Document:

U.S. Securities and Exchange Commission
                              Washington, DC 20549

                                  Form 10-QSB/A
                                (Amendment No. 1)

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
      OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED

                               SEPTEMBER 30, 2005

                          Commission File Number 0-4186

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

                     New York                            13-1948169
          (State or other jurisdiction of              (IRS Employer
           Incorporation or organization)          Identification Number)

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

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

         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 [ ]

         Indicate by checkmark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act Yes [ ] No [X]

         State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practical date: As of November 18, 2005, the
registrant had 7,545,253 shares of its par value $.01 common stock outstanding.

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

<PAGE>

                                EXPLANATORY NOTE

This Amendment No. 1 to Form 10-QSB is being filed to include the correct
Exhibit 10.1. A previously filed exhibit 10.1 was inadvertently filed with the
Form 10-QSB.

<PAGE>

                  The Sagemark Companies Ltd. and Subsidiaries
                        CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX
                                      -----

PART 1. FINANCIAL INFORMATION..................................................3

Item 1. Financial Statements...................................................3

Report of Independent Registered Public Accounting Firm........................3

Unaudited Consolidated Statements of Operations for the
  Three and Nine Months Ended September 30, 2005 and 2004....................4-5

Unaudited Consolidated Statements of Comprehensive Income (Loss)
  for the Three and Nine Months Ended September 30, 2005 and 2004..............6

Unaudited Consolidated Balance Sheet as of September 30, 2005..................7

Unaudited Consolidated Statements of Cash Flows for the
  Nine Months Ended September 30, 2005 and 2004..............................8-9

Notes to Unaudited Consolidated Financial Statements.......................10-17

Item 2. Management's Discussion and Analysis of Finaicial Conditions
  and Results of Operations................................................18-23

Item 3. Controls and Procedures...............................................23

PART II OTHER INFORMATION.....................................................24

Item 6. Exhibits and Reports on Form 8-K......................................24

Signatures....................................................................25

Certifications.............................................................26-28

                                       2
<PAGE>

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

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 reviewed the accompanying consolidated balance sheet of The Sagemark
Companies Ltd. and its subsidiaries as of September 30, 2005 and the related
consolidated statements of operations and comprehensive income (loss) and cash
flows for the three and nine month periods ended September 30, 2005 and 2004.
These interim financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements referred
to above for them to be in conformity with United States generally accepted
accounting principles.

MOORE STEPHENS, P. C.
Certified Public Accountants

Cranford, New Jersey
November 16, 2005

                                       3
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
================================================================================

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
                                                           Three months ended              Nine Months Ended
                                                              September 30,                   September 30,
                                                       ----------------------------    ----------------------------
                                                          2 0 0 5         2 0 0 4         2 0 0 5         2 0 0 4
                                                       ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>
Revenues:
  Net patient service revenue                          $    884,000    $    717,000    $  2,668,000    $  2,134,000
  Net patient service revenue - related party                    --           4,000           4,000          43,000
  Management fees - related parties                       1,119,000         847,000       3,365,000       2,499,000
                                                       ------------    ------------    ------------    ------------

  Total Revenues                                          2,003,000       1,568,000       6,037,000       4,676,000
                                                       ------------    ------------    ------------    ------------

Operating Expenses:
  Patient service costs and expenses - FDG                  199,000         194,000         600,000         597,000
  Patient service costs and expenses - related party          5,000           4,000          17,000          19,000
  Patient service costs and expenses - other                 59,000          44,000         110,000         129,000
  Radiology expense                                           2,000          12,000          62,000          49,000
  Radiology expense - related party                          57,000          35,000         148,000         110,000
  Equipment maintenance                                     103,000         118,000         341,000         317,000
  Professional fees                                          49,000          45,000         207,000         175,000
  Legal fees - related party                                 85,000          20,000         155,000         174,000
  Billing and collection fees - related party                29,000          26,000         117,000          70,000
  Salaries, payroll taxes and fringe benefits               416,000         205,000       1,119,000         747,000
  Consulting fees                                            19,000              --         191,000              --
  Consulting fees - related party                            15,000              --          33,000              --
  Rent expense - related party                               23,000          27,000          74,000          81,000
  Fair value of common stock issued pursuant
   to a subscription termination agreement                       --              --         125,000              --
  Marketing fees - related parties                           58,000          24,000         156,000          72,000
  Other general and administrative expenses                 466,000         386,000       1,439,000         940,000
  Depreciation and amortization                             398,000         320,000       1,191,000         961,000
  Provision for bad debt expense                                 --          24,000              --          38,000
                                                       ------------    ------------    ------------    ------------

  Total Operating Expenses                                1,983,000       1,484,000       6,085,000       4,479,000
                                                       ------------    ------------    ------------    ------------

Income (Loss) From Operations                                20,000          84,000         (48,000)        197,000

Interest Expense                                           (168,000)       (147,000)       (526,000)       (459,000)

Interest Income - Investments                                27,000           1,000          78,000           1,000

Other Income                                                  2,000              --           2,000           2,000
                                                       ------------    ------------    ------------    ------------

Loss From Operations Before Share of
  Earnings of Unconsolidated Affiliate
  and Minority Interest in Income
  of Subsidiaries                                          (119,000)        (62,000)       (494,000)       (259,000)

Share of Earnings of Unconsolidated Affiliate                14,000         158,000         218,000         698,000

Minority Interest in Income
   of Subsidiaries                                         (192,000)       (178,000)       (613,000)       (395,000)
                                                       ------------    ------------    ------------    ------------

(Loss) Income Before Income
   Tax Provision - Forward                             $   (297,000)   $    (82,000)   $   (889,000)   $     44,000
</TABLE>

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

                                       4
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
================================================================================

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================

<TABLE>
<CAPTION>
                                                 Three months ended            Nine months ended
                                                    September 30,                 September 30,
                                             --------------------------    --------------------------
                                               2 0 0 5        2 0 0 4        2 0 0 5        2 0 0 4
                                             -----------    -----------    -----------    -----------
<S>                                          <C>            <C>            <C>            <C>
(Loss) Income Before Income
   Tax Provision - Forwarded                 $  (297,000)   $   (82,000)   $  (889,000)   $    44,000

Income Tax Provision                              (8,000)        (1,000)       (15,000)       (23,000)
                                             -----------    -----------    -----------    -----------

  Net (Loss) Income                          $  (305,000)   $   (83,000)   $  (904,000)   $    21,000
                                             ===========    ===========    ===========    ===========

(Loss) Earnings Per Common Share:
  Basic (loss) earnings per common share     $     (0.04)   $     (0.02)   $     (0.12)   $      0.01
                                             ===========    ===========    ===========    ===========
  Diluted (loss) earnings per common share   $     (0.04)   $     (0.02)   $     (0.12)   $      0.01
                                             ===========    ===========    ===========    ===========

Weighted Average Number of Common Shares:
  Basic                                        7,545,253      3,670,253      7,436,843      2,686,050
                                             ===========    ===========    ===========    ===========
  Diluted                                      7,545,253      3,670,253      7,436,843      2,993,567
                                             ===========    ===========    ===========    ===========
</TABLE>

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

                                       5
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
================================================================================

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
================================================================================

<TABLE>
<CAPTION>
                                            Three months ended             Nine months ended
                                               September 30,                 September 30,
                                        --------------------------    --------------------------
                                          2 0 0 5        2 0 0 4        2 0 0 5        2 0 0 4
                                        -----------    -----------    -----------    -----------
<S>                                     <C>            <C>            <C>            <C>
Net (Loss) Income                       $  (305,000)   $   (83,000)   $  (904,000)   $    21,000

Other Comprehensive Income (Expense):
  Unrealized holding gain (losses) on
   available for sale securities              1,000         (7,000)         2,000          9,000
                                        -----------    -----------    -----------    -----------

  Comprehensive (Loss) Income           $  (304,000)   $   (90,000)   $  (902,000)   $    30,000
                                        ===========    ===========    ===========    ===========
</TABLE>

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

                                       6
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
================================================================================

UNAUDITED CONSOLIDATED BALANCE SHEET
================================================================================

<TABLE>
<CAPTION>
                                                                            September 30,
                                                                               2 0 0 5
                                                                            ------------
<S>                                                                         <C>
Assets:
Current Assets:
   Cash                                                                     $  5,065,000
   Restricted cash                                                               172,000
   Patient accounts receivable - net                                             715,000
   Management fees receivable - related parties                                  868,000
   Marketable securities - current                                                13,000
   Other current assets                                                          247,000
                                                                            ------------

   Total Current Assets                                                        7,080,000
                                                                            ------------

Fixed Assets:
   Furniture, fixtures, equipment and leasehold improvements - net             3,909,000
   Equipment held under capitalized lease obligations - net                    1,704,000
                                                                            ------------

   Total Fixed Assets                                                          5,613,000
                                                                            ------------

Other Assets:
   Investment in unconsolidated affiliate                                      2,529,000
   Goodwill                                                                    4,811,000
   Other assets                                                                  307,000
                                                                            ------------

   Total Other Assets                                                          7,647,000
                                                                            ------------

   Total Assets                                                             $ 20,340,000
                                                                            ============

Liabilities and Shareholders' Equity
Current Liabilities:
   Accounts payable                                                         $  1,109,000
   Accounts payable - related parties                                            470,000
   Accrued payroll                                                               154,000
   Accrued dividends                                                              44,000
   Other accrued expenses                                                         92,000
    Escrow deposit                                                               172,000
   Current portion of notes payable                                            1,292,000
   Current portion of capitalized lease obligations                              290,000
                                                                            ------------

   Total Current Liabilities                                                   3,623,000
                                                                            ------------

Long-Term Debt:
   Notes payable, net of current portion                                       3,227,000
   Subordinated notes payable                                                    417,000
   Deferred interest on subordinated notes payable                               103,000
   Capitalized lease obligations - net of current portion                      1,665,000
                                                                            ------------

   Total Long-Term Debt                                                        5,412,000
                                                                            ------------

Minority Interest                                                              1,336,000
                                                                            ------------

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;
      7,892,011 shares issued; and, 7,545,253 shares outstanding)                 79,000
   Additional paid-in-capital, common stock                                   71,946,000
   Accumulated other comprehensive loss                                          (38,000)
   Accumulated deficit                                                       (60,332,000)
   Deferred compensation expense                                                  (3,000)
   Less:  Common stock (346,758 shares) in treasury at cost                   (1,686,000)
                                                                            ------------

   Total Shareholders' Equity                                                  9,969,000
                                                                            ------------

Total Liabilities and Shareholders' Equity                                  $ 20,340,000
                                                                            ============
</TABLE>

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

                                       7
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
================================================================================

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================

<TABLE>
<CAPTION>
                                                                             Nine Months Ended
                                                                               September 30,
                                                                        --------------------------
                                                                          2 0 0 5        2 0 0 4
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
Cash Flows - Operating Activities
  Net (loss) income                                                     $  (904,000)   $    21,000

  Adjustments to reconcile net (loss) income to net cash -operations:
   Depreciation and amortization                                          1,191,000        961,000
   Share of earnings of unconsolidated affiliates                          (218,000)      (698,000)
   Stock option compensation expense                                          2,000          4,000
   Provision for bad debt expense                                                --         38,000
   Minority interest in income of subsidiaries                              613,000        395,000
   Fair value of common stock issued pursuant
     to a subscription termination agreement                                125,000             --
   Other operating adjustments                                                8,000             --

  Change in assets and liabilities:
   Patient accounts receivable - net                                       (395,000)       140,000
   Management fees receivable - related parties                            (640,000)       (51,000)
   Other current assets                                                       6,000        (82,000)
   Accounts payable                                                         250,000        266,000
   Accounts payable - related parties                                       (92,000)       231,000
   Accrued payroll and related expenses                                     103,000         98,000
   Other accrued expense                                                     18,000        (26,000)
   Deferred interest on subordinated debt                                    30,000         27,000
                                                                        -----------    -----------

  Net Cash - Operating Activities                                            97,000      1,324,000
                                                                        -----------    -----------

Cash Flows - Investing Activities
  Purchased fixed assets                                                    (79,000)       (26,000)
  Proceeds from sale of subsidiary equity                                    26,000             --
  Other assets, construction & equipment deposits                          (154,000)      (100,000)
                                                                        -----------    -----------

  Net Cash - Investing Activities                                          (207,000)      (126,000)
                                                                        -----------    -----------

Cash Flows - Financing Activities
  Proceeds from private placement offering                                1,678,000        100,000
  Offering costs                                                           (437,000)      (129,000)
  Loan proceeds                                                                  --        113,000
  Payments on notes payable                                                (817,000)      (793,000)
  Payments on capital lease obligations                                     (23,000)       (31,000)
  Proceeds from subsidiaries equity financings                              177,000             --
  Transfer subsidiary equity financing proceeds to escrow                  (172,000)            --
  Distributions to minority interest investors                              (66,000)      (147,000)
  Distributions to minority interest investors - related parties           (230,000)      (318,000)
                                                                        -----------    -----------

  Net Cash - Financing Activities                                           110,000     (1,205,000)
                                                                        -----------    -----------

  Net Change in Cash                                                             --         (7,000)

Cash - Beginning of Period                                                5,065,000        526,000
                                                                        -----------    -----------

Cash - End of Period                                                    $ 5,065,000    $   519,000
                                                                        ===========    ===========

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the periods for:
   Interest                                                             $   489,000    $   432,000
   Income taxes                                                         $    15,000    $    23,000
</TABLE>

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

                                       8
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
================================================================================

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================

Supplementary Disclosures of Non-Cash Investing and Financing Activities:

Nine Months Ended September 30, 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.

Nine Months Ended September 30, 2004
------------------------------------

     During the nine months ended September 30, 2004, Theodore Shapiro, a
Director of the Company and its Chief Executive Officer exchanged $325,000 of
accrued salary for 130,000 shares of the Company's common stock.

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

                                       9
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(1) Basis of Presentation

         The accompanying unaudited consolidated financial statements of The
Sagemark Companies Ltd. ("Sagemark" or, the "Company") have been prepared in
accordance with Regulation S-B promulgated by the Securities and Exchange
Commission and do not include all of the information and footnotes required by
generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, these interim financial
statements include all adjustments (adjustments are of a normal recurring
nature) necessary in order to make the financial statements not misleading. The
results of operations for such interim periods are not necessarily indicative of
results of operations for a full year. The unaudited consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto of the Company and management's discussion and
analysis of financial condition and results of operations included in the Annual
Report on Form 10-KSB for the year ended December 31, 2004.

(2) Accounting Policies

         The accounting policies followed by the Company are set forth in Note 1
to the Company's consolidated financial statements in the December 31, 2004 Form
10-KSB.

(a) Basic and Diluted Earnings (Loss) Per Share

         Basic earnings (loss) per share reflect the amount of earnings (loss)
for the period available to each share of common stock outstanding during the
reporting period. Diluted earnings (loss) per share reflect basic earnings
(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 (options or warrants)
into common stock.

         The computation of diluted loss 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 September 30, 2005 options and warrants issued to employees and
consultants pursuant to the Company's long-term stock incentive plan to purchase
an aggregate of 616,000 shares of common stock at prices ranging from $1.13 to
$3.91 per share were outstanding. 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 251,775 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. In June and October 2005, pursuant
to a Placement Agency Agreement, the Company issued 75,000 and 56,250 shares of
common stock and warrants to purchase an aggregate of 37,500 and 28,125 shares
of common stock for $4.00 per share, as a consequence of the Company not having
a Registration Statement becoming effective by June 12, 2005. The Registration
Statement became effective August 2, 2005.

         For the three month periods ended September 30, 2005 and 2004 and the
nine month period ended September 30, 2005, the Company recorded a loss and as a
result, the average number of common shares used in the calculation of basic and
diluted loss per share is identical and have not been adjusted for the effects
of potential common shares from unexercised stock options and warrants which
were anti-dilutive for such time period. For the nine months ended September 30,
2004, options and warrants to purchase an aggregate of 636,000 shares of common
stock at prices ranging from $1.13 to $3.50 per share were outstanding. The
following table presents a reconciliation of basic earnings per common share to
dilutive earnings per common share.
<TABLE>
<CAPTION>
                                                        Weighted           Net
                                                         Average         Income
                                            Net          Shares            Per
                                           Income      Outstanding        Share
                                        ------------   ------------   ------------
<S>                                     <C>               <C>         <C>
Nine Months Ended September 30, 2004:
 Basic earnings per common share        $     21,000      2,686,050   $       0.01
 Effect of potential common shares                --        307,517           0.00
                                        ------------   ------------   ------------
 Diluted earnings per common share      $     21,000      2,993,567   $       0.01
                                        ============   ============   ============
</TABLE>

                                       10
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(2) Accounting Policies (continued)

(b) Stock-based Compensation

         The Company has elected to use the intrinsic value method of accounting
for stock options issued under its stock option plan and accordingly does not
record an expense for such stock options. For purposes of pro forma disclosures
under the fair value method, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows:

<TABLE>
<CAPTION>
                                                     Three months ended             Nine Months Ended
                                                        September 30,                 September 30,
                                                  --------------------------    --------------------------
                                                    2 0 0 5        2 0 0 4        2 0 0 5        2 0 0 4
                                                  -----------    -----------    -----------    -----------
<S>                                               <C>            <C>            <C>            <C>
  Net income (loss) as reported                   $  (305,000)   $   (83,000)   $  (904,000)   $    21,000
  Add: Stock-based employee compensation
   included in the statement of operations              1,000          1,000          2,000          4,000
  Deduct: Stock-based employee compensation as
   determined under the fair value based method       (26,000)       (19,000)       (77,000)       (56,000)
                                                  -----------    -----------    -----------    -----------
  Pro forma net income (loss) under SFAS 123      $  (330,000)   $  (101,000)   $  (979,000)   $   (31,000)
                                                  ===========    ===========    ===========    ===========

Basic and Diluted Earnings (Loss) per Share:
  As reported
   Basic earnings (loss) per common share         $     (0.04)   $     (0.02)   $     (0.12)   $      0.01
                                                  ===========    ===========    ===========    ===========

   Diluted earnings (loss) per common share       $     (0.04)   $     (0.02)   $     (0.12)   $      0.01
                                                  ===========    ===========    ===========    ===========

  Pro forma under SFAS 123
   Basic earnings (loss) per common share         $     (0.04)   $     (0.03)   $     (0.13)   $     (0.01)
                                                  ===========    ===========    ===========    ===========

   Diluted earnings (loss) per common share       $     (0.04)   $     (0.03)   $     (0.13)   $     (0.01)
                                                  ===========    ===========    ===========    ===========
</TABLE>

         On October 11, 2005, the Company's board of directors approved a
resolution, pursuant to which all outstanding options and warrants granted to
officers and directors of the Company, and their affiliates, entitling them to
purchase up to an aggregate of 550,000 shares of common stock at exercise prices
ranging from $1.125 per share to $1.70 per share and expiring on dates ranging
from March 6, 2006 to June 13, 2006 will be extended for a five year period
expiring on October 10, 2010 and 450,000 of the such shares were repriced at an
exercise price of $1.60 per share (the closing price of the Company's common
stock on October 11, 2005). The fair value of the common stock on the date the
options were granted equaled the exercise price and no compensation expense was
incurred. All such options and warrants are fully vested.

         In addition, the Board issued stock options to its chief financial
officer and an employee entitling them to purchase 45,000 and 10,000 shares of
the Company's common stock, respectively, for a five year period expiring on
October 10, 2010 at an exercise price of $1.60 per share (the closing price of
the Company's common stock on October 11, 2005). The fair value of the common
stock on the date the options were granted equaled the exercise price and no
compensation expense was incurred. These stock options are fully vested and
replace stock options previously issued to such officer and employee for a like
number of shares of common stock which were exercisable at $1.90 per share for a
term which expired on August 2, 2005.

(c) Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk include cash and accounts receivable. As of
September 30, 2005, all of the Company's cash is placed with high credit quality
financial institutions. The amount on deposit in any one institution that
exceeds federally insured limits is subject to credit risk. As of September 30,
2005, the Company had $4,407,000 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 the three month period
ended September 30, 2005, $478,000, or 54% of net patient service revenue was
from Medicare and $169,000, or 19% of net patient service revenue was from Blue
Cross/Blue Shield. During the nine month period ended September 30, 2005,
$1,289,000, or 48% of net patient service revenue was from Medicare, $570,000,
or 21% of net patient service revenue was from Blue Cross/Blue Shield, and
$4,000, or .2% 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 PET Imaging International,
Inc. ("Premier"), a wholly owned subsidiary of the Company. During the three
months ended September 30, 2004, $376,000, or 52% of net

                                       11
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Accounting Policies (continued)
(c) Concentration of Credit Risk (continued)

patient service revenue was from Medicare, $153,000, or 21% of net patient
service revenue was from Blue Cross/Blue Shield and $4,000, or 1% of net patient
service revenue was from Diagnostic Radiology Network. During the nine months
ended September 30, 2004, $1,065,000, or 49% of net patient service revenue was
from Medicare, $515,000, or 24% of net patient service revenue was from Blue
Cross/Blue Shield and $43,000, or 2% of net patient service revenue was from
Diagnostic Radiology Network. As of September 30, 2005, $329,000, or 46%, of
patient accounts receivable were due from Medicare and $109,000, or 15%, 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.

(d) New Authoritative Pronouncements

         In May 2005, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 154 "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS 154 changes the requirements for the accounting
for and reporting of a change in accounting principle. SFAS 154 requires that
the cumulative effect of voluntarily changing to a new accounting principle be
applied retrospectively to prior period financial statements. Prior to the
effective date of SFAS 154, the cumulative effect of voluntarily changing to a
new accounting principle was included in the operating results of the period in
which such change was adopted. SFAS 154 is effective for fiscal years beginning
after December 15, 2005. The Company expects that the adoption of SFAS 154 will
not have a significant impact on its financial statements.

(3) Establishment of New PET Centers

(a) Suffolk PET Management LLC

         The Company capitalized Suffolk PET Management LLC ("Suffolk") by
issuing 100 Membership Units (the "Suffolk Units") at a purchase price of $100
per unit. On September 27, 2005 Premier purchased 51 Suffolk Units for a total
of $5,100, and loaned Suffolk $350,000 on a subordinated basis. The subordinated
debt bears interest at 10% per annum and is subordinated to GE Healthcare
Financial Services ("GE"). On September 29, 2005, an investor purchased 49
Suffolk Units for a total of $4,900.

         Suffolk will provide management and administrative services to Advanced
PET Imaging, P.C., ("Advanced PET"), a professional corporation owned by the
investor, which will operate the PET Center in East Setauket, New York, pursuant
to a Turnkey License and Services Agreement dated August 10, 2005 between
Suffolk and Advanced PET (the "Turnkey License"). The Turnkey License has a term
of fifteen years, subject to a renewal option for successive five year periods
and provides for administrative services fees payable by Advanced PET from PET
Center revenues that may not exceed $250,000 per month during the first six
months and $350,000 during the second six months of the agreement and $400,000
per month in subsequent years. Suffolk has agreed to sublease the premises,
which was leased by the Company from an entity owned by the investor, to be
utilized for the operations of the PET Center and make the PET scanning 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
Center during the term of the Turnkey License. The Turnkey 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
thereunder. The Turnkey 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 Turnkey License or sooner from certain
payments that may be received by Advanced PET from revenues generated from its
operations. Advanced PET has agreed to grant Suffolk a security interest in all
of its assets as collateral security for Advanced PET's obligation to pay such
service fees to Suffolk.

                                       12
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(3) Establishment of New PET Centers (continued) (a) Suffolk PET Management LLC
(continued)

         On August 29, 2005 the Company entered into two leases with GE to lease
a positron emission tomography / computed tomography ("PET/CT") scanner and hot
lab equipment. The principal amount of the leases is approximately $1,914,000
and will be repaid in eighty four monthly installments. 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. Also on August 29, 2005 the
Company entered into a $450,000 loan agreement with GE, the proceeds of which
will be used to construct the Advanced PET facility. The loan will be repaid in
eighty-four monthly installments. As of September 30, 2005 the Company has
utilized $48,875 of the loan amount and interest is accruing at a rate of 7.99%
per annum.

         On August 10, 2005 the Company entered into a separate premises lease
with an affiliated entity of the minority investor in Suffolk for the facility
in which the Advanced PET center operations will be conducted. The lease is for
a ten year period with two five year renewal options and will commence upon
completion of the construction of the Advanced PET center. The monthly base
annual rent during the term of the lease is $5,612. On October 1, 2005 the
Company paid a total of $11,224 to the landlord as a security. For the three and
nine month periods ended September 30, 2005, the Company incurred no lease
expense.

(b) Bethesda PET Management LLC

         The Company capitalized Bethesda PET Management LLC ("Bethesda") by
issuing 100 Membership Units (the "Bethesda Units") at a purchase price of
$3,500 per unit. On September 26, 2005 Premier purchased 51 Bethesda Units for a
total of $178,500, and investors purchased 49 Bethesda Units for a total of
$171,500. The investor's money is being held in escrow until the Company
satisfies certain specific conditions, among which, is the Company's receipt of
a firm financing commitment for the PET/CT equipment and leasehold improvements.

         Bethesda will provide management and administrative services to Premier
PET Imaging of D.C. and Maryland, Inc., ("PET DC"), wholly owned subsidiary of
the Company, which will operate the PET Center in Bethesda, Maryland, pursuant
to a Administrative Services Agreement dated September 2, 2005 between Bethesda
and PET DC (the "Services Agreement"). The Services Agreement has a term of ten
years, subject to a renewal option for ten year periods and provides for monthly
administrative services fees payable by PET DC from its PET Center revenues. The
monthly administrative services fee will be equal to the fair market value of
the administrative services as determined by an independent appraiser. Bethesda
has agreed to lease the premises and has leased the PET/CT equipment, to be
utilized for the operations of the PET Center. Bethesda has also agreed to make
the PET scanning and ancillary medical equipment, furniture and fixtures and
leasehold improvements available to PET DC for use by PET DC in its operations
of the PET Center during the term of the Services Agreement. The Services
Agreement provides for a full range of day to day non-professional management
and business office services to PET DC in consideration of the service fees
payable to Bethesda. The Services agreement also provides for Bethesda to
advance certain sums from its working capital to PET DC to enable PET DC to meet
any shortfall in its operating expenses. Each such advance shall constitute a
loan to PET DC, which loan will bear interest at the rate of 5% per annum and be
payable upon the expiration of the Services Agreement or sooner from certain
payments that may be received by PET DC from revenues generated from its
operations. PET DC has agreed to grant Bethesda a security interest in all of
its assets as collateral security for PET DC's obligation to pay such service
fees to Bethesda.

                                       13
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(4) Sale of Morris PET Management LLC Units

         On September 30, 2005 Premier PET Imaging International, Inc.
("Premier"), a wholly owned subsidiary of the Company, reduced its' ownership
percentage in Morris County PET Management LLC ("Morris") from 61% to 51% by
selling ten of its sixty-one units to an investor for $26,000. The transaction
was not material.

(5) Investment in Unconsolidated Affiliate

         The Company committed to make $4,920,000 in capital contributions to
Trident Growth Fund, L.P. ("Trident" or the "Partnership") and, as of September
30, 2005, all but $188,000 of such contributions have been made. The
Partnership's General Partner has agreed to defer the remaining $188,000 capital
contribution until all other Limited Partners make their required contributions
and Trident fully invests all of its funds. The Partnership received $3,500,000
of capital from new partners during 2003 and as of September 30, 2005 the
Company's ownership in the Partnership is 24.1%. The Company is currently in
negotiations with an affiliate of the General Partner of Trident to sell to it
such 24.1% interest. There can be no assurance as to whether or when the Company
will sell its interest in Trident or, if so, what the final terms of such
transaction will be.

         As of September 30, 2005, the Company's investment balance in Trident,
under the equity method, is presented in the following table.

   Total Subscription at inception                      $  4,920,000
   Subscription payable at inception                        (333,000)
                                                        ------------
   Capital contributions paid-in at inception              4,587,000
   Expenses allocated to Trident in 1999                    (557,000)
   Sale of 27% limited partnership interest               (1,584,000)
   Reduction in subscription payable balance upon
    sale of 27% limited partnership interest                 145,000
   Cumulative equity method loss                             (62,000)
                                                        ------------
   Equity method investment balance                     $  2,529,000
                                                        ============

         At September 30, 2005 the equity method investment balance of
$2,529,000 is $486,000 less than the amount of underlying equity in net assets,
$3,015,000, because of temporary unrealized appreciation in investments. If such
unrealized appreciation was permanent the Company's net loss for the three and
nine month periods ended September 30, 2005 would be reduced by $486,000 and the
equity method investment balance at September 30, 2005 would be $3,015,000. The
Company does not have operating control as it relates to Trident Growth Fund,
L.P. The condensed results of operations and financial position of Trident is
summarized in the following table.

<TABLE>
<CAPTION>
                                    Three months ended              Nine Months Ended
                                       September 30,                   September 30,
                               ----------------------------    ----------------------------
                                  2 0 0 5         2 0 0 4         2 0 0 5         2 0 0 4
                               ------------    ------------    ------------    ------------
<S>                            <C>             <C>             <C>             <C>
   Income                      $    663,000    $    718,000    $  1,920,000    $  1,963,000
   Operating expenses              (491,000)       (547,000)     (1,503,000)     (1,651,000)
   Investment (losses) gains       (112,000)        483,000         489,000       2,582,000
                               ------------    ------------    ------------    ------------
   Net income                  $     60,000    $    654,000    $    906,000    $  2,894,000
                               ============    ============    ============    ============

As of September 30, 2005:
   Investments at fair value   $ 29,395,000
   Other assets                   4,269,000
   SBA Debentures               (20,865,000)
   Other liabilities               (303,000)
                               ------------
   Partnership capital         $ 12,496,000
                               ============
</TABLE>

                                       14
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(6) Subscription Termination Agreement

         On June 3, 2004, the Company entered into a subscription agreement with
a group of potential investors, for PET Management of Queens, LLC ("Queens
Management"), 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, and such amount was charged as an operating
expense for the nine month period ended September 30, 2005.

(7) Private Placement

         On January 13, 2005, the Company consummated a third and final closing
in connection with a private placement of its securities (the "Private
Placement") 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 at such
closing consisted of Units comprised of shares of the Company's common stock
(the "Shares") and warrants to purchase shares of the Company's common stock
(the "Warrants"). At such closing, the Company sold an aggregate of 839,250
Shares at a purchase price of $2.00 per share and 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.

         The Warrants entitle the holders to purchase shares of the Company's
common stock reserved for issuance thereunder (the "Warrant Shares") for a
period of five years from the date of issuance at an exercise price of $4.00 per
share. The Warrants contain certain anti-dilution rights and are redeemable by
the Company, in whole but not in part, on terms specified in the Warrants.

         Under the terms of the Agency Agreement, the Placement Agent received,
among other compensation, a cash commission fee of nine (9%) percent of the
gross proceeds to the Company of the securities sold at such closing, a cash
consulting fee of two (2%) percent of the gross proceeds of the securities sold
at such closing, plus a non-accountable expense allowance equal to one (1%)
percent of such proceeds.

         In addition, pursuant to the terms of the Agency Agreement, the Company
agreed to issue to the Placement Agent, as partial consideration for its
services under the Agency Agreement, 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 sold in the Private Placement and 20% of the number of Warrant
Shares issuable pursuant to Warrants issued to investors in the Private
Placement (the "Placement Agent Warrants"). The Placement Agent Warrants are
exercisable at $2.00 per share, contain substantially the same anti-dilution
rights as the Warrants, and provide for cashless exercise. On January 13, 2005,
the Company issued to the Placement Agent, warrants to purchase an aggregate of
251,775 shares of common stock for $2.00 per share.

         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. In
June and October 2005, the Company issued 75,000 and 56,250 shares of common
stock and warrants to purchase an aggregate of 37,500 and 28,125 shares of
common stock for $4.00 per share, as a consequence of the Company not having a
Registration Statement becoming effective by June 12, 2005. The Registration
Statement became effective August 2, 2005.

         The securities discussed above were offered and sold in reliance upon
exemptions from the registration requirements of Section 5 of the Securities Act
of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act and Rule
506 promulgated thereunder. Such securities were sold exclusively to accredited
investors as defined by Rule 501(a) under the Act.

                                       15
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(8) Employment Agreements

         On January 25, 2005, the Company entered into an employment agreement
with Elizabeth Farrell 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 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 (i)
future PET Centers commence operations and (ii) future PET 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 and no
compensation expense was incurred.

         On March 25, 2005, the board of directors of the Company approved
extensions of the employment agreement between the Company and Theodore B.
Shapiro, president and chief executive officer of the Company, and the
employment agreement between Dr. Stephen A. Schulman and Premier P.E.T. Imaging
International, Inc. ("Premier"), through and including March 24, 2010.

         On October 25, 2005, the Company entered into an Executive Employment
Agreement and Exclusive Radiology Services Agreement with Dr. Michael Fagien,
who will 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
will receive 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"). The $100,000 fee will be payable from the first
$100,000 of distributions received by the Company from the newly opened center's
operating cash flow. Dr. Fagien will receive 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 and no compensation
expense was incurred. 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 and, at the Company's request, at
any other imaging centers 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.

(9) Related Party Transactions

(a)      Robert L. Blessey is a member of the Company's board of directors and
is the Company's general counsel. During the three months ended September 30,
2005 and 2004 the Company incurred $103,000 (of which $18,000 was recorded as
stock offering costs) and $20,000 of legal fees, respectively, to Mr. Blessey.
During the nine months ended September 30, 2005 and 2004 the Company incurred
$329,000 (of which $174,000 was recorded as stock offering costs) and $174,000
of legal fees, respectively, to Mr. Blessey. At September 30, 2005, the Company
owes Mr. Blessey $359,000.

(b)     Dr. Stephen A. Schulman is a member of the Company's board of directors
and the chief executive officer of Premier. During the three months ended
September 30, 2005 and 2004, the Company made aggregate lease payments of
$13,000 and $17,000, respectively, for its administrative offices in Boca Raton,
Florida and a building for PET Wichita to companies controlled by Dr. Schulman.
During the nine month periods ended September 30, 2005 and 2004 such lease
payments amounted to $44,000 and $51,000, respectively. During the three month
periods ended September 30, 2005 and 2004, the Company incurred billing and
collection expenses of $29,000 and $26,000, respectively, and CT Fusion Scan
fees of $5,000 and $4,000, respectively, both payable to companies controlled by
Dr. Schulman. During the nine month periods ended September 30, 2005 and 2004,
the Company incurred billing and collection expenses of $117,000 and $70,000,
respectively, and CT Fusion Scan fees of $17,000 and $19,000, respectively to
companies controlled by Dr. Schulman. For the nine month period ended September
30, 2005 the company paid Dr. Schulman $18,000 for consulting services rendered.
At September 30, 2005, the Company owes such entities $38,000. During the three
month periods ended September 30, 2005 and 2004, $0 and $4,000 of the Company's
net patient service revenue was from Diagnostic Radiology Network. During the
nine month periods ended September 30, 2005 and 2004, $4,000

                                       16
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
(9) Related Party Transactions (continued)
and $43,000 of the Company's net patient service revenue was from Diagnostic
Radiology Network, a company controlled by Dr. Schulman.

(c)      Edward Bright is the Chairman of the Board of the Company. For the
three and nine month periods ended September 30, 2005 the Company paid Mr.
Bright $15,000 for consulting services rendered.

(d)      A radiology company owns 49% of PET LI. Pursuant to a Turnkey License
and Services Agreement, PET LI manages a PET center and earns management fees. A
radiologist is the principal owner of the radiology company and the PET center.
Management fees earned by PET LI from its management of the PET center during
the three month periods ended September 30, 2005 and 2004 were $645,000 and
$508,000, respectively, and during the nine month periods ended September 30,
2005 and 2004 were $2,081,000 and $1,534,000, respectively. As of September 30,
2005, the PET center owes PET LI $449,000. Additionally, PET LI pays equity
distributions to its owners. During the three month periods ended September 30,
2005 and 2004, the radiology company received equity distributions of $71,000
and $61,000, respectively, and during the nine month periods ended September 30,
2005 and 2004 received equity distributions of $208,000 and $272,000,
respectively.

(e)      A radiologist owns 11% of Hialeah PET Management LLC ("Hialeah
Management"). Pursuant to an Administrative Services Agreement, Hialeah
Management manages a PET center and earns management fees. The radiologist is
the principal owner of the PET center. Management fees earned by Hialeah
Management from its management of the PET Center during the three month periods
ended September 30, 2005 and 2004 were $322,000 and $339,000, respectively, and
during the nine month periods ended September 30, 2005 and 2004 were $985,000
and $965,000, respectively. As of September 30, 2005, the PET center owes
Hialeah Management $330,000. Hialeah Management also pays monthly premises rent
to an entity which is owned by the radiologist. For the three and nine month
periods ended September 30, and 2005 and 2004, Hialeah Management incurred and
paid $10,000 and $30,000, respectively, for premises rent. Additionally, Hialeah
Management pays equity distributions to its owners. During the three month
periods ended September 30, 2005 and 2004 the radiologist received equity
distributions of $11,000 and $0, respectively, and during the nine month periods
ended September 30, 2005 and 2004 received equity distributions of $11,000 and
$19,000, respectively.

(f)      The same radiology company that owns 49% of PET LI also owns 10% of PET
Management of Queens, LLC ("Queens Management"). Pursuant to a Turnkey License
and Services Agreement, Queens Management manages a PET center and earns
management fees. A radiologist is the principal owner of the radiology company
and the PET center. Management fees earned by Queens Management from its
management of the PET center during the three and nine months ended September
30, 2005 were $152,000 and $299,000, respectively. As of September 30, 2005, the
PET center owes Queens Management $89,000.

(g)      A radiology group owns 8% of Morris, and provides radiology reading
services to Premier PET Imaging of New Jersey, Inc. ("PET NJ"). For the three
month periods ended September 30, 2005 and 2004 PET NJ incurred radiology
reading expenses of $57,000 and $35,000, respectively, and for the nine month
periods ended September 30, 2005 and 2004 incurred radiology reading expenses of
$148,000 and $110,000, respectively. At September 30, 2005 PET NJ owes the
radiology group $17,000. Additionally, Morris pays equity distributions to its
owners. During the three month periods ended September 30, 2005 and 2004 the
radiology group received equity distributions of $0 and $7,000, respectively,
and during the nine month periods ended September 30, 2005 and 2004 received
equity distributions of $8,000 and 22,000, respectively.

(h)      For the three and nine month periods ended September 30, 2005 and 2004,
the Company incurred marketing expenses of $58,000 and $24,000, respectively,
and $156,000 and $72,000, respectively, with marketing entities related to the
Company via employee and or investor relationships. At September 30, 2005 the
marketing entities are owed $58,000. Additionally, a principal of one of the
marketing entities received equity distributions of $3,000 and $0, respectively,
for the three month periods ended September 30, 2005 and 2004, and $3,000 and
$5,000, respectively, for the nine month periods ended September 30, 2005 and
2004, from Hialeah Management.

                                       17
<PAGE>

THE SAGEMARK COMPANIES LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Statement Regarding Forward- Looking Disclosure

         This Quarterly Report of Sagemark Companies Ltd on Form 10-QSB,
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" in our
Form 10-KSB annual report for the year ended December 31, 2004 and those
described in any other filings which we make with the SEC. 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 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 the Company in light
of these important factors.

Introduction

         We are engaged in the operation and management of out-patient medical
diagnostic imaging centers that utilize positron emission tomography (PET)
scanning equipment. PET is an advanced, robust medical diagnostic imaging
procedure currently used by physicians in the detection of certain cancers,
coronary disease and neurological disorders including Alzheimer's disease. As of
September 30, 2005, we own and or operate five PET imaging centers and are in
the process of establishing two more PET imaging centers.

         We continue to expend significant time, effort and funds identifying
and negotiating to establish additional potential PET imaging centers which we
anticipate will commence operations in subsequent periods, assuming we
successfully complete required negotiations and obtain required capital and
financing to do so. We remain in the initial phase of our long-term plan and we
may incur future losses principally as a result of the significant start-up
costs required to establish such additional PET imaging centers. We anticipate
that the losses incurred during the initial stages of our business plan may be
offset by future revenues when additional PET centers commence operations.

         The key factor that management uses to evaluate our operating
performance is individual PET center revenue trends. Because we are in the
initial phase of our long-term plan, it is important that we achieve increasing
revenue trends and it is that evaluation that management uses in order to
determine whether a PET center's sales and marketing efforts are effective. The
key factor that management uses to evaluate our financial condition is working
capital and 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, it is critical that we begin to develop a trend of increasing
working capital that is derived from our operations.

         We manage our PET centers either through direct ownership or through
Administrative Services Agreements. For the PET 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 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 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 center is established is based primarily on laws
that exist for PET center ownership in the state in which the PET center is
established.

                                       18
<PAGE>

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; 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 the Company's
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 the nine
months ended September 30, 2005, was 73 compared to 40 for the year ended
December 31, 2004. The increase in days sales outstanding relates to Medicare
and other insurance carriers not remitting timely due to billing system changes
to accommodate new Medicare billing codes which became effective in April 2005.
An annualized increase in net patient service revenue of $660,000 also
contributed to the increase in days sales outstanding. As of September 30, 2005,
patient accounts receivable, net of contractual allowances and allowances for
doubtful accounts is $715,000. Contractual adjustments are recorded based on
historical experience.

         The following table presents our net accounts receivable aging by payor
class as of September 30, 2005:

<TABLE>
<CAPTION>
                                         31-60        61-90     91 days or
                           Current       days         days       greater        Total
                         ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>
Managed care             $  125,000   $   69,000   $   24,000      150,000   $  368,000
Medicare/Medicaid           131,000       73,000       34,000       91,000      329,000
Commercial                    4,000        6,000        2,000        6,000       18,000
                         ----------   ----------   ----------   ----------   ----------
Total                    $  260,000   $  148,000   $   60,000   $  247,000   $  715,000
                         ==========   ==========   ==========   ==========   ==========
</TABLE>

         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 September 30, 2005, our receivables do not include
any amounts which are in legal collections.

         At September 30, 2005, the Company's contractual allowance balance is
$526,000 which is a $281,000 increase from the balance at December 31, 2004. The
increase of $281,000 resulted from an increase in patient account receivables
prior to contractual allowances of $676,000. None of the $281,000 increase
related to a change in estimates of prior year net patient service revenue. The
contractual allowance percentage at September 30, 2005 is 42% compared to 43% at
December 31, 2004. For each one percentage point increase in the contractual
allowance percentage the Company's net patient service revenue would be
decreased by $13,000. Likewise, for each one percentage point decrease in the
contractual allowance percentage the Company's net patient service revenue would
be increased by $13,000.

         Long-Lived Assets: We state our furniture, fixtures, equipment and
leasehold improvements at acquisition cost 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.

                                       19
<PAGE>

         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.

         Accounting for Expenses in Connection with Stock Option and Warrant
Issuances: We currently account for stock options and warrants issued to
employees under Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees" which is an intrinsic value based method of
accounting, rather than the fair value based method prescribed by Statement of
Financial Accounting Standard ("SFAS") No. 123 "Accounting for Stock Based
Compensation", as amended by SFAS No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure". We currently disclose the required
information regarding stock options, warrants and similar equity instruments
issued to employees pursuant to SFAS No. 123 and SFAS No. 148. If we adopted the
accounting requirements of SFAS No. 123 and SFAS No. 148, our results of
operations would have been negatively affected as disclosed in Note 2(b) to the
September 30, 2005 unaudited consolidated financial statements.

         The issuance of SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS No.123(R)") in December 2004 requires that the compensation cost relating
to share-based payment transactions (including employees) be recognized in the
financial statements. SFAS No. 123(R) will be effective beginning with the
quarter ended March 31, 2006. The adoption of the standard is currently expected
to reduce future earnings by an amount consistent with the reduction shown in
the pro forma disclosure under SFAS No. 123 and SFAS No. 148 as noted above. Due
to the various assumptions and factors, such as the current environment at date
of grant, that effect this calculation, the actual impact of adoption on future
earnings could differ significantly from our current estimate.

         Accounting for Income Taxes: We currently have a net deferred tax asset
of approximately $14.6 million with an offset of a 100% valuation allowance. The
primary component of our deferred tax asset is approximately $14.4 million
related to approximately $46.6 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 transaction to
approximately $420,000 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
three and nine month periods ended September 30, 2005 and 2004.

Revenues

         Our sources of revenues come from net patient service revenues for the
PET centers which we own and management fees for the PET centers which we manage
pursuant to service and license agreements. Total revenues for the third quarter
of 2005 represent a net increase of approximately $435,000 from 2004 of which
$163,000 was an increase in net patient service revenues and $272,000 was an
increase in management fees, of which $151,000 came from Queens Management which
became operational in December 2004. Total revenues for the first nine months of
2005 represent a net increase of approximately $1,361,000 from 2004 of which
$495,000 was an increase in net patient service revenues and $866,000 was an
increase in management fees, of which $299,000 was from Queens Management.

         The net patient service revenues of the two PET centers that we
directly own trended upwards from the prior three and nine month periods. Our
PET center in Wichita, Kansas, increased its revenues by $26,000 or 12%, for the
third quarter of 2005 and increased its revenues by $82,000, or 11% for the
first nine months of 2005. Our PET center in Parsippany, New Jersey, increased
its revenues by $137,000, or 27%, for the third quarter of 2005 and increased
its revenues by $413,000, or 29%, for the first nine months of 2005. The
procedures performed by both of the two PET centers that we directly own
increased for both the third quarter and first nine months of 2005 when compared
to the prior periods. During the third quarter of 2005, $478,000, or 54% of net
patient service revenue was from Medicare and $169,000, or 19% of net patient
service revenue was from Blue Cross/Blue Shield. During the third quarter of
2004, $376,000, or 52% of net patient service revenue was from Medicare and

                                       20
<PAGE>

$153,000, or 21% of net patient service revenue was from Blue Cross/Blue Shield.
During the first nine months of 2005, $1,289,000, or 48% of net patient service
revenue was from Medicare and $570,000, or 21% of net patient service revenue
was from Blue Cross/Blue Shield. During the first nine months of 2004,
$1,065,000, or 49% of net patient service revenue was from Medicare and
$515,000, or 24% of net patient service revenue was from Blue Cross/Blue Shield.
The Company does not require collateral to support accounts receivable
instruments subject to credit risk.

         The overall PET procedures performed by the PET centers which we manage
increased when comparing the third quarter and first nine months of 2005 to the
prior periods. Correspondingly, we experienced an overall upwards revenue trend
from the prior periods in our PET centers in which we generate management fees.
Management fees of our PET center in Long Island, New York, increased by
$136,000 or 27%, for the third quarter of 2005 and increased by $545,000, or 36%
for the first nine months of 2005. Management fees of our PET center in Hialeah,
Florida decreased by $15,000, or 4%, for the third quarter of 2005 and increased
by $22,000, or 2% for the first nine months of 2005. Our PET center located in
Forest Hills (Queens), New York, became operational in December 2004 and did not
begin generating revenues until the second quarter of 2005. Our Queens PET
Center generated revenues of $151,000 and $299,000, respectively, for the third
quarter of 2005 and first nine months of 2005. 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 the practice groups
patient accounts receivable outstanding. The monthly management fee has ceilings
as agreed to by the Company and practice groups.

         We attribute the overall increase in the number of PET procedures
performed by all of our centers to the success of our marketing efforts and the
increased awareness of our PET Centers by the physicians to whom we market our
services.

Operating Expenses

         The operating expenses of the PET centers increased $83,000 or 8% when
comparing the third quarter of 2005 and 2004 and increased $424,000, or 15% when
comparing the first nine months of 2005 and 2004. The increase in operating
expenses is primarily from the added operating expenses of our Queens PET Center
which was not operational for the 2004 comparative periods, and an increase in
variable costs related to increased scan volume.

         Corporate operating expenses increased $416,000, or 89% when comparing
the third quarter of 2005 and 2004 and increased 1,182,000, or 71% when
comparing the first nine months of 2005 and 2004. During the third quarter and
first nine months of 2005, we incurred consulting fees of $34,000 and $224,000,
respectively, primarily for services related to the private placement and
marketing and development which were not incurred in the prior periods. During
the first nine months of 2005, we recognized a $125,000 expense representing the
market value of stock issued to terminate a subscription agreement. During the
third quarter and first nine months of 2005 we incurred $26,000 and $76,000 of
premises lease expense and $73,000 and $220,000 of depreciation expense relating
to our Queens PET Center. Also, during the first nine months of 2005 we incurred
$36,000 in expense for a landlord settlement relating to our Queens PET Center.
Salaries and benefits increased $143,000 and $225,000, respectively, for the
third quarter and for the first nine months of 2005. On January 25, 2005 the
Company entered into an employment agreement with an operations executive at an
annual salary of $140,000.

         We anticipate that if we develop new PET centers our fixed operating
costs will also increase which would affect our profitability until such time as
any new PET centers generate revenues sufficient to absorb such fixed costs. We
also anticipate the need to hire additional personnel as we develop new PET
centers.

Interest Expense

         Interest expense increased $21,000 and $67,000 when comparing the third
quarter and first nine months of 2005 to the prior periods. The increase in
interest expense is due primarily to an increase in imputed interest on
capitalized lease obligations for new PET/CT equipment at our Queens PET Center.

                                       21
<PAGE>

Equity Method Investments

         As of September 30, 2005, we held a 24.1% limited partnership interest
in Trident Growth Fund, L.P. Our share of earnings related to our limited
partnership investment in Trident Growth Fund, L.P. was $14,000 and $158,000,
respectively, for the third quarter of 2005 and 2004 and was $218,000 and
$698,000, respectively, for the first nine months of 2005 and 2004. As of
September 30, 2005, our cumulative share of Trident Growth Fund, L.P.'s loss was
$62,000. As of September 30, 2005, Trident Growth Fund, L.P. had $29,395,000 of
investments in public and private companies that are carried at estimated fair
market value. Private company equities are not traded on a stock exchange or
other public market and as a result do not have readily determinable values.
Although Trident issues annual audited financial statements and is highly
regulated by the Small Business Administration, the determination of the fair
market value of investments in private companies requires significant estimates
and broad assumptions. We do not have oversight over Trident's operations,
internal controls or financial statements.

Minority Interests

         The income of our PET centers that is allocable to the minority
shareholders of our PET centers for the third quarter of 2005 and 2004 was
$192,000 and $178,000, respectively. The income of our PET centers that is
allocable to the minority shareholders of our PET centers for the first nine
months of 2005 and 2004 was $613,000 and $395,000, respectively. To the extent
that our PET centers in Rockville Centre, New York; Parsippany, New Jersey;
Hialeah, Florida; and Forest Hills, 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 September 30, 2005, we had available working capital of
approximately $3,457,000 compared to $3,021,000 at December 31, 2004. The
following table details changes in components of working capital during the
first nine months of 2005.

<TABLE>
<CAPTION>
                                               September 30, 2005    December 31, 2004           Change
                                               ------------------    ------------------    ------------------
<S>                                            <C>                   <C>                   <C>
Cash                                           $        5,065,000    $        5,065,000    $               --
Restricted cash                                           172,000                    --               172,000
Patient accounts receivable - net                         715,000               320,000               395,000
Management fees receivable - related parties              868,000               228,000               640,000
Other current assets                                      260,000               262,000                (2,000)
Accounts payable                                       (1,579,000)           (1,421,000)             (158,000)
Other current liabilities                                (462,000)             (169,000)             (293,000)
Current portion of notes payable                       (1,292,000)           (1,181,000)             (111,000)
Current portion of capitalized
   lease obligations                                     (290,000)              (83,000)             (207,000)
                                               ------------------    ------------------    ------------------

Working Capital                                $        3,457,000    $        3,021,000    $          436,000
                                               ==================    ==================    ==================
</TABLE>

         Currently, 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.

         Our sources of working capital during the first nine months of 2005
were $1,241,000 of net proceeds from the sale of common stock on a final closing
on a private placement offering and $852,000 from our operations. During the
first nine months of 2004 our sources of working capital was $100,000 from the
sale of our securities, $954,000 from our operations and $113,000 from proceeds
on notes payable. Cash flows from the sale of common stock are not necessarily
expected to be recurring in nature.

         Our principal uses of working capital during the first nine months of
2005 included $840,000 of loan and capital lease payments, as compared to
$824,000 for 2004, $233,000 for capital expenditures and construction and
equipment deposits, as compared to $126,000 for 2004, and $296,000 in
distributions paid to minority interest investors, as compared to $465,000 for
2004.

                                       22
<PAGE>

         Working capital includes $715,000 of net patient accounts receivable of
which $329,000 or 46%, of patient accounts receivable were due from Medicare and
$109,000, or 15%, of patient accounts receivable were due from Blue Cross/Blue
Shield.

         During the first nine months of 2005, we closed on an additional
private placement and received net proceeds of $1,241,000. This additional
funding, in conjunction with our $3,021,000 of working capital as of December
31, 2004 provided us with necessary working capital to meet our current and
long-term working capital needs which are discussed in the following paragraphs.
In addition, to the extent that our existing PET centers are able to establish
and maintain a trend of generating working capital from their operations, we
will have the working capital necessary to continue the development of new PET
centers.

         On May 14, 2001, we purchased Premier through which we establish,
operate and manage outpatient diagnostic imaging centers ("PET 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
September 30, 2005, $1,914,000 has been advanced.

         We currently operate five PET centers and are in the process of
establishing two more. Each new PET center requires the acquisition of PET
scanning equipment. The PET scanning equipment at each PET center requires
maintenance and as of September 30, 2005, we have entered into four separate
long-term service contracts to provide for such maintenance 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 facility is a
pay as you go contract based on time and material incurred. The premises in
which the centers conduct their operations are leased and as of September 30,
2005 our premises lease commitments approximate $39,000 per month.

         Our existing debt service, including principal and interest for all of
our debt and capital leases, approximates $2.1 million for the next twelve
months. Our equipment and leasehold improvement loan and lease agreements with
our equipment lenders, our senior creditors (including our equipment for Queens
PET center), 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 September 30,
2005 we are in compliance with our debt covenants. We anticipate that we will be
the borrower or guarantor of all additional equipment indebtedness incurred in
connection with additional PET centers in which we have an ownership interest.

Item 3. 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 Company's periodic SEC filings.

                                       23
<PAGE>

PART II.  OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

The exhibits listed below as filed as part of this Quarterly Report for the
period ended September 30, 2005

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.

10.1     Master Lease Agreement (Quasi) dated as of June 24, 2003 by and between
         General Electric Capital Corporation and the Sagemark Companies Ltd.

10.2     Master Security Agreement dated as of August 29, 2005 by and between
         General Electric Capital Corporation and The Sagemark Companies Ltd.*

10.3     Promissory Note dated as of August 29, 2005 by and between General
         Electric Capital Corporation and The Sagemark Companies Ltd.*

* Previously filed.

The Company filed a Report on Form 8-K on September 30, 2005 which is
incorporated herein by reference thereto.

                                       24
<PAGE>

SIGNATURES

         In accordance with the requirements 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.

November 21, 2005                       /s/ THEODORE B. SHAPIRO
                                        ----------------------------------------
                                        Theodore B. Shapiro
                                        Chief Executive Officer,
                                        President and Director

November 21, 2005                       /s/ GEORGE W. MAHONEY
                                        ----------------------------------------
                                        George W. Mahoney
                                        Chief Financial Officer

                                       25<PAGE>
EXHIBIT 10.1

                               EMRISE CORPORATION
                   AMENDED AND RESTATED 2000 STOCK OPTION PLAN
                        INCENTIVE STOCK OPTION AGREEMENT

         This Incentive Option Agreement (this "Agreement") is made and entered
into by and between Emrise Corporation, a Delaware corporation ("Company"), and
___________________ ("Optionee"), as of ______________, 20__ ("Date of Grant").
If the Optionee is presently or subsequently becomes employed by a subsidiary of
the Company, the term "Company" shall be deemed to refer collectively to Emrise
Corporation and the subsidiary or subsidiaries that employs the Optionee.

                                    RECITALS

         A. The Board of Directors and stockholders of the Company have adopted
an Amended and Restated 2000 Stock Option Plan ("Plan") as an incentive to
retain key employees, officers, directors, and consultants of the Company and to
enhance the ability of the Company to attract new employees, officers,
directors, and consultants whose services are considered unusually valuable by
providing an opportunity to have a proprietary interest in the success of the
Company.

         B. The Board of Directors has established a Committee to administer the
Plan ("Committee"), and the Committee has approved the granting of an option to
the Optionee pursuant to the Plan to provide an incentive to the Optionee to
focus on the long-term growth of the Company.

                                    AGREEMENT

         In consideration of the mutual covenants and conditions hereinafter set
forth and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and the Optionee agree as follows:

         1. GRANT OF OPTION. The Company hereby grants to the Optionee the right
and option ("Option") to purchase an aggregate of ___________ (_____) shares
(such number being subject to adjustment as provided in paragraph 10 below and
Section 13 of the Plan) of the Common Stock of Emrise Corporation ("Stock") on
the terms and conditions herein set forth. This Option may be exercised in whole
or in part and from time to time as hereinafter provided. The Option granted
under this Agreement is intended to be an "incentive stock option" as set forth
in Section 422 of the Internal Revenue Code of 1986, as amended ("Code").

         2. VESTING OF OPTION. The Option shall vest and become exercisable as
follows: _____________________.

         3. PURCHASE PRICE. The price at which the Optionee shall be entitled to
purchase the Stock covered by the Option shall be $_____ per share, which price
equals or exceeds 100% of the Fair Market Value (as defined in the Plan) of a
share of the Stock on the Date of Grant.

<PAGE>

         4. TERM OF OPTION. The Option granted under this Agreement shall
expire, unless otherwise exercised, ____ years from the Date of Grant, through
and including the normal close of business of the Company on ______________,
20__ ("Expiration Date"), subject to earlier termination as provided in
paragraph 8 below.

         5. EXERCISE OF OPTION. The Option may be exercised by the Optionee as
to all or any part of the Stock then vested by delivery to the Company of
written notice of exercise and payment of the purchase price as provided in
paragraphs 6 and 7 below.

         6. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
this Agreement, the Option may be exercised by timely delivery to the Company of
written notice, which notice shall be effective on the date received by the
Company ("Effective Date"). The notice shall state the Optionee's election to
exercise the Option, the number of shares in respect of which an election to
exercise has been made, the method of payment elected (see paragraph 7 below),
the exact name or names in which the shares will be registered and the taxpayer
identification number of the Optionee. The notice shall be signed by the
Optionee and shall be accompanied by payment of the purchase price of such
shares. If the Option is exercised by a person or persons other than Optionee
pursuant to paragraph 8 below, the notice shall be signed by the other person or
persons and shall be accompanied by proof acceptable to the Company of the legal
right of the person or persons to exercise the Option. All shares delivered by
the Company upon exercise of the Option shall be fully paid and nonassessable
upon delivery.

         7. METHOD OF PAYMENT FOR OPTIONS. Payment for shares purchased upon the
exercise of the Option shall be made by the Optionee in cash or such other
method permitted by the Plan and the Committee and communicated to the Optionee
in writing prior to the date the Optionee exercises all or any portion of the
Option.

         8. TERMINATION OF EMPLOYMENT.

             8.1 GENERAL. If the Optionee terminates employment for any other
reason than for cause (as that term is defined in the Plan, "Cause") or
voluntary resignation in violation of any agreement to remain in the employ of
the Company, then the Optionee may at any time within three months after the
effective date of termination of employment exercise the Option to the extent
that the Optionee was entitled to exercise the Option at the date of
termination, provided that in no event shall the Option be exercisable after the
Expiration Date. If the Optionee terminates employment for Cause or voluntary
resignation in violation of any agreement to remain in the employ of the
Company, then the Option shall terminate immediately upon termination of
employment, and the Option shall be deemed to have been forfeited by the
Optionee.

             8.2 DEATH OR DISABILITY OF OPTIONEE. In the event of the death or
disability (as that term is defined in the Plan, "Disability") of the Optionee
within a period during which the Option, or any part thereof, could have been
exercised by the Optionee ("Option Period"), the Option shall lapse unless it is
exercised within the Option Period and in no event later than twelve months
after the date of the Optionee's death or Disability by the Optionee or the
Optionee's legal representative or representatives in the case of a Disability
or, in the case of death, by the person or persons entitled to do so under the

                                      -2-
<PAGE>

Optionee's last will and testament or if the Optionee fails to make a
testamentary disposition of the Option or shall die intestate, by the person or
persons entitled to receive the Option under the applicable laws of descent and
distribution. An Option may be exercised following the death or Disability of
the Optionee only if the Option was exercisable by the Optionee immediately
prior to his death or Disability. In no event shall the Option be exercisable
after the Expiration Date. The Committee shall have the right to require
evidence satisfactory to it of the rights of any person or persons seeking to
exercise the Option under this paragraph 8 to exercise the Option.

         9. NONTRANSFERABILITY. The Option granted by this Option Agreement
shall be exercisable only during the term of the Option provided in paragraph 4
above and, except as provided in paragraph 8 above, only by the Optionee during
his lifetime and while an Optionee of the Company. This Option shall not be
transferable by the Optionee or any other person claiming through the Optionee,
either voluntarily or involuntarily, except by will or the laws of descent and
distribution or such other events as are set forth in the Plan.

         10. ADJUSTMENTS IN NUMBER OF SHARES AND OPTION PRICE. In the event of a
stock dividend or if the Stock is changed into or exchanged for a different
number or class of shares of stock of the Company or of another corporation,
whether through reorganization, recapitalization, stock split-up, combination of
shares, merger or consolidation, there shall be substituted for each remaining
share of Stock then subject to this Option the number and class of shares of
stock into which each outstanding share of Stock is to be so exchanged, all
without any change in the aggregate purchase price for the shares then subject
to the Option, all as set forth in Section 13 of the Plan.

         11. DELIVERY OF SHARES. No shares of Stock shall be delivered upon
exercise of the Option until (i) the purchase price has been paid in full in the
manner herein provided; (ii) applicable taxes required to be withheld have been
paid or withheld in full; (iii) approval of any governmental authority required
in connection with the Option, or the issuance of shares thereunder, has been
received by the Company; and (iv) if required by the Committee, the Optionee has
delivered to the Committee an Investment Letter in form and content satisfactory
to the Company as provided in paragraph 12 below.

         12. SECURITIES ACT. The Company shall not be required to deliver any
shares of Stock pursuant to the exercise of all or any part of the Option if, in
the opinion of counsel for the Company, the issuance would violate the
Securities Act of 1933, as amended, or any other applicable federal or state
securities laws or regulations. The Committee may require that the Optionee,
prior to the issuance of any shares pursuant to exercise of the Option, sign and
deliver to the Company a written statement ("Investment Letter") stating (i)
that the Optionee is purchasing the shares for investment and not with a view to
the sale or distribution thereof; (ii) that the Optionee will not sell any
shares received upon exercise of the Option or any other shares of the Company
that the Optionee may then own or thereafter acquire except either (a) through a
broker on a national securities exchange or (b) with the prior written approval
of the Company; and (iii) containing such other terms and conditions as counsel
for the Company may reasonably require to assure compliance with the Securities
Act of 1933, as amended, or other applicable federal or state securities laws
and regulations. The Investment Letter shall be in form and content acceptable
to the Committee in its sole discretion.

                                      -3-
<PAGE>

         13. FEDERAL AND STATE TAXES. Upon exercise of the Option, or any part
thereof, the Optionee may incur certain liabilities for federal, state or local
taxes and the Company may be required by law to withhold taxes for payment to
taxing authorities. Upon determination by the Company of the amount of taxes
required to be withheld, if any, with respect to the shares to be issued
pursuant to the exercise of the Option, the Optionee shall pay all federal state
and local tax withholding requirements to the Company.

         14. DEFINITIONS; COPY OF PLAN. To the extent not specifically provided
herein, all capitalized terms used in this Agreement have the same meanings
ascribed to them in the Plan. By the execution of this Agreement, the Optionee
acknowledges receipt of a copy of the Plan.

         15. ADMINISTRATION. This Agreement shall at all times be subject to the
terms and conditions of the Plan and the Plan shall in all respects be
administered by the Committee in accordance with the terms of and as provided in
the Plan. The Committee shall have the sole and complete discretion with respect
to all matters reserved to it by the Plan and decisions of the majority of the
Committee with respect thereto and to this Option Agreement shall be final and
binding upon the Optionee and the Company. In the event of any conflict between
the terms and conditions of this Agreement and the Plan, the provisions of the
Plan shall control.

         16. CONTINUATION OF EMPLOYMENT. This Agreement shall not be construed
to confer upon the Optionee any right to continue in the employ of the Company
and shall not limit the right of the Company, in its sole discretion, to
terminate the employment of the Optionee at any time.

         17. OBLIGATION TO EXERCISE. The Optionee shall have no obligation to
exercise any option granted by this Agreement.

         18. GOVERNING LAW. This Agreement shall be interpreted and administered
under the laws of the State of Delaware.

         19. AMENDMENTS. This Agreement may be amended only by a written
agreement executed by the Company and the Optionee. The Company and the Optionee
acknowledge that changes in federal tax laws enacted subsequent to the Date of
Grant, and applicable to stock options, may provide for tax benefits to the
Company or the Optionee. In that event, the Company and the Optionee agree that
this Agreement may be amended as necessary to secure for the Company and the
Optionee any benefits that may result from that legislation. Any amendment shall
be made only upon the mutual consent of the parties, which consent (of either
party) may be withheld for any reason.

         20. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between the parties with regard to the subject matter of this Agreement. All
agreements, covenants, representations and warranties, express or implied, oral
and written, of the parties with regard to the subject matter of this Agreement
are contained in this Agreement and the documents referred to or implementing
the provisions of this Agreement. No other agreements, covenants,
representations or warranties, express or implied, oral or written, have been
made by either party to the other with respect to the subject matter of this
Agreement. All prior and contemporaneous conversations, negotiations, covenants
and warranties with respect to the subject matter of this Agreement are waived,
merged in this Agreement and superseded by this Agreement.

                                      -4-
<PAGE>

         21. TAX INFORMATION AND NOTICE OF DISQUALIFYING DISPOSITION. This
Option is intended to be eligible for treatment as an Incentive Stock Option
under Section 422 of the Code. Whether this Option will receive that tax
treatment will depend, in part, on the actions by the Optionee after exercise of
this Option. For example, if the Optionee disposes of any of the Stock acquired
under this Option within two years after the Date of Grant or within one year of
the date of exercise of this Option, the Optionee may lose the benefits of Code
Section 422. Accordingly, the Company makes no representations by way of the
Plan, this Agreement, or otherwise, with respect to the actual tax consequences
of the grant or exercise of this Option or the subsequent disposition of the
Stock acquired under this Option.

                  If the Optionee sells or makes a disposition (within the
meaning of Section 422 of the Code) of any of the Stock acquired under this
Option prior to the later of (i) one year from the date of exercise of this
Option, or (ii) two years from the Date of Grant, the Optionee agrees to give
written notice to the Company of the disposition. The notice shall include the
Optionee's name, the number, exercise price and exercise date of the shares of
Stock disposed of, and the date of disposition.

         IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officer thereunto duly authorized and the Optionee has hereunto
set his or her hand as of the date first written above.

EMRISE CORPORATION                           OPTIONEE

By:
    ---------------------------------        -----------------------------------

     --------------, ----                    ------------

                                      -5-

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