EXHIBIT 10.3

LETTER OF STOCK OPTION GRANT
ORTHOLOGIC CORP. 1997 STOCK OPTION PLAN

March 3, 2005

Dr. James M. Pusey
OrthoLogic Corp.
1275 West Washington
Tempe, Arizona 85281

          RE:  OrthoLogic Corp. 1997 Stock Option Plan
(200,000 shares)

Dear Dr. Pusey:

     In order to provide additional incentive to certain selected employees,
OrthoLogic Corp. (the “Company”) adopted the OrthoLogic 1997 Stock Option Plan
(the “Stock Option Plan”). By means of this letter, the Company is offering you
an option pursuant to the Stock Option Plan. The Company’s sale of its common
shares underlying the option granted to you hereby has been registered with the
U.S. Securities and Exchange Commission. A copy of the prospectus including a
copy of the Stock Option Plan (the “Prospectus”) relating to that registration
can be obtained from the Company by request.

     The option granted to you hereunder shall be subject to all of the terms
and conditions of the Stock Option Plan, which you should carefully review. In
addition, such option is subject to the following terms and conditions:

     1. Grant of Option. The Company hereby grants to you, pursuant to the Stock
Option Plan, the option to purchase from the Company upon the terms and
conditions and at the times hereinafter set forth:

  (a)   effective on the date hereof (the “Option Date”), an aggregate of
125,000 shares of the common stock, $.0005 par value, of the Company (“Common
Stock”) at a purchase price of $5.88 per share (“Option Date Grant”); and    
(b)   effective on the date of commencement of your employment with the Company
(the “Commencement Date”), an aggregate of 75,000 shares of Common Stock at a
purchase price equal to the closing price of the Common Stock on that date, as
reported by the Nasdaq Stock Market (the “Commencement Date Grant”).

The shares subject to the Option Date Grant and the Commencement Date Grant are
referred to herein collectively as the “Shares.”

 

--------------------------------------------------------------------------------

 

Dr. James M. Pusey
March 3, 2005
Page 2

 

     This option is intended to be an incentive stock option (“ISO”) to the
maximum extent permitted by law. In accordance with Internal Revenue Code rules,
the aggregate fair market value (determined as of the date of grant) of shares
with respect to which ISOs are exercisable for the first time during any
calendar year (under the Plan or under any other incentive stock option plan of
the Company or Subsidiary of the Company) may not exceed $100,000. If the fair
market value of shares on the date of grant with respect to which options are
exercisable for the first time during any calendar year exceeds $100,000, then
the options for the first $100,000 of shares to become exercisable in such
calendar year (in the order of Commencement Date Grant options then Option Date
Grant options) will be ISOs and the options for the amount in excess of $100,000
that become exercisable in that calendar year will be treated as non-qualified
stock options (“NSOs”).

     2. Exercisability of Option. The Option Date Grant option shall be
immediately exercisable as to 10% of the total shares covered thereby and shall
become exercisable as to 1/48 of the remaining 90% for each full month of
employment with the Company after the Option Date (2,343.75 shares per month).
The Commencement Date Grant option shall be immediately exercisable upon its
effectiveness as to 10% of the total shares covered thereby and shall become
exercisable as to 1/48th of the remaining 90% for each full month of employment
with the Company after the Option Date (1,406.25 shares per month). By way of
example, the options will be exercisable in the aggregate for 65,000 shares if
you continue in employment for one full year, 110,000 shares if you continue in
employment for two full years, 155,000 shares if you continue in employment for
three full years and all 200,000 shares if you continue in employment for four
full years. No fractional shares shall be issued upon exercise of this option
and if the application of the fractions set forth above would result in a
fractional share, the number of shares exercisable shall be rounded up to the
next full share.

     Notwithstanding the foregoing, upon a Change in Control, you shall be
entitled to exercise this option with respect to all shares covered by this
option (200,000 shares); provided, however, that if the Company shall, on or
before the date of such Change of Control, request that you remain in the employ
of the Company following the Change of Control, then you shall be entitled to
exercise this option with respect to the greater of (i) 90% of the shares
covered by this option (180,000 shares) or (ii) the number of shares then
exercisable as of the Change in Control, and the remaining portion of this
option shall become exercisable upon your completion of six months service
thereafter or, if earlier, the date on which the Company terminates your
employment.

     For purposes of this Letter of Grant, the term “Change of Control” shall be
defined as a change in ownership or control of the Company effected through any
of the following transactions: (a) a statutory share exchange, merger,
consolidation or reorganization approved by the Company’s stockholders, unless
securities representing more than 50% of the total combined voting power of the
voting securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly, by the persons who beneficially
owned the

 

--------------------------------------------------------------------------------

 

Dr. James M. Pusey
March 3, 2005
Page 3

 

Company’s outstanding voting securities immediately prior to such transaction;
(b) any stockholder approved transfer or other disposition of all or
substantially all of the Company’s assets (whether held directly or indirectly
through one or more controlled subsidiaries) except to or with a wholly-owned
subsidiary of the Company); or (c) the acquisition, directly or indirectly by
any person or related group of persons of beneficial ownership (within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) of securities possessing more than 50% of the total combined
voting power of the Company’s outstanding securities pursuant to transactions
with the Company’s stockholders.

     3. Termination of Option. Notwithstanding anything to the contrary herein,
the extent to which this option may be exercised shall not increase after your
employment with the Company terminates, and this option shall not be exercisable
after the earliest of (i) the tenth anniversary of the Option Date; (ii) two
years after the date your employment with the Company terminates, if such
termination is for any reason other than permanent disability, death, or cause;
(iii) the date your employment terminates, if such termination is for cause; or
(iv) three years after the date your employment with the Company terminates, if
such termination is the result of death or permanent disability. For purposes of
this Letter of Grant, cause shall be determined pursuant to your employment
agreement then in effect and if you are not then subject to an employment
agreement, in the Company’s reasonable discretion. You acknowledge that any
incentive stock options exercised more than 90 days after the date on which your
employment terminates (one year in the case of termination due to death or
permanent disability), shall no longer qualify as incentive stock options under
the Internal Revenue Code.

     4. Nontransferability. This option shall not be transferable otherwise than
by will or by the laws of descent and distribution, and the options shall be
exercisable only by (a) you, during your lifetime (except as contemplated by the
next clause); or (b) your legal representative or a person who acquired the
right to exercise these options by bequest or inheritance, during the three-year
period referred to in Section 3(iv) hereof. Any attempted transfer in violation
of this restriction shall be void.

     5. Other Conditions and Limitations. Unless the Shares are subject to a
then effective registration statement under the Securities Act of 1933, upon
exercise of this option (in whole or in part) and the issuance of the Shares,
the Company shall instruct its transfer agent to enter stop transfer orders with
respect to Shares, and all certificates representing the Shares shall bear on
the face thereof substantially the following legend:

“The shares of common stock represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be sold,
offered for sale, assigned, transferred or otherwise disposed of unless
registered pursuant to the provisions of that Act or an opinion of counsel to
the Company is obtained stating that such disposition is in compliance with an
available exemption from such registration.”

 

--------------------------------------------------------------------------------

 

Dr. James M. Pusey
March 3, 2005
Page 4

 

     6. Exercise of Option. You may exercise the option including the number of
Shares that you are intending to acquire, accompanied by the full exercise
price, only by giving the Company written notice by personal hand delivery, by
professional overnight delivery service, or by registered or certified mail,
postage prepaid with return receipt requested, at the following address:

Chief Financial Officer
OrthoLogic Corp.
1275 West Washington Street
Tempe, AZ 85281

     Payment of the option price shall be made either in (i) cash or by check,
or (ii) at your request and with the approval of the Company, by delivering
shares of the Company’s common stock which have been beneficially owned by you
for a period of at least six months prior to the time of exercise (“Delivered
Stock”) or a combination of cash and Delivered Stock. Payment in the form of
Delivered Stock shall be in the amount of the fair market value of the stock at
the date of exercise, determined pursuant to the Stock Option Plan.

     7. Valuation and Withholding. If required by applicable regulations, the
Company shall, at the time of issuance of any Shares purchased pursuant to the
Stock Option Plan, provide you with a statement of valuation of the Shares
issued. The Company shall be entitled to withhold amounts from your compensation
or otherwise to receive an amount adequate to provide for any applicable
federal, state and local income taxes (or require you to remit such amount as a
condition of issuance). The Company may, in its discretion, satisfy any such
withholding requirement, in whole or in part, by withholding from the shares to
be issued the number of shares that would satisfy the withholding amount due.

     8. Notice of Disposition of Shares. If you dispose of any Shares acquired
upon the exercise of the portion of the option treated as an ISO within either
(a) two years after the Option Date or (b) one year after the date of exercise
of this option, you must notify the Company within seven days of such
disposition.

     9. Miscellaneous. You will have no rights as a stockholder with respect to
the Shares until the exercise of the option and payment of the full purchase
price therefor in accordance with the terms of the Stock Option Plan and this
Letter of Grant. Nothing herein contained shall impose any obligation on the
Company or any parent or subsidiary of the Company or on you with respect to
your continued employment by the Company or any parent or subsidiary of the
Company. Nothing herein contained shall impose any obligation upon you to
exercise this option. While a portion of the option granted hereunder is
intended to qualify as an incentive stock option under Code Section 422, the
Company cannot assure you that such option will, in fact, qualify as incentive
stock options, and makes no representation as to the tax

 

--------------------------------------------------------------------------------

 

Dr. James M. Pusey
March 3, 2005
Page 5

 

treatment to you upon receipt or exercise of the option or sale or other
disposition of the Shares covered by the option.

     10. Governing Law. This Letter of Grant shall be subject to and construed
in accordance with the law of the State of Arizona, except as may be required by
the Delaware General Corporation Law or the federal securities laws. Venue for
any action arising from or relating to this Agreement shall lie exclusively in
Superior Court, Maricopa County, Arizona or the United States District Court for
the District of Arizona, Phoenix Division.

     11. Relationship to the Stock Option Plan. The option contained in this
Letter of Grant is subject to the terms, conditions and definitions of the Stock
Option Plan. To the extent that the terms, conditions and definitions of this
Letter of Grant are inconsistent with the terms, conditions and definitions of
the Stock Option Plan, the terms, conditions and definitions of the Stock Option
Plan shall govern. You hereby accept this option subject to all terms and
provisions of the Stock Option Plan. You agree to accept as binding, conclusive
and final all decisions or interpretations of the Board or any committee
appointed by the Board upon any questions arising under the Stock Option Plan,
absent fraud or manifest error. You agree to consult your independent tax
advisors with respect to the income tax consequences to you, if any, of
participating in the Stock Option Plan and authorize the Company to withhold in
accordance with applicable law from any compensation otherwise payable to you
any taxes required to be withheld by federal, state or local law as a result of
your participation in the Stock Option Plan.

     12. Communication. No notice or other communication under this Letter of
Grant shall be effective unless the same is in writing and is personally
hand-delivered, or is sent by professional overnight delivery service or mailed
by registered or certified mail, postage prepaid and with return receipt
requested, addressed to:

  (a)   the Company at the address set forth in Section 6 above, or such other
address as the Company has designated in writing to you, in accordance with the
provisions hereof, or     (b)   you at the address set forth at the beginning of
this letter, or such other address as you have designated in writing to the
Company, in accordance with the provisions hereof.

     13. Share Amounts. All share amounts set forth in this Agreement shall be
equitably adjusted to reflect stock splits, stock dividends, stock combinations,
reorganizations and the like.

     14. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement. This Agreement may be executed and delivered by facsimile.

 

--------------------------------------------------------------------------------

 

Dr. James M. Pusey
March 3, 2005
Page 6

 

     You should execute the enclosed copy of this Letter of Grant and return it
to the Company as soon as possible. The additional copy is for your records.

            Very truly yours,

ORTHOLOGIC CORP.
      By:   /s/ Jock M. Holliman, III         Jock M. Holliman, III       
Chairman of the Board     

 
ACCEPTED AND AGREED TO:
 
/s/ James M. Pusey

--------------------------------------------------------------------------------

James M. Pusey
 
Date:          03/03/2005

--------------------------------------------------------------------------------