Grey Screen - Can't get past apple logo

Mid 2011 iMac i7.

My iMac stopped working earlier this week in the midst of working on a small video in iMovie. The screen turned blue and pixelated.

Upon restart, apple logo appears and the boot progress bar shows up, then everything turns grey once it hits about 1/4 of the way through.

I tried rebooting into recovery mode and I get the same result as above.

I have tried booting from a Yosemite USB and a Mavericks USB - same result. Just can't get past the apple logo and 1/4 progress bar.

When booting while holding the option key - I can indeed see all the volumes come up (OS X, USB Boot, and a boot camp windows volume.

Since my iMac is out of warranty, I took the HDD out to see if it was corrupted. It's totally fine when (Tested via external HDD enclosure with a USB on another iMac).

I have tried resetting PRAM.

I've checked all Ram chips and they are ok.

I just don't get it - if it recognizes volumes and the boot sequence starts would this not eliminate a hardware issue?

Luckily, everything is backed up via time machine, so data is not an issue. I just need this smokin fast i7 back!!

My next step is to try apple hardware test by using apple OS X disk 2 (startup holding the D key), but I can't seem to locate the disks. Are there archives of these available for download? My assumption is that I will likely encounter the same problem anyway as the iMac simply doesn't want to boot fully.

Any ideas would be GREATLY appreciated.

Cheers,

Nick