IMRIS 6-K Current report (foreign)

Exhibit #99.1

CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

August 9, 2011

(Date Issued)

IMRIS Inc.
100-1370 Sony Place	TF. 1.888.304.0114
Winnipeg, Manitoba	T. 204.480.7070
Canada R3T 1N5	F. 204.480.7071	www.imris.com

IMRIS INC.
Consolidated Balance Sheets
Expressed in US $000’s except share and per share data,
and except as otherwise indicated
(Unaudited)
	June 30,			December 31,
	2011			2010
				(Note 2)
Assets
Current assets
Cash and cash equivalents (note 5)	$	45,816		$	60,773
Accounts receivable (note 6)		13,766			15,874
Unbilled receivables		11,985			7,152
Inventory (note 7)		4,499			5,283
Prepaid expenses		2,631			2,013
		78,697			91,095
Advance payment (note 19)		1,101			-
Property, plant, and equipment (note 8)		5,970			6,424
Goodwill		6,498			6,498
Intangibles (note 9)		11,223			10,936
		17,721			17,434
Total assets	$	103,489		$	114,953
Liabilities and Shareholders' equity
Current liabilities
Accounts payable and accrued liabilities (note 10)	$	12,809		$	15,100
Deferred revenue		3,854			6,888
		16,663			21,988
Shareholders' equity (note 11)
Share capital
Common Shares, unlimited number of voting common shares authorized; 44,626,951 and 44,113,783 issued and outstanding at June 30, 2011 and December 31, 2010 respectively		143,933			143,050
Additional paid-in capital		3,674			3,176
Deficit		(60,520	)		(53,059	)
Accumulated other comprehensive loss		(261	)		(202	)
		86,826			92,965
Commitments and contingencies (note 14)
Total liabilities and shareholders' equity	$	103,489		$	114,953

See accompanying notes

IMRIS INC.
Consolidated Statements of Operations
Expressed in US $000’s except share and per share data,
and except as otherwise indicated
(Unaudited)
	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
				(Note 2)						(Note 2)
Sales	$	18,881		$	16,633		$	29,938		$	28,690
Cost of sales		12,560			10,118			19,164			17,289
Gross profit		6,321			6,515			10,774			11,401
Operating expenses
Administrative		2,559			2,070			4,908			3,887
Sales and marketing		2,325			2,460			4,444			4,149
Customer support and operations		1,685			1,351			3,484			2,500
Research and development		1,973			1,425			4,320			2,650
Amortization		871			864			1,725			1,681
Total operating expenses		9,413			8,170			18,881			14,867
Operating loss before the following		(3,092	)		(1,655	)		(8,107	)		(3,466	)
Other income (expense)
Foreign exchange gain (loss)		210			142			615			14
Interest income		9			6			31			10
Gain (loss) on embedded derivative		-			84			-			(38	)
Total other income (expense)		219			232			646			(14	)
Loss before taxes		(2,873	)		(1,423	)		(7,461	)		(3,480	)
Income taxes		-			-			-			-
Loss for the period	$	(2,873	)	$	(1,423	)	$	(7,461	)	$	(3,480	)
Weighted average number of common shares outstanding		44,600,721			32,870,657			44,500,628			32,489,892
Basic and diluted loss per share	$	(0.06	)	$	(0.04	)	$	(0.17	)	$	(0.11	)

See accompanying notes

IMRIS INC.
Consolidated Statements of Shareholders Equity and Other Comprehensive Loss
Expressed in US $000’s except share and per share data,
and except as otherwise indicated
(Unaudited)
											Accumlated
					Additional						Other
	Common Shares				Paid-in						Comprehensive
	Shares		Amount		Capital			Deficit			Loss			Total
Balances at December 31, 2009		31,082,377	$	82,894	$	2,158		$	(51,293	)	$	(3,819	)	$	29,940
Issuance of stock on exercise of employee stock options		331,406		517											517
Stock issued on acquisition of NASL		1,600,000		9,680											9,680
Stock issued for cash		11,100,000		49,959											49,959
Stock based compensation expense for the period						1,086									1,086
Amount credited to share capital related to options issued						(68	)								(68	)
Loss for the period									(1,766	)					(1,766	)
Currency translation adjustment												3,617			3,617
Balances at December 31, 2010		44,113,783	$	143,050	$	3,176		$	(53,059	)	$	(202	)	$	92,965
Issuance of stock on exercise of employee stock options		513,168		883											883
Stock based compensation expense for the period						681									681
Amount credited to share capital related to options issued						(183	)								(183	)
Loss for the period									(7,461	)					(7,461	)
Currency translation adjustment												(59	)		(59	)
Balances at June 30, 2011		44,626,951	$	143,933	$	3,674		$	(60,520	)	$	(261	)	$	86,826

Total comprehensive loss for the six months ended June 30, 2011 is $7,520 which is comprised of a loss of $7,461 from operations and a currency translation adjustment of $59.   Total comprehensive income for the previous period is $1,851, which is comprised of a loss of $1,766 from operations and a currency translation adjustment of $3,617.

IMRIS INC.
Consolidated Statements of Cash Flows
Expressed in US $000’s except share and per share data,
and except as otherwise indicated
(Unaudited)
	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
				(Note 2)						(Note 2)
OPERATING ACTIVITIES
Loss for the period	$	(2,873	)	$	(1,423	)	$	(7,461	)	$	(3,480	)
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		871			864			1,725			1,681
Stock based compensation		370			283			681			557
Gain (loss) on embedded derivative		-			(84	)		-			38
Revenue from embedded derivative		-			(339	)		-			(339	)
Advance payment (note 19)		(1,101	)		-			(1,101	)		-
Changes in non-cash working capital items:
Accounts receivable		(2,242	)		3,096			2,108			9,104
Unbilled receivables		(3,910	)		4,953			(4,833	)		438
Inventory		1,704			(156	)		784			(138	)
Prepaid expenses		(149	)		(739	)		(618	)		(774	)
Accounts payable and accrued liabilities		3,100			(1,506	)		(2,291	)		(6,237	)
Deferred revenue		(1,476	)		(5,689	)		(3,034	)		(5,356	)
		(5,706	)		(740	)		(14,040	)		(4,506	)
FINANCING ACTIVITIES
Proceeds from issuance of share capital (net)		77			117			700			343
		77			117			700			343
INVESTING ACTIVITIES
Restricted cash		-			1,905			-			106
Acquisition of property, plant and equipment		(272	)		(264	)		(789	)		(612	)
Acquisition of intangibles		(528	)		(18	)		(775	)		(20	)
Acquisition costs for asset acquisition (note 13b)		-			(30	)		-			(172	)
Cash acquired in asset acquisition (note 13b)		-			-			-			28
		(800	)		1,593			(1,564	)		(670	)
Foreign exchange translation adjustment on cash		(5	)		(933	)		(53	)		(220	)
Decrease in cash and cash equivalents		(6,434	)		37			(14,957	)		(5,053	)
Cash and cash equivalents, beginning of period		52,250			19,631			60,773			24,721
Cash and cash equivalents, end of period	$	45,816		$	19,668		$	45,816		$	19,668
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	3		$	-		$	4		$	1
Income taxes		-			-			-			-

See accompanying notes

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

1.  DESCRIPTION OF BUSINESS

IMRIS Inc. (“IMRIS” or the “Company”) provides image guided therapy solutions that deliver timely information to clinicians during surgical or interventional procedures.  IMRIS systems incorporate multiple imaging modalities including magnetic resonance imaging (“MRI”) and fluoroscopy into fully integrated imaging suites.  The systems use a variety of patented technologies, including the capability of moving an MRI scanner to the patient, rather than having to move the patient to the scanner, while the surgery or interventional procedure is in progress.  The Company’s products include IMRISneuro for the neurosurgical market, IMRIScardio for the interventional cardiovascular market and IMRISNV for the neurovascular market.  The Company was incorporated on May 18, 2005 under the Canada Business Corporations Act.  The Company’s shares are traded on the Toronto Stock Exchange under the symbol “IM” and on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “IMRS”.

2.  CHANGES IN ACCOUNTING POLICIES

a) Change in generally accepted accounting principles

Effective January 1, 2011, the Company has adopted United States generally accepted accounting principles (“U.S. GAAP”) as its basis of accounting.  For comparative purposes the historical information included in these statements has been restated in accordance with these standards.  Certain of the comparative figures have been restated to conform to the current year presentation.

b) Change in functional currency

Effective January 1, 2011, the functional currency of the Company’s parent and several of its subsidiaries has changed.  As at January 1, 2011, the US dollar (USD) is the functional currency of IMRIS Inc. (parent) and IMRIS, Inc., the Euro is the functional currency of IMRIS Europe SPRL and IMRIS Germany GmbH, the rupee is the functional currency of IMRIS India Private Limited and the yen is the functional currency of IMRIS KK.  NeuroArm Surgical Limited has retained the Canadian dollar as its functional currency.  In accordance with ASC 830 the Company’s assets and liabilities were translated into USD as at January 1, 2011 using the exchange rate in effect on that date.  Equity transactions were translated at historical rates.  As the change took place on the first day of the fiscal year, there was no income statement or cash flow translation required.  Any exchange differences resulting from the translation are included in accumulated other comprehensive income presented in shareholders’ equity.

c) Change in reporting currency

Effective January 1, 2011, the Company adopted USD as its reporting currency.  The Company made this change as a result of its common shares being listed on the NASDAQ and a significant portion of its revenue, expenses, assets and liabilities being denominated in US dollars.  Prior to that date the Company’s consolidated financial statements were expressed in Canadian dollars.  For comparative purposes, the historical financial information included in these statements has been restated to USD using the current rate method.  Under this method, assets and liabilities are translated at the closing rate in effect at the end of these periods, revenues, expenses and cash flows are translated at average rates in effect for these periods and equity transactions are translated at historical rates.  Any exchange differences resulting from the translation are included in accumulated other comprehensive income presented in shareholders’ equity.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared by management in accordance with U.S. GAAP.  The significant accounting policies of the Company include the following:

a) Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: IMRIS, Inc. (United States), IMRIS (Europe) SPRL (Belgium), IMRIS India Private Limited (India), IMRIS KK (Japan), NeuroArm Surgical Limited (Canada) and IMRIS Germany GmbH (Germany).  All intercompany transactions and balances are eliminated on consolidation.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

b) Basis of presentation

These unaudited interim consolidated financial statements have been prepared by the Company in USD, unless where otherwise stated, and in accordance with accounting principles generally accepted in the United States.  In the opinion of management of the Company, the unaudited interim consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results for the interim periods presented, in accordance with U.S. GAAP, applied on a consistent basis.

c) Use of estimates

The preparation of financial statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Areas where management used subjective judgment include, but are not limited to, the completion percentage applied to system installations, the recognition and measurement of current and deferred income tax assets and liabilities, estimated useful lives of intangible and capital assets, investment tax credits receivable, stock-based compensation costs, assessment of inventory obsolescence and the valuation and recognition of goodwill and impairment assessments. Actual results could differ significantly from those estimates.  Changes in estimates are recorded in the accounting period in which these changes are determined.

d) Revenue recognition

The Company generates revenues from three principal activities: system sales, sales of ancillary products and services, and extended maintenance services.

Revenues for system sales are recognized on a percentage of completion basis as systems are installed.  The degree of completion is generally determined by the ratio of actual costs incurred to date to estimated total costs.  Actual costs include only those costs that are directly attributable to contract performance with respect to the revenue recognized.  Pre-contract costs are expensed unless their costs can be directly associated with a specific anticipated contract and recoverability from that contract is probable.  Any projected losses are recognized immediately.  Funds received from customers in advance of meeting the criteria for revenue recognition are recorded as deferred revenue until such time as the revenue is recognized.  Revenues recognized in advance of the criteria for invoicing to the customer are recorded as unbilled receivables where the collection of the receivable is probable.

Revenues from ancillary products and services are recognized where there is persuasive evidence of an arrangement and upon delivery or as the services are rendered, respectively.  Revenues from extended maintenance service agreements are recognized ratably over the life of the service agreement.  Revenues from both ancillary products and services and extended maintenance service agreements are based on pre-determined or determinable sales prices and are only recognized when the collection of the receivable is probable.

System sales are adjusted for the effects of the foreign currency embedded derivatives.  As of June 30, 2011 none of the Company’s outstanding contracts contained foreign currency embedded derivatives.  The net reduction to sales for the three and six months ended June 30, 2011 was $Nil (Three months and six months ended June 30, 2010 - $339).

e) Cash and cash equivalents

Cash and cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash with maturities of three months or less at the date of acquisition and generally consist of bank deposits and guaranteed investment certificates.  Cash equivalents are carried at cost.  For cash equivalents, fair value approximates cost because these instruments are typically subject to an insignificant risk of a change in value.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

f) Accounts receivable and allowance for doubtful accounts

The accounts receivable balance reflects all amounts invoiced and is presented net of any allowance for doubtful accounts.  The Company evaluates the collectability of its accounts receivable on a periodic basis by monitoring the financial condition of its customers, reviewing historical trends and assessing economic circumstances.  When collectability becomes uncertain the Company estimates an allowance for doubtful accounts.  Due to the nature of its client base, the Company has not yet had to recognize any allowance for doubtful accounts.

g) Inventory

Inventories are stated at the lower of cost or market.  Cost is determined on an average cost basis and includes the cost of materials plus an allocation of production labor and overhead.  Cost of materials is based on the invoiced value of goods.  The Company determines an inventory allowance based on an estimate of obsolete inventories.

h) Property, plant, and equipment

The Company records all property, plant and equipment acquisitions at their original cost.  Recorded amounts are amortized over their estimated useful life using the straight line method at the following rates:

Computer equipment	3 years
Office furnishings and equipment	5 years
Assembly & test equipment	5 years
Demonstration suite & tradeshow equipment	3-5 years
Leasehold improvements	Lesser of their useful life and the term of lease

i) Goodwill and intangible assets

Goodwill

Goodwill represents the excess of the purchase price over fair value of the identifiable net tangible assets and intangible assets purchased at the date of acquisition.  Goodwill is not amortized, but rather it is tested for impairment annually or more frequently if an event occurs or circumstances change that indicates that goodwill might be impaired.

The impairment test for goodwill is a two-step process.  Step one consists of a comparison of the fair value of its reporting units against their carrying amount, including the goodwill.  The Company determines the fair value of the reporting unit based on the present value of the estimated future cash flows of the reporting unit.  If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting unit’s goodwill against the carrying amount of the reporting units goodwill.  Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss.

Patents

Patents are accounted for at cost.  Amortization is based on the estimated useful life which is generally the life of the patent, using the straight line method.  The average remaining life of the patents at the time of acquisition in May 2005 was 11 years.  The patents acquired in the NeuroArm Surgical Limited acquisition (note 13) in February, 2010 are amortized over the estimated useful lives which range between 13-18 years.

Computer software

Computer software is accounted for at cost.  Amortization is based on the estimated useful life which is generally three years, using the straight line method.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

j) Impairment of long lived and intangible assets

Management evaluates the carrying value of its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  To the extent the estimated undiscounted future net cash inflows attributable to the asset are less than the carrying amount, an impairment loss is recognized.  The amount of impairment loss to be recorded is the difference between the assets’ carrying value and the net discounted estimated future cash flows.

k) Research and development

Research and development costs are expensed as incurred.  Costs related to the development of software are capitalized beginning when a product’s technological feasibility has been established and ending when the product is available for general release to the customer.  Software development costs are capitalized and amortized over the useful life of the technology.  To date the Company has expensed all research and development costs.

l) Investment tax credits

The Company is entitled to Canadian federal and provincial investment tax credits, which are earned as a percentage of eligible current and capital research and development expenditures incurred in each taxation year.  Investment tax credits are included in the determination of the Company’s deferred tax assets.  The Company recognizes a corresponding valuation allowance against any deferred asset balance resulting in no impact to the consolidated financial statements.

Investment tax credits are recognized when realization of the tax credits is more likely than not either as an item on the statement of loss in the Company’s income tax provision or as a reduction in capital assets depending on where the original costs which gave rise to the tax credits are recorded.

m) Stock-based compensation

The Company measures compensation expense at the date of granting of stock options to employees and recognizes the expense based on their fair values determined in accordance with ASC 718.  The fair value of options is determined using the Black-Scholes option pricing model.  This model takes into consideration estimated forfeitures, determined on a historic basis, at the time of grant to determine the number of awards that will ultimately vest.  The fair value amount is amortized to earnings over the vesting period, with the related credit recorded as additional paid-in capital.  Upon exercise of these stock options, amounts previously credited to additional paid-in capital are reversed and credited to share capital.

n) Income taxes

The Company follows the liability method of accounting for income taxes.  Under this method, deferred taxes are recognized based on the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax basis, using the enacted income tax rates for the years in which the differences are expected to be realized or settled.  A valuation allowance is provided to the extent that it is not more likely than not that the deferred tax assets will be realized.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

o) Foreign currency translation

All monetary assets and liabilities denominated in currencies other than each subsidiary’s functional currency are translated at the applicable period end reporting date exchange rates.  Non-monetary assets are translated at the exchange rates prevailing when the asset was acquired.  Revenue and expenses are translated at average exchange rates for the period.  Exchange gains or losses on translation of foreign currencies transactions are included in the Consolidated Statements of Operations.

Translation adjustments occurring as a result of the consolidation of subsidiaries whose functional currency is not USD are recorded as a separate component of accumulated other comprehensive income.

p) Derivative financial instruments

The Company recognizes an asset or liability representing the fair value of the embedded derivatives when it sells products to customers located in foreign countries and the contract currency is denominated in the functional currency of neither of the contracting parties.  The embedded derivative arises on initial execution of the contract and is active until the contract is closed with the fair value being recalculated throughout the life of the contract.  Valuation of the embedded derivative is derived using observable forward currency rates combined with estimated timing and magnitude of contractual cash flows pertaining to specific sales contracts.  Changes in the fair value of the embedded derivative are recognized in income during the period in which the changes occur.  The fair value of the embedded derivative is calculated using the credit adjusted discount rate because contracts can be active for two or more years.  As at June 30, 2011 there are no embedded derivative assets or liabilities recognized in the financial statements.  As at June 30, 2010 there was an embedded derivative liability of $84.

4. RECENTLY ISSUED PRONOUNCEMENTS

OnMay 12, 2011, the FASB issued authoritative guidance (ASU 2011-04) for fair value measurement and disclosure.  This guidance is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single converged fair value framework on how to measure fair value and on what disclosures to provide about fair value measurements.  Determining when to measure fair value is not within the scope of this new guidance.  The new guidance is largely consistent with existing fair value measurement principles currently included in in U.S. GAAP (ASC 820); however, it does present amendments which clarify existing fair value measurements and disclosure requirements.  Amendments include such areas as clarifying the application of the highest and best use and valuation premise concepts and expanded disclosure of quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.  The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2011.  The Company will adopt the guidance in the first quarter of fiscal 2012 and is currently evaluating the impact that adoption of this guidance will have on its results of operations, financial condition and disclosures.

On June 16, 2011, the FASB issued authoritative guidance (ASU 2011-05), which revises the manner in which entities present comprehensive income in their financial statements.  The new guidance removes the presentation options currently included in U.S. GAAP (ASC 220) and requires entities to report components of comprehensive income in either: 1) a continuous statement of comprehensive income or 2) two separate but consecutive statements.  The authoritative guidance does not change the items that must be reported in other comprehensive income.  The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2011.  The Company will adopt the guidance in the first quarter of fiscal 2012 and is currently evaluating the impact that adoption of this guidance will have on its disclosures.

5. CASH AND CASH EQUIVALENTS

	June 30, 2011		December 31, 2010
Cash	$	45,816	$	53,239
Cash equivalents		-		7,534
	$	45,816	$	60,773

Cash equivalents consist of investments in short term bank deposits.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

6.  ACCOUNTS RECEIVABLE

	June 30, 2011		December 31, 2010
Accounts receivable, trade	$	13,726	$	15,867
Commodity taxes receivable		34		-
Interest receivable		6		7
	$	13,766	$	15,874

The carrying value of the Company’s trade accounts receivable is as noted above.  For the three and six months ended June 30, 2011 the Company has not recognized any allowance for doubtful accounts or any corresponding amount to bad debt expense for the period (Three and six months ended June 30, 2010 - $Nil).

7. INVENTORY

	June 30, 2011		December 31, 2010
Materials	$	3,863	$	4,844
Work in progress		636		439
	$	4,499	$	5,283

During the three and six months ended June 30, 2011, the Company recorded inventory write-downs of $50 and $96, respectively, for slow moving or obsolete inventory (Three and six months ended June 30, 2010 - $Nil and $120, respectively).

8. PROPERTY, PLANT, AND EQUIPMENT

	June 30, 2011						December 31, 2010
	Cost		Accumulated amortization		Net book value		Cost		Accumulated amortization		Net book value
Computer equipment	$	1,264	$	835	$	429	$	1,081	$	724	$	357
Office furnishings & equipment		721		504		217		685		449		236
Assembly & test equipment		10,461		6,010		4,451		10,207		5,195		5,012
Demonstration suite & tradeshow equipment		1,785		1,096		689		1,558		881		677
Leasehold improvements		413		307		106		423		281		142
Assets under construction		78		-		78		-		-		-
	$	14,722	$	8,752	$	5,970	$	13,954	$	7,530	$	6,424

During the three and six month periods ended June 30, 2011 amortization of $627 and $1,237, respectively, relating to the property, plant and equipment was charged to operations (Three and six months ended June 30, 2010 - $638 and $1,282, respectively).  As at June 30, 2011 there were no events or changes in circumstances which would indicate an impairment of property, plant and equipment.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

9.  INTANGIBLE ASSETS

	June 30, 2011						December 31, 2010
	Cost		Accumulated amortization		Net book value		Cost		Accumulated amortization		Net book value
Patents	$	11,431	$	1,262	$	10,169	$	11,431	$	890	$	10,541
Software		922		563		359		842		447		395
Licence		695		-		695		-		-		-
	$	13,048	$	1,825	$	11,223	$	12,273	$	1,337	$	10,936

During the three and six months ended June 30, 2011 amortization of $244 and $488 respectively, relating to the patents and software was charged to operations (Three and six months ended June 30, 2010 - $226 and $399, respectively).  As at June 30, 2011 there were no events or changes in circumstances which would indicate an impairment of intangible assets.

The aggregated amortization expense related to patents for the next five years is as follows:

	As at June 30, 2011		As at December 31, 2010
2012	$	743	$	714
2013		743		714
2014		743		714
2015		743		714
2016		709		714
	$	3,681	$	3,570

10.  ACCOUNTS PAYABLE

	June 30, 2011		December 31, 2010
Trade accounts payable	$	9,122	$	10,964
Accruals		2,005		2,285
Payroll related accruals		1,270		1,250
Warranty		412		601
	$	12,809	$	15,100

11.  SHARE CAPITAL

a) Authorized

The Company’s share capital consists of an unlimited number of common shares and an unlimited number of preferred shares.  As at June 30, 2011 and December 31, 2010 there were no preferred shares outstanding.

b)  Issued and outstanding

Pursuant to option exercises, during 2010, the Company issued 331,406 common shares to employees for cash consideration of $449.  In addition to the cash consideration, $68 was transferred from additional paid-in capital to share capital.

The Company closed on November 19, 2010 a public offering with a syndicate of underwriters to issue 10,500,000 common shares of IMRIS at US $5.00 per common share for gross proceeds of $52,128.  In addition, IMRIS granted the underwriters an option, exercisable in whole or in part for a period of up to 30 days following the offering closing date, to increase the offering by up to 1,650,000 common shares at a price of US $5.00 per common share.  This option was partially exercised on November 30, 2010, increasing the aggregate size of the offering to $55,127.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

11.  SHARE CAPITAL (continued)

Costs relating to the November 19, 2010 offering include underwriter fees (6% of the gross proceeds or US $0.30 per share) plus various legal and professional fees.

Pursuant to option exercises, during the six months ended June 30, 2011, the Company issued 513,168 common shares to employees for cash consideration of $700.  In addition to the cash consideration, $183 was transferred from additional paid-in capital to share capital.

c) Stock-based compensation plan

On May 20, 2005 the Board of Directors approved a stock option plan (the “Plan”) for the employees, directors, officers and consultants of the Company and any of its subsidiaries, which govern all options granted under the Plan.  At the 2009 Annual Meeting on May 11, 2010, the shareholders reaffirmed the plan.  Under the Plan, options to purchase common shares of the Company may be granted by the Board of Directors.  The exercise price of the options granted is established by the Board of Directors based on the fair market value of the common shares as at the date of the grant.  The maximum number of common shares which may be issued pursuant to options granted under the Plan is equal to 15% of the common shares of the Company outstanding at any time.

Options granted under the Plan generally vest over a four year period and may be exercised in whole or in part as to any vested options prior to the expiry time as follows:  25% on or after the first anniversary of the grant date, increasing 6.25% per quarter thereafter until fully vested after four years.  Options generally expire six years after the date of the grant.  The vesting of options granted under the plan ceases upon the death or the termination of employment of the participant or the participant ceases to be a director.  The participant thereafter has 90 days to exercise any vested and unexpired options, failing which any unexercised options shall lapse.  The Board of Directors, at their discretion, may accelerate the vesting period of individual grants as deemed appropriate.

The Board of Directors may accelerate the vesting of all unvested options in the event of certain change of control transactions, including without limitation a takeover bid, merger or other structured acquisition; and may further force the exercise of any and all vested options, and/or may cancel or replace any unvested options in any manner as the Board deems reasonable in its unfettered discretion.  The Company can satisfy its obligation from the exercise of options by either issuing treasury shares or repurchasing shares on the market.  To date the Company has chosen to issue treasury shares and does not expect to repurchase shares from the market to satisfy expected exercises of stock options.

The outstanding options and the activity relating to these options are as follows:

	Number of options			Weighted average exercise price (CDN$)		Average remaining contractual life in years		Aggregate intrinsic value
Balance  as at December 31, 2009		4,007,915		$	3.08
Granted		672,145			6.07
Exercised		(331,406	)		1.40
Forfeited		(348,005	)		5.63
Balance December 31, 2010		4,000,649		$	3.50
Granted		467,303			7.22
Exercised		(465,080	)		1.32
Forfeited		(9,884	)		5.49
Balance March 31, 2011		3,992,988		$	4.18
Granted		57,000			7.65
Exercised		(48,088	)		1.55
Forfeited		(19,636	)		5.35
Balance June 30, 2011		3,982,264		$	4.25
Exercisable as at June 30, 2011		2,684,347		$	3.29		1.8	$	9,378
Vested and expected to vest as at June 30, 2011		3,688,005		$	4.08		2.7	$	10,082

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

11.  SHARE CAPITAL (continued)

c) Stock-based compensation plan (continued)

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company’s common shares on June 30, 2011 and the exercise price for the in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on June 30, 2011.  The total intrinsic value of the stock options exercised during the three and six months ended June 30, 2011, calculated using the average market price during the period, was $284 and $3,146, respectively (Three and six months ended June 30, 2010 - $384 and $1,208, respectively).

The following table summarizes information related to options outstanding and exercisable at June 30, 2011:

Year granted	Number of options outstanding		Exercise price range  (CDN$)	Weighted average exercise price (CDN$)		Number of options exercisable		Weighted average exercise price (CDN$)		Expiry date
2005		294,000	$0.97 to $1.71	$	0.98		294,000	$	0.98		2011
2006		981,500	1.71 to 2.25		2.21		981,500		2.21		2012
2007		1,010,500	2.25 to 6.00		4.42		949,813		4.32		2013
2008		304,851	2.40 to 5.00		4.58		235,629		4.66		2014
2009		284,872	2.01 to 5.60		4.57		122,890		4.27		2015
2010		583,386	5.52 to 6.45		6.03		100,515		6.45		2016
2011		253,950	7.27 to 7.65		7.36		-		-		2017
2011		269,205	7.18 to 7.18		7.18		-		-		2018
		3,982,264	$0.97 to $7.65	$	4.25		2,684,347	$	3.29

The fair value of option grants issued was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

	June 30, 2011			December 31, 2010
Number of options granted during the year		524,303			672,145
Weighted average grant date fair value of stock options granted during the year (CDN$)	$	3.91		$	3.05
Risk-free interest rate		2.86	%		2.40	%
Dividend yield		0	%		0	%
Expected life of the options	4.2 years			4.2 years
Expected volatility of the underlying stock		67.18	%		62.41	%

Expected volatilities are based on the historic volatility of the Company’s shares as this represents the most appropriate basis to determine the expected volatility in future periods.

The estimated fair value of the options is expensed on a straight-line basis over the option’s vesting period.  During the three and six months ended June 30, 2011, the Company recorded an expense of $370 and $681, respectively, related to stock options (Three and six months ended June 30, 2010 - $283 and $557, respectively) with a corresponding credit to additional paid-in capital.  The table below summarizes the effect of recording shared based compensation expense for the period:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Administrative	$	196	$	153	$	368	$	306
Sales and marketing		55		40		92		72
Customer support and operations		57		42		106		83
Research and development		62		48		115		96
Net decrease in earnings	$	370	$	283	$	681	$	557

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

11.  SHARE CAPITAL (continued)

c) Stock-based compensation plan (continued)

The following is a summary of unvested stock options as at June 30, 2011:

	Number of awards			Weighted average grant date fair value (CDN$)
Balance, as at December 31, 2009		1,268,654		$	1.87
Granted during the period		672,145			3.05
Vested during the period		(626,317	)		1.53
Forfeited during the period		(255,753	)		2.55
Balance, as at December 31, 2010		1,058,729		$	2.66
Granted during the period		467,303			3.89
Vested during the period		(175,255	)		2.47
Forfeited during the period		(8,998	)		2.57
Balance, as at March 31, 2011		1,341,779		$	3.11
Granted during the period		57,000			4.12
Vested during the period		(88,540	)		2.41
Forfeited during the period		(12,322	)		2.72
Balance, as at June 30, 2011		1,297,917		$	3.21

As at June 30, 2011 there was $2,921 of unrecognized stock-based compensation expense related to unvested stock options which will be expensed over the vesting period, which on a weighted-average basis, results in a period of approximately 3.0 years.  The total fair value of stock options vested during the three and six month periods ended June 30, 2011 was $221 and $663.

d) Diluted loss per share

There were no adjustments to the weighted number of shares outstanding for the purposes of calculating diluted loss per share because to do so would be anti-dilutive.  Employee stock options totaling 3,962,022 could have been dilutive as at June 30, 2011 (As at June 30, 2010 – 3,088,226).

12. INCOME TAXES

a) Income tax expense

The Company has not recorded a provision for current income tax expense in these financial statements.  Income tax expense differs from the amount that would be computed by applying the statutory income tax rates to loss before income taxes.  An annual reconciliation of income taxes calculated at the statutory rate to the actual tax provision is as follows:

	December 31, 2010
Statutory federal and provincial tax rate		30.00	%
Expected tax recovery at statutory rate	$	(422	)
Permanent differences and other		208
Non taxable foreign exchange		109
Expiry of non-capital losses		-
Benefit of deferred tax assets not recognized		105
Income tax expense	$	-

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

12. INCOME TAXES (continued)

a) Income tax expense (continued)

The components of the Company’s loss from operations before income taxes, by taxing jurisdiction, were as follows:

	December 31, 2010
Canada	$	136
United States		(2,267	)
Other		366
	$	(1,765	)

b) Deferred taxes

The Company has not recorded any deferred tax assets in these financial statements because a valuation allowance has been provided against the full amount of the deferred tax assets.  The balances of deferred taxes as at June 30, 2011 and December 31, 2010 represents the future benefit of unused tax losses and temporary differences between the tax and accounting bases of assets and liabilities.

The major items giving rise to deferred tax assets and liabilities are presented below:

	June 30, 2011			December 31, 2010
Non-capital losses carried forward	$	12,275		$	9,964
Capital assets		411			110
Intangible assets		(2,743	)		(2,837	)
Research and development expenditures		5,738			5,739
Reserves not taken for tax purposes		2,831			3,494
Total deferred tax assets		18,512			16,470
Valuation allowance		(18,512	)		(16,470	)
Net deferred tax asset	$	-		$	-

The net increase in the valuation allowance for the six months ended June 30, 2011 was $2,042.  The Company’s deferred tax liability for each tax jurisdiction is $Nil for all periods noted above.  As at June 30, 2011, the Company had non-capital losses available of approximately $44,400 (December 31, 2010 - $35,838) to reduce the taxable income of future years.  These losses expire in 2026 and beyond.

The company has deductible Scientific Research and Experimental Development expenditures applicable to future years of approximately $21,253.  These expenditures have been included in the calculation of deferred taxes in note 12(b) and have no expiry date.

The Company has unutilized federal and provincial scientific research and experimental development investment tax credits of approximately $5,200 and $6,100 respectively.  These credits expire in 2014 and beyond.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

12. INCOME TAXES (continued)

b)  Deferred taxes (continued)

The Company has adopted the provisions in ASC 740 related to unrecognized tax benefits.  ASC 740 provides specific guidance on the recognition, de-recognition and measurement of income tax positions in financial statements, including the accrual of related interest and penalties recorded in interest expense.  First the tax position is evaluated for recognition.  An income tax position is recognized when it is more likely than not that it will be sustained upon examination based on its technical merits.  If recognition is warranted the benefit is measured as the largest amount that is greater than 50% likely of being realized upon ultimate settlement.  As of June 30, 2011 the Company has no recognized tax benefits (As at December 31, 2010 – $Nil).  As of June 30, 2011 the Company has not accrued any amounts for interest or penalties related to unrealized tax benefits (As at December 31, 2010 - $Nil).

The Company files tax returns in Australia, Belgium, Canada, India, Japan, Germany and the United States.  The years 2006 to 2010 remain subject to examination by Japanese tax authorities.  The years 2006 to 2009 remain subject to examination by all the other tax authorities.

13.  ACQUISITION OF NEUROARM SURGICAL LIMITED

a) Overview

On February 4, 2010, the Company announced that it entered into a definitive agreement to acquire 100% issued and outstanding common shares of NeuroArm Surgical Limited (“NASL”), a privately held company based in Calgary, Alberta, and its magnetic resonance-compatible neurosurgical robotics system.

The transaction was accomplished through the issuance of 1.6 million common shares from treasury and included the technology, patents and associated intellectual property.  The value of the common shares was determined based on the closing trading price of the common shares of the Company on The Toronto Stock Exchange as of the closing of the transaction on February 5, 2010.  The Company has issued 20% of the common shares, being 320,000 common shares placed into escrow for a period of 24 months for any claims that could be made against NASL.

b) Consideration and Transaction Costs

Consideration offered to complete the acquisition was 1.6 million common shares of the Company with a value of $9,695 or $6.06 per share.  Transaction costs to complete the acquisition included legal and accounting costs of $169 which brought the total purchase price to $9,864.

c) Net Assets Acquired

The following estimated fair values were assigned to the net assets of NASL as at February 5, 2010:

Cash and cash equivalents	$	27
Intangibles		10,147
Total Assets		10,174
Accounts payable and accrued liabilities		310
Total Liabilities		310
Total purchase price	$	9,864

Intangibles include the valuation of the patents tied to the intellectual property acquired.  The intangibles are amortized over their estimated useful lives which range between 13-18 years.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

13.  ACQUISITION OF NEUROARM SURGICAL LIMITED

The carrying amount of the intangibles is $9,956 as at June 30, 2011 (As at December 31, 2010 - $10,305).  The associated amortization for the three and six months ended June 30, 2011 was $174 and $348, respectively (Three and six months ended June 30, 2010 - $169 and $279, respectively).

14.  COMMITMENTS AND CONTINGENCIES

a) Operating leases

The Company had commitments under operating leases requiring future minimum annual lease payments as follows:

	June 30, 2011		December 31, 2010
2011	$	318	$	320
2012		121		122
2013		64		64
2014		64		64
2015		32		32
	$	599	$	602

b) Warranty liability

The Company records a liability for future warranty costs to repair or replace its products.  The warranty term is 12 months.  The amount of the liability is determined based on management’s historical experience and the best estimate of probable claims under Company warranties.  The Company regularly evaluates the appropriateness of the remaining accrual.

The following table details the changes in the warranty accrual.

	June 30, 2011			December 31, 2010
Balance at beginning of the year	$	601		$	520
Accruals		30			286
Utilization		(219	)		(205	)
Balance at end of the period	$	412		$	601

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

15.  SEGMENTED INFORMATION

The Company operates as one business segment.  The Company develops, assembles and installs surgical imaging systems used in medical applications, as well as providing ancillary products and services and extended maintenance services.

Revenue attributable to geographic locations, based on the location of the customer, is as follows:

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Canada	$	724	$	711	$	1,519	$	8,765
United States		5,233		8,852		13,070		11,056
Europe and Middle East		3,169		10		4,585		340
Asia Pacific		9,755		7,060		10,764		8,529
	$	18,881	$	16,633	$	29,938	$	28,690

During the three month period ended June 30, 2011, revenues from three customers totalled 78% or $14,710 of total revenue for the period.   During the six month period ended June 30, 2011, revenues from five customers totalled 81% or $24,279.  For the three month period ended June 30, 2010 four customers accounted for 86% or $14,340 of total revenues.  For the six months ended June 30, 2010 four customers totalled 78% or $22,396.  The revenues from each of these customers, individually accounted for more than 10% of the total revenue for the three and six months ended June 30, 2011 and 2010.

Substantially all of the capital assets and all the goodwill and intangibles balances are attributable to the Company’s operations located in Canada.

16.  RELATED PARTY TRANSACTIONS

The Company leases air travel time from a company which is wholly owned by the Chairman of IMRIS Inc.  The amount charged to travel included in Administrative expenses during the three and six months ended June 30, 2011 totaled $107 and $155, respectively (Three and six months ended June 30, 2010 – $45 and $45, respectively).  The transactions were priced using an estimated third party comparable cost and were recorded at the exchange amount.  There are no receivables outstanding from related parties as at June 30, 2011 (As at December 31, 2010 - $Nil).  There is a related party payable of $55 as at June 30, 2011 (As at December 31, 2011 - $Nil).

17. DEFINED CONTRIBUTION EMPLOYEE PENSION PLAN

The Company contributes to a defined contribution Employee Pension Plan for all its employees.  Contributions to this Plan are expensed as incurred.  The Company makes a matching contribution equal to 50% of the employee’s contribution, to a maximum of 3% of the employee’s annual remuneration (subject to regulatory maximums).  These employer contributions vest immediately with the employee.  The expense for the defined contribution plan during the three and six month period ended June 30, 2011 totaled $134 and $194, respectively (For the three and six month period ended June 30, 2010 - $58 and $109, respectively).

18. FINANCIAL INSTRUMENTS

Effective January 1, 2008, the Company adopted FASB standard ASC 820 which defines fair value, establishes a framework, prescribes methods for measuring fair value and outlines additional disclosure requirements on the use of fair value measurements.  Fair value is defined as the exchange price that would be recovered for an asset or paid to transfer a liability (an exit price in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date).  Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability utilizing a hierarchy of three different valuation techniques, based on the lowest level input that is significant to the fair value measurement in its entirety.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

18. FINANCIAL INSTRUMENTS (continued)

Financial instruments measured at fair value should be classified into one of three levels that distinguish fair value measurements by the significance of the inputs used for valuation.

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 - Observable inputs other than Level 1 quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data; and

Level 3 - Unobservable inputs that are supported by little or no market activity.  Valuation techniques are primarily model-based.

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis have been segregated into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value measurement date in the table below.  For cash and cash equivalents, fair value approximates cost.

Financial assets and liabilities measured at fair value as at June 30, 2011 in the consolidated financial statements on a recurring basis are summarized below:

	Level 1		Level 2		Level 3
Cash and cash equivalents	$	45,816	$	-	$	-
	$	45,816	$	-	$	-

Financial assets and liabilities measured at fair value as at December 31, 2010 in the consolidated financial statements on a recurring basis are summarized below:

	Level 1		Level 2		Level 3
Cash and cash equivalents	$	60,773	$	-	$	-
	$	60,773	$	-	$	-

19. COLLABORATIVE ARRANGEMENT

During 2010, IMRIS entered into a collaborative arrangement with a third party to encourage research, education and patient care activities of mutual benefit in the areas of developing diagnostic and functional assessment capabilities of magnetic resonance imaging for mainstream interventional cardiology and neuroscience.  As part of the agreement, IMRIS agreed to provide the necessary equipment, maintenance and support staff to achieve the purpose intended by the agreement.  The third party has agreed to provide the appropriate clinical validation over a five year period.

Revenue resulting from the arrangement is recognized in accordance with the Company’s current revenue recognition policy.  Included in the consolidated statement of operations for the three and six month periods ended June 30, 2011 is revenue of $2,199 and $2,224, respectively (For the three and six months ended June 30, 2010 - $Nil).  As at June 30, 2011, the Company has recorded an advance payment of $1,101, which represents the value of the clinical validation projects it will receive in exchange for the equipment, as outlined in the agreement.  This amount will be expensed as research and development on a straight-line basis over the life of the agreement.

Any future payments to the participant of this agreement will be recognized in accordance with the Company’s current expenditure policies.  The classification of these, or any future payments between participants pursuant to this collaborative arrangement, will be based on the nature of the arrangement.  All future costs or revenue generated from third parties will be recognized in the income statement on a gross basis.

IMRIS INC.

Notes to the Consolidated Financial Statements

Expressed in US $000’s except share and per share data, and except as otherwise indicated

June 30, 2011

(Unaudited)

20. GUARANTEES

The Company has entered into an agreement which meets the definition of a guarantee.  Under the terms of the agreement, the Company has agreed to be legally bound to pay the obligation.  The Company’s maximum obligation under this agreement is $652 and the obligation expires once the Company satisfies the conditions of the original agreement.  To offset this arrangement the Company entered into a reciprocal arrangement with a financial institution to cover the full amount of the obligation, should the need arise.  The financial institution, involved in the reciprocal arrangement did not require any of the Company’s assets to be pledged as collateral; as a result, the Company has not recorded a liability in the year end statements related to the original arrangement.

The Company periodically enters into agreements that include limited intellectual property indemnifications that are customary in the industry.  These guarantees generally require the Company to indemnify the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions.  The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers.  The Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.