imageinnovations holdings, inc., …securities.stanford.edu/filings-documents/1036/...case...

Case 1:06-cv-03707-JGK Document 29 Filed 01/03/2007 of 50

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

SARA KATZ, on behalf of herself and allothers similarly situated,

Plaintiff,CIVIL ACTION #06-CV-03707-JGK

V.

IMAGE INNOVATIONS HOLDINGS, INC.,ALAIN KARDOS, DERICK SINCLAIR,MICHAEL RADCLIFFE, JAMESARMENAKIS, ARTHUR GONONSKY,CLIFFORD WILKINS, CHRIS SMITH,JOSEPH RADCLIFFE, MICHELLERADCLIFFE, DENISE CONSTABLE,GOLDSTEIN GOLUB KESSLER LLP,CLYDE BAILEY, P.C. and H. E. CAPITALS.A.

FIRST AMENDED CLASS ACTIONCOMPLAINT FOR VIOLATIONS OFTHE FEDERAL SECURITIES LAWS

JURY TRIAL DEMANDED

Defendants

Lead Plaintiffs, Elizabeth Adams, A. Stephen Drane, J. M. Blackburn, and V. S.

Goes , LLC (collectively " Plaintiffs " or "Lead Plaintiffs "), individually and on behalf of all

other persons similarly situated , by their undersigned attorneys , upon personal

knowledge as to themselves and upon information and belief as to all other matters,

based upon, inter alia, the investigation conducted by and through their attorneys,

which included, among other things, a review of the public documents and

announcements made by Defendants , Securities and Exchange Commission ("SEC")

filings , press releases regarding Image Innovations Holdings , Inc. ("Image" or the

"Company" ), internal Company documents and interviews with current Image

employees allege, for their First Amended Complaint , as follows:

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1. NATURE OF THE ACTION

1. This is a federal class action on behalf of purchasers of Image securities

during the period of April 13, 2004 through March 16, 2006, inclusive (the "Class

Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the

"Exchange Act").

II. JURISDICTION AND VENUE

2. The claims asserted herein arise under and pursuant to Sections 10(b)

and 20(a) of the Exchange Act, 15 U.S.C. §§78j( b) and 78t(a), and Rule 10b-5

promulgated under Section 10(b) by the SEC , 17 C.F. R. §240.1 Ob-5.

3. This Court has jurisd iction over the subject matter of this action

pursuant to 28 U.S.C. §§1331 and 1337, and Section 27 of the Exchange Act, 15

U.S.C. §78aa.

4. Venue is proper in this District pursuant to Section 27 of the Exchange Act

and 28 U.S.C. § 1391( b). Many of the acts charged herein , including the preparation

and dissemination of materially false and misleading information, occurred in

substantial part in this District and Image conducts business in this District.

5. In connection with the acts alleged in this Complaint, Defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce,

including, but not limited to, the mails, interstate telephone communications, and

the facilities of the national securities markets.

III. PARTIES

6. Lead Plaintiffs, as set forth in the certifications attached to the Declaration

of William B. Federman filed with the Court on July 13, 2006 and incorporated by

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reference herein, purchased the common stock of Image at artificially inflated prices

during the Class Period and have been damaged thereby.

7. Defendant Image is a Nevada corporation located at 432 Park Avenue

South, New York, New York, 10022. Image filed Chapter 11 bankruptcy proceedings

on July 6, 2006. Accordingly, on October 5, 2006, the Court entered an order staying

this action as to Image.

8. Defendant Alain Kardos ("Kardos") was Chief Executive Officer of Image

from June 30, 2003 until he was terminated from that position on October 19, 2004.

Kardos also served as a director of Image and an Image subsidiary, Image Innovations,

Inc., ("Image Innovations") from June 30, 2003 until he resigned from those positions on

February 3, 2005.

9. Defendant Michael Radcliffe was, at all relevant times, a director of

Image. Michael Radcliffe served as Chief Operating Officer of an Image subsidiary,

Image Innovations Sports & Entertainment Inc. ("ISE"), from its inception until

October 19, 2004 when he became ISE's Chief Executive Officer. He served as

CEO of ISE until the Spring of 2006, when he was terminated by the Company's

Board of Directors. Michael Radcliffe, together with his father, Joseph Radcliffe, and

several other family members, were promoters and controlling principals of MDK

Sports, Inc ("MDK").1 ISE acquired the entire celebrity memorabilia inventory owned

by MDK during first quarter of 2004. As consideration, Image issued to MDK Sports

an aggregate 4 million shares of restricted common stock.

1 MDK stood for Michael, Dennis and Kenneth, Defendant Joseph Radcliffe's two sons

and nephew, respectively.

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10. Defendant Derick Sinclair ("Sinclair") has served as Chief Financial

Officer of Image since February 2004.

11. Defendant James Armenakis ("Armenakis") served as a director of the

Company from March 15, 2004 until his resignation on April 10, 2006. Armenakis is

an attorney in New York City, and served as counsel to Image and its three wholly-

owned subsidiaries (collectively referred to as the "Image Group") during the Class

Period. In 2004, fees payable by the Image group to Armenakis for services

performed by his law firm, Armenakis & Armenakis, amounted to $118,400.

Armenakis is currently a defendant in an action filed by Image's bankruptcy estate

(the "Estate"). The Estate is seeking to recoup $235,000 in alleged unauthorized

payments made to Armenakis.

12. Defendant Arthur Gononsky ("Gononsky") served as a director of the

Company and member of its Board of Directors' Audit Committee from September

23, 2004 until his resignation on April 9, 2006.

13. Defendant Michelle Radcliffe is the wife of Michael Radcliffe and

daughter-in-law of Defendant Joseph Radcliffe. She served during the Class Period

as the bookkeeper for ISE in its Tannersville, New York offices and was intimately

involved in ISE' s financial dealings.

14. Defendant H. E. Capital SA ("H.E. Capital" or "H.E.") is and was a large

shareholder of image . During the Class Period H. E. Capital was a major source of

funding for Image. H.E. Capital's Director, Defendant Clifford Wilkins, was CEO of

Image through December 1, 2003. As financier of Image and its two subsidiaries,

Image Innovations and ISE, H. E. Capital was closely involved with these companies'

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business operations. According to the Company's Annual Report for the year ending

2003 filed with the SEC on Form 10-KSB, on April 14, 2004, H. E. Capital was at that

time the owner of more than 5% of the Company's common stock. According to the

Company's present CEO, Michael Preston ("Preston"), entities connected to H.E.

Capital owned around 40% of the Company at the end of 2003. The 2003 Annual

Report further stated that the Company had at that time a Loan Agreement with H. E.

Capital for a non-revolving secured $5,000,000 loan, bearing interest at 9% per annum

and due upon demand by H. E. Capital. The loans were secured by a general security

agreement granted by the Company against all of its assets. On December 30, 2003,

the Company sold 1,200,000 units consisting of one common share and one warrant to

H. E. Capital at a purchase price equal to $.75 per unit, for an aggregate purchase price

of $900,000. The purchase price was paid by H. E. Capital by the settlement of

$900,000 of indebtedness of the Company to H. E. Capital. On March 4, 2004, the

Company issued 266,667 units consisting of one common share and one warrant to H.

E. Capital at a price equal to $1.50 per unit for an aggregate purchase price of

$400,000. Each warrant had an exercise price of $2.00 per share. The purchase was

completed by the cancellation of $400,000 of indebtedness to H. E. Capital. As H. E.

Capital was a related party the shares and warrants issued were valued at $491,093 of

which $400,000 was to settle a debt and $91,093 was recorded as a financing expense.

On September 30, 2004, H. E. Capital exercised 600,000 warrants to purchase 600,000

restricted common shares. The purchase by H. E. Capital was completed by the

settlement of $900,000 of indebtedness to H. E. Capital. At December 31, 2004, the

balance of H. E. Capital's advances to the Company under the Loan Agreement totaled



$1,085,541. During 2004, H. E. Capital advanced $2,218,647 against the Loan

Agreement and cancelled indebtedness of $1,300,000 in exchange for the issuance of

common stock and warrants. In addition, H. E. Capital purchased 133,333 units of

common stock and warrants for $200,000.

15. Defendant Clifford Wilkins ("Wilkins") is a director of H. E. Capital.

From June 30, 2003 until December 1, 2003, Wilkins served as the Chief Executive

Officer of Image.

16. Defendant Chris Smith ("Smith") is a director of H. E. Capital and

founder of Image.

17. Defendant Joseph Radcliffe is the father of Michael Radcliffe and was a

promoter and controlling principal of MDK. ISE leases office space in Tannersville,

New York from Joseph Radcliffe. Joseph Radcliffe was directly involved in promoting

Image and in promoting sales of stock in Image.

18. Defendant Denise Constable is the mother-in-law of Michael Radcliffe

and the mother of Michelle Radcliffe. Denise Constable assisted Michelle Radcliffe

with ISE's bookkeeping operations in ISE's Tannersville, New York offices and was

directly involved in ISE's financial affairs.

19. Defendant Goldstein Golub Kessler , LLP ("GGK") is a certified public

accounting firm and served as the Company's independent auditor from January 11,

2005 until its resignation on March 26, 2006. GGK audited the Company' s year ending

2004, financial statements and certified that the Company's financial statements for the

year ending December 31, 2004 , presented fairly in all material respects, the financial

position of Image as of December 31, 2004, and the results of its operations and cash



flows for the year then ended were in conformity with United States Generally Accepted

Accounting Principles ("GAAP"). Eric Altstadler is a certified public accountant and was

the GGK Partner assigned to and in charge of auditing Image's financial statements for

the year ending 2004.

20. Defendant Clyde Bailey, P.C. was Image's auditor from the start of the

Class Period until it was dismissed by Image on January 11, 2005.

21. Defendants Kardos, Sinclair, Michael Radcliffe, Armenakis, Gononsky,

Joseph Radcliffe, Michelle Radcliffe, Denise Constable, Wilkins and Smith are referred

to sometimes herein as the "Individual Defendants."

22. During the Class Period, the Individual Defendants, as senior executive

officers and directors of Image and/or control persons were privy to confidential and

proprietary information concerning Image, its operations, finances, financial condition,

and present and future business prospects. The Individual Defendants also had access

to material, adverse, non-public information concerning Image as discussed in detail

below. Because of their positions with Image, the Individual Defendants had access to

non-public information about its business, finances, products, markets, and present and

future business prospects, via access to internal corporate documents, conversations,

and communications with other corporate officers and employees, attendance at

management and board of directors meetings and committees thereof, and via reports

and other information provided to them in connection therewith. Because of their

possession of such information, the Individual Defendants knew or recklessly

disregarded the fact that adverse facts specified herein had not been disclosed to, and

were being concealed from, the investing public.

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23. The Individual Defendants are liable as direct participants in, and as co-

conspirators with respect to, the wrongs complained of herein. In addition, Individual

Defendants, by reason of their status as senior executive officers, directors and/or

Company insiders were "controlling persons" within the meaning of Section 20 of the

Exchange Act and had the power and influence to cause the Company to engage in the

unlawful conduct complained of herein. Because of their positions of control, the

Individual Defendants were able to and did, directly or indirectly, control the conduct of

Image's business.

24. The Individual Defendants , because of their positions with the Company,

controlled and/or possessed the authority to control the contents of its reports, press

releases, and presentations to securities analysts, and through them, reached the

investing public. The Individual Defendants were provided with copies of the

Company's press releases and SEC filed reports alleged herein to be misleading, prior

to or shortly after their issuance and had the ability and opportunity to prevent their

issuance or cause them to be corrected . Thus, the Individual Defendants had the

opportunity to commit the fraudulent acts alleged herein.

25. As senior executive officers and directors and/or as controlling persons of

a publicly-traded company whose securities were, and are, registered with the SEC

pursuant to the Exchange Act, and which were traded on the NASDAQ over the counter

bulletin board and governed by the federal securities laws, the Individual Defendants

had a duty to promptly disseminate accurate and truthful information with respect to

Image's financial condition and performance, growth, operations, financial statements,

business, products, markets, management, earnings, and present and future business



prospects, and to correct any previously issued statements that had become materially

misleading or untrue, so that the market price of Image's securities would be based

upon truthful and accurate information. The Individual Defendants' misrepresentations

and omissions during the Class Period violated these specific requirements and

obligations.

26. The Individual Defendants are liable as participants in a fraudulent scheme

and course of conduct that operated as a fraud or deceit on purchasers of Image's

securities by disseminating materially false and misleading statements and/or

concealing material, adverse facts. The scheme: (i) deceived the investing public

regarding Image's business, operations, and management and the intrinsic value of

Image securities; and (ii) caused Plaintiffs and the other members of the Class to

purchase Image's securities at artificially inflated prices.

IV. PLAINTIFFS' CLASS ACTION ALLEGATIONS

27. Plaintiffs bring this action as a class action pursuant to Federal Rule of

Civil Procedure 23(a) and (b)(3) on behalf of all those who purchased the securities of

Image during the Class Period and who were damaged thereby (the "Class"). Excluded

from the Class are Defendants, the officers and directors of the Company during the

Class Period, members of their immediate families and their legal representatives, heirs,

successors or assigns and any entity in which Defendants have or had a controlling

interest.

28. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Image securities were publicly traded.

While the exact number of Class members is unknown to Plaintiffs at this time and can



only be ascertained through appropriate discovery , Plaintiffs believe that there are

hundreds or thousands of members in the proposed Class. Record owners and other

members of the Class may be identified from records maintained by Image or its

transfer agent and may be notified of the pendency of this action by mail, using the form

of notice similar to that customarily used in securities class actions.

29. Plaintiffs' claims are typical of the claims of the Class, as all Class

members were similarly affected by Defendants' wrongful conduct in violation of federal

securities law that is complained of herein.

30. Plaintiffs will fairly and adequately protect the interests of the Class and has

retained counsel competent and experienced in class and securities litigation.

31. Common questions of law and fact exist as to all members of the Class

and predominate over any questions solely affecting individual members of the Class.

Among the questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by Defendants' acts asalleged herein;

b. whether statements made by Defendants to the investing public during theClass Period misrepresented material facts about the business andoperations of Image; and

c. to what extent the members of the Class have sustained damages and theproper measure of damages.

32. A class action is superior to all other available methods for the fair and

efficient adjudication of this controversy since joinder of all members is impracticable.

Furthermore, as the damages suffered by individual Class members may be relatively

small, the expense and burden of individual litigation make it impossible for members of



the Class to individually redress the wrongs done to them. There will be no difficulty in

the management of this action as a class action.

V. SUBSTANTIVE ALLEGATIONS

A. Background and Summary

33. Image is in the business of selling high and medium-value sports and

entertainment celebrity artwork and collectibles, and has been in the business of selling

low-cost consumer items branded under license with the logos of professional sports

leagues and teams.

34. Image has three subsidiaries: (1) ISE, which sells celebrity artwork and

collectibles through a targeted distribution network; (2) Image Innovations, which is in the

business of creating, sourcing and marketing a wide variety of relatively low-cost

electronic products by endorsing them with the brand logos of sports teams and leagues

and/or other recognized trademarks; and (3) Imaging Innovations Sports and

Entertainment Inc., ("Imaging") which was incorporated to acquire a warehouse and

storage facility in Tannersville, New York.

35. Image was formerly known as Busanda Explorations , Inc. ("Busanda").

Busanda was incorporated in Nevada in 1998. Busanda was purportedly organized to

engage in the exploration and development of mining claims and properties in British

Columbia, Canada. Busanda's founding shareholders were largely offshore entities,

some or all of which were associated with Fred Sharp, a director of H.E. Capital and

advisor to Coach Capital. After an aborted attempt to undertake a mining operation,

during the course of which Busanda's shares became eligible to be traded on the



NASDAQ Over The Counter Bulletin Board , Busanda remained dormant until 2003. On

June 30, 2003, Busanda had 8,170,000 shares outstanding.

36. On June 30, 2003, Busanda acquired all of the issued and outstanding

shares of Image . On July 25, 2003, Busanda changed its name to Image Innovations

Holdings, Inc. Image was incorporated by Chris Smith and Clifford Wilkins, two of the

principals of H.E., together with H.E. itself and some ten other offshore entities. Image

had not commenced operations at the time of its acquisition by Busanda, but had been

set up to manufacture and sell low-value, high-volume mementos bearing sporting entity

logos. Image issued 10 million shares in connection with the Busanda/Image

acquisition, bringing the total number of outstanding shares in Image to 18,170,000.

37. In approximately October, 2003, Chris Smith was introduced by Ray

Bloom and Wellfleet Partners to Defendant Joseph Radcliffe, a former Merrill Lynch

broker who had been sanctioned by the SEC. At that time, the Radcliffes' business

activities included dealing in sports and entertainment art and memorabilia, conducted

through private entities. Smith and Joseph Radcliffe agreed that Image would acquire

the Radcliffes' sports memorabilia business, which Joseph Radcliffe ran together with

his two sons, Michael Radcliffe and Dennis Radcliffe and his nephew, Kenneth

Radcliffe, in return for the issuance of new shares in Image. According to Michael

Preston ("Preston"), the Company's current CEO who uncovered the fraud alleged

herein and is cooperating with Plaintiffs' Counsel, subsequent events indicate that the

arrangements reached between Radcliffe and Smith at or about that time went far

beyond an honest arm's length acquisition agreement.



38. The mechanism by which the Radcliffes' interests were to be acquired by

Image was for the sports and entertainment business assets owned by the Radcliffes and

some of their associates to be transferred into a newly incorporated company, MDK,

and for MDK to be acquired on a share exchange basis by Image. However, that would

have required MDK, or its predecessor business(es), to be audited and that was

impossible as no auditable records had been kept, so the transaction proceeded as an

acquisition of MDK's assets by a newly incorporated subsidiary of Image, ISE, with 4

million shares in Image being issued to MDK's shareholders as consideration.2 This

transaction closed on March 4, 2004.

39. According to Image CFO Sinclair, as related in an April 28, 2006 e-mail

from Sinclair to Preston, Michael Radcliffe became President of ISE and Kardos

remained CEO; then in July 2004, "when everyone was in the Dominican Republic for

Smith's wedding," Michael Radcliffe was appointed CEO of ISE and Kardos was put on

notice that the Company was looking for a new CEO for Image and that he would retain

the position as CEO of Image Innovations (Vancouver) only, after the new CEO of

Image was appointed. According to Image CEO Michael Preston, Michael Radcliffe

became the sole officer and director of ISE.

40. According to Preston, the share register of Image reveals that

simultaneously with the MDK acquisition, although no filing was ever made to that

z The shareholders of MDK were Sky-Top Holding Company, All Star Entertainment

Corp., International Products & Development, Ltd., Authentic Legends, LLC, Millennium

International, LLC, Millennium Holding, LLC, Angela Constable, Anthony Gallo,

Vanessa Radcliffe, Scott Zambrotta, Ann Gallo, Kenneth Radcliffe, Natalie Manzella,

Denise Constable, Michael Radcliffe, Dennis Radcliffe, Anna Marie Gallo, Angela

Constable and Michelle Constable. According to Preston, the Radcliffes owned or

controlled several companies in various capacities, including, but not necessarily limited



effect, a total of 1,950,000 shares in Image were transferred out of the names of

previous shareholders, apparently connected with H.E. Capital, into the names of the

Radcliffe family and their associates. These shares were treated as free-trading (as

opposed to restricted), and indeed many were sold as such into the market, but it is far

from certain, according to Preston, whether the claim that they were genuinely free-

trading would have withstood full disclosure of the relationship between all the parties

involved in the transactions described above.

41. During 2004, H.E. was the financier of Image and its two subsidiaries,

Image Innovations and ISE. Preston said H. E. Capital was one of the largest

stockholders of Image. However, according to Preston, Clifford Wilkins did not want to

be on Image's Board because he and H. E. Capital did not want to be considered

insiders.

42. For the year 2004, Image reported revenues of $6 million, with ISE

reporting $5.7 million of these revenues, and Image's share price rose from less than $1

to a peak of nearly $7 on the back of the reported sales activity and some extensive

stock promotion.

43. In reality, however, the Company' s phenomenal 2004 sales growth and

corresponding revenues , which were certified by the Company' s independent auditor

GGK through its unqualified opinion of Image's year ending 2004 financial statements,

as well as its revenues in the first quarter of 2005, had been achieved almost entirely

through the booking of fictitious sales in violation of GAAP and the Company's own

revenue recognition policies. As would be discovered by Preston and the Company's

to, Authentic Legends, Millennium Holdings and Millennium International.

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Audit Committee during their subsequent investigation, these fictitious sales were

supported by highly suspicious documentation, including phony invoices which were

paid by sources, other than the named customers. Such payments, as shown by the

checks or other documentation evidencing same, came from private individuals,

including the Individual Defendants , or from H.E. Capital.

44. Moreover, an analysis of the Image share register for the period in

question shows that nearly all of the so-called debtor account payments can be tied to

the sale of restricted stock in Image, with many of the payments coming directly from

individuals who acquired shares in Image at the time of the payments. Invariably,

according to Preston, the shares transferred to these individuals came from the holdings

of entities under the management and control of H.E. or of the Radcliffes. They also

came from the holdings of certain of the Individual Defendants.

45. According to the Company's current CEO Michael Preston, the

Defendants' scheme involved the "peddling [of restricted] 144 stock at a discount to

ramp up" the price of Image stock. Preston said the scheme had to have involved the

total collusion of the Radcliffes and H. E. Capital.

46. In a July 12, 2006 e-mail to Josh Goldberg, United States Attorney,

Preston said "we believe in general terms, viz that there was intimate co-operation

between the Radcliffe camp and the H. E. "client" accounts, and that the so-called sales

were settled out of the proceeds of the sale of primarily restricted stock "by the

Radcliffes and H. E. jointly."

47. Throughout 2004 and into 2005, Image reported false financial results

based on the Company's fictitious sales in Forms 10-KSB and 10-QSB filed with the

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SEC. Moreover, the Company's false financial results for the year ending 2004 filed

with the SEC on Form 10-KSB were certified by GGK in an unqualified audit opinion.

B. The Fraud is Uncovered by the New CEO

48. The Defendants ' fraud was eventually uncovered by Michael Preston, the

Company's current CEO who joined the Company in the first half of 2005.

49. Preston is a chartered accountant in the United Kingdom and from 1968-

73 worked for the then big eight certified public accounting firm, PriceWaterhouse.

According to Preston's resume, his career has been centered around young and

emerging companies as - variously - founder, promoter, advisor and director. For the

past twenty years he has spent equal time in the U.S. and the UK, commuting monthly.

His resume reveals that his focus has been on strategy and capital markets and that he

has been responsible for taking many companies public on both sides of the Atlantic in

a wide variety of sectors. From 1994 to present, Preston has been a joint owner and

principal of Alberdale & Co. an FSA-regulated corporate finance firm that provides

strategic advice and raises capital for small to mid-cap companies engaged in both

technology and non-technology fields.

50. According to Preston, he first heard the story of Image from Reed Smith, a

New York, NY law firm. Reed Smith, said Preston, had been appointed special counsel

for Image. According to Preston, Reed Smith thought Image had no execution but good

business prospects. In 2005, Preston met Joseph Radcliffe and Wilkins. Wilkins is a

UK resident and one of the three partners of H. E. Capital. Preston began performing

consulting work for Image with a view towards an employment contract. Preston

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believed that the Company had great salesmen "but was not much on corporate

governance." Preston also knew that its auditors GGK had a good reputation.

51. Preston became the CEO of Image at the time of the filing of its 2004

Annual Report on Form 10-KSB in April 2005. By November 2005, he began to

seriously suspect that the Company had engaged in accounting and securities fraud

and began an investigation concerning same.

52. In a file note dated November 23, 2005, titled "Chronology of Concerns re:

ISE sales" and a December 2, 2005 e-mail to the ICAEW Ethics Committee , Preston

chronicled the events that gave rise to his suspicions that fraud had been perpetrated

by the Company and its management and the commencement of his investigation into

same. The November 23, 2005 file note provided in part:

When I joined the company as CEO in April, 2005 it was just in time tohelp clean up the draft 10-K and sign off on the accounts for the yearended 12/31/04, which had been audited by GGK. The balance sheetshowed that there had been receivables of some $3.49 million as at 12/31,of which well over $1 million had been collected since the year end.

It was explained to me at the time that volume sales of sports items were

always accompanied by extended credit in order to allow the buyers to sell

the inventory and gain the liquidity to pay. When Image developed cash

flow problems in May and June, and the receivables were the obvious

source of resolving these problems, I began to question Joe Radcliffe

regularly about the receivables. I offered to contact the debtors

personally, but was told that the relationships in question were highly

personal and that Joe would deal with the receivables himself.

At the time of preparation of the June numbers for the second quarter, the

receivables had been increased by some $500K as the result of a sale to

Fine Art Wholesalers ["FAW"] (in fact these had been reflected in the

March Q which was filed at the time of the 12/31 K, but the debt was not

old at that stage and no particular attention was paid to it). When I

questioned the FAW receivables at the time of the June Q, I was told by

Joe that we had to tread very carefully with FAW as to rock the boat would

prejudice our acquisition of their company, which was by then the

cornerstone of our strategy. As a matter of general prudence, and despite

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written representation from ISE management as to the recoverability in fullof the receivables, we created a $600K provision against debtors in theJune numbers.

Although the receivables issue was raised by me with Joe throughout thenext three months (with an ever-frustrating lack of hard response), no cashwas recovered from the debtors. Thus, for the September Q, which wasfiled on November 14, we raised a further $400K provision against thereceivables, bringing the provision to $1 million.

Four events combined suddenly and in a very narrow period to raise myinterest in the 2004 sales. Ironically, the first related to a 2005 sale - thesale to FAW in January, 2005. The second was a request on or aroundNovember 9 from Lazard (with whom we have signed a term sheet for a$35 million financing) for an analysis of 2004 (and 2003) sales. The thirdwas the telephonic audit committee meeting, which I attended as CEO,held on the morning of November 10. The fourth concerned a discussion,reported to me by Derick Sinclair, between himself and Jim Armenakis inrelation to Jim's proposed response to an audit request letter from GGK inconnection with the September Q.

FAW: Joe and I visited FAW with Lazard as part of their diligenceon November 7 and 8. After the four Lazard personnel had left forFort Lauderdale airport around 12:30 on Tuesday November 8, Joeraised the issue of payment of some product that ISE had recentlysent to FAW. There was a good deal of banter between Joe andIlan [Shachr, a principal of FAW] about payment (eventually LisaStier [of FAW] gave Joe a cheque which I never saw but which I amtold was for c$50,000). During the conversation between Joe andIlan (who was wandering in and out of the office of Richard Scrivenwhere Joe and I were sitting), I asked Joe if I could ask for the$500-600K relating to the January (and other) invoices. Joe had alook of consternation at my question and said that I should not raisethat issue. It was an inappropriate moment to query his reason,and I let it go while making a mental note to do some digging.

2. The second event was the meeting at Lazard's offices onWednesday November 10, held before we all went to Battery Parkfor the Sopranos cocktail party, to discuss the follow-up to their visitto Florida. Lazard suggested that while we were waiting for accessto detailed historic information on FAW's auction performance, theyshould clear their diligence on Image, and among the items theyrequested was an analysis of 2004 and 2003 Image sales. Irequested this from Derick Sinclair, and subsequently received the

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requested analysis (in fact, as ISE had only been set up in March,2004, there were no 2003 sales).

3. The third was the audit committee meeting, held on the morning ofNovember 11, where the subject of the receivables drew a lot ofdiscussion. The auditors pointed out that while they welcomed theincrease in the provision, any further increase - which would benecessary if there were no further collections by the end of the year(in fact, they should have said by the time of the audit) - would belikely to attract the attention of the SEC because of their materialityin relation to the prior year's sales. Eric Altstadter focused on thequestion of whether there were in fact consignment sales, pickingup on Derick's suggestion (based on his discussions with Joe) thedebtors in question were trying to generate cash from the inventoryto meet their obligations. We advised Eric that we had beeninformed by Joe that these were firm sales. It was agreed that,absent significant collections in the immediate future, these itemsshould be looked at in greater detail before the year end. GGK didconfirm that they had received satisfactory responses at theyear end to their audit letters to all debtors . I asked for, andwas promised , copies of those responses (not yet received asat the time of writing this file note).

4. The fourth event, which acquired greater significance in light of theother matters that started to become known, was the Armenakisconversation. As Armenakis had performed legal services for thecompany, GGK had asked him for a letter setting out his knowledgeof all the issues where the company was involved in actual orpotential litigation. In the event, Armenakis supplied a letter, butprior to so doing, he raised a matter with Derick that he had alsoraised with me at a meeting with him and Arthur Gononsky on June1 and which I had subsequently raised with Joe Radcliffe. Itappears that in January, when Joe had been short of the cashrequired to make the Peyton Manning advance payment,Armenakis had asked a friend/relative/client (not sure which) of histo put up the shortfall some $150K. Armenakis had complained tome - as he did to Derick in the later conversation - that the lenderhad never received the promissory note which he had beenpromised. When I had raised this with Joe in June following mymeeting with Armenakis and Gononsky, Joe had advised me thathe had given personal undertakings in relation to the money, andthat no action was required from the Company. However, in light ofthis latest mention of the matter (in a context which suggested thatlegal action might be taken) I asked Derick to look into the matteras I had been unable to see a credit for the amount in question inthe accounts. This he did, and he advised me - immediately prior



to my departure to London on November 15 - that the money hadbeen banked in January and credited not to a loan account, but tothe sales ledger, where it had been applied to balances outstandingon the FAW, Ilan Schachr and Richard Scriven ledger accounts.

I was sufficient[ly] alerted by these four events, all coming on top ofeach other, (though I had not yet had the information about theaccounting treatment of the Armenakis $150K) to take informal

legal advice on Friday November 11 as to my responsibilities in thismatter, since the term "channel-stuffing", although not used at theaudit committee meeting, kept coming to mind. The advice Ireceived was to advise the Audit Committee Chairman of myconcerns. Accordingly, I put a call into David Whittle, as Chairmanof the Audit Committee, the next day and we ended up having aconversation on the following day (November 13). That evening Iconfirmed my concerns in an e-mail to David.

I left New York on the evening of November 15 for a trip to Londonon non-Image matters, returning in the early hours of MondayNovember 21. While away, and reflecting particularly on thedisturbing information about the Armenakis accounting treatment, Idecided that as CEO, and particularly with my training ininvestigative accounting, I could not just leave it to others toresearch the background to the 2004 sales. Accordingly, on thatMonday - my first day back in the US - I commenced theinvestigation whose emerging discoveries are the subject of otherschedules and file notes.

Michael Preston

(emphasis added).

53. The December 2, 2005 e-mail to ICAEW further explained and provided in

part:

Further to your e-mail and to our conversation on Wednesday, I amwriting to summarize the situation to which I referred.

In April this year, following an introduction by the head of corporatelaw of the New York office of Reed Smith (A top-ten US law firm), Iagreed to become CEO of a fairly young publicly-traded BulletinBoard company in the U.S. while retaining my other businesscommitments. Reed Smith had been appointed special counsel to

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the company in question, whose name is Image InnovationsHoldings, Inc. ("Image").

Image itself was then engaged, through its wholly-owned subsidiary

Image Innovations Sports and Entertainment, Inc. ("ISE"), in the

business of sports and entertainment art and memorabilia, and hadcontractual arrangements with some of the best-known names inAmerican sport. Over the next few months I led the development of

a strategy for the Company (mostly disclosed in public filings) totake it into the field of art auctions by acquiring a business that acts

as an on-board art auction house for cruise lines and by extendingthe business organically and through acquisitions into land-basedcharity auctions. I was able two weeks ago to announce that thecompany had signed a letter of intent with a major financialinstitution to provide $35 million to enable it to complete theacquisition. Although not named in the announcement, theinstitution was in fact Lazard.

The financial history of Image is short, and 2004 was its first year ofrevenues, recording some $6 million, nearly all from the sale ofsports art and memorabilia. My appointment coincided with thefinalization of the 2004 accounts which had been audited by GGK(Goldstein, Golub and Kessler), a well-regarded practice owned byAmerican Express. The accounts showed that some $3 million ofthe 2004 sales were outstanding as receivables at the year-end,

and a little over $1 million of that had been collected by the time ofthe filing in April of this year of the 10-K for the year ended

December 31, 2004.

It was explained to me that extended credit was a characteristic ofthe sports art business , as dealers were allowed time to realize theproduct in the retail market place . As time passed , however, therump of the receivables - some $2 million - remained unrecovered,although ISE management (who are significant shareholders inImage itself) continued to give assurances that the debts were

good . At the same time, ISE management resisted suggestionsfrom myself and the group CFO that we become directly involved inthe receivables recovery efforts, on the grounds that the customerswere all personal relationships of ISE management and that theinvolvement of Group personnel would jeopardize the relationshipsand the prospects of further sales.

Accordingly, at the time of the filing in August of the 10-Q for theJune quarter, I agreed with the auditors that we should create a

21

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provision of $600,000 against the outstanding receivable. At thetime of the filing in early November of the 10-Q for the Septemberquarter, that provision was increased to $1 million, some 50% of the

old balance.

It was clear to myself and the audit committee that, despite ISEmanagement's diminishingly credible claims that the debts weregood, there were serious problems with them. Discussionscentered on whether the sales that generated the receivables hadin reality been firm or contingent. Furthermore, in the US, thepractice of loading sales toward the end of an accounting period byforce-feeding customers is known as "channel-stuffing"; this is anoffence, and senior officers of, for example, Bristol Myers Squibbwere recently jailed for this offence. Although the term was notused by the auditors, the possibility of there having been channel-stuffing was inescapable.

As a result of my concerns, and immediately following a brief visit tothe UK from 15th - 20th November, I commenced a detailedinvestigation into the prior year's sales to see whether there wasany evidence of channel-stuffing. However, what I havediscovered over the last ten days from the company's invoicesand bank statements has indicated that there may conceivablyhave been offences far more serious than themischaracterization of contingent sales or the force-feeding ofcustomers prior to a period end. While there is stillconsiderable work to be done in verifying my suspicions, myaccounting experience - and my training some 30 years ago asan investigations accountant with Price Waterhouse in London- lead me to believe that some 75% of the reported sales for2004 may have been totally fictitious, with settlement for manyof the paid invoices coming not from the customers but fromthird parties. It may not be coincidence that during the periodwhen the sales were reported to have been made there was asteady increase in Image 's share price to its recent elevatedlevels.

(emphasis added).

54. In a December 1, 2005 memorandum to the Image Board of Directors

Audit Committee, Preston further explained his suspicions concerning the Company's

2004 sales and accounts receivables, including his observance of obviously strange

and suspicious invoicing patterns in connection with ISE's 2004 and 2005 sales:

22



At the telephonic audit committee meeting held on 11 November, 2005 inconnection with the 10-Q for the third quarter of 2005, concerns weregenerally expressed by all in attendance over the size and lack ofmovement of the ISE receivables outstanding since 31 December, 2004and earlier. The auditors in particular placed great emphasis on whetherthe sales that gave rise to the receivables were firm or consignment. If thelatter, they had been incorrectly accounted for in the 2004 accounts. Theauditors advised that any further write-off of the balance (against which $1million had already been provided as at 9/30) would be likely to attract theattention of the SEC. Executive management was asked to look into thismatter as a matter of urgency.

Accordingly, upon my return from London on 20 November, I commenceda review of the receivables, beginning by requesting a schedule of allsales transacted in 2004 (which I had not previously seen). Although whatI was looking out for was consignment sales, which might be construed as"channel-stuffing", certain other matters have come to light that raisequestions about the 2004 sales and which need to be drawn to theattention of the Audit Committee.

To put the following matters into context, Image reported consolidatedsales for 2004 of $6.059 million, of which $308K related to III [ImageInnovations], $1K to commission income and the balance of $5.751 millionto ISE. As at 12/31/04, receivables from these sales amounted to $3.491million. The 12/31 balance came down at 3/31 by over $1 million, butremained well in excess of $2 million, or over 33% of the total group 2004sales. These receivables have not changed since then.

My review of the 2004 sales showed some strange patterns ofinvoicing , with many large round-number totals and a very highincidence of non -recognised distribution channels taking very largenumbers of single line items . Among the various specific items thatcaught my attention, listed with my observations, were the following:

• Fan Sports: this customer made a single purchase in November,2004 of 600 Joe Frazier prints for an aggregate invoice total of$450,000. This has still not been paid. The invoice was made outto Fan Sports, attn Ron Tyler at Ron's home address. Ron is oneof the principals of LIVVE, with whom we have an LOI to acquire51% of this business . During a conversation with Ron on 22November (he called me), he said he had no knowledge of theproduct or the invoice.

• Triumph Sports: this customer received three invoices from us inlate 2004 for an aggregate amount of exactly $2,500,000. Thesum of $1 million was received on account of this debt in

23


Case 1 :06-cv-03707-JGK Document 29 Filed 01/03/2007 of 50

January, 2005 but on enquiry it appears that the funds camefrom H . E. Capital , not Triumph . The balance of the Triumph debtremains outstanding.

• Gorsky Fine Art: this customer purchased three line items in

December, 2004 for an aggregate invoice value of exactly

$300,000. The amount remains unpaid. Upon investigation, itappears that the named recipient of the invoice, MaryAnn

Zambrotta, is the wife of a vendor shareholder in MDK Sports.

All Star Entertainment: this customer purchased $250,000 of

merchandise but has no apparent distribution outlet. A company

called All Star Entertainment was one of the vendor shareholders of

MDK Sports.

LH Enterprises: this customer purchased 139 prints of Joe Montana

for an aggregate invoice price of $125,100 (a $100 credit note wassubsequently issued). LH Enterprises , which is located at 91 LH

Drive in Easton, PA, shares an address with Larry Holmes, oneof our advisory board members.

• Raintree Inc.: this customer purchased 1800 prints of a photograph

of Jackie Robinson, for an invoice total of $330,750. Uponenquiry, it appears that Raintree is a client of H.E. Capital andthat the funds settling the balance came from H.E. Capital.

Loan from Armenakis introduction: a party introduced by Jim

Armenakis in January, 2005 apparently advanced $150,000 to theCompany to enable it to meet its commitment under the PeytonManning contract. The lender has recently complained through JimArmenakis that he has not been issued a promissory note. On

investigating the matter I found that the monies received hadbeen treated in the accounts of ISE not as a loan but as a

payment against , and reduction of, certain sales ledgeraccounts.

There are several other matters relating to the invoicing that arenoteworthy, but the above will, for the time being, illustrate theconcerns that need to be brought to the Audit Committee'sattention.

(emphasis added).

55. In subsequent e-mails, Preston cited additional information leading him to

believe Image's sales were fictitious.

24



56. For instance, in a February 7, 2006 e-mail from Michael Preston to Steven

Henning, Jonathan Elmi, David Whittle, Derick Sinclair and David Fishkin, Preston

wrote:

I'm at Fine Art, where Ilan Shachr is away on a cruise, and have beenasking a few discreet questions.

• Global ( Fine) Arts did operate out of FAW's premises . However,they completed their move out on 2nd September , 2004. Pleasenote the dates of the Global invoices and credit memos that weresent to the old address.

No-one has seen the Ali paintings shown on the 1/19/05 invoice.

They're not in inventory and haven't been sold.

• So far, no-one has heard of Southwest Sales.

57. And on February 9, 2006, Michael Preston wrote Derick Sinclair:

I was wondering what percentage the January FAW invoice comprised of

total 2005 sales . As of 9/30 it accounted for nearly 50%.

We need advise as to disclosure on this; we have referred in our 8-K toreviewing 2004 sales , but not to Q1 , 2005 . My trip to FAW this week hasraised questions as to the validity of this sale.

58. On February 14, 2006, Jonathan Elmi e-mailed Preston, David Fishkin and

David Whittle:

Per your request, attached please find the following documents that wereobtained during the Tannersville site visit:

1. Invoice from "Anytime Logistics," provided in support of returnedmerchandise from Fine Art Wholesalers.

2. Invoice, warehouse packing list, and FedEx shipping docs provided

in support of three sales to Fine Art Wholesalers/Ilan Shachr.

3. Letter from All Star Entertainment stating that merchandise waspicked up from the Tannersville office and that returns are notanticipated.

59. In response, Preston wrote:

25



All Star: ... The question is, why would this letter have been written inJanuary unless it had been solicited by ISE? Secondly, the questions overthe customer remain. With a 973 number for phone and fax, the NYC

address is obviously at best an accommodation address, and doesn'tbespeak a business capable of moving $250K of wholesale product intothe retail market.

FAW shipment document: there is the obvious question of why a smallshipping company in Texas should be used to move goods from Florida to

the Catskills. Also, the zip code and telephone number on the documentdiffer from the entry for Anytime Logistics that I found on Google. ... Theone thing I am pretty sure of is that the 353 Ali prints have not been inFlorida. I've been in the FAW warehouse too many times, and had ourproduct pointed out to me with no mention or sight of those items, for themto have been there. Plus, I had the information given to me at FAW lastweek.

60. As a result of Preston's and others' deep suspicions that Image had

engaged in securities fraud, Image's Audit Committee retained Marks Paneth & Shron

("MP&S" or "Marks Paneth"), a certified public accounting firm, to perform a forensic

investigation into the propriety of the Company's 2004 and first quarter 2005 revenues.

61. The MP&S engagement letter specified that MP&S would : ( 1) review

approximately 20-30 invoices of supporting documentation related to sales of sports

memorabilia; (2) determine the legitimacy of the revenue and receivables attributable to

those transactions, as well as whether the receivables were recorded in the appropriate

period; and (3) report to the Audit Committee on the appropriateness of the accounting

for those 20-30 transactions.

62. As discussed above, Image reported in its 2004 Form 10-K, and

accompanying financial statements audited by GGK, consolidated revenue for 2004 of

$6,059,704. Revenue attributable to ISE, the wholly-owned subsidiary of Image, for

year ending 2004 was $5,751,917. MP&S was asked to focus on 2004 ISE revenue of

$5,751,917 and the corresponding receivables.



63. MP&S selected all of the 2004 sales invoices for 12 customers which

accounted for approximately 97% of 2004 ISE revenue and approximately 92% of 2004

Image revenue. MP&S reviewed approximately 30 invoices in total related to revenues

recognized in 2004. MP&S also reviewed one sale made to Fine Art Wholesalers on

January 19, 2004 for $438,375 that was attributable to first quarter 2005 revenues.

64. The composition of 2004 revenue transactions reviewed by MP&S (by

customer) pursuant to its investigation were as follows:

Customer 2004 ISE Revenue

Fan Sports $450,000.00

Fine Art Wholesalers $244,569.97

Global Arts $588,500.00

Gorsky Fine Art $300,000.00

Ilan Shachr $428,775.00

Triumph Sports $2,500,000.00

All Star Entertainment $250,000.00

LH Enterprise $125,000.00

Raintree $330,750.00

Garfield Sports $125,000.00

Sports, Inc. $125,000.00

Southwest $90,868.64

TOTAL $5,558,463.61

65. MP&S reviewed the invoices supporting the above referenced sales for

completeness, and agreed them to the "ISE 2004 Sales by Customer by Invoice" detail

provided by CFO Sinclair to Image's 2004 Form 10-K. MP&S also traced and agreed

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subsequent cash receipts from these sales to copies of Merrill Lynch and Key Bank

statements.

66. MP&S also toured all facilities at ISE's Tannersville offices, including the

ISE inventory warehouse; discussed with Michelle Radcliffe, ISE chief bookkeeper,

ISE's 2004 accounting policies for sales, accounts receivable and inventory; reviewed

original invoices, inventory and shipping documents, as available, for all revenue

transactions selected for testing; obtained original statements from Merrill Lynch and

Key Bank from 2004 and 2005; and, gave Michelle Radcliffe confirmation requests for

Merrill Lynch and Key Bank , to be signed by ISE' s CEO and returned to MP&S for

mailing.

67. On March 16, 2006, a special meeting of Image's Audit Committee was

held. Members of the Committee present at the meeting were: Chairman David

Whittle, Defendant Gononsky and Jack Jacobs. Also present at the meeting were

Steven Henning and Jonathan Elmi of Marks Paneth & Shron, and David R. Fishken, a

member of the law firm Snow Becker Krauss, P.C., counsel to the Company and the

Audit Committee. According to the minutes of that meeting, MP&S presented in detail

the preliminary findings resulting from its forensic investigation.

68. MP&S' findings confirmed CEO Preston's suspicions of fraud. The

findings also revealed the Radcliffe family's involvement in the fraud with the complicity

of Defendant Directors Armenakis and Gononsky and Image financier and shareholder,

H.E. Capital. MP&S' findings also uncovered the existence of obvious red flags that in

the absence of extreme recklessness should have alerted the Company's auditor GGK

and Image CFO Derick Sinclair to the fraud that was perpetrated by these Defendants.



69. In fact, the minutes of the March 16th special meeting of the Audit

Committee further revealed that Image Director "[Jack] Jacobs stated that since the

findings clearly demonstrated the likelihood of substantial accounting errors and/or fraud

on the part of the Company's wholly-owned subsidiary, Image Sports and

Entertainment, Inc. ("Image Sports"), the Committee should direct management to take

board and managerial control of Image Sports, obtain the books and records of Image

Sports and take over the bank accounts thereof."

70. MP&S preliminary findings as presented to Image's Audit Committee on

March 16, 2006 are set forth in paragraphs 71 to 84 below.

71. Fan Sports 2004 Sales - $450,000:

• A single sale in November 2004 of 600 Joe Frazier prints;

• The invoice was made out to Fan Sports and addressed to RonTyler at his home address;

- According to the IIH [Image] CEO, Mr. Tyler is a principal ofLIVVE, a company that IIH has a letter of intent to acquire;

- Mr. Tyler told the IIH CEO that he had no knowledge ofthe invoice, the product, or Fan Sports;

• According to Michelle Radcliffe, this inventory was returned to ISEin December 2005;

- A credit memo for $450,000 was issued on December 30,2005, which we obtained during our site visit;

During our site visit we also viewed inventory itemspurported to represent the merchandise returned by FanSports , although documentation to support the returns(i.e. shipping doc ., invoices from logistical companies,etc.) was not provided;



- Note that ISE was also unable to provide conclusiveevidence that the inventory was ever shipped to Ron Tyler;

• This sale does not appear to be a valid 2004 revenuetransaction;

- Note 4(g) to the financial statements in the 2004 Form 10-Kstates that "revenues are recognized upon delivery andacceptance of the product to the customers";

(emphasis added).

72. Fine Art Wholesalers 2004 Sales - $244,570:

Michelle Radcliffe was only able to provide shippingdocuments for $29,880 of merchandise;

A June 30, 2004 customer remittance of $83,725 appears to be avalid remittance related to invoice #1908 for the same amount (alsosupported by shipping documents);

A $50,000 cash deposit applied against the A/R [accountsreceivable] balance on January 20, 2005 is suspicious;

- We are awaiting additional detail and support from KeyBank;

A $150,000 wire was received in a Merrill Lynch account on

January 14, 2005 (from Vertical Design Construction), of which we

believe $110,845 was applied against this account;

According to Michael Preston, IIH [Image] CEO, he had beeninformed by James Armenakis that this cash receipt actuallyrepresented a loan from Vertical Design Construction to ISE,and is unrelated to the aforementioned transaction;

The remaining $160,845 of cash receipts appear to bemisapplied, casting doubt that this amount is a valid 2004revenue transaction;

(emphasis added).

73. Fine Art Wholesalers 2005 Sales - $438,375:

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• We selected this single sale from the first quarter of 2005 becauseof its proximity to year-end 2004 and because it represented 94% ofsales for the quarter ended March 31, 2005;

• Michelle Radcliffe was not able to provide any shippingdocuments to support this sale;

• According to Michelle Radcliffe, this inventory was returned to ISEon January 30, 2006, less than two week prior to our site visit;

- During our site visit, we viewed inventory items purported torepresent the merchandise returned by Fine ArtWholesalers;

- ISE also provided documentation from Anytime Logistics,

Inc., the shipping company that allegedly returned theinventory;

This sale does not appear to be a valid 2005 revenuetransaction;

(emphasis added).

74. Global Arts 2004 Sales - $558,500:

This sales amount is net of $603,075 of credit memos issued during2004;

ISE provided copies of three invoices, as well as shippingdocuments from FedEx, to support net sales of $588,500;

• Three deposits correspond to the three invoices;

- A check for $32,000 and signed by P[xxxx] Radcliffe wasreceived from Global Fine Arts in September 2004;

- A check for $81,500 and signed by P[xxxx] Radcliffe and anunknown second party was received from Global Fine Arts inOctober 2004;

- A third check for $475,000 from Jacob and Chana Pinsonwas deposited in a Merrill Lynch account in October 2004;

• Per Transfer Online, Jacob and Chana Pinson were issued 100,000shares of ISE restricted stock on 10/11/2004;

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• The legitimacy of these amounts as 2004 revenue is unclear,although it appears that at a minimum the $475,000 cashreceipt from the Pinson's was misapplied;

- There may also be implications for related party transaction

disclosures;

- Revenue may be overstated in ISE's 2004 Forms 10-Q,as significant credit memos were issued after quarterswhere large sales to Global Arts occurred;

(emphasis added).

75. Ilan Schachr 2004 Sales - $428,775:

• Remittances for the invoices were received during 2004 and 2005;

- Invoices and warehouse packing lists were provided to

support all sales, and shipping documents were provided to

substantiate $407,150 of merchandise;

- Documentation provided by IIH indicated that $419K of Mr.Shachr's debt to IISE was extinguished through a "bartertransaction";

• We have not been able to evaluate the accounting for thisbarter transaction due to a lack of documentation;

• Despite the fact that Ilan Shachr had vacated his Pompano Beach

facilities as of September 2, 2004, we reviewed invoices indicating

that goods were shipped to Ilan's attention at that location as late

as October 26, 2004;

We also noted, per discussion with Michael Preston, IN CEO, that

Ilan Shachr is the president of Fine Art Wholesalers;

• Because of our inability to evaluate the accounting for thebarter transaction, we are currently unable to conclude aboutthe validity of the 2004 revenue transactions;

(emphasis added).

76. Gorsky Fine Arts 2004 Sales - $300,000:



• ISE was unable to provide shipping documents to supportthese sales;

• IN CEO reports the name recipient of the invoice, MaryAnnZambrotta, appears to be the wife of a vendor shareholder of MDKsports;

• Cash deposits in April and May of 2005 totaling $33,500 aresuspicious;

- We are waiting for additional detail and support from KeyBank;

• A check for $7,040 from First Southwest Co. to Angela Constable,sister of Michelle Radcliffe, was signed over to ISE and appliedagainst this receivable on June 9, 2005;

- Per Transfer Online, Angela sold 40,000 shares of IIH stockthrough First Southwest Company on February 1, 2005;

• The remaining $259,460 of inventory was returned in December2005;

- We viewed the returned inventory and obtained a copy of thecredit memo;

- Michelle Radcliffe speculated that this sale may have beenon consignment;

• The entire $300,000 sale does not appear to be a valid 2004revenue transaction , because of the apparent misapplicationof cash flows and returned merchandise;

(emphasis added).



77. Triumph Sports 2004 Sales - $2,500,000:

• Invoices and warehouse packing sheets were provided tosubstantiate the sales, but documentation to support actualshipment was not available;

• Multiple deposits were applied to this receivable;

- $1 million of wire transfers into a Merrill Lynch accountfrom H. E. Capital were applied to this receivable; the

originating source of the funds is unknown;

• H. E. Capital is a major supplier of credit, is a shareholder, andemployees and partners and principals of H. E. Capital havesignificant involvement with IN and its board of directors;

- A wire for $1,120,000 from an Armenakis & Armenakisescrow account was received on February 6, 2006;

• James Armenakis is a member of the Board of directors of IN[Image] and has acted as counsel without authority from the

Board;

- Three cash deposits in February and March 2005 totaling$220,000 were applied to this account;

• We are awaiting additional detail and support from Key Bank;

- A wire for $50,000 from H. E. Capital via a Swiss bank

account was received on March 16, 2005 and applied

against this account;

• We are currently unable to conclude about the validity of the2004 revenue transactions because we do not yet know who isthe source of the cash deposits or the funds wired by H. E.Capital;

(emphasis added).

78. All Star Entertainment 2004 Sales - $250,000:

We were unable to ascertain whether All Star Entertainment has noapparent distribution outlet and that a company called All StarEntertainment was one of the vendor shareholders of MDK Sports;


Case 1 :06-cv-03707-JGK Document 29 Filed 01/03/2007 of 50

• No shipping documents were provided , but we agreed the 2004sales to invoices and warehouse packing lists;

- During our site visit, we reviewed documents that indicatedAll Star Entertainment picked up the merchandise from ISE'sTannersville facility:

Michelle Radcliffe provided a letter from Jeffrey Chicola of AllStar verifying that his company picked up the itemsassociated with the invoices in question, and that All Starhad no plans to return the merchandise;

• This letter was dated January 6, 2006, more than a year after thesale and applied receipts;

• Three wires from September 2004 were applied against thisreceivable;

- The first wire was originated by Arthur Gononsky, andapplied against the receivable on September 1, 2004;

The remaining two wires were both originated onSeptember 16, 2004 by Merrill Lynch, Jacksonville, FL,on behalf of "Image Sports Entertainment Inc.," of RestHills, NY;

The receipts appear to be misapplied, casting doubt that the$250,000 is a valid 2004 revenue transaction;

(emphasis added).

79. LH Enterprises 2004 Sales - $125,000:

• We reviewed an invoice and warehouse packing sheet to supportthe sale, but shipping documentation was not available;

- According to the packing sheet the customer was supposedto pick up the merchandise at the Tannersville facility;

- The customer address on the invoice is Mr. [Larry] Holmes'Easton, PA residence;

35



• The 2004 payment was a wire transfer from Jeffrey Gononsky,son of Arthur Gononsky, IIH [Image] Chairman of the Board, on11/8/2004;

- Per "Transfer Online," Jeffrey and Debbie Gononskywere issued shares on 12/8/2004;

- It appears that the proceeds from the issuance of theseshares might have been incorrectly applied against thisoutstanding balance;

• Note that IIH ' s 2004 10-K disclosed Larry Holmes as an IIHAdvisory Board member;

• The receipt appears to be misapplied, cast[ing] doubt that the$125,000 is a valid 2004 revenue transaction;

(emphasis added).

80. Raintree Inc. 2004 Sales - $330,750:

• Funds settling this account came from H. E. Capital;

• ISE provided an invoice and warehouse packing sheet to supportthe sale, but shipping documentation was not available;

• Thus far, we have been unable to determine whether Raintreehas any bona fide sports merchandise operations;

• We are currently unable to conclude whether the $330,750 is avalid 2004 revenue transaction because the source of thefunds remitted by H. E. Capital is unclear;

- H. E. Capital has provided funds for the settlement ofmultiple accounts.

(emphasis added).

81. Garfield Sports 2004 Sales - $125,000:

• Funds settling this account came from Morgan Stanley andArthur Gononsky, IIH Chairman of the Board;

- Per "Transfer Online," Arthur and Susan Gononsky wereissued 100,000 shares on September 29, 2004;

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- It appears that the proceeds to USE from this issuancemay have been incorrectly applied against the Garfieldreceivable;

ISE provided an invoice and warehouse packing sheet to supportthe sale, but shipping documentation was not available;

• The receipt appears to be misapplied, casting doubt on thevalidity that $125,000 was a valid 2004 revenue transaction;

(emphasis added).

82. Sports Incorporated 2004 Sales - $125,000:

• ISE provided copies of invoices and warehouse packing slipsduring our site visit, but shipping documentation was notavailable;

• Funds settling this account came from Dr. Richard Gilbert, c/o NYUMedical Center;

- Per "Transfer Online ," Dr. Gilbert was issued 50,000shares on September 29, 2004 and an additional 50,000shares on October 6, 2004;

- It appears that the proceeds from the purchase of theseshares might have been incorrectly applied against thisoutstanding receivable;

• The cash receipt appears to be misapplied, casting doubt thatthe $125,000 was a valid 2004 revenue transaction;

(emphasis added).

83. Southwest 2004 Sales - $90,868:

The only supporting documentation for the sales wereinvoices printed from ISE's accounting system during the sitevisit;

• None of the invoices contained shipping information orproduct descriptions;

• First Southwest Company does not appear to be a distributionoutlet, but rather is an investment banking firm;



• Funds settling this account came from First SouthwestCompany and were payable to Denise Constable, the mother ofMichelle Radcliffe and the mother-in-law of Michael Radcliffe,ISE CEO;

Transfer Online shows that Denise Constable received40,000 restricted shares on March 8, 2004, and thatthese holdings had been reduced to 29,000 shares byDecember 31, 2004;

- It appears that the proceeds from Denise's sale of theseshares (held at Southwest Co.) might have beenincorrectly applied against this outstanding receivable;

• The receipt appears to be misapplied, casting doubt that the$90,868 was a valid 2004 revenue transaction;

(emphasis added).

84. IN 2004 Revenue Review

Summary of findings:

• As indicated in the previous slide, our preliminary results fall intothree categories:

- Invalid revenue transactions attributable to returnedmerchandise

- Revenue transactions of questionable validity because of theapparent misapplication of cash receipts

- Revenue transactions for which further procedures arenecessary to determine their validity

• Several of the revenue transactions, even if valid, will requireadditional related party disclosures in IIH's SEC filings

• Invalid revenue transactions attributable to returned merchandise:

Fan Sports $450,000Fine Art Wholesalers $438,375 (2005)Gorsky $259 ,460Total $709,460 (2004)

$438,375 (2005)



Revenue transactions of questionable validity because of theapparent misapplication of receipts:

Fine Art Wholesalers $168,845Global Arts $475,000Gorsky $ 40,540All Star Entertainment $250,000LH Enterprises $125,000Garfield $125,000Sports, Inc. $125,000Southwest 90 , 868Total $1,400,253

F- Revenue transactions for which further procedures are necessary todetermine their validity:

Ilan SchachrTriumphRaintreeTotal

85

$ 428,775$2,500,000$ 330,250$3,259,525

On April 5, 2006, MP&S provided Image's Audit Committee with its

updated findings through that date:

• On March 17, 2006, MPS presented preliminary findings to the fullIIH Audit Committee, via conference call.

• Representatives from Snow Becker Krauss, special counsel to theIIH Audit Committee, were present at the meeting.

• The IIH Audit Committee agreed with our initial assessment andconcluded that a restatement of the IIH 2004 financial statementswas necessary.

• On March 29, 2006, MP&S received additional information fromKey Bank regarding the $300K of "cash deposits," as follows:

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- The "deposits" represented funds withdrawn from aconsumer account held by Joseph Radcliffe ("JR"), whichwere subsequently deposited into ISE's commercial account.

- JR is the father of Michael Radcliffe , ISE CEO.

- JR deposited a number of ISE corporate checks into hispersonal account, some of which were later transferred tothe ISE account.

- The "memo" field on many of the ISE corporate checksindicated that they were written for the purchase of ISE'srestricted equity.

- JR freely transferred funds between his personal accountand the ISE corporate account since at least 2004.

- These transfers continued through the date of KeyBank'scommunication with MPS.

- JR's personal account had been the recipient of numerous"suspicious" wire transfers.

- KeyBank believed these transfers were inappropriate for apersonal account, but did not elaborate further.

- KeyBank believes that JR intentionally transferred fundsbetween his personal account and ISE's account toobfuscate the paper trail.

- KeyBank believes JR hoped to circumvent KeyBank'srequirements to file Suspicious Activity Reports (SARs) inaccordance with the Bank Secrecy Act.

- Key Bank confirmed that they did not, in fact, file any suchreports.

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MP&S communicated KeyBank's findings to the chairman of IIH'sAudit Committee, IIH's CEO, and the Audit Committee's special

counsel.

MP&S urged the IIH Audit Committee chair and the IIH CEO tocontact the SEC's Division of Enforcement immediately.

86. Thereafter, in a March 30, 2006 e-mail from Steven Henning of MP&S to

Fishkin, Preston and Image director Whittle, among others, Henning advised:

As of yesterday (March 29) there is no question that this fraudinvolves criminal activity.

C. ISE's Operations were Controlled by the Radcliffe Family

87. As set forth in the schedules attached to the Asset Purchase Agreement

between MDK and ISE entered into on March 4, 2004, following Image ' s acquisition of

the assets of MDK, members of the Radcliffe family became employees of ISE. Michael

Radcliffe became the COO "responsible for the overall day-to-day operations for the

company with a primary focus on marketing and sales." Dennis Radcliffe became the

Director of Special Events, "responsible for the management of promotional and special

events." Kenneth Radcliffe became Director of Sales, "responsible for the sales

functions for the organization and for establishing new markets and management of

existing accounts." Denise Constable, Michael Radcliffe's mother-in-law, became

Manager, Office Administration, "responsible for the management of the day-to-day

operations of the office, including administrative support for all members of the

management team and inside sales support."

88. According to Preston, Joseph Radcliffe ran ISE's operations in

Tannersville through his son, Michael. Joseph Radcliffe had a large private office at

Tannersville, while Michael, Dennis and Kenneth shared an office. Preston said Joseph

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Radcliffe made every decision at ISE. This was confirmed by Image CFO Sinclair.

According to Sinclair, Joseph Radcliffe was the driving force behind ISE. Sinclair said

Joseph Radcliffe's involvement with the Company was to develop funding and sales.

He said Joseph Radcliffe had Company business cards. Sinclair further stated Joseph

Radcliffe and Chris Smith made numerous trips to New York to look for bankers to fund

Image.

89. Indeed, all aspects of ISE's operations were controlled by the Radcliffe

family. Radcliffe family members, including Michael Radcliffe, Joseph Radcliffe,

Michelle Radcliffe, Denise Constable, and Angela Constable, Michael Radcliffe's sister-

in-law, generated, and kept at ISE's offices in Tannersville, all the supporting

documents for ISE's accounting entries. In addition, by September 2004, ISE's

accounting records were maintained there as well. ISE sales invoices were generated

and customer payments were posted to the general ledger by Michelle Radcliffe based

on information provided by Joseph and Michael Radcliffe.

90. In a July 3, 2006 memorandum to Michael Preston from Derick Sinclair,

ISE's CFO who resided in Vancouver, Sinclair explained the bookkeeping processes at

ISE:

[F]ollowing the incorporation of ISE in January 2004, and the purchase ofthe inventory of MDK Sports ... in March 2004, Nadine in the Vancouveroffice set up ISE's general ledger in Quickbooks and recorded theacquisition of MDK Sports inventory. Nadine was responsible formaintaining the ISE general ledger from accounting records faxed to herby ISE. Angela Constable [Michael Radcliffe's sister-in-law] and DeniseConstable, Angela's mother and Michael Radcliffe's mother-in-law, werethe primary contacts for faxing the ISE information to Nadine beforeMichelle Constable/Radcliffe ("Michelle") joined ISE. Sales and invoiceswere manually generated by Angela or Denise based on informationprovided to them by Joe Radcliffe and Michael Radcliffe. The invoiceswould be reviewed by Michael Radcliffe before they were faxed to Nadine.



Purchase invoices received by mail were reviewed by Michael Radcliffebefore being faxed to Nadine. Purchase invoices received at the time ofpurchase were also reviewed by Michael Radcliffe before being faxed toNadine. Bank statements were also faxed to Vancouver. MichaelRadcliffe would identify the source of the deposits and provide thatinformation to Nadine usually through Angela and Denise. The originaldocuments used to post to the general ledger by Nadine, such as salesinvoices, supplier invoices, bank statements, etc., were filed in ISE'sTannersville office and provided as needed by fax to Nadine.

Michelle was hired in September 2004 as ISE's bookkeeper. As ISE'sbookkeeper, Michelle was responsible for maintaining the ISE accountingrecords, which included original documents filed in her office inTannersville as well as the ISE general ledger (the Quickbooks electronicdata file). Nadine's role with respect to ISE changed from maintaining theISE general ledger to one of support and training of Michelle to: (a) useQuickbooks and (b) maintain the ISE Quickbooks general ledger. Thissupport and training role was possible as the ISE general ledger data filewas small enough that it could be e-mailed. Michelle was provided withthe Quickbooks software and the ISE general ledger data file. Over time,Michelle increased her knowledge of Quickbooks with Nadine's supportand training. As part of the training process, Nadine continued to postsome entries into ISE's general ledger. Michelle would e-mail the ISEgeneral ledger to Nadine and provide the supporting documents andNadine would post the entries then Nadine would e-mail the ISE generalledger back to Michelle. At all times, entries posted in ISE's generalledger by Nadine were based on information provided by Michelle inTannersville. In particular , sales invoices were now generated byMichelle in Quickbooks based on information provided to her by JoeRadcliffe and Michael Radcliffe , and purchase invoices werereviewed by Michael Radcliffe before being posted by Michelle inQuickbooks . Michelle also posted payments from customers into theISE general ledger based on information provided to her by JoeRadcliffe and Michael Radcliffe . Mail was opened by DeniseConstable and checks received in the mail were deposited by Denise.Michelle was responsible for reconciling the ISE bank accountsmonthly.

(emphasis added).

91. Moreover, Joseph Radcliffe and Michael Radcliffe maintained exclusive

relationships with ISE's purported customers. As explained by Sinclair in his July 3,

2006 memo to Michael Preston:



Joe Radcliffe and Michael Radcliffe at all times exclusively managed therelationships with all ISE customers. On numerous occasions, including inan e-mail from Michael Radcliffe, it was made very clear that therelationships with ISE customers and in particular, managing collectionsfrom these customers was to be handled by Joe Radcliffe and MichaelRadcliffe only. Michael Radcliffe issued instructions that it was importantfor ISE to exclusively manage the relationship with their customers andthat only ISE personnel under the supervision of Michael Radcliffe were tocontact ISE customers. Michael specifically instructed that Image staff inVancouver were not to contact ISE customers.

92. According to Preston, Michael Radcliffe, Armenakis and Gononsky were in

one camp. Gononsky was consistently obstructive, according to Preston, following the

report to the Audit Committee of the apparent accounting irregularities. Preston said

Gononsky was trying to obstruct the Audit Committee from doing its job and attempted

to have the Company's securities lawyers changed so that the investigation by the

forensic accounts might be suppressed. Preston also said he understood that

Armenakis and Joseph Radcliffe had attended high school together. Preston also

understood that Gononsky was a client of Armenakis, and that Armenakis had

introduced Gononsky to Image and Joseph Radcliffe.

D. The Radcliffes, H. E. Capital, and Chris Smith were the MainPerpetrators of the Fraud with the Assistance or Knowledge ofGononsky and Armenakis

93. As set forth above and more particularly below, Joseph Radcliffe, Michael

Radcliffe, H. E. Capital and Chris Smith directed or facilitated ISE's fictitious sales with

the assistance or knowledge of Armenakis and Gononsky. As described in the July 3,

2006 memo from Sinclair to Preston:

With respect to the $150,000 transaction [involving the purported loanfrom a party introduced by Armenakis], the funds were deposited directlyinto ISE's Merrill Lynch account. Mr. Sinclair met with Joe Radcliffe andMichael Radcliffe who instructed him that the deposit of $150,000 receivedfrom Vertical Construction in January 2005 was from Ilan Shachr at Fine

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Art Wholesalers to settle against various 2004 receivables from Fine ArtWholesalers, Ilan Shachr and Richard Scriven.

With respect to the $1 million received from H. E. Capital, these fundswere deposited into Holdings [Image] Merrill Lynch account by H. E.Capital. Mr. Sinclair, Joe Radcliffe and Michael Radcliffe had Chris Smithof H. E. Capital on a speaker phone in Joe Radcliffe's office when Chrisadvised that H. E. Capital was acting for Triumph Sports/Axiom Sportswhen they wired the $1 million into Holdings' Merrill Lynch account andthat the $1 million was to be applied to the receivable owed by TriumphSports/Axiom Sports to ISE. It was agreed that these funds plus anadditional $50,000 would be transferred to ISE's Merrill Lynch bankaccount. ISE used the funds to complete the requirements under thePeyton Manning contract. Michelle was instructed to post this transactionin the ISE general ledger to reflect the advice from Chris Smith.

At the end of each quarter, as part of the quarterly review, H. E. Capitalprovided written confirmation of the amount owed to H. E. Capital byImage. At all times, H. E. Capital's records agreed with Image's recordson the treatment of the $1 million sent to Holdings by H. E. Capital forISE's customer Triumph Sports/Axiom Sports. There was never a claim orsuggestion by H. E. Capital that the funds constituted either a loan to, orinvestment in, any of the Image companies.

Following his appointment, Mr. Preston, CEO of Image Holdings, required,at minimum, that at the end of each quarter, Joe Radcliffe and MichaelRadcliffe review and provide an assessment of the ISE receivables. At alltimes, Joe Radcliffe and Michael Radcliffe confirmed that the amountowed by Triumph Sports/Axiom Sports, with the $1 million from H. E.Capital applied as a payment from that customer, was correct.

When the sale by ISE was made to Raintree, Chris Smith from H. E.Capital told Mr. Sinclair that Raintree was a H. E. Capital client and thatRaintree had purchased the $330,750 of sports memorabilia from ISE.Both Joe Radcliffe and Michael Radcliffe in telephone conversations withMr. Sinclair confirmed that the sale was made to Raintree and that ChrisSmith from H. E. Capital would assist in managing the relationship withthis ISE customer and that they were both aware that Raintree was aclient of H. E. Capital.

In November, 2004, H. E. Capital wired $100,000 into Image Innovation,Inc.'s Bank of Montreal account in Vancouver and instructed Nadine thatthese funds had been sent on behalf of Raintree. The funds were nottransferred to ISE. As the funds were sent to the Image Innovations Bankof Montreal account in Vancouver, Nadine advised Michelle of the



transaction and how to record the transaction in ISE's books. ISErecorded the payment of the receivable from Raintree and a reduction inthe inter-company account withholdings. Image Innovations reported anincrease in cash and an increase in the inter-company account withHoldings.

In December, 2004, H. E. Capital advised Mr. Sinclair that Raintree hadauthorized them to pay $230,750, being the balance owed to ISE. H. E.Capital wired $130,750 to Holdings Merrill Lynch account and paid$100,000 to Coach Capital. Coach Capital was a H. E. Capital client thathad advanced Image $800,000. The decision that H. E. Capital shouldpay Coach directly was made jointly by Chris Smith of H. E. Capital andMr. Sinclair. It was reasoned that H. E. Capital's paying Coach directlywould allow Coach to be paid faster. The $130,750 was not transferred toISE. As the funds were sent in part to Holdings' Merrill Lynch account andin part to Holdings' account with Coach Capital, Mr. Sinclair advisedNadine and Michelle of the transactions and the transactions wererecorded by Nadine and Michelle so as to reflect the nature of thetransaction as Mr. Sinclair understood it. ISE recorded payment of thereceivable from Raintree in the sum of $230,750 and a reduction in theinter-company account with Holdings.

At December 31, 2004 and at the end of each quarter, H. E. Capitalprovided written confirmation of the amount owed to H. E. Capital byImage. At all times, H. E. Capital's records agreed with Image's recordson the treatment of the $330,750 payment by H. E. Capital on behalf ofRaintree.

At all times Joe Radcliffe and Michael Radcliffe agreed that Raintree hadpaid their account in full through the wire transfer of $230,750 to Holdingsand the payment of $100,000 to Coach.

Joe Radcliffe instructed Michelle to prepare invoices to Southwest (sales)("Southwest"). Mr. Sinclair discussed Southwest with Joe Radcliffe afterMichelle advised that the sales resulted from an agreement made betweenSouthwest and Joe Radcliffe and she was unsure of the proper accountingtreatment . Joe described the agreement , which was not in writing to Mr.Sinclair and again later to both Mr. Sinclair and Corey Massella ofMassella & Associates , CPA, PLLC who was involved in helping theCompany prepare its accounts for audit.

At no time was Mr. Sinclair told that Denise Constable was in any wayinvolved with the sales to Southwest, nor was he told that thesetransactions may have involved sales of shares or were loan transactions

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and not sales of ISE inventory. Michelle prepared the Southwest invoicesusing Quickbooks and recorded the payment by Southwest of thoseinvoices. Mr. Sinclair was unaware of any involvement of DeniseConstable in any respect of these transactions.

Four invoices were issued to Ilan Schachr/FAW [Fine Art Wholesalers] in2004:

• Invoice 92542 June 29, 2004 for $126,000;• Invoice 52419 June 29, 2004 for $112,275;• Invoice 205414 July 9, 2004 for $12,600; and• Invoice 45281 August 4, 2004 for $168,875.

On November 24, 2004 ISE prepared a journal entry that was posted inISE's general ledger to record the arrangement described to Mr. Sinclairby Joe Radcliffe and Michael Radcliffe whereby Joe Radcliffe and MichaelRadcliffe on behalf of ISE agreed to purchase/swap the ISE receivable of$419,750 from Ilan Schachr/FAW Holmes Cooney Neiman prints ownedby Ilan Schachr/FAW.

ISE recorded Invoice 92542 on June 29, 2004 for $126,000, Invoice52419 on June 29, 2004 for $112,275, Invoice 205414 on July 9, 2004 for$12,600 and Invoice 45281 on August 4, 2004 for $168,875. The saleswere recorded by Nadine into the ISE general ledger based on manualinvoices provided to her by Denise or Angela Constable. The invoiceswere prepared by Denise or Angela on instruction from Joe Radcliffe andMichael Radcliffe.

There is no transaction in the amount of $419,750 with Ilan Schachr/FAWrecorded in 2005 in the ISE general ledger as seen by or known to Mr.Sinclair. The transaction for the swap was recorded in the fourth quarter2004 by Mr. Sinclair based on advise and information provided by JoeRadcliffe and Michael Radcliffe.

94. In a July 3, 2006 memorandum to CEO Michael Preston, Derick Sinclair,

the Company's CFO, further explained the two wire transactions that were reported as

payments on account of ISE customers, Triumph Sports/Axiom Sports and Raintree,

Inc.:

There were two transactions at issue in the forensic report where wireswere received by Image Innovations Holdings, Inc. ("Holdings") and Image



Innovations, Inc. ("Image Innovations") on behalf of Image InnovationsSports and Entertainment, Inc. ("ISE"). In these two transactions fundswere wired in the bank accounts of Holdings and Image Innovations by H.E. Capital to pay balances owed by ISE customers. Chris Smith of H. E.Capital advised Derick Sinclair that the wires received by Holdings andImage Innovations were payments on account of ISE customers TriumphSports/Axiom Sports and Raintree, Inc.

95. Moreover, in a March 29, 2006 memorandum from Jonathan D. Elmi of

MP&S to Image, MP&S reported information that had been disclosed to it concerning

the illegal activities of Joseph Radcliffe in connection with ISE's bank accounts at Key

Bank. The memo stated in part:

At approximately 10 a.m. on the morning of March 29, 2006, MP&Sreceived a phone call from Holly Mari, a supervisor at Key Bank'scommercial credit department in Canton, OH.

During the March 29, 2006 call, Holly represented to MP&S that thesource of approximately $300,000 of deposits, classified as "currency" or"cash" on the deposit slips provided to MP&S, was a private consumeraccount at Key Bank held by Joseph Radcliffe, the father of MichaelRadcliffe, ISE's former CEO.

Holly further represented to MP&S that the sources of the funds initiallydeposited into Joseph Radcliffe's consumer account (and subsequentlytransferred to ISE's commercial account ) were various personal checks.Holly noted that the memo field on these personal checks typicallyindicated they had been written for the purpose of purchasing ISE'srestricted equity.

Holly stated that she believed Joseph Radcliffe had intentionallytransferred funds in this matter to obfuscate the paper trail. She alsobelieved that Joseph hoped to circumvent Key Bank ' s requirements to fileSuspicious Activity Reports in accordance with the Banks Secrecy Act.Holly represented to MP&S that, in fact, no such reports were ever filed.

At the conclusion of the conversation , Holly further disclosed that JosephRadcliffe had initiated a number of deposits , withdrawals and transfersbetween his personal account and ISE's commercial account . This activity



apparently began as early as 2004, and continued through the date of thiscall. Additionally, she represented that Joseph's personal account hadbeen the recipient of a number of suspicious wire transfers. Takentogether , Holly believes that the transactions described throughoutthis memo constitute bank fraud , and they also indicate moneylaundering.

(emphasis added).

96. Finally, in a February 4, 2006 file note, Michael Preston described

information provided by Ken Tsukada, an ISE employee responsible for business

development:

I then asked him [Ken] directly about the 2004 sales. He wasn't directlyinvolved in those sales, as his responsibility was business development(new projects). He said he thought that all the sales were accountingentries only, and generated to ramp up the stock . In particular,

• He was very friendly with John [Vega] the warehouseman, withwhom he traveled on occasion. John had told him that he hadregularly been asked to move large amounts of inventory from thewarehouse to Joe' s house.

• Brian , the other warehouseman, had left in the summer because hedidn't like some of the things the Radcliffes asked him to do with theinventory.

• No deliveries from Tannersville were ever made that remotelyaccounted for the product volumes needed to support the salesamounts the Company reported.

• It was a joke to suggest that Larry Holmes would spend $125,000on Joe Montana portraits: Larry was a notorious skin-flint whowouldn't lay out money for anything that had no channelswhatsoever for distributing memorabilia.

• Triumph Sports did exist, but they sold minutes amount of product(they participated in sports collectible shows) and never got nearthe sales levels predicated by the invoices we sent to them.

• We also discussed Rob Radju and his role in the Company - hedidn't think Rob had any direct involvement in selling memorabilia,so he was most unlikely to have been a principal in (or possiblyeven aware of) the sale to Triumph.



He gave his general view that the boys [Michael Radcliffe, DennisRadcliffe and Kenneth Radcliffe] knew all that was going on but that theydid just what Joe told them to. He had hoped that I would be able to cleanup the Tannersville operation.

97. During the Class Period, the Defendants took advantage of the Company's

artificially inflated stock price by selling restricted stock to investors. According to one

witness, Michael Osterer, Defendants sold him Image shares in the fall of 2004.

98. For instance, specifically on four occasions, September 15, 2004

($50,000), November 8, 2004 ($50,000), December 14, 2004 ($50,000) and October 4,

2004 ($45,000), Osterer wrote checks for Image stock purchases. According to

Osterer, at least one of these checks, each of which was left blank as to the payee,

were handed to Joseph Radcliffe and Chris Smith. When Osterer reviewed the checks

after they were cashed/deposited by the Defendants, he observed that one was made

payable to H. E. Capital, at least one was made payable to Armenakis and another was

made payable to ISE.

99. On September 15, 2004, Rose Arem purchased 20,000 shares of Image

stock for $50,000. In return for the $50,000 check that was made payable to ISE, Arem

received an Image stock certificate signed by Defendant Kardos.

100. In an August 2, 2005 e-mail, Preston wrote Whittle and Sinclair among

others , concerning Defendants ' stock sales to Arem:

Extremely interesting new information received today.

I have been getting calls from a Ted Breidbart, who represents (in whatform I don't know) Rose Arem. We traded calls but at 1St spoke fullytoday.

Ms. Arem is apparently a teacher who was persuaded by Gene Dworkin(who introduced Steve Bayern and Gold Solutions) to buy some 144 stock

50


Case 1 :06-cv-03707-JGK Document 29-2 Filed 01/03/2007 Page 1 of 50

from the Company. In October 2004, she paid $50,000 (this is apparentlya large proportion of her assets) for shares in the Company.

I asked Breidbart who she bought them from - he replied "the Company".When I pointed it out that the Company issued no stock for cash duringthe year, he said he had a check to prove it. I suspected the usual - acheck credited to a bogus customer account, although I wondered why wehad not picked up a check from that source - we were looking ateverything of that size.

In any event, Breidbart faxed me the check and it is made out to "ImagingSports and Entertainment" and is stamped as having been accepted atKey Bank, Albany. That is of course, the Company that owns thewarehouse, but I do not believe that any account of that company hasbeen made known to us.

I suspect that this may lie along side the Merrill Lynch "Image SportsEntertainment" account at Jacksonville as a rip-off account. But itdefinitely warrants pursuit. They doubtless pocketed the money."M P01728.

101. As set forth above, some of the proceeds of these stock sales were used

to partially pay down the Company's bogus receivables. Among other instances, stock

sale proceeds received by Defendants Denise Constable and Michelle Constable, each

of which were involved in ISE's bookkeeping operations, were apparently used to settle

the balance of the $90,868 balance of the Southwest account.3

102. The Defendants' fraudulent conduct and self-dealing continued after the

Class Period.

103. In an April 19, 2006 e-mail from Preston to Whittle, among others, Preston

wrote:

Having at last been able to get to grips with the ISE salary situation, wehave got from ADP a list of salary payments made during 2006.

3 Proceeds from Gononsky's and Armenakis' stock sales were also apparently used topay down receivables.


Case 1:06-cv-03707-JGK Document 29-2 Filed 01/03/2007 Page 2 of 50

You will see that some employees got no increase at all, while others gotsubstantial ones. In particular:

• Phil Uhrik (Vanessa Radcliffe's boyfriend) got a 100% increase onMarch 4 from $500 per week to $1,000 per week ($52,000 perannum).

• Michelle Constable/Radcliffe (Michael's wife), who is the part-time

bookkeeper got a 200% increase on March 4, from $500 per week

to $1,500 per week ($78,000 per annum).

• Kenneth Radcliffe (cousin of Michael and Dennis, and the "K" ofMDK Sports) got a 57% increase from $5,981.36 per month to$9,406 per month ($112,872 per annum).

• Dennis Radcliffe got a 51% increase from $9,972.37 per month to$15,084 per month ($181,008 per annum).

• Michael Radcliffe got a 59% increase from $13,051.51 per month to$20,811 per month ($249,732 per annum).

No communication of these increases was made to the Board or approvalsought. No reference of Michael's increase was made to theCompensation Committee or approval sought. I had no knowledgewhatsoever of these increases.

To which on that same day, Whittle replied:

At no time whatsoever was I approached as a member of theCompensation Committee of the Board in respect of any salary increase,

not for Michael Radcliffe, not for anyone at Tannersville, not for anyoneperiod, and nor would I have ever approved it nor considered itappropriate given the circumstances in play between Jan. 1 and the

present day.

If this doesn't evidence self-dealing, I don't know what does.

104. In March 2006, Michael Radcliffe fraudulently transferred funds from an

ISE bank to Armenakis. On March 30, 2006, Michael Preston wrote Michael Radcliffe

concerning Image funds fraudulently transferred to Defendant Armenakis. The letter

provided in part:



I have today been informed by Key Bank that they have received and mayhave inadvertently executed a wire transfer instruction in the sum of$235,000 to the account of Armenakis and Armenakis. Please be advisedthat in light of my previous letter, this transfer constitutes a fraudulenttransaction, and that the Company will both seek to recover said sumpersonally from the signatories to the wire transfer authorization and fromits recipients and refer the matter to the proper authorities.

105. According to documents provided by Michael Preston, at all times during

his engagement, H.E. acted in concert with the Radcliffes in relation to the Image

Group's affairs (in which both were actively engaged) and in particular in relation to the

market in the Company's stock. According to the Preston documents, in addition to the

discovery of the undisclosed March, 2004 transfer of 1.95 million shares to the

Radcliffes and the final resolution of the Triumph question, the following matters support

the fact that H.E. and Joseph Radcliffe were acting together and that, in all probability,

H.E.'s deal with Radcliffe involved their effectively dividing up the H.E. stake (including

the MDK-purchase stake) between them:

• Information that during 2004 Joseph Radcliffe made between eightand ten visits to the Dominican Republic, home of H.E.;

• Comment from Chris Smith to Preston in March 2006 that JosephRadcliffe controlled 40% of IIH, the same amount as H.E., a figurenot supported by the share register alone;

• Papers seized by the US Attorney from Tannersville, indicating thatH.E. and the Radcliffes were acting together;

• The high probability that the $1.12 million received by Armenakisinto his client account in February, 2006, purportedly from TriumphSports, also came from H.E.

106. Moreover, according to Preston, it was a matter of record that the sum of

$1,050,000 had been transferred to ISE from H.E. in January, 2005 on behalf of ISE's

largest customer , Triumph Sports (in relation to what is now known to be a fictitious and

totally fraudulent transaction), although no-one had picked up on the fact that the

53



transfers from H.E. with respect to that payment had come in four wires, a suspicious

fact in itself.

107. Further, Preston stated, it was subsequently discovered that another

invoice for $330,750 (relating entirely to Jackie Robinson photographs ), to Raintree Inc

of Reno, Nevada was settled by two separate wire transfers from H.E. in November and

December, 2004; it was claimed that Raintree was a "banking client" of H.E., although

no independent evidence has ever been found of the existence of that customer, let

alone of its involvement in the sports memorabilia business, or of the delivery of the

invoiced merchandise to Raintree.

108. It is clear, according to Preston, from the forensic accountants' report,

taken together with subsequent information from the addressee of the Triumph Sports

invoice, that the entire sales performance of ISE was a fraudulent construct without any

substantive actuality whatsoever; sales invoices were issued and, with only one material

exception, settled by payments from sources other than the named customer.

E. The Radcliffes, Armenakis, H. E. Capital and Gononsky

Attempt to Thwart the Investigation

109. According to Preston, Armenakis and Gononsky were in the Radcliffe

"camp." Armenakis and Joseph Radcliffe had been at high school together as he had

understood, and he also understood Gononsky to have been a client of Armenakis.

110. Preston said Gononsky was consistently obstructive, and had consistently

minimized the significance of the accounting findings, and had sought to suppress the

forensic accounts' investigation.

111. In January 2006, as evidenced by a January 13, 2006 e-mail from

Gononsky to fellow Image board members, Gononsky attempted but failed to persuade



Image 's Board of Directors to retain a different securities law firm, Meltzer Lippe, a firm

which had provided previous representation to Gononsky.

112. In March, 2006, at the behest of Joseph Radcliffe, H.E. approached

Preston with a request that he resign in return for cash compensation. This request was

a last-ditch attempt (following many other attempts from the Radcliffe camp) to derail the

independent accounting investigation.

113. On March 29, 2006, Preston wrote Whittle:

I had agreed to meet Jim Armenakis in NYC at 11 a.m. on Monday, March

20, to discuss my proposals for the sale back to the Radcliffes of ISE andtheir removal from the company and all shareholdings in it. I had come to

the conclusion that whatever small chance remained of survival for the

company, and in particular for the Fine Art deal, lay in that direction. The

meeting had been brokered by H. E. Capital.

While the meeting was cordial it made no real progress:

Armenakis, with whom I had had no direct contact for many weeks,

spent most of the time self-justifying and trying to buy me off by

offering me generous terms for my resignation as CEO and a

director, something that was out of the question now that we had the

MP&S findings.

(emphasis added).

114. When that request was eventually rejected, as a result of the delivery of

the forensic accountants' findings, an attempt was made by the Radcliffes and H.E.

together to remove CEO Preston and CFO Sinclair from the Board and thus to gain

Board control. To this effect Defendants purportedly solicited and obtained written

consents from 75.4% of Image's shareholders removing, effective as of March 31, 2006,

Preston and Defendant Sinclair as directors. On March 30, 2006 Armenakis sent

Defendant Sinclair a letter advising him of same. Shareholders signing the written

consents included Defendants Armenakis, Angela Constable, Denise Constable,

55



Michelle Constable (Radcliffe), Arthur Gononsky and Jay Gononsky, H. E. Capital,

Dennis Radcliffe (Michael Radcliffe's brother), Kenny Radcliffe (Michael Radcliffe's

cousin), Michael Radcliffe, Vanessa Radcliffe (Michael Radcliffe's sister), Chris Smith

and Richard Smith of H. E. Capital, G. Uhrik and Jay P. Uhrik (Vanessa Radcliffe's

boyfriend was Phil Uhrik). MP00880-00882. The solicitation which was in violation of

the proxy solicitation rules of the Securities and Exchange Act failed.

115. On March 30, 2006, Michael Preston wrote Jack Jacobs and David Whittle

concerning same:

Things move fast. I have just been faxed a notice from Armenakispurporting to remove Derick Sinclair and myself as directors withimmediate effect. This is clearly in anticipation of tomorrow's meeting andis presumably an attempt to derail the investigative process. Fortunately,things are too well advanced with the SEC for that ruse to have anybenefit to them.

116. On April 3, 2006, CEO Michael Preston sent a letter to Image Board of

Directors also concerning the attempt to remove him and Derick Sinclair from Image

Board of Directors. The letter which was confirmed as to the statements set forth

therein by Directors and Audit Committee members David Whittle and Jack Jacobs

provided in part:

Ever since the issuance of my report to the Audit Committee of December1, there has been a persistent and widespread campaign to discredit meand to undermine the process that the Audit Committee, by majoritydecision, decided to implement. This has been accompanied by anattempt to dismiss, if not trivialize, the implications of my report.

Friday's Meeting, while paying lip service to the principle of the forensicinvestigation and its process, proceeded in reality as though suchinvestigation had found no results of consequence. Persons wereappointed to lead and manage the affairs of this subsidiary in which themisconduct arose who are themselves to varying degrees implicated in theexecution or concealment of such misconduct.

56



Reference was continually made at Friday's Meeting to the importance tothe Group of the Sports and Entertainment subsidiary. However, thatsubsidiary reported net sales of some $5.7 million in 2004 and of some$246,000 in 2005. Of these sales, I believe that over $5 million in 2004are either fraudulent or seriously in question, while the achievement in2005 is so small as to be derisory.

Until the preliminary findings [by the forensic accountants], it may havebeen defensible to hide behind the claim that my concerns, as reported onDecember 1, were mere suspicions. ... Since these findings, however,and since the subsequent advice to the forensic accountants from one ofthe subsidiaries bankers have suspected "bank fraud" and "moneylaundering" involving the Radcliffe family and the Sports andEntertainment subsidiary, there is no excuse for inaction.

To that extent, I intend to call another Board meeting at the earliestpermitted moment, at which I shall propose the following:

• That Michael Radcliffe be forthwith terminated as an employee ofImage Innovations Sports and Entertainment, Inc. ("ISE");

• That Joseph Radcliffe be instructed to cease to have anyinvolvement in the affairs of either ISE or the Company or to holdhimself out as so having;

• That Arthur Gononsky be removed as Chairman of the Board andas a member of the Audit Committee of the Board;

• That James Armenakis cease to act or describe himself as actingas general counsel to the Company;

• That the Company retain special criminal counsel for the purpose ofconducting interviews under oath with all persons connected withthe misconduct, be they directors, ex-directors, employees, ex-employees, consultants, shareholders, members of the AdvisoryBoard or purported customers;

• That Messrs. Michael Radcliffe, Arthur Gononsky and JamesArmenakis be invited to resign as directors for the good of the



Company pending the outcome of the enquiries of the special

criminal counsel;

• The Company approach the Enforcement Division of the Securities

and Exchange Commission with a request that the Division initiatean investigation into the matters referred to herein and examine

whether they should consider terminating trading in the Company's

securities.

117. Finally, on April 10, 2006, CEO Michael Preston wrote Defendant

Gononsky a letter asserting that Gononsky had impeded the Audit Committee's

investigation:

Your letter misrepresents the facts and circumstances that have transpired

in recent months relating to the forensic investigation into the Company's

financial statements. Further, your misguided attempts, together with

others, to frustrate and otherwise protect those persons that may have

done harm to the Company, have impeded the efforts of the Audit

Committee and current management to bring this matter to a proper

conclusion.

F. Materially False and Misleading Statements

118. On the first day of the Class Period , April 13, 2004, Image filed its Annual

Report for the year ended 2003 with the SEC on Form 10-KSB. The 2004 Form 10-

KSB was signed by Michael Radcliffe, Kardos and Sinclair. The Form 10-KSB reported

revenues of $101,743 for fiscal year 2003. The Form 10-KSB contained the Company's

audited financial statements for the year ending December 31, 2003. It also included a

representation by Clyde Bailey, P.C. that Clyde Bailey, P.C. audited the Company's

financial statements for the year ending December 31, 2003 in accordance with General

Accepted Auditing Standards and that such financial statements presented fairly in all

material respects, the financial position of Image as of December 31, 2003 in



accordance with GAAP. The Form 10-QSB also stated that the Company's "[r]evenues

are recognized when earned."

119. The Form 10-QSB further stated:

Revenue on product sales is recognized when persuasive evidence of anarrangement exists, such as when a purchase order or contract isreceived from a customer, the price is fixed, title to the goods has changedand there is a reasonable assurance of collection of sales proceeds....Revenue is recognized at shipment.

120. On May 13, 2004, Image filed its results for the 2004 first quarter on Form

10-QSB with the SEC. The first quarter 2004 Form 10-QSB was signed by Defendants

Kardos and Sinclair. Kardos and Sinclair also signed certifications required by the

Sarbanes Oxley Act of 2002 attesting to the accuracy of the Form 10-QSB. In the Form

10-QSB, Image reported revenues for the three months ending March 31, 2004 of

$180,968. The Form 10-QSB also stated that the Company's "[r]evenues are

recognized when earned."



122. After this announcement, Image stock rose from $2.45 on May 14, 2004 to

$2.60 on May 17, 2004 (the next trading day).

123. On July 9, 2004, Image filed its results for the 2004 second quarter on

Form 10-QSB with the SEC. The second quarter 2004 Form 10-QSB was signed by

Defendants Kardos and Sinclair. Kardos and Sinclair also signed certifications required

by the Sarbanes Oxley Act of 2002 attesting to the accuracy of the Form 10-QSB. In



the Form 10-QSB, Image reported revenues for the three and six months ending June

30, 2004 of $738,358 and $919,326, respectively. The Form 10-QSB also stated that

the Company's "[r]evenues are recognized when earned."



125. On November 15, 2004, Image filed its results for the 2004 third quarter on

Form 10-QSB with the SEC. The third quarter 2004 Form 10-QSB was signed by

Defendants Kardos and Sinclair. Kardos and Sinclair also signed certifications required

by the Sarbanes Oxley Act of 2002 attesting to the accuracy of the Form 10-QSB. In

the Form 10-QSB, Image reported revenues for the three and nine months ending

September 30, 2004 of $2,297,830 and $3,217,156, respectively.

126. The Form 10-QSB stated:

Revenue on product sales is recognized when persuasive evidence of anarrangement exists, such as when a purchase order or contract isreceived from a customer, the price is fixed, title to the goods has passedand there is a reasonable assurance of collection to the extent there is areasonable assurance of collection of the sales proceeds. ... Revenue isrecognized on shipment....

127. After this announcement, Image stock price rose from $5.85 on November

15, 2004 to $6.00 per share on November 16, 2004 on particularly high volume.

128. On January 14, 2005, in a Form 8-K filed with the SEC, Image announced

that on January 11, 2005, the Audit Committee of Image's Board of Directors dismissed

Clyde Bailey , P.C. as its independent accountant and retained GGK to act as Image's

independent public accountants to audit and certify Image's financial statements for the

60



year ended December 31, 2004. No reasons were given for Clyde Bailey , P.C.'s

dismissal.

129. After this announcement, Image stock price fell about 11 % from $6.25 on

January 14, 2005 to $5.55 per share on January 18, 2005 (the next trading day).

130. On February 3, 2005, Kardos resigned as director of Image and its wholly

owned subsidiary, Image Innovations. Kardos' resignation letter, dated February 3,

2005, alleged, among other things, that Image never revealed his termination as CEO:

To: The Boards of Directors of Image Innovations Holdings Inc.("Holdings" ) and Image Innovations Inc. ("Image" ); (together the"Companies "). I hereby give notice that I am, effective immediately,resigning my positions as a director of Holdings and Image.

My resignation is caused by my concern with the corporate governance ofHoldings, and its business ethics, as they relate to my termination as thePresident and CEO of the Companies, and related issues.

On October 19, 2004, I was terminated as President and CEO of both ofthe Companies, without cause, notice, or pay of lieu. I have been unable toaccess the Companies' offices since that time, and unable to participate inits day to day business. Despite my written (through counsel) and verbalrequests, no disclosure of my termination has been made to the SEC or thepublic at large.

Following my termination, I entered into negotiations with Holdings, throughMr. Armenakis [Image's counsel], in respect of severance. My counselwas advised, in December, 2004, that the terms of a severance packagehad been reviewed and approved by Mr. Gononsky, Mr. Radcliffe, Mr.Sinclair and (presumably) himself. Subsequently, my counsel has beenadvised the Board does not intend to honor this commitment and that noseverance will be offered or provided.

Further, I am the legal and beneficial owner of 700,000 shares in Holdingswhich, upon issuance, were provided to Mr. Derek Sinclair by Holdings'transfer agent. Despite numerous requests from my counsel, Mr. Sinclairand the company have refused to provide me with the share certificatesrelated to these shares. Holdings has also, during the above negotiation,improperly refused to return them to me until I entered into restrictions onmy ability to sell the shares as part of the provision of severance.



I am saddened at having to tender these resignations, especially in the

circumstances outlined above.

131. On February 8, 2005, Kardos also resigned from his position as a director

of ISE.

132. On April 1, 2005, Image filed a Form NT10-K, notifying the SEC that it

could not file its Form 10-KSB on time because it did not, due to "limited personnel,"

have time to completely review Image's financial information.

133. On April 14, 2005, Michael Preston ("Preston") was appointed Chief

Executive Officer of Image.4

134. On April 15, 2005, Image filed its Annual Report for the year ended 2004

on Form 10-K with the SEC. The 2004 Form 10-KSB was signed by Defendants

Sinclair, Michael Radcliffe, Gononsky and Armenakis, among others. The Form 10-K

reported revenues of $6.1 million for fiscal 2004.

135. The Form 10-KSB stated:

Sales from transactions are recorded automatically and posted to the

general ledger from the invoice produced when shipment of the product is

completed. Revenue is recognized upon delivery and acceptance of the

product to the customer.

136. The 2004 Form 10-KSB contained the Company's audited financial

statements for the year ended December 31, 2004 and the following representation by

Defendant GGK:

We have audited the accompanying consolidated balance sheet of ImageInnovations Holdings , Inc. as of December 31, 2004 , and the relatedstatements of operations , changes in stockholders' equity and cash flows

4 Preston continues to serve as the CEO of Image to present . Preston is cooperating

with Plaintiffs ' counsel and has provided Plaintiffs with documents and other information

concerning the wrongful conduct of Defendants - - conduct that is actionable under the

federal securities laws.

62



for the year ended December 31, 2004. These financial statements arethe responsibility of the Company's management. Our responsibility is toexpress an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.

An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementspresentation. We believe that our audit provides a reasonable basis forour opinion.

In our opinion, the financial statements referred to above present fairly, inall material respects, the financial position of Image Innovations HoldingsInc. as of December 31, 2004 and the results of its operations and its cashflows for the year then ended in conformity with United States generallyaccepted accounting principles.

/s/ GOLDSTEIN GOLUB KESSLER LLP

GOLDSTEIN GOLUB KESSLER LLPNew York, New York

137. On May 17, 2005, Image filed a Form NT10-Q, notifying the SEC that it

could not file its 2005 first quarter Form 10-QSB on time because it did not, due to

"limited personnel," have time to completely review Image's financial information.

138. On May 23, 2005, Image filed its results for the 2005 first quarter on Form

10-QSB with the SEC. The Form 10-QSB was signed by Defendant Sinclair. In the

Form 10-Q, Image reported revenues for the three months ending March 31, 2005 of

$464,502. The Form 10-QSB also stated that the Company' s "[r]evenues are

recognized when earned."

139. The Form 10-QSB stated:



Revenues are recognized upon delivery and acceptance of the product tothe customers.

140. On August 15, 2005, Image filed a Form NT10-Q, notifying the SEC that it

could not file its second quarter 2005 Form 10-QSB on time because it did not, due to

"limited personnel," have time to completely review Image's financial information.

141. On August 22, 2005, Image filed its results for the 2005 second quarter on

Form 10-QSB with the SEC. The Form 10-QSB was signed by Defendant Sinclair,

among others . In the Form 10-QSB, Image reported revenues for the three and six

months ending June 30, 2005 of $48,115 and $512,617, respectively. The Form 10-

QSB also stated that the Company' s "[r]evenues are recognized when earned."

142. The Form 10-QSB further adopted the disclosure of the Company's

recognition policies set forth in the Company's year ending 2004 Form 1 OKSB.

143. After this announcement, Image's stock price rose from $4.25 on August

22, 2005 to $4.55 per share on August 25, 2005 (the next trading day).

144. On November 8, 2005, Image announced that a lawsuit filed by former

CEO Kardos had been settled , with H.E. Capital, a large holder of Image stock,

agreeing to deposit the shares in question into escrow and purchase the same at

specified times at an amount agreed to by Kardos and H.E. Capital. Kardos' claim with

respect to his alleged wrongful termination was dismissed with no payments required to

be made by any party.

145. On November 14, 2005, Image filed its results for the 2005 third quarter on

Form 10-QSB with the SEC. The Form 10-QSB was signed by Defendant Sinclair,

among others. In the Form 10-QSB, Image reported revenues for the three and nine



months ending September 30, 2005 of $397,487 and $910,104, respectively. The Form

10-QSB also stated that the Company's "[r]evenues are recognized when earned."

146. The Form 10-QSB further adopted the Company' s revenue recognition

policies set forth in its year ending 2004 Form 10-KSB.

G. The Truth is Slowly Revealed

147. On November 22, 2005, the Public Company Accounting Oversight Board

(the "PCAOB") released an Order Instituting Disciplinary Proceedings , Making Findings,

and Imposing Sanctions In The Matter of Clyde Bailey, P.C. and Clyde B. Bailey, CPA

(the "Order"). Pursuant to the Order, in which the registration of Clyde Bailey, P.C. with

the PCAOB was revoked, the PCAOB determined that in connection with CBPC's fiscal

year 2003 audit of Image's financial statements (the "2003 Audit"), Clyde Bailey, P.C.

relied upon the work of another audit firm as a component of Clyde Bailey, P.C.'s audit

procedures and the audit evidence obtained through procedures performed by such

other firm constituted substantially all of the audit evidence obtained to support the 2003

Report. The Order stated that the level of planning, testing, supervision and review

exercised by Clyde Bailey , P.C. with regard to the other audit firm's work was not

sufficient to enable Clyde Bailey, P.C. to use the work of such other auditor in the same

manner as if it had been performed by Clyde Bailey, P.C.'s own personnel. The Order

further stated that , consequently, Clyde Bailey, P.C. had violated PCAOB standards in

issuing the 2003 Report.

148. On December 1, 2005, Image's management, in consultation with GGK,

determined that the audit report issued by Clyde Bailey , P.C., with respect to Image's

consolidated financial statements for the fiscal year ended December 31, 2003, should


Case 1 : 06-cv-03707 -JGK Document 29-2 Filed 01/03/2007 Page 16 of 50

no longer be relied upon . Image , in consultation with GGK , stated that it was

investigating whether a re-audit of the financial statements for the year ended

December 31, 2003 was necessary or appropriate.

149. After the December 1st announcement, the share price of Image stock fell

10% from $3.70 on December 1, 2005 to $3.46 on December 2, 2005.

150. On December 5, 2005, the Audit Committee of Image concluded that a

forensic accounting investigation concerning Image's consolidated financial statements

for the fiscal year ended December 31, 2004 (the "2004 Financials") would be necessary

to confirm Image's recorded revenue and receivables with respect to such period. At

such time, Image advised its independent registered accounting firm, GGK, that such

forensic audit would be commenced.

151. In a Form 8-K filed with the SEC on March 16, 2006, the Company

announced that the forensic accounting firm retained by the Audit Committee to conduct

the investigation presented preliminary findings to the Audit Committee , concluding that

a number of revenue and receivables in respect of Image's inventory sales were

improperly recorded. The Company further announced that based on such preliminary

findings , the Audit Committee, in consultation with the forensic accountant , determined

that the Company's 2004 financial statements and the related independent auditor's

report could no longer be relied upon. Thus, Image announced:

[Image] anticipates that a restatement of the 2004 Financials will benecessary. Since the forensic accounting firm has not yet completed itsinvestigation, the exact nature and full extent of the restatement is notknown at this point. However, it is expected that the restatement willreflect materially lower revenue, and materially greater net loss, thanoriginally reported by the Registrant in the 2004 Financials.



152. Because this announcement was after the close of trading on March 16,

2006, Image stock price did not fall until the next trading day, March 20, 2006, when it

fell about 16% from its $1.55 closing price on March 17, 2006 to $1.30 on March 20,

2006.

153. Accordingly, as Image has now admitted , Image's revenue

announcements and financial statements issued during the Class Period, which are

detailed above in paragraphs 118-21, 123-26, 134-36, 138-39 and 145-46 were all

materially false and misleading . This is true notwithstanding the fact that the

restatements have not yet been quantified because a restatement is not required unless

there is a material change in a reported figure.

H. Post-Class Period Events

154. On March 26, 2006, GGK, Image's independent registered accounting

firm, resigned as auditor. In its letter of resignation to Image's Audit Committee

Chairman, GGK stated that based on discussions with Image and its forensic

accountants, GGK could no longer rely on the representations of management that

were necessary for GGK to perform auditing work on Image's behalf. The letter, which

was attached to the Company's Form 8-K filed with the SEC on April 3, 2006, stated

that as a result, GGK was withdrawing its auditors' report on Image's financial

statements for the year ended December 31, 2004 and provided in pertinent part:

The following factors prompted our resignation:

1. The Company's CEO refused to tell us what triggered the forensicinvestigation.

The Company began a forensic investigation to confirm its recordedrevenue and receivables for the fiscal year ended December 31, 2004,after the Company's Audit Committee concluded on December 5, 2005,



that such an investigation was necessary, according to a Form 8-K filed bythe Company the following day. The Company chose not to allow GGK tohear from the forensic accountants conducting the investigation until mid-afternoon this past Friday, March 24, 2006, when a conference call("Friday's conference call") was convened at the request of GGK and itscounsel.

On Friday's conference call, our counsel asked what triggered the forensicinvestigation. The Company's CEO indicated that he contacted counseland asked for an investigation to be commenced after four problems cameto his attention during a single week in November 2005. One of theseproblems, he said, was that the receivables of the Company's principalsubsidiary were not being paid down. This was a problem already knownto GGK; indeed, we raised it as an issue at the Audit Committee meetingsfor the second and third quarters of 2004. However, we had noknowledge at the time of Friday's conference call, and continue to have noknowledge, of the other three problems that triggered the forensicinvestigation, because on Friday's conference call the Company's CEOdeclined our request that he tell us the other three problems.

2. The forensic accountants' investigation has, at a minimum , calledinto serious questions virtually all of the Company ' s 2004 revenue,and we believe that the Company has not taken adequate remedialsteps in response to the findings of the investigation.

The Company reported revenues of slightly more than $6 million for 2004,with $5.75 million attributed to its principal subsidiary, Image InnovationsSports and Entertainment Inc. ("ISE"). ISE sells celebrity artwork andcollectibles.

On Friday's conference call, GGK learned for the first time that theforensic accountants examined nearly all of the reported sales for 2004and were able to confirm, as legitimate revenue, sales of only about$83,000. The investigation covered purported sales to ISE's twelvelargest customers, totaling approximately 92% of the Company's reportedrevenues. The forensic accountants could not find documentation tosupport the vast majority of the Company's 2004 revenue. Indeed, you,the Chairman of the Audit Committee, stated during Friday's conferencecall that the Company's CEO believes that all of the Company's 2004revenue is illegitimate.

The investigation findings were described to us as preliminary, but theforensic accountants also indicated they have followed the paper trail asfar as they can, and that investigating further would require interviewingwitnesses, contacting purported customers, and securing the cooperationof various other parties to obtain additional evidence. However, the



forensic accountants told us their mandate did not include determiningwho was responsible for any accounting errors or misconduct. Thus, farthe Company and Audit Committee have chosen not to engageindependent investigative counsel, and to our knowledge have notconducted any interviews to determine who participated in the apparentmisconduct. Nor have they terminated any employees or officers or madeany changes to the Board of Directors to remove from the companypersons responsible for the apparent misconduct.

As we discussed on Friday, we believe that the Company shouldimmediately and fully report the findings of the forensic accountinginvestigation to the Commission.

155. On March 27, 2006, the Company's lawyers responded to certain inquiries

made by the SEC concerning the Company's fraudulent accounting. The letter provided

in part:

On behalf of the Company, we hereby transmit the Company's responsesto the comments contained in the Letter. Our numerical responsescorrespond with the numbered comments of the Letter. For yourconvenience, we have set forth each comment in its entirety directlybefore the corresponding response.

Comment :

Please tell us in further detail the nature of the errorsdiscovered by the forensic accounting firm. In this regard,ensure you tell us why these errors were not discoveredpreviously.

Response :

As disclosed in the Form 8-K, on March 16, 2006, the forensicaccounting firm retained by the Company's Audit Committee toconduct the investigation presented preliminary findings to the AuditCommittee, concluding that a material amount of revenue items andreceivables in respect of inventory sales of the Registrant, relatingto one of its subsidiaries, was improperly recorded on the financialstatements of the Company for the year ended December 31, 2004(the "2004 Financials"). The forensic accountant has preliminarilyadvised the Company that the nature of such apparent errorsincludes the following general categories:



• Multiple instances in which material amounts of revenuerecorded on the books and records of ImageInnovations Sports and Entertainment, Inc. a wholly-owned subsidiary of the Company and its principaloperating subsidiary ("ISE"), and included within theCompany's consolidated accounts, in respect ofinventory sales transactions during 2004, could not besupported by evidence that the inventory purportedlysold by ISE had actually been shipped form ISE'swarehouse and delivered to a customer.

• Multiple instances in which material amounts of inventoryrelated to various sales transactions recorded on ISE'sbooks and records in 2004 and included with the Company'sconsolidated accounts related to inventory purportedly soldby ISE that was subsequently (after more than twelvemonths) returned to ISE's warehouse and for which noshipping records or proof of payment in respect thereofcould be verified.

• At least one transaction in which revenue recorded on ISE'sbooks and records related to a purported customer of ISE,who indicated that he had no knowledge of any purchase ofinventory from ISE in respect thereof.

• Multiple instances in which material amounts depositedinto ISE's bank accounts, apparently in relation toprivate purchases of stock in the Company, werecredited to ISE's accounts receivable in satisfaction ofsales invoices raised by ISE for which no satisfactoryevidence of shipment could be found.

As previously disclosed, the Company anticipates that a restatement ofthe 2004 Financials will be necessary. However, since the investigation isnot yet complete, the exact nature and full extent of the restatement is notknown at this point. However, it is expected that the restatement willreflect materially lower revenue, and materially greater net loss, thanoriginally reported by the Company in the 2004 Financials. Currently, theAudit Committee is formulating and executing those steps that it believesshould next be taken in connection with the investigation. These stepsinclude initiating the next phase of the investigation, not only to identify theexact nature and extent of what restatement is required but to identify theindividual or individuals for the errors or misconduct that has necessitatedit.

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With respect to the reasons why the aforementioned accounting errorswere not discovered previously, the Company originally became aware of

the possibility that certain accounting entries were in error in November

2005 and after the Company's Chief Executive Officer, who joined theCompany in April 2005, became concerned that certain revenue items that

had been recorded as firm sales in 2004 might in reality have been

consignment sales. This concern was reinforced by advice form the

Company's independent registered accounting firm, Goldstein Golub

Kessler LLP ("GGK"), at an audit committee meeting held telephonically

on November 11, 2005 to approve the financial statements for the quarter

ended September 30, 2005 (The "November Meeting"), to the effect that

GGK was then also concerned that certain of the 2004 sales might havebeen consignment sales. At that meeting, the Audit Committee directed

the CEO to undertake an examination of the prior year's transactions, andwith the assistance of the Company's Chief Financial Officer, the CEO

discovered what he believed to be more serious issues. The CEOpromptly relayed his concerns to counsel, and subsequently to the AuditCommittee in a report dated December 1, 2005 (the "Report"). After

consideration of the Report during a meeting held on December 5, 2005,the Audit Committee immediately commenced an investigation. On

December 7, 2005, the Chairman of the Audit Committee and counsel metwith potential forensic auditing firms, and shortly thereafter the forensic

accounting firm was retained.

It should be noted that at the November Meeting, the Audit

Committee requested that the GGK partner in attendance produce,

for review by the Audit Committee, GGK's audit confirmation letters

received from the Company's customers outstanding at December

31, 2004 in order to clarify and understand the procedures involved

in sending out the request and receiving the replies. This requestwas repeated by the CEO to the GGK audit partner in a telephone

conversation on December 2, 2005 after presentation of the Report to

the Audit Committee, and again in an e-mail sent to the same

individual on December 3, 2005. No response was ever received to

these three requests.

Additionally, in another telephone conversation with the GGK audit partner

at the time of the issue of the Report to the Audit Committee, the CEO

shared with GGK in full the concerns that had led to the Report, none

of which had been identified by GGK in its review of the Company'squarterly financial statements or in any other communication tomanagement of the Audit Committee . The CEO invited GGK to

participate in the forensic investigation either formally or informally, but this

invitation was declined by GGK on December 2, 2005 in a telephone callto the Company's counsel.

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(emphasis added).

156. On March 30, 2006, the Company filed a Form 8-K with the SEC

announcing GGK's resignation and commenting on same.

157. On April 3, 2006 , Image announced that because of GGK's resignation,

Image would be unable to file its Annual Report on Form 10-KSB for fiscal year 2005.

158. In a Form 8-K filed with the SEC on April 12, 2005, the Company

announced Image's Chief Executive Officer Preston had met with members of the

Enforcement Division of the SEC on April 6, 2006 to discuss the nature of, and facts

underlying, the Company's forensic accounting investigation. The Company further

stated that on April 9, 2006, Defendant Gononsky resigned as Chairman of the Board of

Directors of Image and as a member of the Audit Committee, and on April 10, 2006,

Defendant Armenakis resigned from Image's Board of Directors.

159. Gononsky's resignation letter stated in part:

It was and is my belief that the Board should have engaged independent

counsel, with no ties to management or existing counsel, to conduct and

oversee an investigation into these matters which would of course have

included a thorough forensic audit. Others felt, and apparently feet,differently. Accordingly, the forensic accounting firm of Marks, Paneth &

Shron, LLP was engaged to investigate the alleged improper accounting

treatment and issued a "preliminary" report in March that raised more

questions than it answered. While I do not pretend to have the level of

financial and accounting sophistication of Mr. Preston, Mr. Sinclair or

[Image Board member] Mr. Whittle, it is my belief that, had independent

counsel been engaged, unconnected with the management on whose

watch the accounting improprieties are alleged to have occurred or been

certified, this investigation would have proceeded to a far more rapid

conclusion. Moreover, at this point, the Company's auditors, GGK, have

resigned, alleging that they can no longer rely on the representations of

management. I also believe that Mr. Preston's decision to withhold the

payment of wages to line employees who are not in any way involved in

the alleged improprieties is morally wrong and most probably illegal, has

not, so far as I am aware, been mandated by the SEC, and can only have

the effect of further damaging the Company and its shareholders.



In short, the manner in which management has proceeded, in my opinion,has resulted in continuing and unnecessary harm to the interests ofshareholders. In light of the foregoing, you will understand that I feel that Ican no longer remain a member of the Board and effectively represent theinterests of the shareholders of the Company. Accordingly, effectiveimmediately, I hereby resign as a member of the Board of Directors ofImage Innovation Holdings, Inc., as a member of any Committee thereof,and as Chairman of the Board.

160. Armenakis' resignation letter provided in part:

This is to inform you that effective immediately, Armenakis & Armenakishereby resigns as General Counsel to the Company. In addition, effectiveimmediately, I hereby resign as a director of the Company.

We are compelled to take this action as a result of the Company'scontinuing failure to follow our advice concerning its operations. Despitethe fact that the Company has instructed us to draft numerous contracts,referred litigation matters to our firm for resolution, and both MichaelPreston and Snow Becker Krauss, P.C. have asked us to draft opinionletters in connection with various transactions, they suddenly refuse toacknowledge our role as General Counsel.

The Company also refuses to follow our advice to terminate theabsentee Chief Financial Officer [Sinclair]. It should be noted thatalthough the alleged incidents listed in the forensic accountants' reviewoccurred during his tenure, there is no mention of Derick Sinclair in thatreport. This can only cause one to conclude that the directions given tothe forensic accountants and/or their review, are suspect.

Similarly, despite clear indication that the Chief Executive Officer has lostthe confidence of an overwhelming majority of the shareholders, hecontinues to ignore their wishes and continues to take steps to consolidatethe daily operations of the Company and its assets under his sole control.Under his reign, the Company's stock has steadily declined in value and isunlikely to recover.

As a result of these circumstances our further involvement with theCompany has become untenable.

161. The April 12, 2006 Form 8-K further disclosed that on April 10, 2006,

Image terminated Defendant Michael Radcliffe from his position as Chief Executive

Officer of ISE.

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162. On April 13, 2006, GGK sent a letter to the SEC correcting what it said

was a typographical error in its March 26, 2006 letter:

Our resignation letter contained a typographical error in the followingsentence: "This was a problem already known to GGK; indeed, we raisedit as an issue at the Audit Committee meetings for the second and thirdquarters of 2004." The sentence should have read: "This was a problemalready known to GGK; indeed, we raised it as an issue at the AuditCommittee meetings for the second and third quarters of 2005."

163. Also, on April 13, 2006, the SEC issued document subpoenas to the

Company.

164. On April 14, 2006, the Company filed an amended Form 8-K with the SEC

on Form 8-K/A again commenting on GGK's resignation and March 26, 2006 letter:

Consequently, GGK's resignation constitutes a "reportable event" pursuantto Item 304(a)(1)(iv)(B)(1) of Regulation S-B inasmuch as GGK hasindicated to the Registrant that information has come to the attention ofGGK which made GGK unwilling to rely on management's representationsand unwilling to be associated with the 2004 financial statements preparedby management.

GGK's report on the Registrant's financial statements for the last fiscalyear did not contain an adverse opinion or disclaimer of opinion and wasnot modified as to uncertainty, audit scope, or accounting principles.Further, there were no disagreements with GGK on any matter ofaccounting principles or practices, financial statement disclosure, orauditing scope or procedure, which, if not resolved to GGK's satisfaction,would have caused GGK to make reference to the subject matter of thedisagreement(s) in connection with such report.

The Registrant intends to engage new auditors, and anticipatescommencing the process of seeking out and interviewing potentialcandidates, as soon as reasonably practicable. Upon the engagement ofnew auditors, the Registrant will file a Current Report disclosing suchengagement.

GGK set forth a variety of factors that prompted its resignation. Amongthe reasons set forth in the letter, GGK stated that the Registrant's ChiefExecutive Officer refused to inform GGK as to what triggered the forensicaccounting investigation (the "Investigation"), which has been previouslydisclosed on Current Reports filed on December 6, 2005 and March 17,

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2006. GGK also stated that the Investigation has, at a minimum, called

into serious questions virtually all of the Registrant's 2004 revenue, and

GGK believes that the Registrant has not taken adequate remedial steps

in response to the findings of the Investigation. Further, GGK stated that

the Registrant apparently is in the process of offering or selling its

securities, or has offered or sold its securities, during the Investigation.

The Registrant believes that the statements provided by GGK in its letteras reasons prompting its resignation are either materially inaccurate, orotherwise substantially mischaracterize the facts. It is the belief of theRegistrant that the Investigation could have been avoided had GGK'saudit of the Registrant' s 2004 financial statements (the "2004 Audit")uncovered the improper accounting treatment that is the subject ofthe Investigation . As a result, the Registrant has serious concernsas to whether appropriate audit procedures were performed by GGKin connection with the 2004 Audit.

The following sets forth the Registrant's position with respect to thereasons provided by GGK for its resignation.

"GGK believes that it can no longer rely on the representations ofmanagement...."

The Registrant's management is not the same as at December 31, 2004.

The current Chief Executive Officer (the "CEO") was retained by the

Registrant in April 2005 and had no knowledge of the circumstancesgiving rise to the Investigation until November 2005. In fact, the CEO, inaccepting a position in management, relied on GGK and its audit report in

respect of the 2004 Audit which states that "the financialstatements... present fairly, in all material respect, the financial position of

Image Innovations Holdings Inc. as of December 31, 2004 and the results

of its operations and its cash flows for the year then ended in conformity

with United States generally accepted accounting principles."

The Registrant believes that any and all representations made by the CEOto GGK have been accurate in all material respects.

"The Company's CEO refused to tell us what triggered the forensic

investigation"

The Registrant disputes this statement. In November 2005, the CEO

conveyed to the GGK audit partner, in detail, his concerns and suspicionsrelating to the 2004 financial statements. In connection with the March

2006 discussion referenced in GGK's letter that included GGK, the CEOand the forensic accountants, the CEO, in responding to a question from

counsel to GGK requesting the specific reasons for the Investigation,

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merely stated that he wished to take advice of counsel prior to discussingthis subject with GGK and its counsel. The CEO's concern arose out of adesire to refrain from providing information to GGK, since GGK'sperformance in connection with the 2004 Audit would necessarily comeinto question in the Investigation.

"The Company chose not to allow GGK to hear from the forensicaccountants....."

In early December 2005, GGK was informed by the Registrant that theInvestigation was imminent. Counsel to the Registrant was explicitlyadvised by counsel to GGK at such time that GGK would not be able toact as "auditor" in connection with the Investigation and that the Companywould have to retain an outside auditing firm to perform the Investigation.Once the Investigation commenced, in order to preserve theindependence thereof, GGK was specifically excluded from participating,especially in light of the concerns of the Audit Committee andmanagement relating to GGK's audit procedures in connection with the2004 Audit.

The principal GGK partner responsible for the 2004 Audit subsequentlyinquired with the CEO about the progress of the Investigation in the mostgeneral terms (particularly about when it was likely to be completed) butnever inquired as to specifics or requested to meet or speak with theforensic accountants.

Three separate requests by the CEO in November and December2005 to obtain from GGK copies of its audit confirmations in respectof the 2004 receivables and of its procedures in connection therewithwere ignored.

"The forensic accountants' investigation has, at a minimum , called intoserious question virtually all of the Company's 2004 revenue..."

The Registrant does not dispute that a material amount of revenue in 2004appears to be in serious question. However, the Investigation is not yetcomplete and the forensic accountants have so far only presentedpreliminary findings. Accordingly, GGK's assertion that "virtually all of the[Registrant's] 2004 revenue" is in serious question is premature.

"The Company has not taken adequate remedial steps ................."

In November 2005, when the CEO became concerned of potential seriouserrors in the 2004 financial statements, he immediately informed counseland the Audit Committee as well as GGK. An Audit Committee meetingwas convened, and the Registrant filed a Current Report disclosing,

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among other matters, that the Investigation would be necessary to confirm

the Registrant's recorded revenue and receivables in respect of 2004 andthat the results of the Investigation could have a material adverse effect on

the 2004 financials as well as the Registrant's financial condition. The

Registrant promptly retained the forensic accountants who commenced

the Investigation.

On March 16, 2006, the forensic accountants presented their preliminary

findings to the Audit Committee, and a subsequent Current Report was

filed by the Registrant on March 17, 2006 disclosing the nature of such

findings. Subsequently, the Audit Committee has authorized, and

management has taken prompt action, to take control of the Registrant's

principal operating subsidiary that has been the focus of the Investigation

(the "Subsidiary") and its books and records and freeze its bank accounts.

The Registrant believes that each of these actions has taken place on a

timely basis following presentation of the forensic accountants' preliminary

findings.

"The forensic accountants could not find documentation..........."

Evidently, this documentation , or lack of it, was not raised as aconcern by GGK in connection with the 2004 Audit and its auditopinion in respect thereof.

"Their mandate did not include determining who was responsible ......."

The forensic accountants' initial mandate concerned an immediate effort to

determine the accuracy of the 2004 financials. It is anticipated that the

Audit Committee will forthwith authorize and direct the forensic

accountants, together with special counsel, as appropriate, to investigatethe identities of the responsible parties, which investigation is anticipated

to include, among other matters, employee, customer and vendor

interviews.

"Thus far , the Company and Audit Committee have chosen not to engage

independent investigative counsel ......... ..

The Audit Committee does not believe that independent counsel has beennecessary up to this point. Counsel to the Audit Committee has consultedwith special counsel on an informal basis, and is presently consideringwhether a formal engagement is necessary or appropriate.

"To our knowledge have not conducted interviews .................."

Prior to the preliminary factual findings of the forensic accountant, the

Audit Committee lacked the necessary information to effectively conduct

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interviews or interrogations. As stated above, the purpose of theInvestigation was to initially determine the true nature of the questionsconcerning the 2004 financial statements as promptly and efficiently as

practicable, and subsequently to investigate and identify the responsibleparties. This portion of the investigation is anticipated to commence

shortly.

"Nor have they terminated ..................."

A new board of directors and management has been installed at theSubsidiary. The Registrant is not in a position to remove directors from theRegistrant's Board of Directors, since this is a matter solely within thepurview of the shareholders of the Registrant.

(emphasis in bold added).

165. On April 19, 2006, as described in an e-mail from David Fishkin to Whittle,

Preston and Jack Jacobs GGK's counsel informed Fishkin that the SEC had issued a

subpoena to GGK. MP01612.

166. On July 26, 2006, Image filed Chapter 11 bankruptcy proceedings in the

United States Bankruptcy Court for the Southern District of New York. In an adversary

proceeding instituted on July 31, 2006 in connection with same, Image sought and

seeks the return of approximately $235,000 allegedly fraudulently transferred to

Armenakis from an ISE Key Bank account at the direction of Michael Radcliffe.

1. Image 's GAAP Violations

167. GAAP are those principles recognized by the accounting profession as the

conventions, rules, and procedures necessary to define accepted accounting practice at

a particular time. Those principles are the official standards adopted by the American

Institute of Certified Public Accountants ("AICPA"), a private professional association,

through three successor groups it established: the Committee on Accounting

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Procedure, the Accounting Principles Board, and the Financial Accounting Standards

Board ("FASB")

168. In order to inflate the price of Image's common stock and, in violation of

GAAP, Image falsely reported its financial results during the Class Period.

169. Image's periodic reports filed with the SEC on Forms 10-QSB and 10-KSB

during the Class Period, materially overstated Image's operating results due to the

Company's improper and fraudulent recording of revenue. Indeed, Defendants were

motivated to overstate the Company's reported revenue because revenue is often used

as a measure of a company's value, as GAAP, in FASB's Emerging Issues Task Force

("EITF") Abstract No. 99-19, notes:

How companies report revenue for goods and services they offer has

become an increasingly important issue because some investors mayvalue certain companies on a multiple of revenue rather than a multiple ofgross profit or earnings.

170. GAAP provides that revenue should not be recognized until it is realized or

realizable and earned . FASB Concepts Statement No. 5, ¶83. The conditions for

revenue recognition ordinarily are met when persuasive evidence of an arrangement

exists, delivery has occurred or services have been rendered, the vendor's price is fixed

or determinable, collectibility of the sales price is possible and when the entity has

substantially performed the obligations which entitle it to the benefits represented by the

revenue. Generally, revenue should not be recognized until an exchange has occurred

and the earnings process is complete. A transfer of risk has to occur in order to effect

an "exchange" for the purposes of revenue recognition. SEC Staff Accounting Bulletin

("SAB") Nos. 101 and 104; FASB Concept Statement No. 5; FASB Statement of

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Financial Accounting Standards ("SFAS") No. 48; and American Institute of Certified

Public Accountants ("AICPA") Statement of Position ("SOP") 97-2.

171. Image falsely represented that it complied with these accounting principles

and its publicly disclosed policies of revenue recognition during the Class Period. For

example, in its Forms 10-QSB and 10-KSB, filed with the SEC during the Class Period,

the Company disclosed the following "Critical Accounting" policy, or similar variation, for

the recognition of revenue:


172. Notwithstanding Image's assertion that it complied with GAAP, the

representations in paragraphs 118-21, 123-26, 134-36, 138-39 and 145-46 above were

materially false and misleading when made because, as the Defendants knew or

recklessly ignored that Image engaged in practices, e.g., recognizing revenues on

fictitious sales , that were in direct contravention of GAAP and the Company' s publicly

stated revenue recognition policies.

173. Image included its false and incorrect financial statements and results in

its 2003 and 2004 Forms 10-KSB and in periodic reports filed during 2004 and 2005 on

Form 10-QSB. These reports and filings falsely represented that the financial

information presented therein was a fair statement of Image's financial results and that

the results were prepared in accordance with GAAP.

174. These representations were false and misleading as to the financial

information reported, as such financial information was not prepared in conformity with

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GAAP, nor was the financial information a "fair representation " of Image ' s financial

condition and operations, causing the financial results to be presented in violation of

GAAP and SEC rules.

175. Regulation S-X (17 C.F.R. §2120.4-01(a)(1)) states that financial

statements filed with the SEC which are not prepared in compliance with GAAP are

presumed to be misleading and inaccurate. Regulation S-X requires that interim

financial statements must also comply with GAAP, with the exception that interim

financial statements need not include disclosures that would be duplicative of

disclosures accompanying annual financial statements.

176. Management is responsible for preparing financial statements that

conform with GAAP . As noted by the AICPA professional standards , "management is

responsible for adopting sound accounting policies.. .The entity' s transactions and the

related assets, liabilities and equity are within the direct knowledge and control of

management." The standards go on to state that the "fair presentation of financial

statements in conformity with Generally Accepted Accounting Principles is an implicit

and integral part of management responsibility."

177. The Company's announced financial results were in violation of GAAP, the

Company's own announced revenue recognition policies, and the following fundamental

accounting principles:

(a) The principle that interim financial reporting should be based upon thesame accounting principles and practices used to prepare annual financialstatements (APB No. 28, 110);

(b) The principle that financial reporting should provide information that isuseful to present to potential investors and creditors and other users inmaking rational investment, credit, and similar decisions (FASB Statementof Concepts No. 1, ¶34);



(c) The principle that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and

effects of transactions, events, and circumstances that change resources

and claims to those resources (FASB Statement of Concepts No. 1, ¶40);

(d) The principle that financial reporting should provide information about an

enterprise's financial performance during a period. Investors and creditors

often use information about the past to help in assessing the prospects of

an enterprise. Thus, although investment and credit decisions reflect

investors' expectations about future enterprise performance, those

expectations are commonly based at least partly on evaluations of past

enterprise performance (FASB Statement of Concepts No. 1, ¶42);

(e) The principle that financial reporting should provide information about how

management of an enterprise has discharged its stewardship

responsibility to owners (stockholders) for the use of enterprise resources

entrusted to it. To the extent that management offers securities of the

enterprise to the public, it voluntarily accepts wider responsibilities for the

accountability to prospective investors and the public in general (FASB

Statement of Concepts No. 1, ¶50);

(f) The principle that financial reporting should be reliable in that it representswhat it purports to represent (FASB Statement of Concepts No. 2, 7%58-59);

(g) The principle of completeness, meaning that nothing is left out of theinformation that may be necessary to insure that it validly representsunderlying events and conditions (FASB Statement of Concepts No. 2,¶79); and

(h) The principle that conservatism be used as a prudent reaction to

uncertainty to try to ensure that uncertainties and risks inherent in

business situations are adequately considered. The best way to avoid

injury to investors is to try to ensure that what is reported represents what

it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).

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J. GGK's Participation in the Fraud

178. Plaintiffs incorporate by reference all allegations above insofar as they

relate to GGK's materially false and misleading audit opinions concerning Image's year

ending 2004 financial statements as if fully set forth herein.

179. In performing its audit on Image's financial statements, Defendant GGK

was required by GAAS, as stated in AU §380, to discuss the following matters with

Image 's Audit Committee:

(a) The selection of and changes in significant accounting policies ortheir application;

(b) The effect of Image ' s accounting policies on revenue recognition;

(c) GGK's judgments about the quality , not just the acceptability, ofImage ' s accounting principles as applied in its financial reporting;

(d) Any significant unusual transactions;

(e) Any material financial statement misstatement.

180. During the Class Period, GGK issued a false and misleading unqualified

audit report on the Company's year ending 2004 financial statements, which stated that

Image's financial statements were presented in conformity with GAAP and that GGK's

audit was performed in accordance with GAAS. This audit report was filed with the SEC

in Image's Form 10-KSB for the year ending 2004.

181. In issuing its unqualified audit opinion regarding Image's year ending 2004

financial statements during the Class Period, GGK knew or recklessly disregarded that

such financial statements violated GAAP and were materially false and misleading.

182. Indeed, Image's accounting records, including invoices supporting 2004

sales, raised numerous red flags that alerted, or should have alerted, in the absence of



extreme recklessness, GGK of the fraud perpetrated by the Company's management.

See, e.g., ¶¶ 54,56-59, 70-84.

183. Significantly, although Image's own revenue recognition policies provided

that "[r]evenue is recognized at shipment" or "upon delivery," ISE had no shipping

documentation for most of its purported 2004 sales. See, e.g., %171-73, 75-81, 83,

supra. Such sales included, (1) all but $29,880 of the $244,570 Fine Art Wholesalers

2004 sales; (2) the $300,000 2004 Gorsky Fine Arts sales; (3) the $2.5 million Triumph

Sports 2004 sales; (4) the $250,000 2004 All Star Entertainment sales; (5) the $125,000

2004 LH Enterprises sales; (6) the $330,750 Raintree, Inc. 2004 sales; (7) the $125,000

2004 Garfield Sports sales; and (8) the $90,868 2004 Southwest sales. Id. In all, over

$4 million of the Company's $6 million in sales lacked proper shipping documentation.

Id.

184. Moreover, many of the purported sales were made to purported customers

that had no knowledge of same . See, e . g., Complaint at ¶¶ 54-57, 71.. Purported sales

were also made to Company insiders. Obviously misapplied remittances of purported

payments on invoices came from Company insiders , e.g., directors Gononsky and

Armenakis and H . E. Capital , as well . In all, MP&S could not confirm the validity of

nearly all of the Company's 2004 revenues.

185. Indeed , the suspicious nature and incompleteness of the Company's

accounting records and supporting documents was obvious , as CEO Preston observed

on many occasions.

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186. For example, in a November 26, 2005 e-mail from Michael Preston to

Defendant Sinclair, Preston highlighted the suspicious nature of some of the invoices

that should have alerted GGK to the Company's fraud:

So far as concerns the invoices you sent me, I have the followingobservations:

• Some of the invoices date back to March, 2004. Is that right?When did we acquire the MDK Sports inventory and set up ISE?

• There is only one invoice relating to 2005 (for $29K) - our ARSshow that we made sales to FAW of $327K in Q1. Where are theother 2005 invoices?

• There are invoices for $364K in June and another for $168K inAugust that look very fishy. There are no quantities but they arehuge amounts that don't appear on the outstanding balance. Itstretches credulity to believe that FAW bought $252K of paintingsof Jack Nicklaus alone with an invoice that doesn't show quantity orprice per unit. Similarly, the $168K purchase of the Ali painting(s)seems odd; the quantity is shown as "'I", which would make this arather expensive piece of art at wholesale (retail at $1 M?).

• The smaller invoices also look odd, with a lot of round sums and nodescriptions.

(emphasis added).

187. And, in a February 6, 2006 e-mail from Steven Henning of MP&S to

Michael Preston, Derick Sinclair and David Whittle, an Image director, Henning

commented on the obvious lack of detail in the documentation supporting Image sales:

As of this afternoon, we have reviewed all of the invoices, account detailsand bank statements that Derick has provided us thus far. Once again,we have noted issues regarding a lack of detail on the customer invoices.Specifically, none of the Southwest invoices contained addresses in the"Ship to" field. These invoices also lacked detailed product descriptions.



188. The conduct of GGK was particularly inexcusable given that all of Image's

purported sales were concentrated in a small number of purported customers, twelve,

and involved only 30 invoices.

189. In a March 25, 2006 e-mail, Preston commented to David Fishkin

concerning the woefully inadequate audit performed by GGK:

Just for the record, I don't care whether GGK hits the roof or not. Theywere absolutely delinquent. A first-year audit clerk should have pickedup on the sheer improbability of the invoicing pattern which in turnshould have led to enquiries that would have picked up the fraudthere and then.

(emphasis added).

190. The sheer enormity of the fraud together with the numerous red flags

alleged herein should have alerted GGK to the Company's fraud upon only a cursory

investigation. In fact, as stated in an e-mail from March 28, 2006 from David Fishkin,

Image's attorney, to Michael Preston and David Whittle:

John Huber [GGK's counsel and former director of the SEC Division ofEnforcement] said this [the Company's fraud] is one of the five worstcases he has ever seen.

191. Nevertheless, GGK ignored the numerous red flags that did alert, or

should have alerted, GGK to the Company's fraud and issued an unqualified opinion on

the Company's false and misleading financial statements.

192. As alleged in detail here, Image's financial statements and financial

reporting during the Class Period were materially false and misleading in at least the

following respects:

(a) Image's revenue recognition practices did not comply with GAAP;

(b) Image failed to comply with its publicly disclosed revenue recognitionpolicies;



(c) Image recognized revenue for fictitious sales and misapplied fundsreceived through restricted stock sales as payments against receivables.

193. GGK issued an unqualified audit opinion on Image's 2004 year-end

financial statements when it knew, or recklessly ignored, that the Company's revenue

recognition practices violated GAAP.

194. Moreover, in certifying Image's year ending 2004 financial statements,

GGK falsely represented that its audit was conducted in accordance with GAAS. These

statements were materially false and misleading in that the audit conducted by GGK

was knowingly or recklessly not performed in accordance with GAAS in the following

respects:

a. GGK violated GAAS Standard of Reporting No. 1 that requires the auditreport to state whether the financial statements are presented inaccordance with GAAP. GGK's opinion falsely represented that Image'syear ending 2004 financial statements were presented in conformity withGAAP when they were not for the reasons herein alleged;

b. GGK violated GAAS Standard of Reporting No. 4 which requires that,when an opinion on the financial statements as a whole cannot beexpressed, the reasons therefore must be stated. GGK was required tohave stated that no opinion could be issued by it on Image's year ending2004 financial statements or issued an adverse opinion stating that suchfinancial statements were not fairly presented;

c. GGK violated GAAS and the standards set forth in SAS No. 1 and SASNo. 53 by, among other things, failing to adequately plan its audit andproperly supervise the work of assistants and to establish and carry outprocedures reasonably designed to search for and detect the existence oferrors and irregularities which would have a material effect upon thefinancial statements;

d. GGK violated GAAS General Standard No. 3 that requires that dueprofessional care must be exercised by the auditor in the performance ofthe audit and the preparation of the audit report;

e. GGK violated GAAS Standard of Field Work No. 2 which requires theauditor to make a proper study of existing internal controls, including

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accounting, financial and managerial controls, to determine whetherreliance thereon was justified, and if such controls are not reliable, toexpand the nature and scope of the auditing procedures to be applied.The standard provides that a sufficient understanding of an entity's internalcontrol structure be obtained to adequately plan the audit and todetermine the nature, timing and extent of tests to be performed. AU§150.02. In all audits, the auditor should perform procedures to obtain asufficient understanding of three elements of an entity's internal controlstructure: the control environment, the accounting system, and controlprocedures. AU §319.02. The control environment, which includesmanagement's integrity and ethical values, is the foundation of internalcontrol and provides discipline, structure and sets the tone of anorganization. After obtaining an understanding of an entity's internalcontrol structure, the auditor assesses the entity's control risk. AU§319.02. Control risk is the risk that a material misstatement in anassertion by management contained in a company's financial statementswill not be prevented or detected on a timely basis by an entity's internalcontrol structure policies or procedures. AU §319.29. The ultimatepurpose of assessing control risk is to aid the auditor in evaluating the riskthat material misstatements exist in the financial statements. AU §319.61.The failure to properly evaluate the Company's internal control proceduresassociated with the recognition of revenue and uncollectible accountsreceivable was a violation of GAAS;

f. GGK violated Standard of Field Work No. 3, which requires sufficientcompetent evidential matter to be obtained through inspection,observation, inquiries and confirmations to afford a reasonable basis foran opinion regarding the financial statements under audit; GGK knew orrecklessly disregarded that it did not obtain sufficient competent evidentialmatter as to Image's reported Class Period revenues, fictitiousreceivables, the source of payments applied to such receivables orfinancial statement disclosures. Indeed, Image CEO Michael Prestonquestioned the propriety of the Company's revenue recognition practicesafter only a cursory review and without the benefit of a detailed audit orreview of the Company's financial statements;

g. GGK violated auditing standard AU §342 in that it failed to perform theaudit procedure required to determine that Image's accounting estimates,including the Company's reserve for uncollectible accounts receivable,were adequate. AU §342 provides that in establishing the reasonablenessof an accounting estimate, the auditor normally concentrates on keyfactors and assumptions, including the significance of the accountingestimate and its susceptibility to misstatement and bias. As noted above,GAAP requires an entity's bad debt reserve to reflect, at a given point intime, the estimated probable loss inherent in the entity's accountsreceivable and further provides that events that occur subsequent to the

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balance sheet date, but prior to the issuance of the financial statements,provide additional evidence with respect to conditions that existed on thebalance sheet date and affect the estimates inherent in the process ofpreparing financial statements. Nonetheless, during the Class Period,GGK falsely certified that Image's receivables, were fairly stated, whenthey were not, as GGK knew or recklessly disregarded;

h. GGK violated auditing standard AU §330 which requires auditors toproperly confirm accounts receivables . SAS No. 67 specifically focuseson the confirmation process and outlines the four tenets of performing a"good " confirmation . They are: ( 1) direct communication with the thirdparty; (2) professional skepticism ; ( 3) respondent free from bias; and (4)maintaining control . Auditors that rely upon contact information providedby the client for the purposes of the confirmation procedures , rather thanindependently attaining or authenticating that information violate the fourtenets of SAS No. 67. Professional skepticism and due professional careare lacking when relying solely on the client for the contact information;control is lost when the contact information is not independentlyauthenticated and/or with no attempt made to validate the respondent'sfreedom from a bias . Had GGK properly confirmed receivables , it wouldhave learned , if it did not already know , about Image ' s fictitious sales andcorresponding receivables;

i. GGK violated auditing standard AU §508 which requires auditors to issuea qualified or adverse opinion when an inappropriate accounting principlecauses a client's financial statements to be materially misstated.

195. GGK's audit opinion , which represented that Image ' s year ending 2004

financial statements were presented in conformity with GAAP, were materially false and

misleading because GGK knew or was reckless in not knowing that such financial

statements violated the principles of fair reporting and GAAP. In the course of

rendering its unqualified audit certification on GGK's 2004 financial statements, GGK

knew it was required by GAAS to obtain reasonable assurance about whether the

financial statements were free of material misstatement and was required to adhere to

each of the herein described standards and principles of GAAS , including the

requirement that the financial statements comply in all material respects with GAAP.

GGK also was required by GAAS to exercise professional skepticism, a process that



requires a questioning mind, including an increased recognition of the need to

corroborate management representations and explanations . GGK, in issuing its

unqualified opinion, knew or recklessly disregarded that by doing so it was engaging in

gross departures from GAAS, thus making its opinions false, and issued such

certification knowing or recklessly disregarding that GAAS had been violated.

196. As a result of its failure to accurately report on Image's Class Period

financial statements , GGK utterly failed in its role as an auditor as defined by the SEC.

SEC Accounting Series Release No. 296, Relationships Between Registrants and

Independent Accountants, Securities Act Release No. 6341, Exchange Act Release No.

18044, states in part:

Moreover, the capital formation process depends in large part on theconfidence of investors in financial reporting. An investor's willingness tocommit his capital to an impersonal market is dependent on the availabilityof accurate, material and timely information regarding the corporations inwhich he has invested or proposes to invest. The quality of informationdisseminated in the securities markets and the continuing conviction ofindividual investors that such information is reliable are thus key to theformation and effective allocation of capital. Accordingly, the auditfunction must be meaningfully performed and the accountants'independence not compromised. The auditor must be free to decidequestions against his client's interests if his independent professionaljudgment compels that result.

VI. FRAUDULENT SCHEME AND COURSE OF BUSINESS

197. The market for Image's securities was open , well-developed and efficient

at all relevant times. As a result of the Defendants' materially false and misleading

statements and failures to disclose, Image's securities traded at artificially inflated prices

during the Class Period. Plaintiffs and the other members of the Class purchased or

otherwise acquired Image securities relying upon the integrity of the market price of



Image's securities and market information relating to Image, and have been damaged

thereby.

198. During the Class Period, Defendants materially misled the investing public,

thereby inflating the price of Image's securities, by publicly issuing false and misleading

statements and omitting to disclose material facts necessary to make Defendants'

statements, as set forth herein, not false and misleading. Such statements and

omissions were materially false and misleading in that they failed to disclose material,

adverse information and misrepresented the truth about the Company, its business and

operations, as alleged herein.

199. At all relevant times , the material misrepresentations and omissions

particularized in this Complaint directly or proximately caused or were a substantial

contributing cause of the damages sustained by Plaintiffs and the other members of the

Class. As described herein, during the Class Period Defendants made or caused to be

made a series of materially false or misleading statements about Image's business,

prospects and operations. These material misstatements and omissions had the cause

and effect of creating in the market an unrealistically positive assessment of Image and

its business, prospects and operations, thus causing the Company's securities to be

overvalued and artificially inflated at all relevant times. Defendants' materially false and

misleading statements during the Class Period resulted in Plaintiffs and the other

members of the Class purchasing the Company's securities at artificially inflated prices,

thus causing the damages complained of herein.



VII. APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD -ON-THE-MARKET DOCTRINE

200. At all relevant times, the market for Image's securities was efficient for the

following reasons, among others:

a. Image's stock met the requirements for listing, and was listed and

traded on the NASDAQ over the counter bulletin Board, a highly efficient and automated

market;

b. As a regulated issuer, Image filed periodic public reports with the

SEC and the NASDAQ;

c. Image regularly communicated with public investors via

established market communication mechanisms, including through regular

disseminations of press releases on the national circuits of major newswire services and

through other wide-ranging public disclosures, such as communications with the

financial press and other similar reporting services; and

d. Image was followed by securities analysts who wrote reports that

were distributed. Each of these reports was publicly available and entered the public

marketplace.

201. As a result of the foregoing, the market for Image's securities promptly

digested current information regarding Image from all publicly available sources and

reflected such information in Image's stock price. Under these circumstances, all

purchasers of Image's securities during the Class Period suffered similar injury through

their purchase of Image's securities at artificially inflated prices and a presumption of

reliance applies.

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COUNT I

Violation Of Section 10(b) OfThe Exchange Act And Rule 10b-5

Promulgated Thereunder Against All Defendants

202. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

203. Throughout the Class Period, Image and the Individual Defendants carried

out a plan, scheme, and course of conduct that was intended to and did: (i) deceive the

investing public, including Plaintiffs and the other Class members, as alleged herein; (ii)

artificially inflate and maintain the market price of Image's securities; and (iii) cause

Plaintiffs and the other members of the Class to purchase Image's securities at

artificially inflated prices. In furtherance of this unlawful scheme and course of conduct,

Defendants took the actions set forth herein.

204. Defendants (a) employed devices, schemes, and artifices to defraud; (b)

made untrue statements of material fact and/or omitted to state material facts necessary

to make the statements not misleading; and (c) engaged in acts, practices, and a

course of business that operated as a fraud and deceit upon the purchasers of the

Company's securities in an effort to maintain artificially high market prices for Image's

securities in violation of Section 10(b) of the Exchange Act and Rule 1 Ob-5. Defendants

are sued either as primary participants in the wrongful and illegal conduct charged

herein or as controlling persons as alleged below.

205. In addition to the duties of full disclosure imposed on Defendants as a

result of their making of affirmative statements and reports, or participation in the making

of affirmative statements and reports to the investing public, Defendants had a duty to



promptly disseminate truthful information that would be material to investors in

compliance with the integrated disclosure provisions of the SEC as embodied in SEC

Regulation S-X (17 C.F.R. § 210.01 et seq.) and Regulation S-K (17 C.F.R. § 229.10 et

seq.) and other SEC regulations, including accurate and truthful information with respect

to the Company's operations, financial condition, and earnings so that the market price

of the Company's securities would be based on truthful , complete, and accurate

information.

206. Image and the Individual Defendants, individually and in concert, directly

and indirectly, by the use, means or instrumentalities of interstate commerce and/or of

the mails, engaged and participated in a continuous course of conduct to conceal

material, adverse information about the business, operations, and future prospects of

Image as specified herein.

207. Defendants employed devices, schemes and artifices to defraud, while in

possession of material, adverse, non-public information and engaged in acts, practices,

and a course of conduct as alleged herein in an effort to assure investors of Image's

value and performance, which included the making of, or the participation in the making

of, untrue statements of material facts and omitting to state material facts necessary in

order to make the statements made about Image and its business operations , financial

performance and future prospects in the light of the circumstances under which they

were made, not misleading, as set forth more particularly herein, and engaged in

transactions, practices and a course of business that operated as a fraud and deceit

upon the purchasers of Image's securities during the Class Period.

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208. The Individual Defendants' primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high-level officers

and/or directors at the Company during the Class Period; (ii) the Individual Defendants

were privy to and participated in the creation, development and reporting of the

Company's internal budgets, plans, projections and/or reports; and/or (iii) the Individual

Defendants were aware of the Company's dissemination of information to the investing

public that they knew or recklessly disregarded was materially false and misleading.

209. Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with reckless disregard for the truth

in that they failed to ascertain and to disclose such facts, even though such facts were

available to them. Such Defendants' material misrepresentations and/or omissions

were done knowingly or recklessly and for the purpose and effect of concealing Image's

operating condition, financial performance and future business prospects from the

investing public and supporting the artificially inflated price of its securities. As

demonstrated by Defendants' overstatements and misstatements of the Company's

business, operations, revenues and earnings throughout the Class Period, Defendants,

if they did not have actual knowledge of the misrepresentations and omissions alleged,

were reckless in failing to obtain such knowledge by deliberately refraining from taking

those steps necessary to discover whether those statements were false or misleading.

210. As a result of the dissemination of the materially false and misleading

information and failure to disclose material facts, as set forth above, the market price of

Image's securities was artificially inflated during the Class Period. In ignorance of the

fact that market prices of Image's publicly-traded securities were artificially inflated, and



relying directly or indirectly on the false and misleading statements made by

Defendants, or upon the integrity of the market in which the securities trade, and/or on

the absence of material, adverse information that was known to or recklessly

disregarded by Defendants but not disclosed in public statements by Defendants during

the Class Period, Plaintiffs and the other members of the Class acquired Image

securities during the Class Period at artificially high prices and were damaged thereby.

211. At the time of said misrepresentations and omissions , Plaintiffs and the

other members of the Class were ignorant of their falsity, and believed them to be true.

Had Plaintiffs and the other members of the Class and the marketplace known of the

true financial condition, financial performance and business prospects of Image, which

were not disclosed by Defendants, Plaintiffs and the other members of the Class would

not have purchased or otherwise acquired their Image securities, or, if they had

acquired such securities during the Class Period, they would not have done so at the

artificially inflated prices that they paid.

212. By virtue of the foregoing, Defendants have violated Section 10(b) of the

Exchange Act and SEC Rule 1 Ob-5 promulgated thereunder.

213. As a direct and proximate result of Defendants' wrongful conduct,

Plaintiffs and the other members of the Class suffered damages in connection with their

respective purchases and sales of the Company's securities during the Class Period.

COUNT II

Violation Of Section 20(a) OfThe Exchange Act Against the Individual Defendants

214. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.



215. The Individual Defendants acted as controlling persons of Image within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-

level positions, and their ownership and contractual rights, participation in and/or

awareness of the Company's operations and/or intimate knowledge of the statements

filed by the Company with the SEC and disseminated to the investing public, the

Individual Defendants had the power to influence and control and did influence and

control, directly or indirectly, the decision-making of the Company, including the content

and dissemination of the various statements that Plaintiffs contend are false and

misleading. The Individual Defendants were provided with or had unlimited access to

copies of the Company's reports, press releases, public filings, and other statements

alleged by Plaintiffs to be misleading prior to and/or shortly after these statements were

issued and had the ability to prevent the issuance of the statements or cause the

statements to be corrected.

216. In particular, the Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, are presumed

to have had the power to control or influence the particular transactions giving rise to

the securities violations as alleged herein, and exercised the same.

217. As set forth above, Defendants violated Section 10(b) and Rule 10b-5 by

their acts and omissions as alleged in this Complaint. By virtue of their positions as

controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the

Exchange Act. As a direct and proximate result of Image's and the Individual

Defendants' wrongful conduct, Plaintiffs and the other members of the Class suffered



damages in connection with their purchases of the Company's securities during the

Class Period.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for relief and judgment , as follows:

A. Determining that this action is a proper class action under Rule 23 of the

Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of Plaintiffs and the other

members of the Class against all Defendants for all damages sustained as a result of

Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demands a trial by jury.

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Dated: January 3, 2007 Respectfully submitted,

Willem B. Federman (WBF9124)Attorneys for PlaintiffsFEDERMAN & SHERWOOD10205 N. Pennsylvania Ave.Oklahoma City, OK 73120Telephone: (405) 235-1560Fax: (405) [email protected]

-and-

2926 Maple Ave., Suite 200Dallas, TX 75201


CERTIFICATE OF SERVICE

This is to certify that on January 3, 2007, a true and correct copy of the foregoingwas mailed , via U.S. mail to the following:

Peter. D. StergiosMcCarter & English LLP245 Park Avenue, 27th FloorNew York, New York 10167Telephone: (212) 609-6800Facsimile: (212) 609-6921

Nicholas F. KajonStevens & Lee485 Madison Avenue, 20th FloorNew York, New York 10022Telephone: (212) 319-8500Facsimile: (212)319-8505

iam B. Federman