivable, net                           614,000             399,000             215,000
Lease receivables                                          129,000                  --             129,000
Management fees receivable, related
  parties                                                1,680,000             794,000             886,000
Other receivable, related party                             17,000                  --              17,000
Note receivable                                            486,000                  --             486,000
Accrued interest, note receivable                           52,000                  --              52,000
Other current assets                                       273,000             168,000             105,000
Accounts payable                                        (1,073,000)         (1,165,000)             92,000
Accounts payable, related parties                         (344,000)           (509,000)            165,000
Deferred interest on subordinated notes
  payable                                                  (40,000)                 --             (40,000)
Other current liabilities                                 (462,000)           (456,000)             (6,000)
Current portion of subordinated notes
  payable                                                 (123,000)                 --            (123,000)
Current portion of notes payable                        (3,266,000)         (1,323,000)         (1,943,000)
Current portion of capitalized lease
  obligations                                           (2,830,000)           (288,000)         (2,542,000)
                                                 -----------------   -----------------   -----------------
Working Capital (Deficiency)                     $      (2,139,000)  $       2,286,000   $      (4,262,000)
                                                 =================   =================   =================


         Our primary underlying drivers for cash inflows include operating
activities, new debt facilities and sales of common stock and our underlying
drivers for cash outflows include operating activities, debt service, capital
expenditures and capital distributions.

         During 2006, our operations provided us with $2,021,000 of working
capital compared to 454,000 for 2005. Our other sources of working capital
during 2006 were $1,348,000 from construction loan proceeds and, $625,000 from
the sale of our investment in Trident. During 2005 our other sources of working
capital were $1,241,000 of net proceeds from the sale of common stock from the
final closing of a private placement of our securities and $138,000 in proceeds
from the issuance of notes payable. Cash flows from the sale of investments and
common stock are not necessarily expected to be recurring in future periods.

         Our principal uses of working capital during 2006 included $1,837,000
of loan and capital lease payments, as compared to $1,263,000 for 2005,
$1,486,000 for capital expenditures and construction and equipment deposits, as
compared to $466,000 for 2005, and $488,000 in distributions paid to minority
interest investors, as compared to $517,000 for 2005.

         Working capital includes $614,000 of net patient accounts receivable of
which $313,000, or 49% of patient accounts receivable, were due from Medicare
and $92,000, or 14% of patient accounts receivable, were due from Blue
Cross/Blue Shield, $129,000 of lease receivables of which 45%, 29% and 26%,
respectively, was due from three physician groups, and $17,000 in other

                                    Page 29


receivable - related party, due from Premier Health Imaging International, Inc.,
a company owned by Dr. Schulman.

         We believe our existing working capital as of December 31, 2006, which
includes a cash balance of $2,748,000 provides us with necessary working capital
to meet our current working capital needs provided that our senior creditors do
not call their respective loan and or lease financings as a result of
non-compliance with one of its debt covenants. In addition, our existing PET
imaging centers must be able to establish and maintain a trend of generating
working capital from their operations in order to provide us with the working
capital necessary to continue development of new PET imaging centers, unless we
receive additional external funding.

         On May 14, 2001, we purchased Premier PET Imaging, International, Inc.
("Premier") through which we establish, operate and manage outpatient diagnostic
PET imaging centers and agreed to provide $1 million of our working capital to
fund its operating activities and on November 11, 2002 we agreed to provide up
to an additional $1 million of our working capital to fund Premier's operating
activities. As of December 31, 2006, $1,885,000 has been advanced.

         We currently operate seven PET imaging centers and have an eighth
imaging center under development. Each new PET imaging center requires the
acquisition of PET imaging equipment and systems. All of the PET imaging
equipment and systems require service and maintenance and as of December 31,
2006, we have entered into six separate long-term service contracts which
require monthly payments which range from $9,167 to $15,986, plus applicable
sales tax for each such contract. The maintenance contract for our Wichita,
Kansas PET imaging center is a pay as you go contract based on time and material
incurred. The PET/CT imaging equipment at our East Setauket,, New York and
Jacksonville, Florida PET imaging centers are currently under a one year
manufacturer's warranty, which expire in February and May 2007, respectively,
thus we did not incur equipment maintenance expense relating to such equipment
for 2006. The premises in which the centers conduct their operations are leased
and as of December 31, 2006 our premises lease commitments approximate $46,000
per month.

         Our existing debt service including principal and interest for all of
our debt and capital leases, approximates $3,616,000 for the next twelve months.
Our equipment and leasehold improvement loan and lease agreements with lenders
require that we maintain a $500,000 cash balance as well as a debt to tangible
net worth ratio of no more than three to one. As of December 31, 2006 we are not
in compliance with the debt to tangible net worth ratio. We anticipate that we
will be the borrower or guarantor of all additional equipment indebtedness
incurred in connection with additional PET imaging centers in which we have an
ownership interest.

Available Information

         The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy and information statements and other
information with the Commission. Reports, proxy statements and other information
filed by us with the Commission pursuant to the informational requirements of
the Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such material may also be obtained upon
written request addressed to the Commission, Public Reference Section, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains an Internet web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov.

         No person has been authorized to give any information or to make any
representation other than as contained or incorporated by reference in this
Annual Report and, if given or made, such information or representation must not
be relied upon as having been authorized by us.


                                    Page 30


ITEM 7.  FINANCIAL STATEMENTS

                  The Sagemark Companies Ltd. and Subsidiaries

                        CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX

Report of Independent Registered Public Accounting Firm...................    32

Financial Statements:

      Consolidated Balance Sheet ......................................... 33-34

      Consolidated Statements of Operations............................... 35-36

      Consolidated Statements of Comprehensive Loss ......................    37

      Consolidated Statements of Shareholders' Equity .................... 38-39

      Consolidated Statements of Cash Flows .............................. 40-42

      Notes to Consolidated Financial Statements.......................... 43-68





                                    Page 31


                               [GRAPHIC OMITTED]
                              MOORE STEPHENS, P.C.
                          CERTIFIED PUBLIC ACCOUTANTS


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
The Sagemark Companies Ltd.
New York, New York

         We have audited the accompanying consolidated balance sheet of The
Sagemark Companies Ltd. and its subsidiaries as of December 31, 2006, and the
related consolidated statements of operations, comprehensive loss, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 2006. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Sagemark Companies Ltd. and its subsidiaries as of December 31, 2006, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.

MOORE STEPHENS, P.C.
Certified Public Accountants

/s/ MOORE STEPHENS, P.C.

Cranford, New Jersey
March 9, 2007


                                     Page 32


THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------

                                                                    December 31,
                                                                            2006
                                                                    ------------
Assets:
Current Assets:
   Cash                                                             $  2,748,000
   Patient accounts receivable, net                                      614,000
   Lease receivables                                                     129,000
   Management fees receivable - related parties                        1,680,000
   Other receivable - related party                                       17,000
   Note receivable                                                       486,000
   Accrued interest, note receivable                                      52,000
   Marketable securities, current                                          1,000
   Other current assets                                                  272,000
                                                                    ------------
   Total Current Assets                                                5,999,000
                                                                    ------------
Fixed Assets:
   Furniture, fixtures, equipment and leasehold improvements, net      3,746,000
   Equipment held under capitalized lease obligations, net             6,752,000
                                                                    ------------
   Total Fixed Assets                                                 10,498,000
                                                                    ------------
Other Assets:

   Note receivable                                                     1,459,000
   Marketable securities, restricted                                       1,000
   Goodwill                                                            4,811,000
   Security deposit - related party                                       11,000
   Other assets                                                          587,000
                                                                    ------------
   Total Other Assets                                                  6,869,000
                                                                    ------------
   Total Assets                                                     $ 23,366,000
                                                                    ============

The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.

                                    Page 33


THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------

                                                                    December 31,
                                                                           2006
                                                                   ------------
Liabilities and Shareholders' Equity
Current Liabilities:
   Accounts payable                                                $  1,073,000
   Accounts payable - related parties                                   344,000
   Accrued payroll and benefits                                         331,000
   Accrued dividends                                                     44,000
   Other accrued expenses                                                87,000
   Current portion of deferred interest on subordinated notes
     payable                                                             40,000
   Current portion of subordinated notes payable                        123,000
   Current portion of notes payable                                   3,266,000
   Current portion of capitalized lease obligations                   2,830,000
                                                                   ------------
   Total Current Liabilities                                          8,138,000
                                                                   ------------
Long-Term Debt:
   Notes payable, net of current portion                              1,396,000
   Subordinated notes payable                                           294,000
   Deferred interest on subordinated notes payable                      115,000
   Capitalized lease obligations, net of current portion              4,758,000
                                                                   ------------
   Total Long-Term Debt                                               6,563,000
                                                                   ------------
Minority Interest                                                     1,986,000
                                                                   ------------

Commitments and Contingencies                                                --

Shareholders' Equity:
   Preferred stock, par value $1.00 per share                             3,000
   Common stock, par value $.01 per share, (25,000,000 shares
     authorized; 8,008,261 shares issued and 7,661,503 shares
     outstanding as of December 31, 2006)                                80,000
   Additional paid-in-capital, common stock                          72,167,000
   Accumulated other comprehensive loss                                 (49,000)
   Accumulated deficit                                              (63,774,000)
   Deferred compensation expense                                        (62,000)
   Less common stock (346,758 shares as of December 31, 2006)
     in Treasury, at cost                                            (1,686,000)
                                                                   ------------
   Total Shareholders' Equity                                         6,679,000
                                                                   ------------
   Total Liabilities and Shareholders' Equity                      $ 23,366,000
                                                                   ============

The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.

                                    Page 34




THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------

                                                                                                      Years ended
                                                                                                      December 31,
                                                                                             ----------------------------
                                                                                                 2006            2005
                                                                                             ------------    ------------
                                                                                                       
Revenues:
        Net patient service revenue                                                          $  3,759,000    $  3,450,000
        Net patient service revenue - related party                                                    --           4,000
        Lease revenue                                                                             474,000              --
        Management fees, related parties                                                        6,158,000       4,247,000
                                                                                             ------------    ------------
        Total Revenues                                                                         10,391,000       7,701,000
                                                                                             ------------    ------------
Operating Expenses:
        Patient service costs and expenses, FDG and ammonia                                     1,113,000         807,000
        Patient service costs and expenses - related party                                         28,000          21,000
        Patient service costs and expenses, other                                                 428,000         170,000
        Radiology expense                                                                         109,000          82,000
        Radiology expense - related parties                                                       419,000         246,000
        Equipment maintenance                                                                     633,000         429,000
        Professional fees                                                                         275,000         350,000
        Legal fees - related party                                                                310,000         283,000
        Billing and collection fees - related party                                               106,000         102,000
        Salaries, payroll taxes and fringe benefits                                             2,388,000       1,630,000
        Stock-based compensation expense, employees                                               135,000              --
        Consulting fees                                                                            45,000         210,000
        Consulting fees - related parties                                                          60,000          48,000
        Marketing fees - related parties                                                          334,000         229,000
        Rent expense - related parties                                                            185,000          98,000
        Fair value of common stock issued pursuant to a subscription termination agreement             --         125,000
        General and administrative expenses                                                     2,290,000       1,974,000
        General and administrative expenses - related parties                                      47,000              --
        Bad debt expense                                                                           13,000              --
        Depreciation and amortization                                                           2,019,000       1,589,000
                                                                                             ------------    ------------
        Total Operating Expenses                                                               10,937,000       8,393,000
                                                                                             ------------    ------------
        Loss From Operations                                                                     (546,000)       (692,000)
Interest Expense                                                                                 (881,000)       (695,000)
Interest Income, Investments                                                                      121,000          97,000
Loss on Sale of Unconsolidated Affiliate                                                          (14,000)             --
Other Income (Expense), Net                                                                            --           2,000
                                                                                             ------------    ------------
        Loss From Operations Before Share of Earnings of Unconsolidated Affiliate and
        Minority Interest in Income of Subsidiaries                                            (1,320,000)     (1,288,000)
Share of (Loss) Earnings of Unconsolidated Affiliate                                              (28,000)        301,000
Minority Interest in Income of Subsidiaries                                                      (444,000)       (819,000)
                                                                                             ------------    ------------
        Loss Before Income Tax Provision - Forward                                           $ (1,792,000)   $ (1,806,000)


The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.

                                    Page 35




THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------

                                                                                                      Years ended
                                                                                                      December 31,
                                                                                             ----------------------------
                                                                                                 2006            2005
                                                                                             ------------    ------------
                                                                                                       
        Loss Before Income Tax Provision - Forwarded                                         $ (1,792,000)   $ (1,806,000)
Income Tax Provision                                                                              (23,000)        (16,000)
                                                                                             ------------    ------------
        Net Loss                                                                             $ (1,815,000)   $ (1,822,000)
                                                                                             ============    ============

Basic and Diluted Loss Per Common Share:
        Net Loss                                                                             $      (0.24)   $      (0.24)
                                                                                             ============    ============
Weighted Average Common Shares Outstanding                                                      7,636,681       7,475,728
                                                                                             ============    ============


The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.

                                    Page 36




THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
- -------------------------------------------------------------------------------------------------

                                                                              Years ended
                                                                              December 31,
                                                                     ----------------------------
                                                                         2006            2005
                                                                     ------------    ------------
                                                                               
Net Loss                                                             $ (1,815,000)   $ (1,822,000)
Other Comprehensive Expense:
Unrealized holding losses on available for sale securities                 (1,000)         (8,000)
                                                                     ------------    ------------
        Comprehensive Loss                                           $ (1,816,000)   $ (1,830,000)
                                                                     ============    ============



The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.


                                    Page 37




THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------

                                                        Preferred                                                 Additional
                                                          Shares                                     Common         Paid-in
                                                          Issued        Common                        Stock,        Capital,
                                                           and          Shares        Preferred        Par          Common
                                                       Outstanding      Issued          Stock         Value          Stock
                                                      ------------   ------------   ------------   ------------   ------------
                                                                                                 
        Balance - December 31, 2004                          2,962      6,927,761   $      3,000   $     69,000   $ 70,589,000
Shares issued under private placement
  offering                                                      --        839,250             --          8,000      1,670,000
Offering costs                                                  --             --             --             --       (437,000)
Unrealized investment holding gains                             --             --             --             --             --
Shares issued pursuant to a settlement agreement                --         50,000             --          1,000        124,000
Deferred stock compensation                                     --             --             --             --             --
Shares issued pursuant to a subscription
  termination agreement                                         --        131,250             --          1,000             --
Distributions to minority interest investors                    --             --             --             --             --
Distributions to minority interest investors,
  related parties                                               --             --             --             --             --
Net loss                                                        --             --             --             --             --
                                                      ------------   ------------   ------------   ------------   ------------
        Balance - December 31, 2005                          2,962      7,948,261          3,000         79,000     71,946,000
Unrealized investment holding gains                             --             --             --             --             --
Shares issued pursuant to a consulting agreement                --         60,000             --          1,000         77,000
Warrants issued pursuant to a settlement
  consulting agreement                                          --             --             --             --          9,000
Stock compensation expense                                      --             --             --             --        135,000
Deferred stock compensation                                     --             --             --             --             --
Distributions to minority interest investors                    --             --             --             --             --
Distributions to minority interest investors,
  related parties                                               --             --             --             --             --
Net loss                                                        --             --             --             --             --
                                                      ------------   ------------   ------------   ------------   ------------
        Balance - December 31, 2006                          2,962      8,008,261   $      3,000   $     80,000   $ 72,167,000


                                    Page 38




                                                       Accumulated                      Less
                                                          Other                        Common        Deferred         Total
                                                      Comprehensive   Accumulated       Stock     Compensation     Shareholders'
                                                          Income        Defitic      in Treasury     Expense          Equity
                                                      ------------   ------------   ------------   ------------   ------------
                                                                                                   
        Balance - December 31, 2004                   $    (40,000)  $(59,132,000)  $ (1,686,000)  $     (5,000)  $  9,798,000
Shares issued under private placement offering                  --             --             --             --      1,678,000
Offering costs                                                  --             --             --             --       (437,000)
Unrealized investment holding gains                         (8,000)            --             --             --         (8,000)
Shares issued pursuant to a settlement agreement                --             --             --             --        125,000
Deferred stock compensation                                     --             --             --          4,000          4,000
Shares issued pursuant to a subscription
  termination agreement                                         --             --             --             --          1,000
Distributions to minority interest investors                    --       (130,000)            --             --       (130,000)
Distributions to minority interest investors,
  related parties                                               --       (387,000)            --             --       (387,000)
Net loss                                                        --     (1,822,000)            --             --     (1,822,000)
                                                      ------------   ------------   ------------   ------------   ------------
        Balance - December 31, 2005                        (48,000)   (61,471,000)    (1,686,000)        (1,000)     8,822,000

Unrealized investment holding losses                        (1,000)            --             --             --         (1,000)
Shares issued pursuant to a consulting agreement                --             --             --        (78,000)            --
Warrants issued pursuant to a
  consulting agreement                                          --             --             --         (9,000)            --
Stock compensation expense                                      --             --             --             --        135,000
Deferred stock compensation                                     --             --             --         26,000         26,000
Distributions to minority interest investors                    --       (223,000)            --             --       (223,000)
Distributions to minority interest investors,
  related parties                                               --       (265,000)            --             --       (265,000)
Net loss                                                        --     (1,815,000)            --             --     (1,815,000)
                                                      ------------   ------------   ------------   ------------   ------------
        Balance - December 31, 2006                   $    (49,000)  $(63,774,000)  $ (1,686,000)  $    (62,000)  $  6,679,000


The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.

                                    Page 39




THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------

                                                                                   Years ended
                                                                                   December 31,
                                                                          ---------------------------
                                                                              2006           2005
                                                                          ------------   ------------
                                                                                   
Cash Flows - Operating Activities
        Net loss                                                          $ (1,815,000)  $ (1,822,000)
        Adjustments to reconcile net loss to net Cash - operations:
               Depreciation and amortization                                 2,019,000      1,589,000
               Share of loss (earnings) of unconsolidated affiliates            28,000       (301,000)
               Stock-based compensation expense, employee                      135,000             --
               Stock-based compensation expense, consulting fees                26,000             --
               Stock based compensation expense, other                              --          4,000
               Loss on sale of investment in unconsolidated affiliate           14,000
               Provision for bad debt expense                                   13,000             --
               Minority interest in income of subsidiaries                     444,000        819,000
               Fair value of common stock issued pursuant to a
                subscription termination agreement                                  --        125,000
               Interest expense paid-in-kind                                   199,000             --
               Other operating adjustments                                          --             --
        Change in assets and liabilities:
               Restricted cash                                                 172,000       (172,000)
               Patient accounts receivable, net                               (228,000)      (217,000)
               Patient accounts receivable - related parties                        --        138,000
               Lease receivables                                              (129,000)            --
               Other receivable - related party                                (17,000)            --
               Management fees receivable - related parties                   (886,000)      (566,000)
               Accrued interest, note receivable                               (52,000)            --
               Other current assets                                           (106,000)        87,000
               Accounts payable                                                392,000        306,000
               Accounts payable - related parties                             (165,000)       (53,000)
               Accrued payroll and benefits                                    145,000        135,000
               Other accrued expense                                            33,000        (20,000)
               Deferred interest on subordinated debt                           42,000         40,000
                                                                          ------------   ------------
        Net Cash - Operating Activities - Forward                              264,000         92,000
                                                                          ------------   ------------
Cash Flows - Investing Activities
        Purchased fixed assets                                              (1,393,000)       (83,000)
        Proceeds from sale of subsidiary equity                                     --         26,000
        Proceeds from sale of investment in unconsolidated affiliate           625,000             --
        Other assets, construction and equipment deposits                      (93,000)      (383,000)
                                                                          ------------   ------------
        Net Cash - Investing Activities - Forward                         $   (861,000)  $   (440,000)


The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.

                                    Page 40




THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------

                                                                                  Years ended
                                                                                   December 31,
                                                                          ---------------------------
                                                                              2006           2005
                                                                          ------------   ------------
                                                                                   
        Net Cash - Operating Activities - Forwarded                       $   264,000    $    92,000
                                                                          ------------   ------------
        Net Cash - Investing Activities - Forwarded                          (861,000)      (440,000)
                                                                          ------------   ------------
Cash Flows - Financing Activities:
        Proceeds from private placement Offering                                   --      1,678,000
        Offering costs                                                             --       (437,000)
        Loan proceeds                                                       1,348,000        138,000
        Proceeds from subsidiaries equity financings                               --        178,000
        Transfer subsidiary equity financing proceeds to operations           (40,000)            --
        Refund Bethesda investors                                            (132,000)            --
        Payments on notes payable                                          (1,500,000)    (1,178,000)
        Payments on capital lease obligations                                (337,000)       (85,000)
        Distributions to minority interest investors                         (223,000)      (130,000)
        Distributions to minority interest investors - related parties       (265,000)      (387,000)

                                                                          ------------   ------------
        Net Cash - Financing Activities                                    (1,149,000)      (223,000)
                                                                          ------------   ------------
        Net Decrease in Cash                                               (1,746,000)      (571,000)
Cash - Beginning of Periods                                                 4,494,000      5,065,000
                                                                          ------------   ------------
        Cash - End of Periods                                             $ 2,748,000    $ 4,494,000
                                                                          ===========    ===========
Supplemental Disclosures of Cash Flow Information:
        Cash paid during the periods for:
            Interest                                                      $   634,000    $   654,000
            Income taxes                                                  $    23,000    $    16,000



The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.

                                    Page 41


THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

Supplementary Disclosures of Non-Cash Investing and Financing Activities:

During the year ended December 31, 2006
- ---------------------------------------

         In February 2006, the Company entered into a capital lease obligation
having an aggregate net present value of $1,890,000 resulting in a non-cash
increase in fixed assets.

         In May 2006, the Company entered into a capital lease obligation having
an aggregate net present value of $2,072,000 resulting in a non-cash increase in
fixed assets.

         In November 2006, the Company entered into a capital lease obligation
having an aggregate net present value of $1,900,000 resulting in a non-cash
increase in fixed assets.

         In June 2006, pursuant to a Consulting Agreement between the Company
and a consultant, the Company issued to the consultant, a warrant to purchase
60,000 unregistered shares of its Common Stock exercisable at $4.00 per share,
which was greater than the fair market value of $1.30 per share, on the date of
issuance. Using the Black-Scholes option valuation formula, the warrant was
valued at $9,000, representing deferred compensation expense which is reported
as a separate component of shareholders' equity, and is being amortized over
twenty-four months, the term of the Consulting Agreement. In addition, the
Company issued to such Consultant 60,000 unregistered shares of the Company's
common stock and recorded $78,000 of deferred compensation which is reported as
a separate component of shareholders' equity, and is being amortized over the
twenty-four month term of the Consulting Agreement.

         In July 2006, the Company sold its investment in Trident, an
unconsolidated affiliate. The total sales price was $2,570,000, which included
an interest bearing promissory note receivable in the amount of $1,945,000,
$486,000 is classified in current assets and $1,459,000 is classified in other
assets.

         In December 2006, four of the Company's subsidiaries entered into FDG
Supplier Agreement ("FDG Agreements") with IBA Molecular North America, Inc
("IBA"). Under the terms of the FDG Agreements, each subsidiary entered into a
note payable with IBA for the then outstanding accounts payable balance owed to
IBA. The total amount converted from accounts payable to notes payable
approximated $485,000.

During the year ended December 31, 2005
- ---------------------------------------

         In April 2005, the Company entered into a capital lease obligation
having an aggregate net present value of $12,000 resulting in a non-cash
increase in fixed assets.


The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.


                                    Page 42


THE SAGEMARK COMPANIES LTD AND SUBSIDIARIES
- -------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------

(1) Summary of Significant Accounting Policies
    ------------------------------------------

Organization - The Sagemark Companies Ltd. ("Sagemark", the "Company" or the
"Registrant"), is a publicly held New York corporation organized in 1961.

Sagemark acquired all of the stock of Premier P.E.T. Imaging International, Inc.
("Premier") and Premier Cyclotron International Corp. ("PCI") from Premier's and
PCI's founders ("Premier's Founders") for 6,000 shares of its common stock on
May 14, 2001 pursuant to a Stock Purchase Agreement between the Company and
Premier's Founders. Pursuant to the Stock Purchase Agreement, Premier's Founders
were entitled to receive an aggregate of 1,917,000 additional shares of
Sagemark's common stock (319,500 shares of Sagemark's common stock for each of
the first six PET imaging centers established by Premier) if and when the PET
imaging center achieves positive earnings before the deduction of interest
expense, income taxes, depreciation and amortization during at least one month
during the first eighteen months of each PET imaging center's operations. On
December 30, 2003 the Stock Purchase Agreement was amended whereby, among other
things, Premier's Founders reduced the number of shares they were entitled to
receive by 502,000 shares. On June 28, 2004, pursuant to the Stock Purchase
Agreement, as amended, between the Company and Premier's Founders, the Company
issued 1,415,000 shares of the Company's common stock to the Premier Founders.
The value of the shares was $4,811,000 and represents goodwill. The issuance of
such shares as well as the issuance of shares in 2004 pursuant to the Joseph
Stevens and Company, Inc. private placement will limit the Company's utilization
of its tax net operating loss carryover to approximately $418,000 per year for
losses incurred prior to the issuance of such shares, per Section 382 of the
Internal Revenue Code.

During the first quarter of 2001, Premier P.E.T. Imaging of Wichita, Inc. was
formed as a wholly owned subsidiary of Premier. During the first quarter of
2002, Premier P.E.T. Imaging of Wichita, Inc. merged with and into Premier
P.E.T. Imaging of Wichita, LLC. Premier P.E.T. Imaging of Wichita, LLC ("PET
Wichita") is a wholly owned subsidiary of Premier and was created for the
purpose of such merger.

During the first quarter of 2002, Premier PET Imaging of New Jersey, Inc. ("PET
NJ") was formed as a wholly owned subsidiary of Premier. During the fourth
quarter of 2002 Morris County PET Management LLC ("Morris Management") was
capitalized by issuing 100 Membership Units (the "Morris Units") at a purchase
price of $2,600 per unit of which $100 represents a capital contribution and
$2,500 represents subordinated debt. On October 15, 2002, Premier purchased 77
Morris Units for a total of $200,200, and other investors had previously
purchased 23 Morris Units for a total of $59,800. In each of November 2002 and
July 2003, Premier sold 8 (an aggregate of 16 Morris Units) of its initial 77
Morris Units to other investors for a total of $41,600 and in September 2005
Premier sold ten of its Morris Units to an investor for $26,000. As of December
31, 2006 Premier owns 51% of Morris Management.

During the second and third quarters of 2002, Premier PET of Long Island LLC
("PET LI") was capitalized by issuing 100 Membership Units (the "Long Island
Units") at a purchase price of $2,600 per unit of which $100 represents a
capital contribution and $2,500 represents subordinated debt. On July 3, 2002,
Premier purchased 51 Long Island Units for a total of $132,600, and on June 25,
2002, another investor purchased 49 Long Island Units for a total of $127,400.
As of December 31, 2006, Premier owns 51% of PET LI.

During the first quarter of 2003, Hialeah PET Management LLC ("Hialeah
Management") was capitalized by issuing 100 Membership Units (the "Hialeah
Units") at a purchase price of $3,600 per unit of which $100 represents a
capital contribution and $3,500 represents subordinated debt. Premier purchased
51 Hialeah Units for a total of $183,600, and other investors purchased 49
Hialeah Units for a total of $176,400. As of December 31, 2006, Premier owns 51%
of Hialeah Management.

During the third quarter of 2003, P.E.T. Management of Queens, LLC ("Queens
Management") was formed for the purpose of establishing and managing the Queens
PET imaging center. In the second quarter of 2004 Queens Management was
capitalized by issuing 100 Membership Units (the "Queens Units"). Initially
Premier purchased 90 Queens Units for a total of $109,000 of which $9,000
represented a capital contribution and $100,000 represents subordinated debt.
Another investor purchased 10 Queens units for a total of $1,000. As of December
31, 2006, Premier owns 90% of Queens Management.

During the third quarter of 2005, Suffolk PET Management LLC ("Suffolk
Management") was capitalized by issuing 100 Membership Units (the "Suffolk
Units") at a purchase price of $100 per unit. Premier purchased 51 Suffolk Units
for a total of $5,100, and loaned Suffolk $350,000 on a subordinated basis.
Another investor purchased 49 Suffolk Units for a total of $4,900. As of
December 31, 2006, Premier owns 51% of Suffolk Management.

During the third quarter of 2005, Premier PET Imaging of D.C. and Maryland,
Inc., ("PET DC"), was formed as wholly owned subsidiary of Premier. During the
third quarter of 2005, Bethesda PET Management LLC ("Bethesda Management") was
capitalized by issuing 100 Membership Units (the "Bethesda Units") at a purchase

                                    Page 43


price of $3,500 per unit. Premier purchased 51 Bethesda Units for a total of
$178,500, and independent investors purchased 49 Bethesda Units for a total of
$171,500. The investor's money was being held in escrow until the Company
received a firm financing commitment for the PET/CT equipment and leasehold
improvements. As of December 31, 2005, Premier owned 51% of Bethesda. During the
first quarter of 2006, Premier and the investors elected to discontinue the
development of a PET imaging center in DC and Premier returned to such investors
$132,000 of the $172,000 being held in escrow, after deducting expenses of
$40,000.

During the first quarter of 2006, Premier PET Imaging of Jacksonville, LLC ("PET
Jacksonville") was formed as a wholly owned subsidiary of Premier into which it
made an initial investment of $140,000. As of December 31, 2006 Premier owns
100% of PET Jacksonville.

During the second quarter of 2006, Premier PET Imaging of Tamarac, LLC ("PET
Tamarac") was formed as a wholly owned subsidiary of Premier which as of
December 31, 2006 owns 100% of PET Tamarac.

Nature of Operations - Since May 14, 2001 the Company has developed outpatient
medical diagnostic imaging centers (the "PET imaging centers") that it owns,
operates, and manages throughout the United States. Such medical diagnostic
imaging centers utilize positron emission tomography ("PET") and computed
tomography ("CT") imaging equipment and systems ("PET imaging equipment"). The
medical diagnostic procedures we perform are used by physicians in the
diagnosis, staging and treatment of cancer and other diseases in the human body.
The Company operates its PET imaging centers either through direct ownership or
through Administrative Services Agreements and is responsible for obtaining
premise leases, medical diagnostic imaging equipment, equipment maintenance
agreements, supply agreements and personnel for all PET imaging centers that it
operates.

In February 2006 Congress passed the Federal Deficit Reduction Act of 2005 which
materially reduces reimbursement rates for imaging procedures performed on
Medicare patients and which will materially adversely affect our ability to
generate positive cash flow and future revenues from our existing PET imaging
centers and potentially impact our ability to establish or acquire future PET
imaging centers. The DRA imposes caps on Medicare payment rates for certain
imaging services, including PET and PET/CT, furnished in physician's offices and
other non-hospital based settings. Under the cap, payments for specified imaging
services cannot exceed the hospital outpatient payment rates for those services.
This change is to apply to services furnished on or after January 1, 2007. The
limitation is applicable to the technical component of the services only, which
is the payment the Company receives for the services for which the Company bills
directly under the Medicare Physician Fee Schedule. The technical reimbursement
under the Medicare Physician Fee Schedule generally allows for higher
reimbursement than under the hospital outpatient prospective payment system
("HOPPS"). Currently, the national average Medicare reimbursement for the
technical component of a PET and a PET/CT procedure is $1,800 and $1,950,
respectively, whereas the reimbursement under HOPPS is $1,150 and $1,250,
respectively. Typically, private insurance companies reduce their reimbursement
rates in response to such reductions by government payors. In view of such
legislation, we are currently evaluating the criteria and structure of our
current and proposed future PET imaging centers which may require material
changes to comply with any such legislation and to enable such centers to
achieve positive cash flow and profitability. We cannot guarantee that these or
similar initiatives will not be adopted in the future or, if so, that we will be
successful in restructuring our current PET imaging centers or establishing or
acquiring future PET imaging centers or be able to achieve positive cash flow or
profitability in view of any such new requirements. Any reduction in the rates
of or change of the conditions for reimbursement for such services will have a
material adverse effect on our revenues and financial results. Because we have
many fixed expenses both at the Company level and at each of our PET imaging
centers, relatively small reductions in reimbursement rates could have a
disproportionate effect on our operating and financial results and decreased
revenues from lower scan volumes per PET imaging center could significantly
adversely affect our business.

         As of December 31, 2006, the Company owns and or operates seven PET
imaging centers and is developing an eighth imaging center in Tamarac, Florida.
The Company owns and operates PET imaging centers in Wichita, Kansas and
Parsippany, New Jersey and manages PET imaging centers in Rockville Centre, New
York; Hialeah, Florida; Forest Hills, New York; East Setauket, New York and
Jacksonville, Florida,. The Company is developing an eighth imaging center in
Tamarac, Florida. Additional details on such facilities are as follows:



Center                                     Managed By                                Location                     Start Date
- ----------------------------------------   ----------------------------------------  --------------------------   ------------------
                                                                                                      
Premier PET Imaging of Wichita, LLC        Premier PET Imaging of Wichita, LLC       Wichita, Kansas              August 2001
Rockville PET Imaging, P.C.                Premier PET of Long Island, LLC           Rockville Centre, New York   October 2002
Premier PET Imaging of New Jersey, Inc.    Morris County PET Management, LLC         Parsippany, New Jersey       February  2003
Premier PET Imaging of Hialeah, Inc,       Hialeah PET Management, LLC               Hialeah, Florida             February 2003
Forest Hills PET Imaging, P.C.             PET Management of Queens, LLC             Forest Hills, New York       December 2004
Advanced PET Imaging                       Suffolk PET Management, LLC               East Setauket, New York      February 2006
Premier PET Imaging of Jacksonville, LLC   Premier PET Imaging of Jacksonville, LLC  Jacksonville, Florida        June 2006
Premier PET Imaging of Tamarac, LLC        Premier PET Imaging of Tamarac, LLC       Tamarac, Florida             Under construction


                                    Page 44


The PET imaging center located in Wichita, Kansas reflects the operations of PET
Wichita, a wholly owned subsidiary of Premier. PET Wichita started generating
revenues in the third quarter of 2001.

The PET imaging center located in Rockville Center, New York is an independently
owned PET imaging center, Rockville PET Imaging, P.C., ("PET Rockville"), which
is managed by Premier's 51% owned subsidiary, PET LI. PET Rockville started
generating revenue in October 2002 and, pursuant to a Turnkey License and
Services Agreement dated June 10, 2002, PET LI is entitled to receive management
fees payable by PET Rockville from PET imaging center revenues that may not
exceed $200,000 per month during the first nine months of the agreement and
$400,000 per month for each month thereafter. The annual management fee ceiling
is based on a cumulative monthly amount. Under the agreement the Company
provides the necessary positron emission tomography equipment, office equipment,
practice premises and administrative support services. According to the terms of
the agreement a portion of the management fee can be deferred to the extent that
the contracted radiology groups practice revenues, less the payment of operating
costs, billing and collection fees and PET scan reading/interpretation fees are
not sufficient to pay the cumulative monthly management fee amount. This
deferred management fee shall then be considered an advance by the Company and
accrue interest at a rate of 5% per annum from the date of the deferral through
the date of payment. The Company records the management fee at its net
realizable value based upon the practice groups cash collections from imaging
procedures less the amounts permitted to be retained for physician and
technician salaries as well as the net realizable value of the practice groups
patient accounts receivable outstanding. The agreement expires in June 2012,
with two five year renewal options.

In November, 2006, the Company expanded its imaging systems at PET Rockville to
include PET/CT. In connection therewith, the Company entered into a $1,900,000
capital lease transaction for PET/CT imaging equipment and a $350,000 leasehold
improvement loan with Siemens Medical Solutions USA, Inc. ("Siemens). The PET/CT
capital lease will have a term of eighty-four months with a fixed rate of
interest of 9.32%. The leasehold improvement loan will be repaid over a term of
sixty months with a fixed rate of interest of 9.51%. As of December 31, 2006,
the Company has utilized $252,000 of the $350,000 available loan proceeds from
the leasehold improvement loan. The Company also entered into a five year
equipment service agreement. The first year of the agreement is covered under
the manufacturers warranty with no monthly payments required; the remaining four
years requires 48 monthly payments of approximately $14,000 per month.

The PET imaging center located in Parsippany, New Jersey reflects the operations
of PET NJ, a wholly owned subsidiary of Premier, and is managed by Premier's 51%
owned subsidiary, Morris Management. PET NJ started generating revenues in
February 2003 and, pursuant to an Administrative Services Agreement dated May
22, 2002, Morris Management is entitled to receive management fees payable by
PET NJ from PET imaging center revenues that may not exceed $401,000 per month.
The annual management fee ceiling is based on a cumulative monthly amount. The
agreement expires in May 2012, and shall renew automatically for an additional
ten years. The management fees received by Morris Management are eliminated in
consolidation.

The PET imaging center located in Hialeah, Florida is an independently owned PET
imaging center, Eiber Radiology, Inc. ("Eiber Radiology"), which is managed by
Premier's 51% owned subsidiary, Hialeah Management. Eiber Radiology is owned an
investor who purchased and owns 11% of Hialeah Management. The PET imaging
center in Hialeah started generating revenues in February 2003 and pursuant to
an Administrative Services Agreement dated February 1, 2003, Hialeah Management
is entitled to receive management fees payable from the independent Hialeah PET
imaging center revenues in the amount of $250,000 per month for the first six
months of the agreement, $300,000 per month for the next six months of the
agreement and $400,000 for each month thereafter. The annual management fee
ceiling is based on a cumulative monthly amount. Under the agreement the Company
provides the necessary positron emission tomography equipment, office equipment,
practice premises and administrative support services. The Company records the
management fee at its net realizable value based upon the practice groups cash
collections from imaging procedures less the amount permitted to be retained for
physician and technician salaries as well as the net realizable value of the
practice groups patient accounts receivable outstanding. The agreement expires
in February 2013, and can be renewed for an additional ten years.

The PET imaging center located in Queens, New York is an independently owned PET
imaging center, Forest Hills PET Imaging, P.C., which is managed by Premier's
90% owned subsidiary, Queens Management. The Queens PET imaging center started
generating revenues in April 2005 pursuant to a Turnkey License and Services
Agreement dated December 31, 2004, Queens Management is entitled to receive
management fees payable by Forest Hills PET Imaging P.C. from any of its future
revenues in the amount of $200,000 for each of the first nine months of the
Turnkey License and Services Agreement, and $400,000 for each month thereafter.
The annual management fee ceiling is based on a cumulative monthly amount. Under
the agreement the Company provides necessary positron emission tomography
equipment, office equipment, practice premises and administrative support
services. The Company records the management fee at its net realizable value
based upon the practice groups cash collections from imaging procedures less the
amounts permitted to be retained for physician and technician salaries as well
as the net realizable value of the practice groups patient accounts receivable
outstanding. The agreement expires in December 2014.

The PET imaging center located in East Setauket, New York is Advanced PET
Imaging ("Advanced PET"), a professional corporation, which is managed by
Premier's 51% owned subsidiary Suffolk Management. Advanced PET is owned by the
investor who purchased and owns 49% of Suffolk Management. Advanced PET started

                                    Page 45


generating revenues in February 2006. Pursuant to a Turnkey License and Services
Agreement dated August 10, 2005, Suffolk Management is entitled to receive
management fees payable by Advanced PET, from any of Advanced PET's future
revenues in amounts that may not exceed $250,000 per month during the first six
months and $350,000 per month thereafter. The annual management fee ceiling is
based on a cumulative monthly amount. Suffolk Management subleases the premises,
which was leased by the Company from an entity owned by the investor who owns
49% of Suffolk Management, for the operations of the PET imaging center and made
the PET imaging and ancillary medical equipment, furniture and fixtures and
leasehold improvements available to Advanced PET for use by Advanced PET in its
operations of the PET imaging center during the term of the license. The license
provides for a full range of day to day non-professional management and business
office services to Advanced PET in consideration of the service fees payable to
Suffolk Management thereunder. The Company records the management fee at its net
realizable value based upon the practice groups cash collections from imaging
procedures less the amount permitted to be retained for physician and technician
salaries as well as the net realizable value of the practice groups patient
accounts receivable outstanding. The license also provides for Suffolk to
advance certain sums from its working capital to Advanced PET to enable Advanced
PET to meet any shortfall in its operating expenses. Each such advance shall
constitute a loan to Advanced PET, which loan will bear interest at the rate of
5% per annum and be payable upon the expiration of the license or sooner from
certain payments that may be received by Advanced PET from revenues generated
from its operations. Advanced PET has granted Suffolk a security interest in all
of its assets as collateral security for Advanced PET's obligation to pay such
service fees and advances to Suffolk. The agreement expires August 10, 2020 and
can be renewed for successive five year periods.

On February 28, 2006, the Company utilized the remaining available funds from a
construction loan provided by General Electric Capital Corporation ("GE Cap") to
make the leasehold improvements for the Suffolk PET imaging center. The Company
executed a promissory note to repay the principal balance outstanding of
$485,000 over a term of eighty-four months with a fixed rate of interest of
8.87%. On February 28, 2006, the Company executed a loan agreement with GE Cap
for the PET/CT imaging equipment used at the Suffolk PET Imaging Center. The
capitalized cost of the equipment is $1,890,000 and is being repaid over a term
of eighty-four months with a fixed rate of interest of 8.76%. The equipment has
a one year manufacturer's warranty; thereafter the Company will pay a fixed
monthly maintenance fee of approximately $15,000. On February 28, 2006, the
Company executed a loan agreement with GE Cap for hot lab equipment to be used
at the Suffolk PET Imaging Center. The capitalized cost of the equipment is
$22,214 and is being repaid over a term of eighty-four months with a fixed rate
of interest of 8.76%.

The PET imaging center located in Jacksonville, Florida, reflects the operations
of PET Jacksonville, a wholly owned subsidiary of Premier. On January 26, 2006,
the Company entered into a premises lease for PET Jacksonville. The lease is for
a ten year period with two five year renewal options that commenced upon
completion of the construction of PET Jacksonville in May, 2006. On March 6,
2006, the Company entered into a capital lease transaction of $2,072,000 for the
PET/CT imaging equipment, a $52,000 loan agreement for the hot lab equipment and
a $457,000 construction loan with GE Cap for PET Jacksonville. The capital lease
commenced upon the Company accepting delivery of the equipment in May 2006. The
capital lease has a term of eighty-four months with a fixed rate of interest of
8.69%. The PET/CT imaging equipment has a one year manufacturer's warranty and
thereafter the Company will pay a fixed monthly maintenance fee of $15,000. The
hot lab equipment loan is being repaid over a time of 84 months with a fixed
rate of interest of 8.69% and the construction loan is being repaid over a term
of 60 months with a fixed rate of interest of 9.19%. PET Jacksonville commenced
operations and started generating lease revenues in June 2006, pursuant to Lease
Agreements, and management fee revenue pursuant to a Letter Agreement dated May
4, 2006, with Eiber Radiology, a related party radiology company. Pursuant to
the Lease Agreements, PET Jacksonville receives block lease revenues from
leasing time segments to other PET providers for the use of the Jacksonville PET
imaging center facilities and equipment. Pursuant to the Letter Agreement, PET
Jacksonville recognizes as revenue an amount equal to the revenues actually
received by Eiber Radiology from the imaging and related services it performs at
PET Jacksonville less a fee of $170 per scan for radiology reading,
interpretation, and billing and collections fees of 5% of patient service
revenue collected, plus the net realizable value of the practice groups patient
accounts receivable outstanding. The term of the Letter Agreement is two years
and is subject to renewal for five successive two year periods unless intention
of not to renew is received at least twelve months prior to the end of the
existing term.

As of December 31, 2006 the Company had a PET imaging center under construction
in Tamarac, Florida. On May 25, 2006, the Company entered into a premises lease
for PET Tamarac. The lease is for a ten year period with a ten year renewal
options that commence upon completion of the construction of PET Tamarac. On May
12, 2006, the Company entered into a loan agreement of $1,846,000 for the PET/CT
imaging equipment, a $60,000 loan agreement for the hot lab equipment and a
$275,000 construction loan with GE Cap for the Company's construction of it PET
Tamarac. The PET/CT loan agreement does not commence until the Company accepts
delivery of the equipment. The PET/CT loan agreement has a term of seventy-two
months with a fixed rate of interest of 9.01%. The PET/CT imaging equipment has
a one year manufacturer's warranty from date of acceptance; thereafter the
Company will pay a fixed monthly maintenance fee of $15,000. The hot lab
equipment loan does not commence until the Company accepts delivery of the
equipment and will be repaid over a time of 72 months with a fixed rate of
interest of 9.01%. The construction loan will be repaid over a term of 60 months
with a fixed rate of interest of 9.11%. As of December 31, 2006, the Company has
utilized $79,000 of the $275,000 available loan proceeds from the construction
loan.

                                    Page 46


Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and all of its wholly owned and majority
owned subsidiaries. Premier Cyclotron International Corp. and Premier PET
Imaging of Arlington Heights, Inc. were inactive during 2006 and 2005.

All significant intercompany balances and transactions have been eliminated. For
consolidated subsidiaries that are not wholly owned, the Company eliminates the
minority interest portion of any related profits and losses. The allocable
losses of such minority interests are in excess of the Company's investment in
such subsidiaries by $43,000 at December 31, 2006 all of which relates to Queens
Management.

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards Board Interpretation ("FIN") No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
("FIN 46"). In December 2003, the FASB modified FIN 46 to make certain technical
corrections and address certain implementation issues that had arisen. FIN 46
provides a new framework for identifying variable interest entities (VIEs) and
determining when a company should include the assets, liabilities,
non-controlling interests and results of activities of a VIE in its consolidated
financial statements.

In general, a VIE is a corporation, partnership, limited liability corporation,
trust or any other legal structure used to conduct activities or hold assets
that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its
activities, or (3) has a group of equity owners that do not have the obligation
to absorb losses or the right to receive returns generated by its operations.
However, FIN 46R specifically excludes a VIE that is a business if the variable
interest holder did not participate significantly in the design or redesign of
the entity.

We adopted the provisions of FIN 46R as of January 2004. We have reviewed the
Company's unconsolidated contracted radiology practice arrangements and its
investment in unconsolidated affiliate under the provision and have determined
that none of these arrangements meet the definition of a variable interest
entity.

Cash - The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of December
31, 2006, all of the Company's cash represents bank deposits.

Accounts Receivables - All of the Companies accounts receivables are reported at
their net collectible amounts. The Company routinely assesses the strength of
each payor mix and components, and based upon overall collection trends, factors
surrounding the credit risk of the payor and overall economic conditions
establishes an allowance for doubtful accounts. As a consequence, the Company
believes that its credit risk exposure beyond the reserve is limited. Specific
accounts for which no payments have been received for six consecutive months are
considered delinquent and customary collection efforts are initiated. Specific
accounts for which no payments have been received for twelve months are
written-off. The reserve for uncollectible accounts at December 31, 2006 was
$21,000.

Marketable Securities - All of the Company's investments that are classified as
marketable securities have readily determinable fair market values, are
categorized as available-for-sale and are recorded at fair market value.
Unrealized gains and losses are recorded as a separate component of
shareholders' equity and are included in the statement of other comprehensive
loss. Additionally, when the fair market value of securities decline and in the
opinion of management, the decline in market value of those securities are other
than temporary, the cost basis of the individual security will be written down
to fair value and the amount of the write-down shall be charged to earnings as a
realized loss. As of December 31, 2006 the marketable securities that are
classified as current assets represent the fair market value of the Company's
investments in freely tradable shares and the marketable securities classified
as long-term assets represent the fair market value of the Company's investment
in restricted shares.

Fixed Assets - Furniture, fixtures, equipment and leasehold improvements are
carried at cost less allowances for accumulated depreciation. The cost of
equipment held under capital leases is equal to the lower of the net present
value of the minimum lease payments or the fair market value of the leased
property at the inception of the lease. Depreciation is computed generally by
the straight-line method at rates adequate to allocate the cost of applicable
assets over their expected useful lives which ranges from 2-7 years for
furniture, fixtures and equipment. Leasehold improvements are amortized over
periods not in excess of applicable lease terms. Amortization of capitalized
leases and leasehold improvements is included with depreciation expense. All of
the Company's furniture, fixtures, equipment and leasehold improvements are
pledged as collateral for borrowings.

Investments in Unconsolidated Affiliates - Investments in unconsolidated
affiliates, jointly owned companies and other investees in which the Company
owns 20% to 50% interest or otherwise exercises significant influence are
carried at cost, adjusted for the Company's proportionate share of their
undistributed earnings or losses.

Long-Lived Assets - Goodwill - On May 14, 2001, the Company acquired all of the
stock of Premier P.E.T. Imaging International, Inc. ("Premier") and Premier
Cyclotron International Corp. ("PCI") from Premier's and PCI's founders
("Premier's Founders") for 6,000 shares of its common stock pursuant to a Stock

                                    Page 47


Purchase Agreement between the Company and Premier's Founders. Pursuant to the
Stock Purchase Agreement, as amended, Premier's Founders were entitled to earn
an aggregate of 1,415,000 additional shares of the Company's common stock. All
of the conditions necessary to earn such contingent shares of common stock were
met and on June 28, 2004 the Company issued such shares to Premier's Founders.
The value of the shares approximated $4,811,000 and represents goodwill. The
Company evaluates the recoverability and measures the potential impairment of
its goodwill under Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets." Under SFAS No. 142, the cost of goodwill
and certain intangible assets with indefinite lives acquired in a business
combination are no longer amortized, but instead are reviewed annually (or more
frequently if impairment indicators are present) for impairment. Goodwill
arising from the issuance of such contingent shares was tested for impairment
upon issuance and such test indicated there was no impairment of goodwill.

Long-lived assets are reviewed annually for possible impairment, or whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. If such review indicates that the carrying amount
of long-lived assets is not recoverable, the carrying amount of such assets is
reduced to the estimated recoverable value. Based on this evaluation, as of
December 31, 2006, the balances as reported in the accompanying balance sheet
are expected to be fully recoverable. However, it is at least reasonably
possible that management's estimate of future recoverability may change in the
near term, thus resulting in an acceleration in or complete write-off of certain
long-lived assets.

Revenue Recognition

Net Patient Service Revenues - Net patient service revenues are reported at the
estimated net realizable amounts due from patients, third-party payors, and
others for services rendered, including provisions for estimated contractual
adjustments (based on historical experience) under reimbursement agreements with
third-party payors. The Company is not engaged in the practice of medicine. The
Company has the legal right to set the fees for the services rendered, and such
fees are billed at the time such services are rendered. The patient or
third-party payor is legally obligated to the Company for the amount billed.
Bills to third-party payors are based on contractual arrangements between the
Company and the third-party payors. Contractual adjustments are determined based
upon a review of reimbursement policies and historical collections experience
using a retrospective collection analysis for each payor mix. For the years
ended December 31, 2006 and 2005, contractual adjustments approximated
$3,469,000 and $3,138,000, respectively. The Company has historically not
provided any significant amount of charity care.

Management Fees - Management fee revenues are derived from agreements with
contracted radiology practice group's/PET scan centers. The Company enters into
agreements with a radiology practice group's/PET scan centers which typically
have initial terms of 10 years and contain renewal options for an additional
term. Under these agreements, the Company provides the necessary positron
emission tomography equipment, office equipment, practice premises and
administrative support services, and in turn receives a management fee based
upon the practice group's cash collections from imaging procedures. The Company
records management fee revenues based upon the monthly net cash (i.e., practice
groups' collections less amounts deducted for radiologists' and technicians'
fees and salaries) it receives from the practice groups, as well as the net
realizable value of the practice groups' outstanding patients accounts
receivable, subject to agreed upon management fee ceilings.

Lease Revenue - In connection with the opening of Jacksonville in June 2006, the
Company leases time on its PET/CT equipment to physician groups under lease
agreements with terms ranging from 1 to 2 years.. Upon expiration of their
initial terms, the lease agreements automatically extend for successive one year
periods, unless notice of termination is made at least 90 days prior to the
expiration date. Lease revenue is recognized pursuant to the terms of the
respective lease agreements. The PET/CT equipment on which time is leased is
held by the Company under a capital lease obligation (see Note 4).

The following schedule shows the aggregate future minimum lease receipts
required by year under the leases:

 Year Ending December 31,                                          Amount
- -------------------------------------------------------------   ------------
         2007                                                   $    611,000
         2008                                                        210,000
                                                                ------------
                                                                $    821,000
                                                                ============


Total lease revenues for the years ended December 31, 2006 and 2005 was $474,000
and $0, respectively.

Income Taxes - The Company accounts for income taxes using the asset and
liability approach. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
management does not expect to be realized.

                                    Page 48


Basic and Diluted Loss Per Share - Basic loss per share reflects the amount of
loss for the period available to each share of common stock outstanding during
the reporting period. Diluted loss per share reflects basic loss per share,
while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities (warrants or options) into common
stock. The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an anti-dilutive
effect on loss per share (i.e. reducing loss per share). The dilutive effect of
outstanding options and warrants and their equivalents are reflected in dilutive
earnings per share by the application of the treasury stock method which
recognizes the use of proceeds that could be obtained upon the exercise of
options and warrants in computing diluted earnings per share. It assumes that
any proceeds would be used to purchase common stock at the average market price
of the common stock during the period. As of December 31, 2006 there are
outstanding warrants and options to purchase an aggregate of 4,110,625 shares of
common stock at prices ranging from $1.60 to $4.00 per share. For 2006 and 2005,
all of the Company's potential common shares were anti-dilutive and a dual
presentation of loss per share is not presented. Such items may dilute earnings
per share in the future.

Fair Value of Financial Instruments - Generally accepted accounting principles
require disclosing the fair value of financial instruments to the extent
practicable for financial instruments, which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement. In assessing the fair value of these financial
instruments, the Company used a variety of methods and assumptions, which were
based on estimates of market conditions and risks existing at that time. For
certain instruments, including cash and cash equivalents, notes receivable and
other current liabilities, it was estimated that the carrying amount
approximated fair value for the majority of these instruments because of their
short maturity. For investments in marketable securities, fair value is
estimated based on current quoted market price. The fair value of furniture,
fixtures and equipment is estimated to approximate their net book values. The
fair value of capital lease and note payable obligations as recorded approximate
their fair values as represented by the net present value of the future payments
on the underlying obligations.

Concentration of Credit Risk - Financial instruments that potentially subject
the Company to significant concentrations of credit risk include cash and
accounts receivable. As of December 31, 2006, all of the Company's cash is
placed with a high credit, quality financial institution. The amount on deposit
in the institution that exceeds federally insured limits is subject to credit
risk. As of December 31, 2006 the Company had $2,009,000 of cash balances in
excess of federally insured limits. A majority of the Company's net patient
service revenue and accounts receivable were generated from two customers.
During 2006, $1,868,000, or 50% of net patient service revenue was from Medicare
and $958,000, or 25% of net patient service revenue was from Blue Cross/Blue
Shield. During 2005, $1,749,000, or 51% of net patient service revenue was from
Medicare, $703,000, or 20% of net patient service revenue was from Blue
Cross/Blue Shield and $4,000, or .12% of net patient service revenue was from
Diagnostic Radiology Network, an entity owned by Dr. Stephen A. Schulman, who is
a director of the Company and the Chief Executive Officer of Premier. As of
December 31, 2006, $313,000, or 49%, of patient accounts receivable were due
from Medicare and $92,000, or 14%, of patient accounts receivable were due from
Blue Cross/Blue Shield. The Company does not require collateral to support
accounts receivable or financial instruments subject to credit risk.

Stock Options and Similar Equity Instruments - In 2006 the Company began to
recognize expense of options or similar instruments issued to employees using
the fair-value-based method of accounting for stock-based payments in compliance
with SFAS No. 123(R), "Share-Based Payment" using the
modified-prospective-transition method. During 2006, the Company recognized
$135,000 of stock compensation expense related to employee stock options and
stock warrants. As of December 31, 2006, there was approximately $393,000 of
total unrecognized compensation cost related to non-vested stock-based
compensation arrangements granted. That cost is expected to be recognized over a
weighted-average period of 3.6 years. See Note (13) for additional information
regarding the Company's stock based compensation plan.

Prior to 2006, the Company elected to use the intrinsic value method of
accounting for stock options issued under its stock option plan and accordingly
did not record an expense for such stock options. The Company estimated the fair
value of its option awards granted prior to January 1, 2005 using the
Black-Scholes option-pricing formula. The Black-Scholes option pricing model was
used with the following weighted-average assumptions for grants made in 2005:

Dividend yield                                 0%
Expected volatility                        67.08%
Risk-free interest rate                     4.24%
Expected life of options (years)               5%

The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to its stock options during 2005. For purposes of pro forma disclosures under
the fair-value method, the estimated fair-value of the options was amortized to
expense over the options' vesting period. The Company's pro forma information
for 2005 is as follows:

                                    Page 49




                                                                             
Net loss as reported                                                           $ (1,822,000)
Deduct:  Amount by which stock-based employee compensation as
determined under fair value based method for all awards exceeds
the compensation as determined under the intrinsic value method                    (695,000)
                                                                               ------------
Pro forma net loss                                                             $ (2,517,000)
                                                                               ============
Basic and diluted net loss per common share:
As reported                                                                    $      (0.24)
Pro forma under SFAS No. 123                                                   $      (0.34)


Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Reclassifications - Certain 2005 items have been reclassified to conform to the
December 31, 2006 presentation.

(2) Accounts Receivable
    -------------------

The Company's accounts receivables as of December 31, 2006 are summarized as
follows:



                                    Patient       Management
                                    Accounts         Fees          Lease
                                   Receivable     Receivable     Receivables      Total
                                  ------------   ------------   ------------   ------------
                                                                   
Accounts receivable               $  1,133,000   $  1,680,000   $    129,000   $  2,942,000
Contractual allowances                (498,000)            --             --       (498,000)
Allowance for doubtful accounts        (21,000)            --             --        (21,000)
                                  ------------   ------------   ------------   ------------
Accounts receivable, net          $    614,000   $  1,680,000   $    129,000   $  2,423,000
                                  ============   ============   ============   ============


As of December 31, 2006 315,000 of the Company's accounts receivable are pledged
as collateral for borrowings.

Changes in the allowance for doubtful accounts for the year ended December 31,
2006 is as follows:



Year Ended December 31,                                                             2006
- --------------------------------------------------------------------------     ------------
                                                                            
Balance at beginning of year                                                   $     22,000
Provision for bad debts                                                              13,000
Doubtful accounts written-off                                                       (14,000)
                                                                               ------------
Balance at end of year                                                         $     21,000
                                                                               ============


(3) Furniture, Fixtures, Equipment and Leasehold Improvements
    ---------------------------------------------------------

The Company's furniture, fixtures, equipment and leasehold improvements as of
December 31, 2006 are summarized as follows:



                                                                            
Medical equipment                                                              $  6,335,000
Leasehold improvements                                                            2,511,000
Furniture and fixtures                                                              242,000
                                                                               ------------
Total at cost                                                                     9,088,000
Accumulated depreciation                                                         (5,342,000)
                                                                               ------------
Furniture, fixtures, equipment and leasehold
improvements, net                                                              $  3,746,000
                                                                               ============


                                     Page 50


During 2006 and 2005, the Company recorded depreciation of $1,245,000 and
$1,255,000, respectively. All of the Company's furniture, fixtures, equipment
and leasehold improvements are pledged as collateral for borrowings as of
December 31, 2006.

(4) Equipment Held Under Capitalized Lease Obligations
    --------------------------------------------------

The Company's equipment held under capitalized lease obligations as of December
31, 2006 is summarized as follows:

Computer equipment                                                $    120,000
Medical equipment                                                    7,704,000
Furniture and equipment                                                120,000
                                                                  ------------
                                                                     7,944,000
Accumulated amortization                                            (1,192,000)
                                                                  ------------
Equipment held under capitalized lease obligations, net           $  6,752,000
                                                                  ============


During 2006 and 2005, the Company recorded amortization of $749,000 and
$310,000, respectively, related to equipment held under capitalized leases.

As of December 31, 2006, the future minimum lease payments under capital leases
are as follows:

2007                                                              $  4,058,000
2008                                                                 1,199,000
2009                                                                 1,190,000
2010                                                                 1,190,000
2011                                                                 1,190,000
Thereafter                                                           1,201,000
                                                                  ------------
                                                                    10,028,000
Less amount representing imputed interest                           (2,440,000)
                                                                  ------------

Present value of net minimum capital lease payments                  7,588,000
Current portion of capitalized lease obligations                     2,830,000
                                                                  ------------

Non current portion of capitalized lease obligations              $  4,758,000
                                                                  ============

During 2006 and 2005 interest expense related to capitalized lease obligations
was $412,000 and $177,000, respectively.

In December 2004, the Company entered into two capital leases with GE Cap which
represent a significant portion of the Company's total capitalized lease
obligations. Pursuant to one of the Company's capital leases, the Company is
subject to certain default and remedy provisions, which include the following:
(1) the Company must maintain a cash balance of not less than $500,000; (2) the
Company's total indebtedness must not exceed three times its tangible net worth;
and, (3) the Company's ownership must not materially change (excluding private
placements of less than fifty percent of the total and issued outstanding shares
of capital stock). As of December 31, 2006, the Company is not in compliance
with the debt to tangible net worth ratio. As such, $1,988,000 of such capital
lease obligation, which otherwise would be long-term, has been classified as a
current liability in the accompanying consolidated balance sheet. Based on our
historical relationship with our senior creditors and given that we are current
in all lease payments; we do not anticipate that a demand for payment under such
lease will be made as long as we remain current with such lease payments.

(5) Note Receivable and Sale of Investment in Unconsolidated Affiliate
    ------------------------------------------------------------------

The Company entered into an agreement in November 2005 with the General Partner
of Trident to sell to it or its affiliates such 24.1% interest for the greater
of $2,525,000 or the book value of such interest on the date of closing of such
sale. On July 10, 2006, the Company entered into an agreement to amend the
November 25, 2005, agreement (the "Amendment"). The Amendment changed the
provisions to include a closing date of July 11, 2006 and a purchase price of
$2,570,000 which resulted in the Company recording a loss on sale of $14,000.
The purchase price was payable by a cash down payment of $625,000 into an escrow
account which was released to the Company on August 14, 2006, and the remaining
purchase price of $1,945,000 is due under a four year Secured Promissory Note
("Note"). Payments under the Note are due in four annual installments in which
the payment amount is the greater of $486,250, or 75% of the amount of all cash

                                    Page 51


and property distributions received by Trident Advisors, Inc. from Trident in
each of such years, plus accrued interest on or before July 9, 2007, 2008, 2009,
and 2010. The Note accrues interest at the one year LIBOR rate as published in
the Wall Street Journal and adjusts each anniversary date. The interest rate at
the time of closing was 5.68%. As of December 31, 2006, the current portion of
the note receivable is $486,000 and the long-term portion is $1,459,000. During
2006, the Company recognized interest income of $52,000 related to the note.

The condensed results of operations of Trident are summarized in the following
table.



                                                           Period from
                                                         January 1, 2006
                                                               to          Year Ended
                                                          July 11, 2006    December 31,
                                                          (date of sale)      2005
                                                           ------------   ------------
                                                                    
Income                                                     $    981,000   $  2,788,000
Operating expenses                                           (1,169,000)    (2,117,000)
Investment gains                                                 71,000        578,000
                                                           ------------   ------------
Net (loss) income                                          $   (117,000)  $  1,249,000

Company Ownership Percentage                                         24%            24%
                                                           ============   ============

Share of (Loss) Earnings of Unconsolidated Affiliate       $    (28,000)  $    301,000
                                                           ============   ============


(6) Marketable Securities
    ---------------------

The Company's investment in marketable securities is detailed in the following
tables.



                                                                       
Current marketable securities as of December 31, 2006
Common stock at cost                                                      $     50,000
Unrealized holding loss                                                   $    (49,000)
                                                                          ------------
Market value                                                              $      1,000
                                                                          ============

Restricted marketable securities as of December 31, 2006
Restricted securities at cost                                             $     38,000
Realized loss for permanent decline in value, recognized in 1998          $    (37,000)
                                                                          ------------

Market value                                                              $      1,000
                                                                          ============


The change in net unrealized holding loss on marketable securities is summarized
in the following table.


                                                                       
As of December 31, 2006
Beginning balance                                                         $    (48,000)
Current net change in unrealized holding loss                                   (1,000)
                                                                          ------------

Ending balance                                                            $    (49,000)
                                                                          ============


                                    Page 52


(7) Notes Payable
    -------------

As of December 31, 2006, amounts outstanding on notes payable consist of the
following:

     PET Wichita (a)                                               $    718,000
     PET NJ (b)                                                         625,000
     PET LI (c)                                                         583,000
     Hialeah Management (d)                                             543,000
     Queens Management (e)                                              371,000
     Suffolk (f)                                                        483,000
     Suffolk (g)                                                         22,000
     Jacksonville (h)                                                   448,000
     Jacksonville (i)                                                    53,000
     PET Tamarac (j)                                                     79,000
     PET LI (k)                                                         252,000
     PET LI (l)                                                         135,000
     Hialeah Management (l)                                             111,000
     Morris Management (l)                                              137,000
     Queens Management (l)                                              102,000

                                                                   ------------
Total senior notes payable                                            4,662,000
Less:  Current portion of senior notes payable                        3,266,000

                                                                   ------------
Long-term portion senior of notes payable                          $  1,396,000
                                                                   ============

The aggregate maturities of the notes payable are follows:


Year Ending December 31,                                              Amount
- --------------------------------------------------------------     ------------

2007                                                               $  3,266,000
2008                                                                    297,000
2009                                                                    303,000
2010                                                                    163,000
2011                                                                    177,000
Thereafter                                                              456,000

                                                                   ------------
Total maturities of senior notes payable                           $  4,662,000
                                                                   ============

During 2006 and 2005 interest expense on the notes payable was $427,000 and
$478,000, respectively.

(a) In April 2001, PET Wichita obtained $1.758 million in medical equipment and
leasehold improvement financing from DVI Financial Services, Inc. ("DVI") to
purchase PET imaging equipment and to pay for leasehold improvements necessary
to establish PET Wichita. The loan had a term of sixty-six months commencing
September 25, 2001 and a fixed rate of interest of 10.60%. The Company paid a
non-refundable $16,200 commitment fee to DVI. On June 22, 2004 we executed an
agreement modifying the repayment terms to the note payable whereby beginning
June 25, 2004, the modified repayment terms of this note require six monthly
payments of interest only and sixty monthly payments of principal and interest.
Sagemark and Premier have guaranteed the financing. The loan agreement has
various covenants, including a debt to tangible net worth ratio of no more than
three to one, a cash balance of $500,000; restrictions on any mergers,
consolidations, sales of assets, as well as restrictions on dividend payments,
unless authorized by DVI and provides DVI with a security interest in
substantially all of the assets of PET Wichita. As of December 31, 2006, the
Company is not in compliance with the debt to tangible net worth ratio. As such,
$495,000 of the note, which otherwise would be long-term, has been classified as
a current liability in the accompanying consolidated balance sheet. Based on our
historical relationship with our senior creditors and given that we are current
in debt service payments; we do not anticipate that a demand for payment under
the note will be made so long as we remain current with our debt service.

(b) On October 24, 2001, the Company obtained a commitment for $1.784 million in
medical equipment and leasehold improvement financing from DVI to purchase PET
imaging equipment and to pay for leasehold improvements necessary to establish
PET NJ. The loan has a term of sixty-six months commencing December 15, 2002 and
a fixed rate of interest of 9.35%. Repayment of the loan is interest only for
the first six months and then amortizing principal and interest for the
remaining sixty months. The Company paid a non-refundable $18,250 commitment fee
to DVI. The loan is guaranteed by Premier, PET NJ and Morris Management. The

                                    Page 53


loan agreement has various covenants, including a debt to tangible net worth
ratio of no more than three to one, a cash balance of $500,000; restrictions on
any mergers, consolidations, sales of assets, as well as restrictions on
dividend payments, unless authorized by DVI and provides DVI with a security
interest in substantially all of the assets of the Company, Premier, Morris
Management and PET NJ. As of December 31, 2006, the Company is not in compliance
with the debt to tangible net worth ratio. As such, $218,000 of the note, which
otherwise would be long-term, has been classified as a current liability in the
accompanying consolidated balance sheet. Based on our historical relationship
with our senior creditors and given that we are current in debt service
payments; we do not anticipate that a demand for payment under the note will be
made so long as we remain current with our debt service.

(c) On September 19, 2002, the Company obtained $1.659,000 in equipment and
leasehold improvement financing from DVI to purchase PET imaging equipment and
to pay for leasehold improvements necessary to establish the PET imaging center
in Rockville Centre that is managed by PET LI. The loan has a term of sixty-six
months commencing December 15, 2002 and a fixed rate of interest of 9.50%.
Repayment of the loan is interest only for the first six months and then
amortizing principal and interest for the remaining sixty months. Premier, PET
Rockville and PET LI have guaranteed the financing. Premier pledged its equity
interest in PET LI as collateral security for such loan and $140,000 of the loan
is jointly and severally personally guaranteed by Dr. Schulman and Theodore
Shapiro, a Director of the Company and its Chief Executive Officer. The personal
guarantees will be released after eighteen months, if certain specified
financial conditions are met. The Company paid a non-refundable $15,400
commitment fee to DVI. The loan agreement contains various covenants, including
a debt to tangible net worth ratio of no more than three to one, a cash balance
of $500,000; restrictions on any mergers, consolidations, sales of assets, as
well as restrictions on dividend payments, unless authorized by DVI and provides
DVI with a security interest in substantially all of the assets of the Company,
Premier, PET Rockville, and PET LI. As of December 31, 2006, the Company is not
in compliance with the debt to tangible net worth ratio. As such, $203,000 of
the note, which otherwise would be long-term, has been classified as a current
liability in the accompanying consolidated balance sheet. Based on our
historical relationship with our senior creditors and given that we are current
in debt service payments; we do not anticipate that a demand for payment under
the note will be made so long as we remain current with our debt service.

(d) On March 31, 2003, the Company executed a loan agreement with DVI. The loan
agreement provides for a maximum loan of $1,734,000. During the second quarter
of 2003, $1,498,000 of the loan was used to purchase PET imaging equipment and
$77,000 was used to pay for a portion of the leasehold improvements necessary to
establish the Hialeah PET imaging center and $159,000 remains unfunded. The loan
has a term of sixty-six months commencing in April 2003 and a fixed rate of
interest of 9.25%. Premier, which owns 51% of Hialeah Management, and an
investor that owns 11% of Hialeah Management have pledged their equity interests
in Hialeah Management as collateral security for the loan. The loan is
guaranteed by Premier and Hialeah Management. The loan agreement contains
various covenants, including a debt to tangible net worth ratio of no more than
three to one, a cash balance of $500,000; restrictions on any mergers,
consolidations, sales of assets, as well as restrictions on dividend payments,
unless authorized by DVI and provides DVI with a security interest in
substantially all of the assets of the Company, Premier, and Hialeah Management.
On August 25, 2003, DVI announced that it had filed voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code and it is uncertain
whether the remaining $159,000 of the total financing commitment will be funded.
As of December 31, 2006, the Company is not in compliance with the debt to
tangible net worth ratio. As such, $188,000 of the note, which otherwise would
be long-term, has been classified as a current liability in the accompanying
consolidated balance sheet. Based on our historical relationship with our senior
creditors and given that we are current in debt service payments; we do not
anticipate that a demand for payment under the note will be made so long as we
remain current with our debt service.

(e) In December 2004, the Company executed a loan agreement with GE Cap. The
loan agreement provides for a maximum loan of $458,000. During 2004 the entire
loan was used to pay for leasehold improvements necessary to establish the
Queens PET imaging center. The loan has a term of eighty-four months commencing
December 31, 2004 and a fixed rate of interest of 8.48%.

(f) In September 2005, the Company executed a loan agreement with GE Cap. The
loan agreement provides for a maximum loan of $485,000. During 2005 the Company
utilized $138,000 of the loan amount to pay for the commencement of the
construction of the leasehold improvements necessary to establish the Suffolk
PET imaging center and the final funding of the loan occurred on February 28,
2006. The loan has a term of eighty four months commencing March 15, 2006 and a
fixed rate of interest of 8.87%.

(g) On February 28, 2006, the Company executed a loan agreement with GE Cap for
hot lab equipment to be used at the Suffolk PET Imaging Center. The capitalized
cost of the equipment is $22,000 and is being repaid over a term of eighty-four
months with a fixed rate of interest of 8.76%.

(h) On March 6, 2006, the Company executed a $457,000 construction loan with GE
Cap for the Company's construction of its' PET imaging center in Jacksonville,
Florida. The construction loan is being repaid over a term of 60 months with a
fixed rate of interest of 9.19%. The loan requires the Company to maintain a
minimum cash balance of $500,000 and a debt to tangible net worth ratio not to
exceed a ratio of three to one. As of December 31, 2006, the Company is not in
compliance with the debt to tangible net worth ratio. As such, $364,000 of the
note, which otherwise would be long-term, has been classified as a current
liability in the accompanying consolidated balance sheet. Based on our
historical relationship with our senior creditors and given that we are current
in debt service payments; we do not anticipate that a demand for payment under
the note will be made so long as we remain current with our debt service.

                                    Page 54


(i) On March 6, 2006, the Company entered into a $52,000 loan agreement for the
hot lab equipment for its' PET imaging center in Jacksonville, Florida. The hot
lab equipment loan is being repaid over a term of 84 months with a fixed rate of
interest of 9.14%. The loan requires the Company to maintain a minimum cash
balance of $500,000 and a debt to tangible net worth ratio not to exceed a ratio
of three to one. As of December 31, 2006, the Company is not in compliance with
the debt to tangible net worth ratio. As such, $46,000 of the note, which
otherwise would be long-term, has been classified as a current liability in the
accompanying consolidated balance sheet. Based on our historical relationship
with our senior creditors and given that we are current in debt service
payments; we do not anticipate that a demand for payment under the note will be
made so long as we remain current with our debt service.

(j) On May 12, 2006, the Company executed a $275,000 construction loan with GE
Cap for the Company's construction of PET Tamarac. Commencing with the date the
loan is fully funded, the construction loan will be repaid over a term of 60
months with a fixed rate of interest of 9.11%. As of December 31, 2006, the
Company has utilized $79,000 of the $275,000 available loan proceeds from the
construction loan and is accruing interest on the funded portion, which was
approximately $1,000 at December 31, 2006.

(k) In November, 2006, the Company executed a $350,000 leasehold improvement
loan with Siemens for the Company's new PET/CT imaging equipment in Rockville
Centre, New York. Commencing with the date the loan is fully funded, the loan
will be repaid over a term of sixty months with a fixed rate of interest of
9.51%. As of December 31, 2006, the Company has utilized $252,000 of the
$350,000 available loan proceeds from the leasehold improvement loan and is
accruing interest on the funded portion, which was approximately $6,000 at
December 31, 2006.

(l) On December 8, 2006, PET LI, Hialeah Management, Morris Management, and
Queens Management each entered into an FDG Supplier Agreement ("FDG Agreements")
with IBA Molecular North America, Inc ("IBA") for a thirty-six month term. Under
the terms of the FDG Agreements, each subsidiary entered into a note payable
with IBA for the then outstanding accounts payable balance owed to IBA less a
cumulative $150,000 upfront payment. The terms of each note call for 36 monthly
payments of principal and interest, with interest at 12% per annum. The total
amount converted from accounts payable to notes payable approximated $485,000,
of which $135,000 relates to PET LI, $111,000 relates to Hialeah Management,
$137,000 relates to Morris Management, and $102,000 relates to Queens
Management. Of the $150,000 upfront payment, $26,000 related to PET LI, $22,000
related to Hialeah Management, $27,000 related to Morris Management, and $20,000
related to Queens Management's. The remaining $55,000 of the $150,000 upfront
payment was paid by Suffolk Management representing its balance owed to IBA.

(8) SUBORDINATED NOTES PAYABLE
    --------------------------

As of December 31, 2006, amounts outstanding on subordinated notes payable are
as follows:

        Morris Management (a)                                      $    123,000
        PET LI (b)                                                      122,000
        Hialeah Management (c)                                          172,000

                                                                   ------------
Total subordinated notes payable                                   $    417,000
                                                                   ============

The aggregate maturities of the subordinated notes payable are follows:

Year Ending December 31,                                              Amount
- --------------------------------------------------------------     ------------
    2007                                                           $    123,000
    2008                                                                172,000
    2009                                                                122,000
                                                                   ------------
Total maturities of subordinated notes payable                     $    417,000
                                                                   ============

During 2006 and 2005 interest expense on the subordinated notes payable was
$42,000 and $40,000, respectively.

(a) As a part of capitalizing Morris Management and upon PET NJ's obtainment of
financing from DVI, Morris Management issued $123,000 of subordinated notes to
the Morris Management equity investors. The subordinated notes bear interest at
10% per annum and are subordinate to DVI and no payments under the notes can be
made until the DVI financing is paid in full or a waiver is obtained from DVI.
The notes are also subordinate to the payments required to be made by Morris
Management to Sagemark pursuant to a separate lease agreement between such

                                    Page 55


parties by which the PET imaging equipment and related ancillary medical
equipment, furniture and furnishings, leasehold improvements and the premises
required for the use of the PET imaging center, are leased and/or subleased to
Morris Management by Sagemark. The subordinated notes require a balloon payment
due on December 31, 2007. At December 31, 2006, there is accrued interest
payable of $40,000 on such notes.

(b) As a part of capitalizing PET LI and upon PET LI's obtainment of financing
from DVI, PET LI issued $122,000 of subordinated notes to the PET LI equity
investor. The subordinated notes bear interest at 10% per annum and are
subordinate to DVI and no payments under the note can be made until the DVI
financing is paid in full or a waiver is obtained from DVI. The subordinated
notes require a balloon payment due December 31, 2009. At December 31, 2006
there is accrued interest payable of $51,000 on such note.

(c) As a part of capitalizing Hialeah Management and upon Hialeah Management's
obtainment of financing from DVI, Hialeah Management issued $172,000 of
subordinated notes to the Hialeah Management equity investors. The subordinated
notes bear interest at 10% per annum and are subordinate to DVI and no payments
under the notes can be made until the DVI financing is paid in full or a waiver
is obtained from DVI. The subordinated notes require a balloon payment due
September 30, 2008. At December 31, 2006 there is accrued interest payable of
$64,000 on such notes.

(9) Income Taxes
    ------------

For 2006 and 2005, the Company had state income tax expense of $23,000 and
$16,000, respectively. Deferred taxes based upon differences between the
financial statement and tax basis of assets and liabilities and available tax
carry-forwards are summarized in the following table.

As of December 31, 2006
- ---------------------------------------------------------------
Net operating loss carry-forward                                   $ 17,651,000
Undistributed earnings of subsidiaries                                 (412,000)
Unrealized holding (gain) loss                                           18,000
Allowance for uncollectible related party notes receivable              245,000
Allowance for doubtful accounts receivable                                8,000
Alternative minimum tax credit carry-forward                             17,000
Impaired investment write-off                                           333,000
Stock compensation expense                                              117,000
Depreciation                                                           (635,000)
                                                                   ------------
Net deferred tax asset                                               17,342,000
Valuation allowance                                                 (17,342,000)
                                                                   ------------
                                                                             --
                                                                   ============

For the year ended December 31, 2006 the valuation allowance for net deferred
tax assets increased by $434,000. The net increase was the result of increased
change in net temporary differences of $520,000 offset by the expiration of
$86,000 of net operating loss carryforwards. Based upon the level of historical
tax losses, the Company has established the valuation allowance against the
entire net deferred tax asset.

As of December 31, 2006, the Company has net operating loss carry-forwards
approximating $50,431,000. On June 28, 2004, pursuant to the Stock Purchase
Agreement, as amended, between the Company and Premier's Founders, the Company
issued 1,415,000 shares of the Company's common stock to the Premier Founders.
The issuance of such shares as well as the issuance of the Common Stock Shares
pursuant to the private placement with Joseph Stevens and Company, Inc. has
limited the Company's utilization of its tax net operating loss carryover to
approximately $418,000 per year for losses incurred prior to the issuance of
such shares, per Section 382 of the Internal Revenue Code.

                                    Page 56


The Company's net operating loss carry-forwards at December 31, 2006 expire as
set forth in the following table.

Year carry-forward expires                                             Amount
- --------------------------------------------------------------    ------------
2007                                                                   206,000
2008                                                                 1,505,000
2009                                                                 4,482,000
2010                                                                 6,241,000
2011                                                                 4,413,000
2012                                                                 7,017,000
2018                                                                15,059,000
2020                                                                   972,000
2021                                                                 1,901,000
2022                                                                 1,409,000
2023                                                                 1,631,000
2024                                                                 1,361,000
2025                                                                 2,159,000
2026                                                                 2,075,000
                                                                  ------------
Total                                                             $ 50,431,000
                                                                  ============

The following table reconciles the statutory federal income tax rate to the
effective rate.

Years ended December 31,                               2006           2005
- -------------------------------------------------  ------------   ------------
Statutory federal income tax rate                         (35.0)%        (35.0)%
Increase in net operating loss carry-forward               34.3           34.0
Permanent differences                                       0.2            0.5
Effective state tax rate                                    0.5            0.5
                                                   ------------   ------------
Effective income tax rate                                   0.0%           0.0%
                                                   ============   ============

(10) Commitments and Contingencies
     -----------------------------

(a) Operating Lease Obligations

         o        The Company leases executive offices located in New York, New
                  York under a month to month cancelable agreement.
         o        The Company leases an administrative office in Boca Raton,
                  Florida under a non-cancelable lease which expires on February
                  28, 2010 and has no options to renew.
         o        PET Wichita leases space in a free standing building under a
                  non-cancelable lease which initially expires in August of 2007
                  and has an option to renew for periods up to an additional
                  twelve years. The lease is with a company that is majority
                  owned and controlled by Dr, Schulman, who is a Director and
                  executive officer of the Company.
         o        The Company leases real estate, which is sub-leased to Morris
                  Management, under a non-cancelable operating lease which
                  initially expires in July 2012 and which has the option to be
                  renewed for two additional five year periods.
         o        The Company leases real estate, which is sub-leased to PET LI,
                  under a non-cancelable operating lease which initially expires
                  in May 2012 and which has the option to be renewed for two
                  five year periods.
         o        The Company leases real estate from an affiliated entity of an
                  investor in Hialeah Management, which is sub-leased to Hialeah
                  Management, under a non-cancelable operating lease which
                  initially expires in February 2008 and which has the option to
                  be renewed for three additional five year periods.
         o        The Company leases real estate, which is sub-leased to the
                  Queens PET imaging center under a non-cancelable operating
                  lease which initially expires in May 2014 and which has the
                  option to be renewed for a five year period.
         o        The Company leases real estate, which is sub-leased to Suffolk
                  Management, under a non-cancelable operating lease with an
                  affiliated entity of the minority investor in Suffolk
                  Management which initially expires in February 2016 and has
                  two five year renewal options.
         o        The Company leases real estate, which is sub-leased to
                  Jacksonville, under a non-cancelable operating lease which
                  initially expires May 2016 and has two five year renewal
                  options.

                                    Page 57


         o        On May 25, 2006, the Company entered into a premises lease for
                  PET Tamarac. The lease is for a ten year period with a ten
                  year renewal options that will commence upon completion of the
                  construction of PET Tamarac.

         o        The Company leases various medical equipment, office
                  equipment, computer equipment, and furniture and fixtures
                  under non-cancelable capital leases, the last of which expires
                  in 2013. All of these leases have a $1 buy-out of the leased
                  assets, due at the end of the lease term.


Total operating lease expense for 2006 and 2005 was $596,000 and $417,000,
respectively. During 2006 and 2005, the Company made aggregate lease payments of
$54,000 and $58,000, respectively, for its administrative offices in Boca Raton,
Florida and its PET imaging center in Wichita, Kansas from companies controlled
by Dr. Schulman. During 2006 and 2005, the Company made aggregate lease payments
of $43,000 and $40,000, respectively for its PET imaging center in Hialeah,
Florida to a company controlled by an investor in Hialeah Management. During
2006, the Company made aggregate lease payments of $88,000 for its PET imaging
center in East Setauket, New York to a company controlled by an investor in
Suffolk Management.

As of December 31, 2006 our future minimum lease payments under operating leases
are as follows:

2007                                                               $    545,000
2008                                                                    509,000
2009                                                                    501,000
2010                                                                    466,000
2011                                                                    468,000
Thereafter                                                            1,064,000
                                                                   ------------
Total                                                              $  3,553,000
                                                                   ============

(b)  Employment Agreements

On May 25, 2001 the Company entered into an employment agreement with Mr.
Shapiro, the Company's President, Chief Executive Officer and a Director for a
term of five years at an annual base salary of $200,000 per year. During 2004
Mr. Shapiro exchanged $325,000 of salary owed to him for 130,000 shares of
Common Stock. On July 1, 2004, Mr. Shapiro agreed to amend his employment
agreement which would include a reduction of his base annual salary to $100,000
effective January 1, 2004. Mr. Shapiro is entitled to receive an annual bonus
equal to 5% of the Company's net pre-tax profits. On October 14, 2004, the
Company and Mr. Shapiro executed an amendment to his employment agreement which
effectively limits his annual bonus to $200,000 for years 2004, 2005 and 2006.
Mr. Shapiro has not received any annual bonus under his employment agreement
through December 31, 2006. Mr. Shapiro is entitled to receive a five year
incentive common stock purchase warrant to purchase up to 20,000 shares of the
Company's common stock for each $1,000,000 of net pre-tax profits earned by the
Company each year during the term of his agreement, up to a maximum of five such
warrants each year. Each incentive common stock purchase warrant earned by Mr.
Shapiro will be exercisable at a price equal to the closing price of the
Company's common stock on the date the warrant is issued. The Company also gave
Tara Capital, Inc. ("Tara"), a company owned by Mr. Shapiro and his relatives, a
warrant to purchase up to 100,000 shares of the Company's common stock at an
exercise price of $1.70 per share. Mr. Shapiro is entitled to certain demand and
"piggyback" registration rights with respect to the shares of the Company's
common stock he may acquire pursuant to his employment agreement. The fair
market value of the common stock on the date Mr. Shapiro's warrant was granted
equaled the exercise price and no compensation expense was incurred. On October
11, 2005, the exercise period of this warrant was extended to October 10, 2010.
The modification of this warrant resulted in no compensation expense in 2006. On
March 25, 2005 the term of Mr. Shapiro's Employment Agreement was extended to
March 24, 2010. At December 31, 2006, Mr. Shapiro's accrued and unpaid
compensation approximates $200,000 and is included in accrued payroll.

On May 17, 2001 the Company entered into an employment agreement with Stephen A.
Schulman, M.D. to serve as the Chief Executive Officer of Premier for a term of
five years. The Company also issued to Dr. Schulman a warrant to purchase up to
100,000 shares of the Company's common stock at an exercise price of $1.31 per
share. Dr. Schulman is entitled to certain demand and "piggyback" registration
rights with respect to the shares issuable pursuant to the warrant. The fair
market value of the common stock on the date Dr. Schulman's warrant was granted
equaled the exercise price and no compensation expense was incurred. On October
11, 2005, the exercise period of this warrant was extended to October 10, 2010
and re-priced to $1.60. The modification of this warrant resulted in no
compensation expense in 2006. On December 30, 2003, Dr. Schulman's employment
agreement was amended whereby, among other things, he no longer accrued any base
salary or bonus and is no longer entitled to receive incentive warrants.
Furthermore, the amended employment agreement provides that all unpaid and
accrued salary owed to Dr. Schulman, which amounted to $293,000, is waived.
Since May 17, 2001 through December 30, 2003, Dr. Schulman had earned aggregate
salaries of $418,000 of which $125,000 was exchanged in 2003 for 50,000 shares
of Common Stock. In 2006 and 2005, Dr. Schulman provided services valued at
$25,000 and $25,000 respectively, and such amount was recorded as salaries and
benefits expense. At December 31, 2006, accrued compensation of $75,000 has not

                                    Page 58


been paid and is included in accrued payroll. On March 25, 2005 the term of Dr.
Schulman's Employment Agreement was extended to March 24, 2010.

On March 4, 2001, the Company entered into an agreement to employ George W.
Mahoney as its Chief Financial Officer for a period of three years at an annual
base salary of $70,000 per year. Per the terms of the agreement, upon
consummation of the Premier Acquisition, Mr. Mahoney's annual base salary was
increased to $140,000 and subsequently increased to $194,670. In addition, on
August 3, 2001, Mr. Mahoney received an option to purchase 45,000 shares of the
Company's common stock at an exercise price of $1.90 per share. The fair market
value of the common stock on the date Mr. Mahoney's option was granted equaled
the exercise price and no compensation expense was incurred. The option expired
on August 3, 2005. On October 11, 2005 the Company issued to Mr. Mahoney a fully
vested five year option to purchase 45,000 shares of common stock at an exercise
price of $1.60 per share. The fair market value of the common stock on the date
Mr. Mahoney's option was granted equaled the exercise price and no compensation
expense was incurred.

On January 25, 2005, the Company entered into an employment agreement with
Elizabeth A. Longton to serve as its Vice President of Operations for an initial
term of three years at a base salary of $140,000 per year. Ms. Longton is
entitled to bonus compensation of $5,000 on the date during the contract term
that each of the Company's future PET imaging centers commences operations and a
$5,000 bonus and an option to purchase 5,000 shares of Common Stock, with an
exercise price equal to the fair market value of the common stock on the date of
grant, for each instance in which future PET imaging centers achieve positive
cash flow. The employment agreement automatically renews for successive one year
periods until such time as either Ms. Longton or the Company gives to the other,
notice of intent to terminate the employment agreement. In the event the
employment agreement is not renewed, the Company is obligated to pay Ms. Longton
a lump sum equal to six months base salary. In addition, Ms. Longton received an
option to purchase 35,000 shares of the Company's common stock at an exercise
price of $3.91 per share. The fair market value of the common stock on the date
Ms. Longton's option was granted equaled the exercise price. During 2006 the
Company recognized $29,000 of stock compensation expense from the amortization
of the option issued to Ms. Longton. Of the shares reserved for issuance
pursuant to such option, 17,500 of such shares vest on the last day of the first
year of the term of such employment agreement and the remaining 17,500 shares of
common stock reserved for issuance thereunder vest on the last day of the second
year of the term of such Employment Agreement, provided that Ms. Longton is then
in our employ.

On October 25, 2005, the Company entered into an Executive Employment Agreement
and Exclusive Radiology Services Agreement with Michael Fagien, M.D., to serve
as its Chief Medical Officer for an initial term of five years, subject to
renewal for three successive two year renewal periods. Dr. Fagien receives an
annual base salary of $250,000 and a fee of $100,000 for each new PET imaging
center that is acquired or established by the Company in Florida (the "New
Florida Centers") from the cash flow of each new Florida PET imaging center. Dr.
Fagien was issued a warrant to purchase up to 500,000 shares of the Company's
common stock during a five year period at an exercise price of $1.60 per share.
The fair value of the common stock on the date Dr. Fagien's warrant was granted
equaled the exercise price. During 2006 the Company recognized $95,000 of stock
compensation expense from the amortization of the option issued to Dr. Fagien.
Dr. Fagien is entitled to all of the same rights of indemnification granted by
the Company to its officers, including indemnification rights under an
indemnification agreement between the Company and its executive officers dated
January 3, 2003. Pursuant to the Exclusive Radiology Services Agreement, Dr.
Fagien will serve as the Company's radiologist to perform all required radiology
services for all New Florida Centers as well as any other imaging centers which
are currently owned or managed by the Company or which are acquired or
established by the Company outside of the State of Florida. The Radiology
Agreement will have an initial term of five years, subject to renewal and
earlier termination on the same terms and conditions as provided in the
Employment Agreement. Dr. Fagien will receive a fee for such services of
$250,000 per year, plus an additional fee of $170 for each PET imaging scan and
$75 for each body part computerized tomography imaging scan in excess of 1,470
imaging scans which are read and interpreted by Dr. Fagien in each year of the
term of such agreement.

On January 2, 2003, the Company entered into an Indemnification Agreement with
Mr. Shapiro, Dr. Schulman, Mr. Blessey, Mr. Bright, Dr. Mishrick and Mr. Mahoney
(all officers and or directors and each an "Indemnitee" and collectively, the
"Indemnitees"). The Indemnification Agreement provides the Indemnitees with
greater protection than what is provided to them by the Company's Articles of
Incorporation. Pursuant to the Indemnification Agreement, the Corporation has
agreed, among other things, to provide the Indemnitees with the following (1)
mandatory indemnification in proceedings other than those by or in the right of
the corporation; (2) mandatory indemnification in proceedings by or in the right
of the corporation; (3) mandatory indemnification against expenses incurred
while testifying; and, (4) reimbursement of expenses following adjudication of
negligence. The Indemnification Agreement shall continue until and terminate
upon the later of (a) ten years after the date that an Indemnitee ceases to be
employed by the Company or any of its subsidiaries (including service as a
member of the Board of Directors); (b) the final termination of any pending or
threatened legal actions or proceedings to which the Indemnitee may be
indemnified pursuant to the Indemnification Agreement; or, (c) the expiration of
all applicable statutes of limitation with respect to all such actions or
potential actions to which the Indemnitee is or could be a party as a result of
his services to the Company and/or its subsidiaries.

(c) Radiology Services Agreements for PET NJ - On July 23, 2003, PET NJ entered
into a radiology agreement (the "Radiology Services Agreement") with a New
Jersey professional corporation (the "Radiologist"). The term of the Radiology
Services Agreement is two years commencing July 23, 2003 and expiring July 22,

                                    Page 59


2005, subject to automatic renewal for two successive two year periods unless
earlier terminated by either party pursuant to the termination provisions of the
Radiology Services Agreement. The Radiology Service Agreement was renewed for
two years until July 22, 2007. The Radiologist will receive a fee of $170 for
each PET imaging scan read an interpreted by it. Such fee is payable, not to
exceed 10% of the monthly gross revenues of PET NJ as defined per the Agreement.

(d) PET imaging equipment Service Agreements - On June 26, 2002, PET Wichita
entered into a five year service agreement with Siemens from whom PET Wichita
purchased its PET imaging equipment in 2001. The service agreement commenced
August 1, 2002 and expires July 31, 2007. PET Wichita makes monthly payments of
$9,167 per the terms of the Service Agreement. At the completion of the second
year of the service agreement the monthly payment will be adjusted to reflect
current market conditions, but in no event will the monthly payment amount be
increased. As of December 31, 2006, and the date of this report, the Company has
only made payments required by this service agreement through the February 2004
monthly payment. In March 2005 PET Wichita and Siemens terminated the existing
agreement and PET Wichita now receives maintenance when needed on a time and
materials basis. At December31, 2006 PET Wichita owes $125,000 to Siemens under
the terminated service agreement.

On June 26, 2002, PET LI entered into an equipment purchase order with Siemens
to purchase PET imaging equipment. This purchase order was subsequently assigned
to Sagemark. The PET imaging equipment has a one year warranty and PET LI
entered into a service agreement with Siemens which commences upon the
expiration of the warranty. The service agreement was also subsequently assigned
to Sagemark and has a term of four years and is payable in monthly installments
of $9,167. This service agreement commenced October 24, 2003 and expires October
23, 2007.

On June 30, 2002, Sagemark entered into an equipment purchase order with Siemens
to purchase PET imaging equipment for PET NJ. The PET imaging equipment has a
one year warranty and Sagemark entered into a service agreement with Siemens
which commences upon the expiration of the warranty. The service agreement has a
term of four years and is payable in monthly installments of $9,167. This
service agreement commenced February 21, 2004 and expires February 20, 2008.

On October 10, 2002, Sagemark entered into an equipment purchase order with
Siemens to purchase PET imaging equipment for the Hialeah PET imaging center.
The PET imaging equipment has a one year warranty and Sagemark entered into a
service agreement with CTI which commences upon the expiration of the warranty.
The service agreement has a term of four years and is payable in monthly
installments of $9,167. This service agreement commenced February 7, 2004 and
expires February 6, 2008.

On December 21, 2004, Sagemark entered into a capital lease with GE Cap for the
acquisition of PET/CT imaging equipment for the Queens PET imaging center. The
PET/CT imaging equipment has a one year warranty and Sagemark entered into a
service agreement with GE Cap which commences upon the expiration of the
warranty. The service agreement has a term of six years and is payable in
monthly installments of $12,917, plus taxes beginning December 21, 2005 and
expires December 21, 2011.

On August 29, 2005 Sagemark entered into a lease with GE Cap to lease a positron
emission tomography / computed tomography ("PET/CT") scanner for the Suffolk PET
imaging center. The PET/CT scanner has a one year warranty. The Company entered
into a five year service agreement with the PET/CT manufacturer which commences
upon the expiration of the warranty. The monthly expense of the service
agreement is $15,986 and is payable monthly beginning February 2007.

On March 6, 2006, Sagemark entered into a lease with GE Cap to lease PET/CT
imaging equipment for its' PET imaging center in Jacksonville, Florida. The
PET/CT imaging equipment has a one year manufacturer's warranty from date of
acceptance; thereafter the Company will pay a fixed monthly maintenance fee of
$15,000 and is payable beginning June 2007.

On May 12, 2006, Sagemark entered into a loan agreement with GE Cap for PET/CT
imaging equipment for its' PET imaging center in Tamarac, Florida. The PET/CT
imaging equipment has a one year manufacturer's warranty from date of
acceptance; thereafter the Company will pay a fixed monthly maintenance fee of
approximately $15,000 which will commence one year after delivery of the PET/CT
imaging equipment.

On November 30, 2006, Sagemark entered into a capital lease with GE Cap to lease
PET/CT imaging equipment for its PET imaging center in Rockville Centre, New
York. The Company also entered into a five year equipment service agreement.
During the first year of the agreement, the PET/CT imaging equipment is covered
under the manufacturers warranty with no monthly payments required; the
remaining four years requires 48 monthly payments of approximately $14,000 per
month and is payable beginning December 2007.

(e) Consulting Agreement - On June 1, 2006, the Company entered into an
agreement with a consultant (the "Consulting Agreement") providing for the
performance by such consultant of certain investor and financial relations
services during a two year period commencing on June 1, 2006, subject to earlier
termination as provided for in the Consulting Agreement. The terms of the
Consulting Agreement provide that the Company pay such consultant a monthly
consulting fee of $5,000 for the three month period commencing June 1, 2006

                                    Page 60


through August 31, 2006 and issue to such consultant 60,000 unregistered shares
of the Company's common stock together with a common stock purchase warrant to
purchase up to 60,000 unregistered shares of the Company's common stock during a
five year period at an exercise price equal to the closing price of the
Company's publicly traded shares of common stock on the date of issuance of such
warrant (but in no event less than $4 per share). For the year ending December
31, 2006 the consulting expense was $41,000. On the date of issuance of such
warrant, the fair-market value was $1.30 per share and as such the warrant was
issued with an exercise price of $4.00 per share. In connection with the
issuance of the unregistered shares, the Company recorded $78,000 of deferred
compensation which is being amortized over the term of the Consulting Agreement.
The monthly amortization of approximately $4,000 is included in consulting
expense in the accompanying consolidated statements of operations. In addition,
the Company recorded deferred compensation related to the issuance of the common
stock purchase warrant of $9,000 which is also being amortized over the term of
the Consulting Agreement. The monthly amortization of approximately $400 is
included in consulting expense in the accompanying consolidated statements of
operations. In calculating the $9,000 value of the common stock purchase warrant
the Company used an exercise price of $4.00 per share, a term of two years,
volatility of 69.60%, a dividend rate of 0%, and a risk-free interest rate of
4.92%. The consultant is entitled to receive up to an aggregate of an additional
290,000 shares of the Company's common stock subject to and based upon attaining
five Aggregate Market Capitalization performance milestones as defined and
otherwise provided in the Consulting Agreement. The Company has agreed to
include the shares of common stock issued to the consultant under the Consulting
Agreement in its current Registration Statement, at the Company's cost.

(11) Capital Stock
     -------------

Common Stock

As of December 31, 2006, the authorized number of shares of common stock, par
value $0.01, is 25,000,000 shares of which 8,008,261 shares are issued,
7,661,503 shares are outstanding and 346,758 shares are held in treasury.

On June 3, 2004, the Company entered into a subscription agreement with a group
of potential investors who deposited $250,000 in funds that were held in escrow.
On May 27, 2005, the Company and such potential investors mutually agreed to
terminate the subscription agreement pursuant to which the $250,000 held in
escrow was returned to the potential investors and the Company issued to the
potential investors an aggregate of 50,000 shares of its common stock having a
market value approximating $125,000, which such amount was charged as an
operating expense for the year ended December 31, 2005.

On November 29, 2004, the Company consummated an initial closing of a private
placement of its securities pursuant to a Placement Agency Agreement entered
into between it and Joseph Stevens & Company, Inc., as Placement Agent (the
"Placement Agent"), dated October 14, 2004 (the "Agency Agreement"). The
securities sold consisted of Units comprised of shares of the Company's common
stock and warrants to purchase shares of the Company's common stock. The Company
sold an aggregate of 1,730,750 shares of common stock at a purchase price of
$2.00 per Share and delivered warrants to purchase an aggregate of 865,375
shares of the Company's common stock at an exercise price of $4.00 per share. On
December 29, 2004, the Company consummated a second closing in connection with
the private placement and sold an aggregate of 1,180,000 shares of common stock
at a purchase price of $2.00 per share and delivered warrants to purchase an
aggregate of 590,000 shares of the Company's common stock at an exercise price
of $4.00 per share. On January 13, 2005, the Company consummated a third and
final closing in connection with a private placement and sold an aggregate of
839,250 shares of common stock at a purchase price of $2.00 per share, delivered
warrants to purchase an aggregate of 419,625 shares of the Company's common
stock, at an exercise price of $4.00 per share, and delivered to the Placement
Agent, warrants to purchase an aggregate of 945,000 shares of the Company's
common stock for $2.00 per share. The issuance of these shares will limit the
Company's utilization of its tax net operating loss carryover to approximately
$418,000 per year for losses incurred prior to the issuance of such shares per
Section 382 of the Internal Revenue Code.

Under the terms of the Agency Agreement, the Placement Agent received a cash
commission fee of 9% of the gross proceeds to the Company of the securities sold
at each closing, a cash consulting fee of 2% of the gross proceeds of the
securities sold at each closing, plus a non-accountable expense allowance equal
to 1% of such proceeds. In addition, the Company agreed to issue to the
Placement Agent warrants to purchase shares of the Company's common stock during
a period of five years in an amount equal to 20% of the shares of common stock
sold in the private placement and 20% of the number of shares of common stock
issuable pursuant to warrants issued to investors in the private placement. The
warrants issuable to the Placement Agent provide the Placement Agent with the
right to purchase an aggregate of 945,000 shares of the Company's common stock
and are exercisable at $2.00 per share and provide for cashless exercise.

Pursuant to the Agency Agreement, the Company also agreed to file with the
Securities and Exchange Commission a Registration Statement covering the Shares,
the Warrant Shares and the shares of the Company's common stock reserved for
issuance under the Placement Agent Warrants. If such Registration Statement is
not filed within the required time frame, or does not become effective within
the required time frame, or does not remain effective for any thirty (30)
consecutive days, the Company has agreed to issue to the investors in the
Private Placement, additional Shares and to increase the number of Warrant
Shares for each thirty (30) day period in which the Company fails to comply with
such requirements, all as more specifically provided in the Agency Agreement.
Such Registration Statement was not filed within the required time period and as

                                    Page 61


such the Company issued to the private placement investors an additional 131,250
shares of the Company's common stock and warrants to purchase 65,625 shares of
the Company's common stock at an exercise price of $4.00 per share.

On June 1, 2006, the Company issued 60,000 unregistered shares of the Company's
common stock and a common stock purchase warrant to purchase up to 60,000
unregistered shares of the Company's common stock to an individual pursuant to a
consulting agreement. The consultant is entitled to receive up to an aggregate
of an additional 290,000 shares of the Company's common stock subject to and
based upon attaining five Aggregate Market Capitalization performance milestones
as defined and otherwise provided in the Consulting Agreement. The Company has
agreed to include the shares of common stock issued to the consultant under the
Consulting Agreement in its current Registration Statement, at the Company's
cost. (See Note 10.(e)).

Preferred Stock

As of December 31, 2006, the authorized number of shares of undesignated
preferred stock, par value $1.00 per share, is 2,000,000 shares of which the
following 2,962 shares are issued and outstanding as of December 31, 2006:

Series B (170 shares issued and outstanding) - The Series B subordinated
preferred stock is redeemable at the option of the Company at the issue price of
$87.50 per share. Each share is entitled to a $3.50 annual dividend, which is
contingent upon after tax earnings in excess of $200,000. In the event of
involuntary liquidation, the holders are entitled to $87.50 per share and all
accrued dividends. Accrued dividends on the Series B Preferred stock as of
December 31, 2006 approximated $1,000. No dividends were declared for 2006 and
2005.

Series E (92 shares issued and outstanding) - The Series E preferred stock is
entitled to an annual dividend of $.10 per share contingent upon after tax
earnings in excess of $200,000. Accrued dividends on the Series E preferred
stock as of December 31, 2006 approximated $18. No dividends were declared for
2006 and 2005.

Series F (2,700 shares issued and outstanding) - In consideration for certain
creditors granting extensions on former Company debts, the Company issued, in
1984, 2,700 shares of preferred stock at $1.00 per share. The nonvoting
preferred stock, designated Series F, with a dividend rate of $8.00 per share,
is redeemable at the option of the Company after July 1993 for $1.00 per share.
The dividend is non-cumulative and is payable within 100 days from the close of
any year in which net income after tax exceeds $500,000, and all dividends due
on the Series B preferred stock are paid or provided for. Accrued dividends on
the Series F preferred stock as of December 31, 2006 approximated $43,000. No
dividends were declared for 2006 and 2005.

(12) Treasury Stock
     --------------

In October 1998, the Board of Directors authorized the Company to repurchase its
common stock in unsolicited open market transactions in amounts of up to
$500,000, pursuant to which the Company repurchased 80,096 shares in
transactions with an aggregate value of $247,000. On March 7, 2001, the Board of
Directors authorized the purchase of shares of the Company's common stock in
unrestricted open market transactions, subject to the aggregate purchase price
for such shares not exceeding $25,000, however, no additional shares were
repurchased pursuant to the March 7, 2001 authorization. On March 12, 2002, the
Company consummated the TAL Purchase Agreement pursuant to which it transferred
to TAL an approximate 27% limited partnership interest in Trident owned by it in
exchange for 266,662 shares of the Company's common stock owned by TAL. As of
December 31, 2006 and 2005 there were 346,758 shares of common stock held in
treasury.

(13) Long-term Incentive Plans
     -------------------------

On July 22, 1999, the stockholder's of the Company approved the 1999 long-term
incentive plan. Pursuant to the plan, the following stock purchase warrants and
stock options were issued:

(a) On March 7, 2001, the Company granted to Tara, a corporation in which Mr.
Shapiro owns 10%, five year warrants to purchase an aggregate of 275,000 shares
of its common stock at an exercise price of $1.125 per share and to Mr. Bright a
five year warrant to purchase 50,000 shares of its common stock at an exercise
price of $1.125 per share. On October 11, 2005, the exercise period for the
foregoing warrants was extended until October 10, 2010 and re-priced to an
exercise price of $1.60 per share. The modification of these warrants did not
result in any compensation expense in 2006 or 2005.

(b) On May 21, 2001, the Company granted to Dr. Schulman a five year warrant to
purchase 100,000 shares of its common stock at an exercise price of $1.31 per
share and to Mr. Blessey, a five year warrant to purchase 12,500 shares of its
common stock at an exercise price of $1.31 per share. The fair market value of
the common stock on the date the warrants were granted equaled the exercise
price and no compensation expense was incurred. Mr. Blessey is entitled to
certain demand and piggy-back registration rights with respect to the shares
underlying such warrant. On October 11, 2005, the exercise period for the
foregoing warrants was extended until October 10, 2010 and re-priced to an

                                    Page 62


exercise price of $1.60 per share. The modification of these warrants did not
result in any compensation expense in 2006 or 2005.

(c) On May 25, 2001, the Company granted to Tara a five year warrant to purchase
100,000 shares of its common stock at an exercise price of $1.70 per share. On
October 11, 2005, the exercise period for the foregoing warrant was extended
until October 10, 2010. The modification of this warrant did not result in any
compensation expense in 2006 or 2005.

(d) On June 14, 2001, the Company granted to Mr. Bright a five year warrant to
purchase 12,500 shares of its common stock at an exercise price of $1.31 per
share. Mr. Bright is entitled to certain demand and "piggy-back" registration
rights with respect to the shares underlying such warrant. The fair market value
of the common stock on the date that Mr. Bright's warrant was issued was $2.25
per share, resulting in approximately $7,000 of compensation expense. As of
December 31, 2006 there remains no deferred compensation relating to this
warrant. On October 11, 2005, the exercise period for the foregoing warrant was
extended until October 10, 2010 and re-priced to $1.60 per share. The
modification of this warrant did not result in any compensation expense in 2006
or 2005.

(e) On August 3, 2001, the Company issued to Mr. Mahoney an option to purchase
45,000 shares of its common stock at an exercise price of $1.90 per share and to
four other non executive employees options to purchase an aggregate of 48,000
shares of its common stock at an exercise price of $1.90 per share, with terms
ranging from four to six years. Options to purchase 17,000 shares of common
stock were forfeited upon the resignation of the holders of such options and
options to purchase 61,000 shares of common stock expired. In 2006, as a result
of the adoption of SFAS 123(R) "Share-Based Payments" under the
modified-prospective-transition method, the remaining options held by three non
executive employees were valued at $65,000 as of the grant date and the
remaining unamortized fair value as of January 1, 2006 is being expensed over
the remaining vesting period. During 2006 the Company recorded stock
compensation expense of $11,000 related to these option grants and as of
December 31, 2006, there remains a total of $4,000 of unrecognized compensation
cost related to the non-vested portion of these options.

(f) On April 15, 2003, the Company issued, to a PET imaging technologist for its
Rockville Centre PET imaging center, a warrant to purchase 10,000 shares of its
common stock for $3.50 per share. The option has a term of four years from the
date of issuance, a three year vesting period and was valued at $13,030 which is
being amortized over the three year vesting period. During 2006 and 2005, the
Company recorded amortized deferred stock compensation expense of $4,000 and
$3,000, respectively, related to this warrant.

(g) On January 25, 2005 the Company issued to Ms. Longton an option to purchase
35,000 shares of the Company's common stock at an exercise price of $3.91 per
share, which vests over three years. On the date of grant the fair market value
of the common stock equaled the exercise price and under the intrinsic value
method used in 2005, no compensation expense was incurred. In 2006, as a result
of the adoption of SFAS 123(R) "Share-Based Payments" under the
modified-prospective-transition method, this option was valued at $88,000 as of
the grant date and the remaining unamortized fair value as of January 1, 2006 is
being expensed over the remaining vesting period. During 2006 the Company
recorded stock compensation expense of $29,000 related to this option grant and
as of December 31, 2006, there remains a total of $29,000 of unrecognized
compensation cost related to the non-vested portion of this option.

(h) On October 11, 2005 the Company issued to Mr. Mahoney and another individual
fully vested five year options to purchase 45,000 and 10,000 shares of common
stock, respectively, at an exercise price of $1.60 per share. The fair market
value of the options on the date of grant equaled the exercise price and no
compensation expense was incurred. As of January 1, 2006, this option was fully
vested and no expense resulted from the adoption of SFAS 123(R) "Share-Based
Payments" as it relates to this option.

(i) On October 25, 2005 the Company issued to Dr. Fagien a warrant to purchase
up to 500,000 shares of the Company's common stock during a five year vesting
period at an exercise price of $1.60 per share. On the date of grant the fair
market value of the warrant equaled the exercise price under the intrinsic value
method used in 2005, and no compensation expense was incurred. In 2006, as a
result of the adoption of SFAS 123(R) "Share-Based Payments" under the
modified-prospective-transition method, this option was valued at $472,000 as of
the grant date and the remaining unamortized fair value as of January 1, 2006 is
being expensed over the remaining vesting period. During 2006 the Company
recorded stock compensation expense of $95,000 related to this option grant and
as of December 31, 2006, there remains a total of $360,000 of unrecognized
compensation cost related to the non-vested portion of this option.

As discussed in Note 1, in 2006 the Company began to recognize expense of
options or similar instruments issued to employees using the fair-value-based
method of accounting for stock-based payments in compliance with SFAS 123(R)
"Share-Based Payments". The Company did not grant any stock options or warrants
for 2006 pursuant to the 1999 long-term incentive plan. As noted in Notes (13)
(e), (g) and (i), for 2006, the Company recognized an aggregate of $135,000 of
stock compensation expense from the amortization of deferred stock compensation
expense related to employees and as of December 31, 2006, there was an aggregate
of $393,000 of total unrecognized compensation cost related to non-vested
stock-based compensation arrangements granted to employees. That cost is
expected to be recognized over a weighted-average period of 3.66 years.

                                    Page 63


The following assumptions were used during the respective years to estimate the
fair value of options granted:



Years ended December 31,                                                                                    2006           2005
- -----------------------------------------------------------------------------------------------------   ------------   ------------
                                                                                                                  
Dividend yield                                                                                                    --              0%
Expected volatility                                                                                               --          67.08%
Risk-free interest rate                                                                                           --           4.24%
Expected life of options (years)                                                                                  --              5%


The following table summarizes the Company's fixed stock purchase warrants and
options for 2006 and 2005.



                                                                                            2006                           2005
                                                                                          Weighted                       Weighted
                                                                                          Average                        Average
                                                                               2006       Exercise         2005          Exercise
                                                                              Shares       Price          Shares          Price
                                                                          ------------   ------------   ------------   ------------
                                                                                                           
Outstanding at beginning of year                                             1,171,000   $       1.70        636,000   $       1.38
Granted                                                                             --             --        590,000           1.74
Exercised                                                                           --             --             --             --
Forfeited                                                                       (6,000)          1.90        (55,000)          1.90
                                                                          ------------   ------------   ------------   ------------
Outstanding at end of year                                                   1,165,000   $       1.70      1,171,000   $       1.70
                                                                          ============   ============   ============   ============
Options exercisable at year end                                                847,500   $       1.69        733,000   $       1.65
                                                                          ============   ============   ============   ============
Weighted-average fair value of options granted during the year                                     --                          1.04
                                                                                         ============                  ============
Shares subject to the 1999 long-term incentive plan
                                                                             1,600,000                     1,600,000

Shares issued pursuant to the 1999 long-term incentive plan                  1,165,000                     1,171,000
                                                                          ------------                  ------------
Shares available for issuance under the 1999 long-term incentive plan          435,000                       429,000
                                                                          ============                  ============


As of December 31, 2006, the 1,165,000 warrants and options outstanding have
exercise prices ranging between $1.60 and $3.91 and a weighted-average remaining
contractual life of 3.64 years. On October 11, 2005 the term of all options and
warrants held by officers and directors of the Company, and their designees and
transferees (550,000 shares at exercise prices ranging from $1.12 to $1.70) were
extended to October 10, 2010.



                                                                                                          Weighted
                                                                                           Weighted        Average
                                                                         Outstanding at    Average       Remaining         Total
                                                                          December 31,     Exercise     Contractual      Intrinsic
Range of Exercise Prices for Vested Options                                   2006         Price        Life (Years)       Value
                                                                          ------------   ------------   ------------   ------------
                                                                                                           
Under $2.00                                                                    820,000   $       1.62           3.73   $     20,000
Over $3.00                                                                      27,500           3.76           0.78         (2,000)
                                                                          ------------   ------------   ------------   ------------
                                                                               847,500   $       1.69           3.63   $     18,000
                                                                          ------------   ------------   ------------   ------------



A summary of the status of the Company's non-vested shares as of December 31,
2006 and 2005 and changes during the years then ended is presented as follows:

                                    Page 64




                                                          2006                           2005
                                                        Weighted                       Weighted
                                                        Average                        Average
                                           2006         Exercise         2005          Exercise
                                          Shares        Price           Shares         Price
                                       ------------   ------------   ------------   ------------
                                                                        
Non-vested - beginning of year              438,000   $       1.79         10,334   $       2.42
Granted                                          --             --        590,000           1.74
Vested                                     (120,500)          1.94       (162,334)          1.65
Forfeited/Expired                                --             --             --             --
                                       ------------   ------------   ------------   ------------
Non-vested - end of year                    317,500   $       1.73        438,000   $       1.79
                                       ============   ============   ============   ============


                                                                       Weighted
                                                          Weighted     Average
                                      Outstanding at      Average     Remaining        Total
Range of Exercise Prices                December 31,      Exercise   Contractual     Intrinsic
for Non-Vested Options                      2006          Price      Life (Years)      Value
                                       ------------   ------------   ------------   ------------
                                                                        
Under $2.00                                 300,000   $       1.60           3.81   $     45,000
Over $3.00                                   17,500           3.91           1.07             --
                                       ------------   ------------   ------------   ------------
                                            317,500   $       1.73           3.66   $     45,000
                                       ============   ============   ============   ============


(14) Warrants and Stock Grants Issued Outside of the Company's Long-term
     -------------------------------------------------------------------
     Incentive Plan
     --------------

In connection with a private placement of its securities, in November 2004 and
December 2004, the Company granted warrants to purchase an aggregate of 873,225
shares of common stock for $2.00 per share and warrants to purchase an aggregate
of 1,455,375 shares of common stock for $4.00 per share. In January 2005, in
connection with the same private placement, the Company granted warrants to
purchase an aggregate of 71,775 shares of common stock for $2.00 per share and
warrants to purchase an aggregate of 419,625 shares of common stock for $4.00
per share. During 2005, the Company, as a result of not filing a registration
statement within a required time period, issued an additional 131,250 shares of
the Company's Common Stock and Warrants to purchase 65,625 shares of the
Company's Common Stock at an exercise price of $4.00 per share. Because these
warrants were issued in connection with an equity financing the fair value of
such warrants is considered a discount on the offering and will be a reduction
of paid-in capital at the time that the warrants are exercised, if ever, and
will not be compensation expense charged to operations. The warrants issued
pursuant to the private placements have a weighted average exercise price of the
is $3.35 and a weighted average remaining contractual life of 2.94 years. All of
the warrants are exercisable at year end.

On June 1, 2006, pursuant to a two year consulting agreement, the Company issued
to such consultant 60,000 unregistered shares of its common stock together with
a common stock purchase warrant to purchase up to 60,000 unregistered shares of
its common stock during a five year period at an exercise price equal to the
closing price of the Company's publicly traded shares of common stock on the
date of issuance of such warrant (but in no event less than $4 per share). On
the date of issuance of such warrant, the fair-market value was $1.30 per share
and as such the warrant was issued with an exercise price of $4.00 per share. In
connection with the issuance of the unregistered shares, the Company recorded
$78,000 of deferred compensation which is being amortized over the term of the
related consulting agreement. In addition, the Company recorded deferred
compensation related to the issuance of the common stock purchase warrant of
$9,000 which is also being amortized over the term of the consulting agreement.
In calculating the $9,000 value of the common stock purchase warrant the Company
used an exercise price of $4.00 per share, a term of two years, volatility of
69.60%, a dividend rate of 0%, and a risk-free interest rate of 4.92%. (See Note
10.(e)).

(15) Related Party Transactions
     --------------------------

Robert L. Blessey is a member of the Company's Board of Directors and is the
Company's general counsel. During 2006 and 2005 the Company incurred $310,000
and $457,000 of legal fees (of which $174,000 in 2005 was recorded as stock
offering costs), respectively, to Mr. Blessey. At December 31, 2006 the Company
owes Mr. Blessey $312,000.

Stephen A. Schulman, M.D. is a member of the Company's Board of Directors and
the Chief Executive Officer of Premier. During 2006 and 2005, the Company made
aggregate lease payments of $0 and $4,000, respectively, for its administrative
offices in Boca Raton, Florida and $54,000 and $54,000, respectively, for a
building for PET Wichita to companies controlled by Dr. Schulman. During 2006
and 2005 the Company incurred billing and collection expenses of $106,000 and
$102,000, respectively, and CT Fusion Scan fees of $28,000 and $21,000,

                                    Page 65


respectively, both payable to companies controlled by Dr. Schulman. At December
31, 2006 the Company owes such entities $10,000. During 2005 the Company paid
Dr. Schulman $18,000 for consulting services rendered. During 2005, $4,000 of
net patient service revenue was from an entity owned by Dr. Schulman.

At December 31, 2006, the Company is owed $17,000 from Premier Health Imaging
International, Inc. ("Premier Health") a company owned by Dr. Schulman. Such
amount relates to patient account collections which were collected by Premier
Health and embezzled by one of its employees. Such amount is classified on the
balance sheet as other receivable - related party. Subsequent to December 31,
2006, all such amounts have been repaid to the Company. During the third quarter
of 2006, the Company, together with its independent auditors, commenced a
forensic review of Premier Health's billing and collection records as it relates
to the billing and collections of the Company's outstanding patient accounts
receivables. As a result of the forensic review, we confirmed that the amount
embezzled was approximately $156,000, of which $107,000 belongs to the Company's
PET imaging center in Parsippany, New Jersey; and $49,000 belongs to the
Company's PET imaging center in Wichita, Kansas. Subsequent to December 31,
2006, all such amounts have been repaid to the Company.

Edward Bright is the Chairman of the Board of the Company. During 2006 and 2005
the Company paid Mr. Bright $60,000 and $30,000, respectively, for consulting
services rendered.

A radiology company owns 49% of PET LI. Pursuant to a Turnkey License and
Services Agreement, PET LI manages a PET imaging center and earns management
fees. A radiologist is the principal owner of the radiology company and the PET
imaging center. Management fees earned by PET LI from its management of the PET
imaging center during 2006 and 2005 were $1,934,000 and $2,594,000,
respectively. As of December 31, 2006, the PET imaging center owes PET LI
$431,000. Additionally, PET LI pays equity distributions to its owners. During
2006 and 2005, the radiology company received equity distributions of $218,000
and $355,000.

A radiologist owns 11% of Hialeah Management. Pursuant to an Administrative
Services Agreement, Hialeah Management manages a PET imaging center and earns
management fees. The radiologist is the principal owner of the PET imaging
center. Management fees earned by Hialeah Management from its management of the
PET imaging center during 2006 and 2005 were $1,316,000 and $1,242,000,
respectively. As of December 31, 2006, the PET imaging center owes Hialeah
Management $314,000. Hialeah Management also pays monthly premises rent to an
entity which is owned by the radiologist. For 2006 and 2005, Hialeah Management
incurred and paid $43,000 and $40,000, respectively, for premises rent.
Additionally, Hialeah Management pays equity distributions to its owners. During
2006 and 2005 the radiologist received equity distributions of $17,000 and
$11,000, respectively.

The same radiology company that owns 49% of PET LI also owns 10% of Queens
Management. Pursuant to a Turnkey License and Services Agreement, Queens
Management manages a PET imaging center and earns management fees. A radiologist
is the principal owner of the radiology company and the PET imaging center.
Management fees earned by Queens Management from its management of the PET
imaging center during 2006 and 2005 were $1,619,000 and $411,000, respectively.
As of December 31, 2006, the PET imaging center owes Queens Management $347,000.

A radiology group owns 6.5% of Morris Management, and provides radiology reading
services to PET NJ. For 2006 and 2005 PET NJ incurred radiology reading expenses
of $206,000 and $198,000, respectively. At December 31, 2006 PET NJ owes the
radiology group $15,000. Additionally, Morris Management pays equity
distributions to its owners. During 2006 and 2005 the radiology group received
equity distributions of $26,000 and $18,000, respectively.

For 2006 and 2005, the Company incurred marketing expenses of $334,000 and
$229,000, respectively, with marketing entities related to the Company via
employee and or investor relationships. At December 31, 2006 the marketing
entities are owed $7,000. Additionally, a principal of one of the marketing
entities received equity distributions of $4,000 and $3,000, respectively, for
2006 and 2005, from Hialeah Management.

October 25, 2005 the Company entered into an Exclusive Radiology Services
Agreement with Michael Fagien, M.D., our Chief Medical Officer. For the years
ended December 31, 2006 and 2005 the Company incurred $213,000 and $48,000,
respectively, of radiology reading expenses and $27,000 and $0, respectively, of
professional liability insurance expense pursuant to the Exclusive Radiology
Services Agreement.

Advanced PET, the Company's PET imaging center in East Setauket, New York,
commenced operations in February 2006. A radiologist owns 49% of Suffolk
Management. Pursuant to a Turnkey License and Services Agreement, Suffolk
Management manages Advanced PET and earns management fees. The radiologist is
the principal owner of Advanced PET. Management fees earned by Suffolk
Management from its management of the PET imaging center, for the year ended
December 31, 2006, were $728,000. As of December 31, 2006 the PET imaging center
owes Suffolk Management $192,000. Suffolk Management pays monthly premises rent
to an entity which is owned by the same radiologist that owns 49% of Suffolk
Management. For the year ended December 31, 2006 Suffolk Management incurred and

                                    Page 66


paid $88,000 for premises rent. In 2005 the Company paid $11,000 to the entity
owned by the radiologist as a security deposit for the premises.

A radiology company, whose principal owner owns 11% of Hialeah Management, has a
Facility Lease Agreement with Jacksonville, pursuant to a Letter Agreement dated
May 4, 2006. Management fees earned by Jacksonville pursuant to the Facility
Lease Agreement for the year ended December 31, 2006 were $561,000. As of
December 31, 2006, the radiology company owes Jacksonville $396,000.

Our PET imaging center in Jacksonville, Florida, commenced operations in June
2006. For the year ended December 31, 2006, the Company incurred general and
administrative expenses of $20,000 with an entity whose owner is an investor in
Hialeah Management and is the same entity that provides marketing services to
Hialeah Management.

 (16) Legal Proceedings
      -----------------

The Company is not a party to any legal proceedings as of December 31, 2006;
however, the Company could become a party to certain legal proceedings that
could have occurred in the ordinary course of business.

(17) New Authoritative Pronouncements
     --------------------------------

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid
Financial Instruments an amendment of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, and FASB 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155,
provides the framework for fair value remeasurement of any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation as well as establishes a requirement to evaluate interests in
securitized financial assets to identify interests. SFAS 155 further 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. The guidance SFAS 155 also
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS 133 and concentrations of credit risk in the form of
subordination are not embedded derivatives. This Statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. SFAS 155 is not expected
to have a material impact on the Company's consolidated financial statements.

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial
Assets--an amendment of SFAS 140. SFAS 156 requires the recognition of a
servicing asset or servicing liability under certain circumstances when an
obligation to service a financial asset by entering into a servicing contract.
SFAS 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value utilizing the amortization
method or fair market value method. SFAS 156 is effective at the beginning of
the first fiscal year that begins after September 15, 2006. SFAS 156 is not
expected to have a material impact on the Company's consolidated financial
statements.

In June 2006, the Emerging Issues Task Force ("EITF") ratified EITF 06-3: How
Taxes Collected from Customers and Remitted to Governmental Authorities Should
Be Presented in the Income Statement (That Is, Gross versus Net Presentation).
EITF applies to any tax assessed by a governmental authority that is both
imposed on and concurrent with a specific revenue-producing transaction between
a seller and a customer, and may include, but is not limited to, sales, use,
value added, and some excise taxes. EITF 06-3 excludes tax schemes that are
based on gross receipts and taxes that are imposed during the inventory
procurement process. EITF 06-3 states that the presentation of taxes within the
scope of Issue 1 on either a gross basis (included in revenues and costs) or a
net basis (excluded from revenues) is an accounting policy decision that should
be disclosed in the footnotes to the financial statements. In addition, for any
such taxes that are reported on a gross basis, an entity should disclose the
amounts of those taxes in interim and annual financial statements for each
period for which an income statement is presented if those amounts are
significant. The disclosure of those taxes can be done on an aggregate basis.
EITF 06-3 is effective for all reporting periods after December 15, 2006. EITF
06-3 is not expected to have a material impact on the Company's financial
statements.

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes
- - an interpretation of SFAS 109, Accounting for Income Taxes. This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS 109.
This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. This interpretation also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is not expected to have a
material impact on the Company's consolidated financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously

                                    Page 67


concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements. However, for some entities, the application of this Statement will
change current practice. SFAS 157 is effective at the beginning of the first
fiscal year beginning after November 15, 2007. Earlier application is permitted
provided that the reporting entity has not yet issued financial statements for
that fiscal year. SFAS 157 is not expected to have a material impact on the
Company's consolidated financial statements.

In September 2006, the staff of the SEC issued Staff Accounting Bulletin No. 108
("SAB 108") which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. SAB 108 becomes effective in fiscal
2007. Adoption of SAB 108 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R) ("SFAS 158"). SFAS 158 requires an employer to
recognize an asset or liability for the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan). Any
changes in the funded status will be recognized in the year in which the changes
occur through comprehensive income. SFAS 158 also requires that employers
measure the funded status of a plan as of the date of its year-end balance
sheet. SFAS 158 is effective as of the end of the fiscal year ending after
December 15, 2006. SFAS 158 is not expected to have a material impact on the
Company's consolidated financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an Amendment of SFAS 115, ("SFAS
159"). SFAS 159 establishes a fair value option that permits entities to choose
to measure eligible financial instruments and certain other items at fair value
at specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value options have been elected in earnings
at each subsequent reporting date. SFAS 159 is effective as of the beginning of
an entity's first fiscal year that begins after November 15, 2007.



                                    Page 68


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

         None.

ITEM 8A. CONTROLS AND PROCEDURES

         Our Chief Executive Officer and Chief Financial Officer, have
participated in and supervised the evaluation of our disclosure controls and
procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") that are designed to
ensure that information required to be disclosed by us in the reports that we
file is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that the information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure. The Company's Chief Executive Officer and Chief Financial Officer
determined that, as of the end of the period covered by this report, these
controls and procedures are adequate and effective in alerting them in a timely
manner to material information relating to the Company required to be included
in the our periodic SEC filings.


                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
         REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Directors and Executive Officers

         Officers are elected by, and serve at the pleasure of our Board of
Directors. Set forth below is information concerning our directors and executive
officers as of December 31, 2006. The following table includes the names,
positions held and ages of our executive officers and directors as of such date.



Name                             Age                                       Position
- ---------------------------   ----------     -----------------------------------------------------------------------------------
                                        
Theodore B. Shapiro               71          Chief Executive Officer, President and Director

Edward D. Bright                  70          Chairman of the Board

Stephen A. Schulman               71          Director and Chief Executive Officer of Premier P.E.T. Imaging International, Inc.

George W. Mahoney                 46          Chief Financial Officer

Michael Fagien                    49          Chief Medical Officer

Elizabeth Longton                 43          Vice President of Operations

Robert L. Blessey                 61          Director and Secretary

Abdallah S. Mishrick              71          Director (Deceased February 26, 2006)



         Theodore B. Shapiro has served as our Chief Executive Officer and
President since March 2001 and as a member of our Board of Directors since
November 2000. From January 1998 until October 2000, Mr. Shapiro was the Chief
Executive Officer, President and a Director of Trimol Group, Inc., a public
holding company with controlling investments in companies operating in the
banking, insurance and hotel industries. From 1992 to 1997, Mr. Shapiro was the
Vice-Chairman of the Board of Directors of EMX Corporation, a development-stage
biotechnology firm. From 1981 to 1992, Mr. Shapiro was the Chairman of the
Board, Chief Executive Officer and principal shareholder of The Patrician Group,
an entity founded by Mr. Shapiro that acquired and managed shopping centers
throughout the United States.

                                    Page 69


         Edward D. Bright has served as the Chairman of our Board of Directors
since November 2000 and previously in such capacity from April 1998 through
April 1999. From April 1998 to July 2004, Mr. Bright served as Chairman of the
Board and a director of Netsmart Technologies, Inc., a public company engaged in
the design, development, implementation and licensing of management information
systems for the behavioral health care industry through its wholly-owned
operating subsidiary, Creative Socio-Medics Corp. From July 2004 to the present,
Mr. Bright serves as a consultant to the Board of Directors of Netsmart. From
January 1996 until April 1998, Mr. Bright was an executive officer of and
advisor to Creative Socio-Medics Corp. Mr. Bright has held executive positions
at Exxon Enterprises, Colt Industries and LCD Computer Services which he
founded.

         Stephen A. Schulman, M.D. has served as a member of our Board of
Directors and as Chief Executive Officer of Premier P.E.T. Imaging
International, Inc., our wholly owned subsidiary, since May 2001. Since April
1998 Dr. Schulman has served as the Chief Executive Officer and controlling
shareholder of Premier Health Services, Inc., a private company he founded,
which operates non-PET multi-modality outpatient diagnostic imaging centers.
From January 1988 to April 1998, Dr. Schulman was the President and a director
of International Magnetic Imaging, Inc., an entity which owned and operated
multi-modality outpatient diagnostic imaging centers and was one of our former
operating subsidiaries.

         George W. Mahoney. Before rejoining the Company as its Chief Financial
Officer in March 2001, Mr. Mahoney had been a financial and business consultant
to the Company and other public and private companies since June 1999. For the
five years prior, Mr. Mahoney served as the Chief Financial Officer of the
Company. From 1991 to 1999, Mr. Mahoney also served as the Chief Financial
Officer and a Director of International Magnetic Imaging Inc., a former wholly
owned subsidiary of the Company. Prior to that, Mr. Mahoney was the Chief
Financial Officer of Labor World USA, a temporary labor leasing company and
prior to that Mr. Mahoney was the Chief Financial Officer of Guardian Bank. Mr.
Mahoney began his business career as a public accountant with Arthur Andersen
and then Deloitte Haskins & Sells.

         Michael Fagien, M.D. joined the Company as its Chief Medial Officer in
October 2005. A radiologist board certified in nuclear medicine, from October
2003 to October 2005, Dr. Fagien served as the Chairman of the Medical Advisory
Board of Radiological Corporation of America, also serving as its Chief Medical
Officer from October 2004 to April 2005. From September 2002 to October 2005,
Dr. Fagien served as the Medical Director of National PET Scan, LLC. Prior to
that, Dr. Fagien served as a Clinical Professor and as the Chief of Nuclear
Medicine at the University of Florida for over a decade. An international
speaker on PET, PET/CT, nuclear medicine and advanced imaging, Dr. Fagien has
trained residents and radiologists throughout the world and teaches physicians
about the appropriate utilization of PET and PET/CT. Additionally he advises the
industry on the development of new products in the imaging field currently
serving as a member of the Medical Advisory Board for PET and Advanced Imaging
at GE Healthcare.

         Elizabeth A. Longton became our Vice-President of Operations in January
2005. From 1999 to 2004, Ms. Longton served as the Vice President of Operations
of Strategic Outpatient Services Inc., a PET and PET/CT medical diagnostic
imaging center owner/operator. Prior to that, from 1992 to 1999, Ms. Longton
served as the Area Business Manager for Medical Resources, Inc. responsible for
day to day operations of its outpatient radiology facilities in northern New
Jersey.

         Robert L. Blessey has served as a member of our Board of Directors and
Secretary since May 2001. For more than the past five years, Mr. Blessey has
practiced law and is of counsel to the New York based law firm of Gusrae,
Kaplan, Bruno & Nusbaum, PLLC.

         Abdallah S. Mishrick, M.D. served as a member of our Board of Directors
and a member of our Audit Committee since January 2003. Since 1967 Dr. Mishrick
has been the President of A.S. Mishrick, M.D., P.C. In addition, Dr. Mishrick
holds the following positions: Since 1998, Vice-Chairman, Department of Surgery
with North Shore University Hospital at Manhasset, New York; since 1999, Senior
Vice-President, Medical Affairs with North Shore University Hospital at Syosset,
New York and North Shore University Hospital at Plainview, New York; since 2002,
Senior Vice-President, Medical Affairs with Franklin Hospital Medical Center at
Valley Stream, New York; and, since 2002, Senior Consultant, Medical Affairs
with North Shore Long Island Jewish Health System at New Hyde Park, New York.
Dr. Mishrick died in February 2006.

                                    Page 70


Board of Directors

         All Directors serve for one year or such longer period until their
successors are elected and qualify. Directors do not receive compensation for
serving on our Board, except for our independent director, Dr. Mischrick, who
was paid $1,500 per month for his service on our Board. The Board of Directors
appoints our officers and their terms of office are, unless otherwise provided
in employment contracts, at the discretion of the Board of Directors. There are
no family relationships between or among any of the directors or executive
officers of the Company.

Governance

         The Board of Directors has established an Audit Committee to assist in
the Company's governance. Theodore B. Shapiro and Abdallah S. Mishrick comprised
the Audit Committee. Subsequent to his death in February 2006, Mr. Shapiro is
the sole member of the audit committee. The Audit Committee functions under a
Charter empowering it to, among other things, appoint the independent auditors,
approve the auditor's fees, evaluate performance of the auditors, review
financial statements and management's discussion and analysis thereof, review
all Securities and Exchange Commission reports and press releases of a financial
nature, oversee internal audit processes, oversee new audit reviews performed by
the auditors, and receive management and other reports from the auditors. Dr.
Mishrick, was the only independent member of our Board of Directors, and
received $1,000 per month for his service on the Audit Committee.

         We intend to establish a Compensation Committee to determine the
compensation of our executive officers, determine Board of Director
compensation, award options and other stock grants and issue the report
regarding these matters for inclusion in our annual report to our stockholders.

ITEM 10. EXECUTIVE COMPENSATION

Executive Compensation

         For the fiscal years ended December 31, 2006 and 2005, the following
officers of the Company received the following compensation for services
rendered to the Company. See "Management - Employment Agreements" for a
description of compensation arrangements entered into by us with certain of our
executive officers.



                                                                           Annual Compensation                 Long-Term
                                                                       ---------------------------     ---------------------------
                                                                                      Other Annual                     All Other
Name/Principal Position                        Year       Salary          Bonus       Compensation     Compensation   Compensation
- --------------------------------------       --------   ------------   ------------   ------------     ------------   ------------
                                                                                                          
Theodore B. Shapiro                            2006     $    100,000             --   $     24,000(2)            --             --
Chief Executive Officer (1)                    2005     $    100,000             --   $     24,000(2)            --             --

Stephen A. Schulman, MD                        2006     $     25,000             --   $      6,000(2)            --             --
President of Premier (3)                       2005     $     25,000             --   $      6,000(2)            --             --

George W. Mahoney                              2006     $    194,670   $      8,750         31,592(4)            --             --
Chief Financial Officer                        2005     $    185,400   $     33,750         30,512(4)            --             --

Michael Fagien, MD                             2006     $    219,443             --        245,792(5)            --             --
Chief Medical Officer                          2005     $     47,830             --         47,830(5)            --             --

Elizabeth Longton                              2006     $    140,000          5,000   $     15,796(6)            --             --
Vice President of Operations                   2005          130,988             --   $      5,400(6)            --             --


(1)  For each of 2006 and 2005 Mr. Shapiro provided services valued at $100,000
     which was recorded as salaries and benefit expense. "See Management
     Employment Agreements".

(2)  Other annual compensation consists of certain fringe benefits.

(3)  For each of 2006 and 2005, Dr. Schulman provided services valued at $25,000
     which was recorded as salaries and benefits expense.

                                    Page 71


(4)  Other annual compensation for 2006 and 2005 consists of $18,000 and
     $16,800, respectively, for certain fringe benefits and $13,592 and $13,712,
     respectively, for payment of unused vacation.

(5)  Other annual compensation consists of payments to Dr. Fagien pursuant to
     his Exclusive Radiology Services Agreement.

(6)  Other annual compensation for 2006 and 2005 consists of $5,400 and $5,400,
     respectively, for certain fringe benefits and $10,396 and $0, respectively,
     for payment of unused vacation.

Aggregated Option/SAR Exercises in Last Year and Year-end Option/SAR Values
- ---------------------------------------------------------------------------

         The following table presents information regarding the unexercised
options and stock appreciation rights to purchase shares of our common stock
held by our executive officers who are included in the preceding summary
compensation table as of December 31, 2006.



                                                                   Number of Securities                   Value of
                                                                  Underlying Unexercised           Unexercised In-the-Money
                                                                Options at Fiscal Year End        Options at Fiscal Year End
                                                               -----------------------------     -----------------------------
                           Number of shares
                             Acquired on        Value
Name                          Exercised        Realized         Exercisable    Unexercisable      Exercisable    Unexercisable
- -------------------------    ------------     ------------     ------------    -------------     ------------    -------------
                                                                                                       
Theodore B. Shapiro (1)               -0-              -0-              -0-              -0-              -0-              -0-

Dr. Stephen A. Schulman               -0-              -0-          100,000              -0-              -0-              -0-

George W. Mahoney                     -0-              -0-           45,000              -0-              -0-              -0-

Michael Fagien                        -0-              -0-          200,000          300,000              -0-              -0-

Elizabeth Longton                     -0-              -0-           17,500           17,500              -0-              -0-


(1)  Exclusive of warrants to purchase up to 375,000 shares of common stock
     owned by Tara Capital, Inc., a corporation of which Mr. Shapiro is a 10%
     stockholder. None of the warrants owned by Tara Capital, Inc. were
     exercised in 2006. As of December 31, 2006, the 375,000 shares of common
     stock underlying these warrants had a year end value of $0 and were
     exercisable.

Compensation of Directors

         We do not have a standard arrangement to compensate the members of our
Board of Directors for serving in such capacity.

         On June 14, 2001, we granted Mr. Bright a five year warrant to purchase
up to 12,500 shares of the Company's common stock at $1.31 per share. Mr. Bright
is entitled to certain demand and "piggyback" registration rights with respect
to the shares underlying such warrant. The fair market value of the common stock
on the date that Mr. Bright's warrant was issued was $2.25 per share, resulting
in approximately $7,000 of compensation expense. As of December 31, 2006 there
remains no deferred compensation relating to this warrant. On October 11, 2005,
the exercise period of this warrant was extended to October 10, 2010 and the
exercise price was re-priced to $1.60 per share. The modification of this
warrant resulted in no compensation expense in 2006 or 2005.

         On May 21, 2001, we granted a five year warrant to purchase up to
12,500 shares of our common stock at $1.31 per share to Mr. Blessey, a member of
our Board of Directors. Mr. Blessey is entitled to certain demand and
"piggyback" registration rights with respect to the shares underlying such
warrant. The fair market value of the common stock on the date Mr. Blessey's
warrant was granted equaled the exercise price and no compensation expense was
incurred. On October 11, 2005, the exercise period of this warrant was extended
to October 10, 2010 and the exercise price was re-priced to $1.60 per share. The
modification of this warrant resulted in no compensation expense in 2006 or
2005. Mr. Blessey is our general counsel and during 2006 and 2005 we paid him
$357,000 and $502,000 (of which $245,000 was recorded as deferred offering
costs), respectively, for legal services which he provided to us.

                                    Page 72


         In January 2003 Dr. Mishrick was appointed to our Board of Directors
and we agreed to pay him a director's fee of $1,500 per month and an audit
committee member fee of $1,000 per month. Dr. Mishrick died in February 2006.

Management Employment Agreements

Theodore B. Shapiro
- -------------------

         On March 7, 2001, pursuant to Theodore B. Shapiro's month to month
employment agreement as our President and Chief Executive Officer, we issued to
Tara Capital, Inc. ("Tara"), Mr. Shapiro's designee, a five year warrant to
purchase up to 150,000 shares of our common stock, and a five year warrant to
purchase up to 125,000 shares of our common stock, both exercisable for $1.125
per share, the market price of our common stock on the date of grant and no
compensation expense was incurred. On October 11, 2005 the exercise period of
the warrants were extended to October 10, 2010 and the exercise price was
re-priced to $1.60 per share. The modification of these warrants did not result
in any compensation expense in 2006 or 2005.

         On May 25, 2001, we entered into a five year executive employment
agreement with Mr. Shapiro to serve as our President and Chief Executive
Officer. The agreement requires Mr. Shapiro to devote a substantial portion of
his business time and efforts serving as our President and Chief Executive
Officer and, until July 1, 2004, provided him an annual salary of $200,000 and a
$2,000 per month medical insurance allowance. As additional incentive
compensation, for each year of the agreement, we are required to issue to Tara
five year warrants to purchase up to 20,000 shares of our common stock for the
fair value of our common stock on the date of grant, for each $1,000,000 of Net
Pre-Tax Profits in each year of the agreement, up to a maximum of five incentive
warrants each year. We also gave Tara a warrant to purchase up to 100,000 shares
of our common stock at an exercise price of $1.70 per share, the market price of
our common stock on the date of grant and no compensation expense was incurred.
On October 11, 2005 the exercise period of the warrants were extended to October
10, 2010. The modification of these warrants did not result in any compensation
expense in 2006 or 2005. Mr. Shapiro, or his designee, is entitled to certain
demand and "piggyback" registration rights with respect to shares of our common
stock he may acquire pursuant to his employment agreement.

         Effective July 1, 2004, Mr. Shapiro's employment agreement was amended
and he agreed to reduce his annual base salary to $100,000 and to waive payment
of his future salary until he notifies us that such payments should resume and
we agreed to pay Mr. Shapiro an annual incentive bonus equal to five percent
(5%) of our Net Pre-Tax Profits (as defined in such agreement).

         In October 2004, Mr. Shapiro's employment agreement was amended and he
agreed to waive any bonus to which he is entitled under such agreement through
December 31, 2003 and agreed to cap any bonuses for 2004, 2005 and 2006 to
$200,000 per year. During 2004, Mr. Shapiro exchanged $325,000 of salary owed to
him for 130,000 shares of our common stock. In connection with a private
placement of our securities which was completed in January 2005, both Tara and
Mr. Shapiro entered into lock-up agreements with the placement agent for the
offering, agreeing not to sell or otherwise dispose of any of our securities
owned by them, or to exercise any of their registration rights, for one year
commencing January 13, 2005.

         In each of 2006 and 2005 Mr. Shapiro provided services valued at
$100,000 which was recorded as salaries and benefits expense. At December 31,
2006 $200,000 of Mr. Shapiro's compensation has not been paid and is included in
accrued payroll.

         On March 25, 2005, the term of Mr. Shapiro's employment agreement was
extended to March 2010.

Stephen A. Schulman, M.D.
- -------------------------

         On May 17, 2001, Premier P.E.T. Imaging International, Inc., our wholly
owned subsidiary, entered into an executive employment agreement with Stephen A.
Schulman, M.D., which was amended on December 30, 2003. Dr. Schulman was engaged
by Premier as its Chief Executive Officer during the five year term of the
agreement. The terms of Dr. Schulman's amended employment agreement, require him
to devote such portion of his business time and efforts to the performance of
his services as he determines necessary and he has agreed to provide his
services without payment. From May 17, 2001 through December 31, 2003, Dr.

                                    Page 73


Schulman had earned aggregate salaries of $418,000 and he exchanged $125,000 in
2003 for 50,000 shares of common stock and waived $293,000 of unpaid and accrued
salary owed to him. In each of 2006 and 2005, the services provided by Dr.
Schulman were valued at $25,000 and were recorded as salaries and benefits
expense. At December 31, 2006 the aggregate value of unpaid services provided to
us by Dr. Schulman was $75,000 and is included in accrued payroll.

         On May 2001, Dr. Schulman received a warrant to purchase up to 100,000
shares of our common stock at an exercise price of $1.31 per share, the market
price of our common stock on the date of grant and no compensation expense was
incurred. We granted Dr. Schulman demand and "piggy-back" registration rights
with respect to any shares of our common stock acquired upon the exercise of
such warrant. In connection with a private placement of our securities which was
completed in January 2005, Dr. Schulman and Pamels Corp., a company in which Dr.
Schulman is a principal stockholder, entered into a lock-up agreement with the
placement agent for the offering, agreeing not to sell or otherwise dispose of
any of our securities owned by them, or to exercise any of their registration
rights, for one year commencing January 13, 2005. On October 11, 2005 the
exercise period of the warrants were extended to October 10, 2010 and re-priced
to $1.60 per share. The modification of this warrant did not result in any
compensation expense for 2006 or 2005.

         On March 25, 2005, the terms of Dr. Schulman's Employment Agreement was
extended to March 24, 2010.

George W. Mahoney
- -----------------

         On March 4, 2001, we entered into an agreement to employ George W.
Mahoney as our Chief Financial Officer for a period of 3 years at an annual base
salary of $70,000 per year. Upon our acquisition of Premier P.E.T. Imaging
International, Inc. in May 2001, the agreement provided an increase in Mr.
Mahoney's annual base salary $140,000, and subsequent salary increases to
$185,400 in 2005 and $194,670 in 2006.

         In addition, on August 3, 2001, Mr. Mahoney received an option to
purchase 45,000 shares of our common stock at an exercise price of $1.90 per
share which was the fair market value of our common stock on the date of grant
and no compensation expense was incurred. The option expired on August 3, 2005.
On October 11, 2005 we issued to Mr. Mahoney a fully vested five year option to
purchase 45,000 shares of common stock at an exercise price of $1.60 per share,
which was the fair market value of our common stock on the date of grant and no
compensation expense was incurred.

Michael Fagien
- --------------

         On October 25, 2005, we entered into an employment agreement and
exclusive radiology services agreement with Michael Fagien, M.D., to serve as
our Chief Medical Officer for an initial term of five years, subject to renewal
for three successive two year renewal periods. Dr. Fagien will receive an annual
base salary of $250,000 and a fee of $100,000 for each new PET imaging center
that we acquire or establish in Florida from the cash flow of each new Florida
PET imaging center. Dr. Fagien received a warrant to purchase up to 500,000
shares of our common stock during a five year period at an exercise price of
$1.60 per share, the fair value of our common stock on the date of grant. During
2006 we recognized $95,000 of stock compensation expense from the amortization
of the fair value of the previously unvested portion of the warrant issued to
Dr. Fagien. Pursuant to the radiology services agreement, Dr. Fagien serves as
our radiologist to perform all required radiology services for all new Florida
PET imaging centers as well as any other imaging centers which are currently
owned or managed by us or which are acquired or established by us outside of the
State of Florida. The radiology services agreement has an initial term of five
years, subject to renewal and earlier termination on the same terms and
conditions as provided in Dr. Fagien's employment agreement. Dr. Fagien will
receive a fee for his services of $250,000 per year, plus an additional fee of
$170 for each PET imaging scan and $75 for each body part computed tomography
(CT) imaging scan in excess of 1,470 imaging scans which are read and
interpreted by Dr. Fagien in each year of the agreement.

Elizabeth A. Longton
- --------------------

         On January 25, 2005, we entered into an employment agreement with
Elizabeth A. Longton to serve as our Vice President of Operations. The agreement
expires on January 31, 2008 (subject to early termination renewal provisions)
and provides for an annual base salary of $140,000, a monthly automobile
allowance of $450, expense reimbursement and certain specified fringe benefits.

                                    Page 74


         We issued Ms. Longton a five year qualified incentive stock option to
purchase up to 35,000 shares of our common stock at a per share exercise price
of $3.91, the fair value of our common stock on the date of grant. During 2006
we recognized $29,000 of stock compensation expense from the amortization of the
fair value of the previously unvested portion of the warrant issued to Ms.
Longton. Provided that she is employed with us, Ms. Longton may exercise her
right to purchase 17,500 shares after one year from the grant date 17,500 shares
after two years from the grant date.

         Ms. Longton is required to devote all of her business time and efforts
to the performance of her services under her employment agreement and, as
additional incentive compensation, she is entitled to receive (i) on the date
during the term of her employment agreement that new PET imaging centers (other
than the PET imaging center in East Setauket, New York) commences operations, a
bonus payment of $5,000, and (ii) on the date, if any, that each new PET imaging
centers achieves positive cash flow, an additional bonus payment of $5,000 and a
fully vested, five year warrant to purchase 5,000 shares of our common stock at
an exercise price equal to the fair value of our common stock on the date of
grant. In addition, Ms. Longton is entitled to receive any such additional bonus
or incentive compensation as may be determined by our Board of Directors or our
Chief Executive Officer. Under circumstances specified in Ms. Longton's
employment agreement, we are required to pay Ms. Longton severance compensation,
a lump sum equal to six months base salary, if the agreement is not renewed or
is terminated.

Officer Salary Cap
- ------------------

         In connection with the private placement of our securities which was
completed in January 2005, we agreed with the placement agent for the offering
that for one year commencing January 13, 2005, we would not increase the base
salary of any of our officers in an amount in excess of ten percent (10%) per
year, with the exceptions that such restriction will not prevent us from hiring
additional officers or from paying Dr. Schulman a base salary up to $200,000 per
year.

Stock Option Plan

         Our stock option plan provides for the grant of options to purchase
shares of our common stock to eligible employees, officers and directors, and
other persons who we believe may have made a valuable contribution to us. Our
stock option plan covers a maximum of 1,600,000 shares of common stock and
provides for the granting of both incentive stock options (as defined in Section
422 of the Internal Revenue Code of 1986) and nonqualified stock options
(options which do not meet the requirements of Section 422). Under our stock
option plan, the exercise price of shares of common stock subject to options
granted thereunder may not be less than the fair market value of the common
stock on the date of the grant of the option.

         Currently, our Board of Directors administers and interprets our stock
option plan and is authorized to grant options to any of our eligible employees,
including our officers. The Board of Directors designates the optionees, the
number of shares subject to the options, and the terms and conditions of each
option. Each option granted under our stock option plan must be exercised, if at
all, during a period established in the grant which may not exceed 10 years from
the later of the date of the grant or the date the option first becomes
exercisable. An optionee may not transfer or assign any option granted, and may
not exercise any options after a specified period subsequent to the termination
of the optionee's employment with us.

Indemnification

         Our Articles of Incorporation provide for the indemnification of all
persons who serve as our directors, officers, employees or agents to the fullest
extent permitted under New York law. In addition, we entered into an
indemnification agreement with our chief executive, financial and medical
officers and our directors pursuant to which we granted them certain additional
indemnification rights. We maintain officer and director liability insurance
coverage. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions or agreement, or otherwise, we have
been advised that, in the opinion of the Securities and Exchange Commission, any
such indemnification is against public policy as expressed in the securities
laws and is, therefore, unenforceable.

                                    Page 75


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         As of December 31, 2006, 7,661,503 shares of our common stock were
outstanding (exclusive of 346,758 shares of our common stock held in our
treasury).

         The following table sets forth, as of December 31, 2006, information
known to us relating to the beneficial ownership of the outstanding shares of
our common stock by: (i) each person who is the beneficial owner of more than
five percent (5%) of the outstanding shares of our common stock; (ii) each
director; (iii) each executive officer; and (iv) all executive officers and
directors as a group.

                                                   # of
Name and Address (1)                             Shares (2)         % (3)
- ------------------------                       -------------      ----------
Stephen A. Schulman, M.D.                            623,752 (4)          8%

Pamels Corp.                                         402,892 (5)          5%

Theodore B. Shapiro                                  278,432 (6)          4%

Tara Capital, Inc.                                   650,977 (7)          8%

Robert L. Blessey                                    571,811 (8)          7%

Bocara Corp.                                         525,977 (9)          7%

Edward D. Bright                                      71,300 (10)         1%

George W. Mahoney                                     45,000 (11)         1%

Michael Fagien                                       200,000 (12)         3%

Elizabeth Farrell Longton                             17,500 (13)         0%

Edward Arnold
815 Tudor Avenue
Lebanon, Pennsylvania 17042                          776,250 (14)        10%

Abdallah S. Mishrick                                     -0-              0%

All Directors and Executive Officers
as a group (6 persons)                             1,807,795 (15)        22%

(1)  Except as set forth above, the address of each of the individuals and
     entities set forth above is c/o Premier P.E.T. Imaging International, Inc.,
     4710 N.W. Boca Raton Boulevard, Suite 200, Boca Raton, Florida 33431.

(2)  Unless otherwise indicated, the Company believes that all persons named in
     the table above have voting and investment power with respect to all shares
     of our common stock beneficially owned by them. A person is deemed to be
     the beneficial owner of securities which may be acquired by such person
     within sixty (60) days from December 31, 2006 upon the exercise of options,
     warrants, or convertible securities. Each beneficial owner's percentage
     ownership is determined by assuming that warrants or options that are held
     by such person (but not those held by any other person) and which are
     exercisable within sixty (60) days from December 31, 2006 have been
     exercised.

(3)  Based on 7,661,503 shares outstanding (excludes 346,758 shares of common
     stock held in the Company's treasury).

(4)  Includes (i) 100,000 shares of common stock issuable upon the exercise of a
     warrant exercisable within sixty (60) days from December 31, 2006 which
     expires on October 10, 2010 and is exercisable at $1.60 per share, and (ii)
     402,892 shares of common stock owned by Pamels Corp.

(5)  The sole shareholders of Pamels Corp. are Dr. Stephen A. Schulman and his
     spouse.

(6)  Includes (i) 37,500 shares of common stock issuable upon the exercise of
     warrants exercisable within sixty (60) days from December 31, 2006 which
     expire on October 10, 2010, are exercisable at prices ranging from $1.60 to
     $1.70 per share and are held by Tara Capital, Inc., and (ii) 27,598 shares
     of common stock owned by Tara Capital, Inc. Tara Capital, Inc. is a
     corporation of which Mr. Shapiro is a 10% shareholder.

(7)  Includes 375,000 shares of common stock issuable upon the exercise of a
     warrant exercisable within sixty (60) days from December 31, 2006 which
     expires on October 10, 2010 and are exercisable at prices ranging from
     $1.60 to $1.70 per share.

                                    Page 76


(8)  Includes (i) 12,500 shares of common stock issuable upon the exercise of a
     warrant exercisable within sixty (60) days from December 31, 2006 which
     expires on October 10, 2010 and is exercisable at $1.60 per share and (ii)
     525,977 shares of common stock owned by Bocara Corp.

(9)  The sole shareholders of Bocara Corp. are Robert L. Blessey and his spouse.

(10) Includes 62,500 shares of common stock issuable upon the exercise of a
     warrant exercisable within sixty (60) days from December 31, 2006 which
     expire on October 10, 2010 and are exercisable at $1.60 per share.

(11) Includes 45,000 shares of common stock issuable upon the exercise of an
     option exercisable within sixty (60) days from December 31, 2006 which
     expires on October 10, 2010 and is exercisable at $1.60 per share.

(12) Includes 200,000 shares of common stock issuable upon the exercise of the
     vested portion of a warrant exercisable within sixty (60) days from
     December 31, 2006 and excludes 300,000 shares of common stock representing
     the unvested portion of the warrant to purchase 500,000 shares of common
     stock which expires on October 25, 2010 and is exercisable at $1.60 per
     share.

(13) Includes 17,500 shares of common stock issuable upon the exercise of the
     vested portion of an option exercisable within sixty (60) days from
     December 31, 2006 and excludes 17,500 shares of common stock representing
     the unvested portion of the option to purchase 35,000 shares of common
     stock which expires on January 25, 2010 and is exercisable at $3.91 per
     share.

(14) Includes (i) 129,375 shares of common stock issuable upon the exercise of a
     warrant exercisable within sixty (60) days from December 31, 2006 which
     expires on November 28, 2009 and is exercisable at $4.00 per share and (ii)
     258,750 shares of common stock held by Arnold Venture Fund, L.P. and
     129,375 shares of common stock issuable upon the exercise of a warrant held
     by Arnold Venture Fund, L.P. and exercisable within sixty (60) days from
     December 31, 2006 which expires on December 28, 2009 and is exercisable at
     $4.00 per share. Arnold Venture Fund, L.P. is a limited partnership
     controlled by Edward Arnold.

(15) Includes an aggregate of 1,332,795 shares of common stock and 475,000
     shares of common stock including securities which are owned by Pamels
     Corp., Tara Capital, Inc. and Bocara Corp. (see Notes 4, 6 and 8 above)
     issuable upon the exercise of warrants and options exercisable within sixty
     (60) days from December 31, 2006.

We are not aware of any arrangement that might result in a change of control in
the future.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Robert L. Blessey is a member of our Board of Directors and is our
general counsel. During 2006 and 2005 we incurred $310,000 and $457,000 of legal
fees (of which $174,000 in 2005 was recorded as stock offering costs),
respectively, to Mr. Blessey. At December 31, 2006 the Company owes Mr. Blessey
$312,000.

         Dr. Stephen A. Schulman is a member of our Board of Directors and the
Chief Executive Officer of Premier. During 2006 and 2005, we made aggregate
lease payments of $0 and $4,000, respectively, for our administrative offices in
Boca Raton, Florida and $54,000 and $54,000, respectively, for a building for
PET Wichita to companies controlled by Dr. Schulman. During 2006 and 2005 we
incurred billing and collection expenses of $106,000 and $102,000, respectively,
and CT Fusion Scan fees of $28,000 and $21,000, respectively, both payable to
companies controlled by Dr. Schulman. At December 2006 the Company owes such
entities $10,000. During 2005 the Company paid Dr. Schulman $18,000 for
consulting services rendered. During 2005, $4,000 of net patient service revenue
was from an entity owned by Dr. Schulman.

         At December 31, 2006, we are owed $17,000 from Premier Health Imaging
International, Inc. a company owned by Dr. Schulman. Such amount relates to
patient account collections which were collected by Premier Health Imaging
International, Inc. and embezzled by one of its employees. Subsequent to
December 31, 2006, all such amounts have been repaid to us. During the third
quarter of 2006, we, together with our independent auditors, commenced a
forensic review of Premier Health Imaging International, Inc.'s billing and
collection records as it relates to the billing and collections of our
outstanding patient accounts receivables. As a result of the forensic review, we
confirmed that the amount embezzled was approximately $156,000, of which
$107,000 belongs to our PET imaging center in Parsippany, New Jersey; and
$49,000 belongs to our PET imaging center in Wichita, Kansas.

         Edward Bright is our Chairman of the Board. During 2006 and 2005 we
paid Mr. Bright $60,000 and $30,000, respectively, for consulting services
rendered.

         A radiology company owns 49% of PET LI. Pursuant to a Turnkey License
and Services Agreement, PET LI manages a PET imaging center and earns management
fees. A radiologist is the principal owner of the radiology company and the PET
imaging center. Management fees earned by PET LI from its management of the PET
imaging center during 2006 and 2005 were $1,934,000 and $2,594,000,
respectively. As of December 31, 2006, the PET imaging center owes PET LI

                                    Page 77


$431,000. Additionally, PET LI pays equity distributions to its owners. During
2006 and 2005, the radiology company received equity distributions of $218,000
and $355,000.

         A radiologist owns 11% of Hialeah Management. Pursuant to an
Administrative Services Agreement, Hialeah Management manages a PET imaging
center and earns management fees. The radiologist is the principal owner of the
PET imaging center. Management fees earned by Hialeah Management from its
management of the PET imaging center during 2006 and 2005 were $1,316,000 and
$1,242,000, respectively. As of December 31, 2006, the PET imaging center owes
Hialeah Management $314,000. Hialeah Management also pays monthly premises rent
to an entity which is owned by the radiologist. For 2006 and 2005, Hialeah
Management incurred and paid $43,000 and $40,000, respectively, for premises
rent. Additionally, Hialeah Management pays equity distributions to its owners.
During 2006 and 2005 the radiologist received equity distributions of $17,000
and $11,000, respectively.

         The same radiology company that owns 49% of PET LI also owns 10% of
Queens Management. Pursuant to a Turnkey License and Services Agreement, Queens
Management manages a PET imaging center and earns management fees. A radiologist
is the principal owner of the radiology company and the PET imaging center.
Management fees earned by Queens Management from its management of the PET
imaging center during 2006 and 2005 were $1,619,000 and $411,000, respectively.
As of December 31, 2006, the PET imaging center owes Queens Management $347,000.

         A radiology group owns 6.5% of Morris Management, and provides
radiology reading services to PET NJ. For 2006 and 2005 PET NJ incurred
radiology reading expenses of $206,000 and $198,000, respectively. At December
31, 2006 PET NJ owes the radiology group $15,000. Additionally, Morris
Management pays equity distributions to its owners. During 2006 and 2005 the
radiology group received equity distributions of $26,000 and $18,000,
respectively.

         For 2006 and 2005, we incurred marketing expenses of $334,000 and
$229,000, respectively, with marketing entities related to us via employee and
or investor relationships. At December 31, 2006 the marketing entities are owed
$7,000. Additionally, a principal of one of the marketing entities received
equity distributions of $4,000 and $3,000, respectively, for 2006 and 2005, from
Hialeah Management.

         During 2006 we paid $11,000 as a security deposit to an affiliated
entity of the minority investor of our Suffolk PET imaging center for the
facility in which Advanced PET imaging center commenced operations in February
2006.

         On October 25, 2005 we entered into an exclusive radiology services
agreement with Michael Fagien, M.D., our Chief Medical Officer. During 2006 and
2005 we incurred $213,000 and $48,000, respectively, of radiology reading
expenses and $27,000 and $0, respectively, of professional liability insurance
expense pursuant to the agreement.

         Advanced PET, our PET imaging center in East Setauket, New York,
commenced operations in February 2006. A radiologist owns 49% of Suffolk
Management. Pursuant to a Turnkey License and Services Agreement, Suffolk
Management manages Advanced PET and earns management fees. The radiologist is
the principal owner of Advanced PET. Management fees earned by Suffolk
Management from its management of the PET imaging center, for 2006 were
$728,000. As of December 31, 2006 the PET imaging center owes Suffolk Management
$192,000. Suffolk Management pays monthly premises rent to an entity which is
owned by the same radiologist that owns 49% of Suffolk Management. For 2006
Suffolk Management incurred and paid $88,000 for premises rent. In 2005 the
Company paid $11,000 to the entity owned by the radiologist as a security
deposit for the premises.

         A radiology company, whose principal owner owns 11% of Hialeah
Management, has a Facility Lease Agreement with Jacksonville, pursuant to a
Letter Agreement dated May 4, 2006. Management fees earned by Jacksonville
pursuant to the Facility Lease Agreement for 2006 were $561,000. As of December
31, 2006, the radiology company owes Jacksonville $396,000.

         Our PET imaging center in Jacksonville, Florida, commenced operations
in June 2006. For 2006, we incurred general and administrative expenses of
$20,000 with an entity whose owner is an investor in Hialeah Management and is
the same entity that provides marketing services to Hialeah Management.

                                    Page 78


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         See Exhibit Index for the Exhibits filed as part of or incorporated by
reference into this Report.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

         During 2006 and 2005, we were billed the following fees by MOORE
STEPHENS, P.C.:

                                                     2006           2005
                                                 ------------   ------------
         Audit & Review Fees                     $    112,000   $    103,000
         Tax Fees                                      16,000          8,000
         Other Fees                                    18,000         42,000
                                                 ------------   ------------
                                                 $    146,000   $    153,000
                                                 ============   ============

         The audit committee of our Board of Directors approves the engagement
of an accountant to render all audit and non-audit services prior to the
engagement of the accountant based upon a proposal by the accountant of
estimated fees and scope of the engagement. Our Board of Director's has received
the written disclosure and the letter from MOORE STEPHENS, P.C. required by
Independence Standards Board Standard No. 1, as currently in effect, and has
discussed with MOORE STEPHENS, P.C. their independence.


                                    Page 79


SIGNATURES

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

THE SAGEMARK COMPANIES LTD.


/s/ THEODORE B. SHAPIRO
- ---------------------------------------
Chief Executive Officer,
President and Director
April 1, 2007


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


/s/ THEODORE B. SHAPIRO
- ---------------------------------------
Chief Executive Officer,
President and Director
April 1, 2007


/s/ EDWARD D. BRIGHT
- ---------------------------------------
Chairman of the Board
April 1, 2007


/s/ GEORGE W. MAHONEY
- ---------------------------------------
Chief Financial Officer
April 1, 2007


/s/ ROBERT L. BLESSEY
- ---------------------------------------
Secretary and Director
April 1, 2007


/s/ STEPHEN A. SCHULMAN, M.D.
- ---------------------------------------
Director
April 1, 2007


                                    Page 80


Index to Exhibits

Exhibit No.   Description of Document
- -----------   -----------------------

(3)(i)        Certificate of Incorporation. (Filed with the U.S. Securities and
              Exchange Commission as an exhibit to the Company's Annual Report
              on Form 10-K for the fiscal year ended July 31, 1994 and
              incorporated herein by reference thereto.)

(3)(ii)       By-laws. (Filed with the U.S. Securities and Exchange Commission
              as an exhibit to the Company's Annual Report on Form 10-K for the
              fiscal year ended July 31, 1994 and incorporated herein by
              reference thereto.)

(10.1)        Purchase Agreement dated as of November 9, 2005 between The
              Sagemark Companies Ltd. and Trident Advisors, Inc. (Filed with the
              Securities and Exchange Commission on January 5, 2006 as an
              exhibit to the Registrant's Post Effective Amendment Number 1 to
              Form SB-2 Registration Statement and incorporated herein by
              reference thereto.)

(10.2)        Form of Amendment to Purchase Agreement dated as of November 9,
              2005 between The Sagemark Companies Ltd. and Trident Advisors,
              Inc. (Filed with the Securities and Exchange Commission on July
              17, 2006on Form 8-K and incorporated herein by reference thereto.)

(10.3)        Secured Promissory Note of Trident Advisors, Inc. dated as of July
              11, 2006 (Filed with the Securities and Exchange Commission on
              July 17, 2006on Form 8-K and incorporated herein by reference
              thereto.).

(10.4)        Premise Lease Agreement dated as of January 26, 2006 by and
              between The Sagemark Companies Ltd. and Jacksonville Concourse II,
              Ltd. (Filed on Form 8-K on April 11, 2006 with the U.S. Securities
              and Exchange Commission and incorporated herein by reference
              thereto.)

(10.5)        Equipment With Service Schedule dated as of February 12, 2006 To
              Master Lease Agreement (Quasi) dated as of June 24, 2003 by and
              between The Sagemark Companies Ltd. and General Electric Capital
              Corporation. (Filed on Form 8-K on April 11, 2006 with the U.S.
              Securities and Exchange Commission and incorporated herein by
              reference thereto.)

(10.6)        Equipment Schedule dated as of February 21, 2006 to Master
              Security Agreement dated as of August 29, 2005 by and between The
              Sagemark Companies Ltd. and General Electric Capital Corporation.
              (Filed on Form 8-K on April 11, 2006 with the U.S. Securities and
              Exchange Commission and incorporated herein by reference thereto.)

(10.7)        Promissory Note dated as of March 6, 2006 by and between The
              Sagemark Companies Ltd. and General Electric Capital Corporation.
              (Filed on Form 8-K on April 11, 2006 with the U.S. Securities and
              Exchange Commission and incorporated herein by reference thereto.)

(10.8)        Financial Covenants Agreement dated as of March 6, 2006 by and
              between The Sagemark Companies Ltd. and General Electric Capital
              Corporation. (Filed on Form 8-K on April 11, 2006 with the U.S.
              Securities and Exchange Commission and incorporated herein by
              reference thereto.)

(10.9)        Premise lease agreement dated as of May 25, 2006 by and between
              Tamarac Center, LLC and The Sagemark Companies, Ltd. (Filed with
              Form 10QSB on November 13, 2006 with the U.S. Securities and
              Exchange Commission and incorporated herein by reference thereto.)

(10.10)       Master Equipment Lease Agreement dated as of December 5, 2006 by
              and between The Sagemark Companies Ltd. and Siemens Medical
              Solutions, USA, Inc.

(21)          Subsidiaries of the Registrant.

(31.1)        Chief Executive Officer Certification.

(31.2)        Chief Financial Officer Certification.

(32)          Certification pursuant to 18 U.S.C. Section 1350 as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(99)          Form SB-2 Registration Statement Under The Securities Act of 1933.
              (Filed with the Securities and Exchange Commission on February 28,
              2005 and all amendments thereto filed with on June 8, 2005, July
              12, 2005 and July 26, 2005 and incorporated herein by reference
              thereto.)

(99.1)        Current Reports on Form 8-K (Filed with the Securities and
              Exchange Commission on April 13, 2006, June 5, 2006, July 17, 2006
              and October 16, 2006 and incorporated herein by reference
              thereto.)

                                    Page 81

EX-10.10

Exhibit 10.10

EX-21

Exhibit (21)


List of Subsidiaries of the Registrant



Company                                           State of Incorporation
- ----------------                                  ----------------------

SIS Capital Corp.                                         Delaware
Premier P.E.T. Imaging International, Inc.                Delaware
Premier Cyclotron International Corp.                     Delaware
Premier P.E.T. Imaging of Wichita, LLC                    Kansas
Premier P.E.T. Imaging of Arlington Heights, Inc.         Illinois
Premier P.E.T. Imaging of New Jersey, Inc.                New Jersey
Morris County PET Management LLC                          New Jersey
Premier P.E.T. of Long Island, LLC                        New York
Hialeah PET Management LLC                                Florida
P.E.T. Management of Queens, LLC                          New York
Suffolk PET Management LLC                                New York
Premier PET Imaging of Jacksonville, LLC                  Florida
Premier PET Imaging of Tamarac, LLC                       Florida

There are no other subsidiaries with significant operations or liabilities.


                                    Page 82

EX-31.1

Exhibit (31.1)

                      CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Theodore B. Shapiro, certify that:

1.   I have reviewed this annual report on Form 10-KSB of The Sagemark Companies
     Ltd.;

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

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

4.   The small business issuer's other certifying officer and I are responsible
     for establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
     over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
     15d-15(f) for the small business issuer and have:

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

     b)  Designed such internal control over financial reporting, or caused such
         internal control over financial reporting to be designed under our
         supervision, to provide reasonable assurance regarding the reliability
         of financial reporting and -the preparation of financial statements for
         external purposes in accordance with generally accepted accounting
         principles;

     c)  Evaluated the effectiveness of the small business issuer's disclosure
         controls and procedures and presented in this report our conclusions
         about the effectiveness of the disclosure controls and procedures, as
         of the end of the period covered by this report based on such
         evaluation; and

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

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

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

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

April 1, 2007

By  /s/ THEODORE B. SHAPIRO
    -------------------------------------------
    Theodore B. Shapiro Chief Executive Officer

                                    Page 83

EX-31.2

Exhibit (31.2)

                      CHIEF FINANCIAL OFFICER CERTIFICATION

I, George W. Mahoney, certify that:

1.   I have reviewed this annual report on Form 10-KSB of The Sagemark Companies
     Ltd.;

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

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

4.   The small business issuer's other certifying officer and I are responsible
     for establishing and maintaining disclosure controls and procedures (as
     defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
     over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
     15d-15(f) for the small business issuer and have:

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

     b)  Designed such internal control over financial reporting, or caused such
         internal control over financial reporting to be designed under our
         supervision, to provide reasonable assurance regarding the reliability
         of financial reporting and the preparation of financial statements for
         external purposes in accordance with generally accepted accounting
         principles;

     c)  Evaluated the effectiveness of the small business issuer's disclosure
         controls and procedures and presented in this report our conclusions
         about the effectiveness of the disclosure controls and procedures, as
         of the end of the period covered by this report based on such
         evaluation; and

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

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

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

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

April 1, 2007

By     /s/ GEORGE W. MAHONEY
      ------------------------------------------
      George W. Mahoney, Chief Financial Officer


                                    Page 84

EX-32

Exhibit (32)

           CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
            PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


         In connection with the Annual Report of The Sagemark Companies Ltd.,
(the "Company") on Form 10-KSB for the year ending December 31, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned Chief Executive Officer and Chief Financial Officer of the
Company hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 that (based on their
knowledge): 1) the Report fully complies with the requirements of Section 13(a)
or 15 (d) of the Securities Exchange Act of 1934, and 2) the information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company as of and for the periods
covered in the Report.


/s/ THEODORE B. SHAPIRO
- --------------------------------------------
Theodore B. Shapiro, Chief Executive Officer



/s/ GEORGE W. MAHONEY
- --------------------------------------------
George W. Mahoney, Chief Financial Officer



April 1, 2007


                                     Page 85