UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549




FORM
10-Q


(Mark
One)





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





For
      the quarterly period ended
            September
      30, 2009





or





o
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the transition period from   ________________
            to   ____________________





Commission
      File Number: 0-21214





ORTHOLOGIC
      CORP.(Exact
      name of registrant as specified in its
charter)





Delaware
            86-0585310(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)1275
      W. Washington Street,  Suite 101, Tempe, Arizona
            85281(Address
      of principal executive offices)
            (Zip
      Code)(602)
      286-5520(Registrant's
      telephone number, including area code)


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.


x
YesoNo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


oYes         oNo





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of  “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.    Large accelerated filer o      
Accelerated filer o Non-accelerated
filer o (do
not check if a smaller reporting company)      
Smaller reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  oYesx
No





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.




40,775,411
shares of common stock outstanding as of October 31, 2009.







1


ORTHOLOGICCORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)





INDEX





Page
      No.Part
      I
            Financial
      InformationItem
      1.
            Financial
      Statements (Unaudited)Condensed
      Balance Sheets as of September 30, 2009 and December 31,
      2008
            3Condensed
      Statements of Operations for the three and nine months ended September 30,
      2009 and 2008
            4Condensed
      Statements of Cash Flows for the nine months ended September 30, 2009and
      2008
            5Notes
      to Condensed Financial Statements
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            11Item
      4.
            Controls
      and Procedures
            14Part
      II
            Other
      InformationItem
      1.
            Legal
      Proceedings
            14Item
      1A.
            Risk
      Factors
            15Item
      6.
            Exhibits
            15EXHIBIT
      31.1EXHIBIT
      31.2EXHIBIT
      32


2
 Index


PARTI – Financial Information


Item
      1.
            Financial
      Statements





ORTHOLOGIC
CORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


CONDENSED
BALANCE SHEETS


(in
thousands, except share data)





September
      30,
            
            
            December
      31,2009
            
            
            2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            15,047
            
            
            $
            23,088Short-term
      investments
            
            
            23,647
            
            
            
            22,675Interest
      receivable and other current assets
            
            
            630
            
            
            
            1,094Total
      current assets
            
            
            39,324
            
            
            
            46,857Furniture
      and equipment, net
            
            
            347
            
            
            
            436Long-term
      investments
            
            
            -
            
            
            
            2,221Total
      assets
            
            $
            39,671
            
            
            $
            49,514LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            727
            
            
            $
            1,063Accrued
      compensation
            
            
            599
            
            
            
            648Other
      accrued liabilities
            
            
            1,123
            
            
            
            281Total
      current liabilities
            
            
            2,449
            
            
            
            1,992Stockholders'
      EquityCommon
      Stock  $.0005 par value; 100,000,000 shares authorized;
      40,775,411 in 2009 and 40,775,411 in 2008 shares issued and
      outstanding
            
            
            20
            
            
            
            20Additional
      paid-in capital
            
            
            188,575
            
            
            
            188,314Accumulated
      deficit
            
            
            (151,373
            )
            
            
            (140,812
            )Total
      stockholders' equity
            
            
            37,222
            
            
            
            47,522Total
      liabilities and stockholders' equity
            
            $
            39,671
            
            
            $
            49,514





See
notes to unaudited condensed financial statements


3
 Index


ORTHOLOGICCORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


CONDENSED
STATEMENTS OF OPERATIONS


(in
thousands, except per share data)


(Unaudited)





Three
      months ended
            
            
            Nine
      months ended
            
            
            As
      a DevelopmentSeptember 30,
            
            
            September 30,
            
            
            Stage
      CompanyAugust
      5, 2004 -2009
            
            
            2008
            
            
            2009
            
            2008
            
            
            September 30, 2009OPERATING
      EXPENSESGeneral
      and administrative
            
            $
            604
            
            
            $
            815
            
            
            $
            2,172
            
            
            $
            2,378
            
            
            $
            22,247Research
      and development
            
            
            2,843
            
            
            
            2,817
            
            
            
            9,030
            
            
            
            7,845
            
            
            
            82,549Purchased
      in-process research and development
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            34,311Other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (375
            )Total
      operating expenses
            
            
            3,447
            
            
            
            3,632
            
            
            
            11,202
            
            
            
            10,223
            
            
            
            138,732Interest
      and other income, net
            
            
            (150
            )
            
            
            (488
            )
            
            
            (641
            )
            
            
            (1,659
            )
            
            
            (13,275
            )Loss
      from continuing operations
            
            
            3,297
            
            
            
            3,144
            
            
            
            10,561
            
            
            
            8,564
            
            
            
            125,457Income
      tax benefit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7
            )Loss
      from continuing operations
            
            
            3,297
            
            
            
            3,144
            
            
            
            10,561
            
            
            
            8,564
            
            
            
            125,450Discontinued
      operations - net gain on sale of the bone device business, net of taxes of
      $267
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,202
            )NET
      LOSS
            
            $
            3,297
            
            
            $
            3,144
            
            
            $
            10,561
            
            
            $
            8,564
            
            
            $
            123,248Per
      share information:Net
      loss, basic and diluted
            
            $
            0.08
            
            
            $
            0.08
            
            
            $
            0.26
            
            
            $
            0.21Basic
      and diluted shares outstanding
            
            
            40,775
            
            
            
            40,775
            
            
            
            40,775
            
            
            
            41,200





See
notes to unaudited condensed financial statements


4
 Index


ORTHOLOGICCORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


CONDENSED
STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





As
      a DevelopmentNine
      months ended
            
            
            Stage
      CompanySeptember 30,
            
            
            August
      5th 2004 -2009
            
            
            2008
            
            
            September 30, 2009OPERATING
      ACTIVITIESNet
      loss
            
            $
            (10,561
            )
            
            $
            (8,564
            )
            
            $
            (123,248
            )Non-cash
      items:Deferred
      tax expense
            
            
            -
            
            
            
            -
            
            
            
            770Depreciation
      and amortization
            
            
            94
            
            
            
            99
            
            
            
            3,659Non-cash
      stock compensation
            
            
            261
            
            
            
            246
            
            
            
            4,322Gain
      on sale of bone device business
            
            
            -
            
            
            
            -
            
            
            
            (2,298
            )In-process
      research and development
            
            
            -
            
            
            
            -
            
            
            
            34,311Change
      in other operating items:Interest
      receivable and other current assets
            
            
            464
            
            
            
            (237
            )
            
            
            1,078Accounts
      payable
            
            
            (336
            )
            
            
            203
            
            
            
            (244
            )Accrued
      liabilities
            
            
            793
            
            
            
            (229
            )
            
            
            (1,292
            )Cash
      flows used in operating activities
            
            
            (9,285
            )
            
            
            (8,482
            )
            
            
            (82,942
            )INVESTING
      ACTIVITIESExpenditures
      for furniture and equipment, net
            
            
            (5
            )
            
            
            (148
            )
            
            
            (948
            )Proceeds
      from sale of assets
            
            
            -
            
            
            
            -
            
            
            
            7,000Cash
      paid for assets of AzERx/CBI
            
            
            -
            
            
            
            -
            
            
            
            (4,058
            )Cash
      paid for patent assignment rights
            
            
            -
            
            
            
            -
            
            
            
            (650
            )Purchases
      of investments
            
            
            (24,707
            )
            
            
            (28,845
            )
            
            
            (251,753
            )Maturities
      of investments
            
            
            25,956
            
            
            
            24,711
            
            
            
            286,044Cash
      flows provided by (used in) investing activities
            
            
            1,244
            
            
            
            (4,282
            )
            
            
            35,635FINANCING
      ACTIVITIESNet
      proceeds from stock option exercises
            
            
            -
            
            
            
            -
            
            
            
            4,612Net
      proceeds from sale of stock
            
            
            -
            
            
            
            -
            
            
            
            3,376Common
      stock repurchases
            
            
            -
            
            
            
            (1,017
            )
            
            
            (1,041
            )Cash
      flows (used in) provided by financing activities
            
            
            -
            
            
            
            (1,017
            )
            
            
            6,947NET
      DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (8,041
            )
            
            
            (13,781
            )
            
            
            (40,360
            )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            23,088
            
            
            
            20,943
            
            
            
            55,407CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            15,047
            
            
            $
            7,162
            
            
            $
            15,047Supplemental
      Disclosure of Non-Cash Investing Activities
            
            
            
            
            
            
            
            
            
            AzERx and CBIAzERx/CBI
      AcquisitionsCurrent
      assets acquired
            
            
            
            
            
            
            
            
            
            $
            29Patents
      acquired
            
            
            
            
            
            
            
            
            
            
            2,142Liabilities
      acquired, and accrued acquisition costs
            
            
            
            
            
            
            
            
            
            
            (457
            )Original
      investment reversal
            
            
            
            
            
            
            
            
            
            
            (750
            )In-process
      research and development acquired
            
            
            
            
            
            
            
            
            
            
            34,311Common
      stock issued for acquisition
            
            
            
            
            
            
            
            
            
            
            (31,217
            )Cash
      paid for acquisition
            
            
            
            
            
            
            
            
            
            $
            4,058





See
notes to unaudited condensed financial statements


5
 Index


ORTHOLOGICCORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


September
30, 2009





OVERVIEW
OF BUSINESS





Description of the
business





OrthoLogic
Corp., dba Capstone Therapeutics, is a biotechnology company committed to
developing a pipeline of novel peptides and other molecules aimed at helping
patients with under-served conditions.  We are focused on the
development and commercialization of two product platforms:  AZX100
and Chrysalin® (TP508).





AZX100 is
a novel synthetic 24-amino acid peptide believed to have smooth muscle
relaxation and anti-fibrotic properties.  AZX100 is currently being
evaluated for medically and commercially significant applications, such as
prevention of hypertrophic and keloid scarring, treatment of pulmonary disease
and vascular intimal hyperplasia.





We filed
an IND for AZX100 in a dermal scarring indication in 2007 and completed Phase 1a
and Phase 1b safety clinical trials in dermal scarring in 2008.  In
the first quarter of 2009, we commenced Phase 2 clinical trials in keloid scar
revision and dermal scarring following shoulder surgery.





Chrysalin,
a novel synthetic 23-amino acid peptide, is believed to produce angiogenic and
other tissue repair effects in part by 1) activating or upregulating endothelial
nitric oxide synthase (eNOS); 2) modulating inflammatory cytokines; 3)
inhibiting apoptosis (programmed cell death); and 4) promoting angiogenesis and
revascularization.  Chrysalin may have therapeutic value in diseases
associated with endothelial dysfunction.





We have
conducted clinical trials for two potential Chrysalin
applications:  acceleration of fracture repair and diabetic foot ulcer
healing.  We previously conducted a pilot clinical trial for spine
fusion, and pre-clinical testing for cartilage defect repair, cardiovascular
repair, dental bone repair, and tendon repair.  Currently, we are
focusing our efforts on pre-clinical studies in vascular
applications.  If successful, these studies may provide additional
support for partnering Chrysalin’s future development.





Company
History





Prior to
November 26, 2003, we developed, manufactured and marketed proprietary,
technologically advanced orthopedic products designed to promote the healing of
musculoskeletal bone and tissue, with particular emphasis on fracture healing
and spine repair.  Our product lines included bone growth stimulation
and fracture fixation devices including the OL1000 product line, SpinaLogic® and
OrthoFrame/Mayo, which we sometimes refer to as our “Bone Device
Business.”





On
November 26, 2003, we sold our Bone Device Business.  Our principal
business remains focused on tissue repair, although through biopharmaceutical
approaches rather than through the use of medical devices.


6
 Index


On August 5, 2004, we purchased
substantially all of the assets and intellectual property of Chrysalis
Biotechnology, Inc. (“CBI”), including exclusive worldwide rights to
Chrysalin.  We became a development stage entity commensurate with the
acquisition.  Subsequently, our efforts were focused on research and
development of Chrysalin with the goal of commercializing our product
candidates.





On
February 27, 2006, we purchased certain assets and assumed certain liabilities
of AzERx, Inc. Under the terms of the transaction, we acquired an exclusive
license for the core intellectual property relating to AZX100.





Our
development activities for Chrysalin and AZX100 represent a single operating
segment as they share the same product development path and utilize the same
Company resources.  As a result, we have determined that it is
appropriate to reflect our operations as one reportable segment. Through
September 30, 2009, we have incurred $123 million in net losses as a development
stage company.





OrthoLogic
Corp. commenced doing business as Capstone Therapeutics on October 1,
2008.





In this
document, references to “we”, “our”, the “Company”, “Capstone Therapeutics” and
“Capstone”, refer to OrthoLogic Corp.  References to our Bone Device
Business refer to our former business line of bone growth stimulation and
fracture fixation devices, including the OL1000 product line, SpinaLogic®,
OrthoFrame® and OrthoFrame/Mayo.





Financial
Statement Presentation





In the
opinion of management, the unaudited condensed interim financial statements
include all adjustments necessary for the fair presentation of our financial
position, results of operations, and cash flows.  The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for the complete fiscal year.





Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to Securities and Exchange Commission rules and
regulations, although we believe that the disclosures herein are adequate to
make the information presented not misleading.  It is suggested that
these unaudited condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2008.  Information presented as
of December 31, 2008 is derived from audited statements.





Use of Estimates





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires that management make a number
of assumptions and estimates that affect the reported amounts of assets,
liabilities, and expenses in our financial statements and accompanying
notes.  Management bases its estimates on historical experience and
various other assumptions believed to be reasonable.  Although these
estimates are based on management’s assumptions regarding current events and
actions that may impact us in the future, actual results may differ from these
estimates and assumptions.


7
 Index


Loss
per Common Share





In
determining loss per common share for a period, we use weighted average shares
outstanding during the period for primary shares and we utilize the treasury
stock method to calculate the weighted average shares outstanding during the
period for diluted shares.  Utilizing the treasury stock method for
the three month and the nine month periods ended September 30, 2009, 79,805
shares and 7,479 shares, respectively, were determined to be outstanding during
the periods but were excluded from the calculations of diluted loss per share as
they were anti-dilutive.  At September 30, 2009, options and warrants
to purchase 3,792,002 shares of our common stock, at exercise prices ranging
from $0.42 to $7.83 per share, were outstanding.





Adoption
of New Accounting Standards





Effective
June 15, 2009, we adopted the reporting requirements of Financial Accounting
Standards Board Accounting Standard Codification Topic 855 “Subsequent Events”,
which requires disclosure of the date through which subsequent events have been
evaluated, as well as whether that date is the date the financial statements
were issued or the date the financial statements were available to be
issued.





In
connection with the issuance of this quarterly report on Form 10-Q, we have
reviewed subsequent events to the date the financial statements were issued,
November 9, 2009.





A.   INVESTMENTS AND FAIR VALUE
DISCLOSURES





At
September 30, 2009 and December 31, 2008, investments were classified as
held-to-maturity securities, as we do not intend to sell the investments and it
is not more likely than not that we will be required to sell the investments
before recovery of their amortized cost basis, which may be
maturity.  Such classification requires these securities to be
reported at amortized cost unless they are deemed to be permanently impaired in
value.





A summary
of the fair market value and unrealized gains and losses on these securities is
as follows (in thousands):





September
      30, 2009
            
            Amortized
            
            
            Gross
      unrealized
            
            
            Gross
      unrealizedShort-term investments
            
            cost
            
            
            Gain
            
            
            Loss
            
            
            Fair valueUS
      Government Securities
            
            $
            4,509
            
            
            $
            54
            
            
            $
            -
            
            
            $
            4,563Government-Sponsored
      Enterprise Securities
            
            
            1,110
            
            
            
            -
            
            
            
            (15
            )
            
            
            1,095Corporate
      Debt Securities
            
            
            18,028
            
            
            
            5
            
            
            
            (120
            )
            
            
            17,913Total
      short-term investments
            
            $
            23,647
            
            
            $
            59
            
            
            $
            (135
            )
            
            $
            23,571


8
 Index




December
      31, 2008
              Short-term investments
            
            Amortized cost
            
            
            Gross
      unrealized Gain
            
            
            Gross
      unrealized Loss
            
            
            Fair valueUS
      Government Securities
            
            $
            19,310
            
            
            $
            548
            
            
            $
            -
            
            
            $
            19,858Government-Sponsored
      Enterprise Securities
            
            
            2,967
            
            
            
            -
            
            
            
            (20
            )
            
            
            2,947Corporate
      Debt Securities
            
            
            398
            
            
            
            -
            
            
            
            -
            
            
            
            398Total
      short-term investments
            
            $
            22,675
            
            
            $
            548
            
            
            $
            (20
            )
            
            $
            23,203December
      31, 2008
              Long-term investments
            
            Amortized cost
            
            
            Gross
      unrealized Gain
            
            
            Gross
      unrealized Loss
            
            
            Fair valueUS
      Government Securities
            
            $
            2,221
            
            
            $
            104
            
            
            $
            -
            
            
            $
            2,325Total
      long-term investments
            
            $
            2,221
            
            
            $
            104
            
            
            $
            -
            
            
            $
            2,325





Our
long-term investment at December 31, 2008 was a U.S. Government obligation and
matures in February 2010.





For our
cash and cash equivalents investments, the carrying amount is assumed to
approximate the fair market value because of the liquidity of these
instruments.  Our long-term investment carried a market interest rate
and the fair market value of the investment approximated the carrying value (as
shown above) at December 31, 2008.





B.   Stock
Based Compensation





2009
Stock Options





Non-cash
stock compensation cost for the nine months ended September 30, 2009, totaled
$261,000.  In the condensed Statements of Operations for the nine
months ended September 30, 2009, non-cash stock compensation expense of $188,000
was recorded as a general and administrative expense and $73,000 was recorded as
a research and development expense.





Non-cash
stock compensation cost for the nine months ended September 30, 2008, totaled
$246,000.  In the condensed Statements of Operations for the nine
months ended September 30, 2008, non-cash stock compensation expense of $199,000
was recorded as a general and administrative expense and $47,000 was recorded as
a research and development expense.





No
options were exercised in the nine month periods ended September 30, 2009 and
2008.





It is our
policy to issue options from shareholder approved incentive plans. However, if
the options are issued as an inducement for an individual to join the Company,
we may issue stock options outside of shareholder approved
plans.  Options granted to employees under shareholder approved
incentive plans have a ten-year term and vest over a two to four-year period of
service.  All options and stock purchase rights are granted with an
exercise price equal to the current market value on the date of grant and,
accordingly, options or stock purchase rights have no intrinsic value on the
date of grant.  Based on the closing market price of our common stock
at September 30, 2009 of $0.79, stock options exercisable or expected to vest at
September 30, 2009, have an intrinsic value of $155,000.  At September
30, 2009, 744,302 shares remain available to grant under our existing stock
plans.


9
 Index


Warrants





At
September 30, 2009, we have warrants outstanding to purchase 46,706 shares of
our common stock with an exercise price of $6.39 per share which expire in
February 2016, and warrants outstanding to purchase 117,423 shares of our common
stock with an exercise price of $1.91 per share which expire in July
2016.





Additionally,
performance based warrants to purchase 240,000 shares of our common stock with
an exercise price of $1.91, which expire in February 2016, are outstanding but
unvested at September 30, 2009.  The total cost of the performance
based warrants will be charged to expense over the period of performance. The
costs will be determined based on the fair value of the warrants determined
using the Black-Scholes model, revalued at each Company reporting date until
fully vested.  The fair value of the warrants using the Black-Scholes
model, 66% volatility, 0% dividend yield, expected term of 6.4 years, and 2.3%
interest rate was $84,000 at September 30, 2009.  No costs were
charged to expense at September 30, 2009 as it is not yet probable that any
warrants will vest.





B.   Authorization
of Company Buy-Back of Common Stock





On March
5, 2008, we announced that our Board of Directors approved a stock repurchase
program for up to five percent of our then outstanding common
shares.  The shares may be repurchased from time to time in open
market transactions or privately negotiated transactions at our discretion,
subject to market conditions and other factors.  There were
approximately 41.8 million shares of common stock outstanding on March 5,
2008.





During the nine month period ended
September 30, 2009, we did not purchase any shares.During the nine month
period ended September 30, 2008, we repurchased 1,082,796 shares at a total cost
of $1,017,000.  During the year ended December 31, 2008, we
repurchased and retired 1,131,622 shares of our common stock at a total cost of
$1,041,000.





C.  Contingency
– Legal Proceedings





On or about April 20, 2009, we became
aware of a qui tam complaint that was filed under seal by Jeffrey J. Bierman on
March 28, 2005 in the United States District Court for the District of
Massachusetts against us and other companies that have allegedly manufactured
bone growth stimulation devices, including Orthofix International N.V.,
Orthofix, Inc., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone
Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems,
Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew,
Inc.  By order entered on March 24, 2009, the court unsealed the
amended complaint.  The amended complaint alleges various causes of
action under the federal False Claims Act and state and city false claims acts
premised on the contention that the defendants improperly promoted the sale, as
opposed to the rental, of bone growth stimulation devices.  The
amended complaint also includes claims against the defendants for, among other
things, allegedly misleading physicians and purportedly causing them to file
false claims and for allegedly violating the Anti-kickback Act by providing free
products to physicians, waiving patients’ insurance co-payments, and providing
inducements to independent sales agents to generate business.





The
United States Government declined to intervene in the case.  On
September 4, 2009, Jeffrey J. Bierman, the Relator/Plaintiff served the amended
complaint to the Company.  We sold our bone growth stimulation
business in November 2003 and have had no further activity in the bone growth
stimulation business since that date.  We intend to defend this matter
vigorously and believe that at all times our billing practices in our bone
growth stimulation business complied with applicable laws.  Based upon
the currently available information, we believe that the ultimate resolution of
this matter will not have a material effect on our financial position, liquidity
or results of operations.


10
 Index


Item2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.





The
following is management’s discussion of significant events in the quarter ended
September 30, 2009 and factors that affected our interim financial condition and
results of operations.  This should be read in conjunction with our
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in our Annual Report on Form 10-K for the year ended
December 31, 2008, our “Risk Factors” contained therein and Item 1A. Risk
Factors included in Part II of this quarterly report.





Overview
of the Business





OrthoLogic
Corp., dba Capstone Therapeutics, is a biotechnology company focused on the
development and commercialization of the novel synthetic peptides AZX100 and
Chrysalin® (TP508).





In 2009
and 2008, our activities included:





·
            Evaluating
      AZX100 for medically and commercially significant applications, such as
      prevention of hypertrophic and keloid scarring, treatment of pulmonary
      disease and vascular intimal hyperplasia.  We are executing a
      development plan for this peptide which included filing an IND for dermal
      scarring in 2007 and commencement of Phase 1 safety studies in this
      indication in the first quarter of 2008.  Our Phase 1a study was
      completed in May 2008.  The study’s Safety Committee reviewing
      all safety-related aspects of the Phase 1a trial was satisfied with the
      profile of AZX100.  We initiated a second safety study in dermal
      scarring (Phase 1b), which was completed in the fourth quarter of
      2008.  The study’s Safety Committee reviewing all safety-related
      aspects of the Phase 1b trial was again satisfied with the profile of
      AZX100.  We commenced in the first quarter of 2009 AZX100 Phase
      2 human clinical trials in keloid scar revision and dermal scarring
      following shoulder surgery.  We also continued to perform
      pre-clinical studies supporting multiple indications for
      AZX100.





·
            Pre-clinical
      experiments investigating the potential of Chrysalin to modulate the
      health of endothelial tissue in blood vessels and other
      mechanism-of-action studies to support our strategy to partner our
      vascular product candidates.  We did not perform additional
      pre-clinical or clinical studies in fracture repair, wound healing, spine
      fusion, cartilage defect repair, dental bone repair or tendon
      repair.  In 2009, we are continuing studies to support our
      vascular partnering efforts.





Critical
Accounting Policies





Our
critical accounting policies are those that affect, or could affect our
financial statements materially and involve a significant level of judgment by
management.  The accounting policies and related risks described in
our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 13, 2009, for the year ended December 31, 2008 are those
that depend most heavily on these judgments and estimates.  As of
September 30, 2009, there have been no material changes to any of the critical
accounting policies contained therein.


11
 Index


Results
of Operations Comparing Three-Month Period Ended September 30, 2009 to the
Corresponding Period in 2008.





General and Administrative
(“G&A”) Expenses:  G&A expenses related to our ongoing
development operations were $604,000 in the third quarter of 2009 compared to
$815,000 in the third quarter of 2008.  Our administrative expenses
during the third quarter of 2009 reflect a comparable level of administrative
activity to the same period in 2008.  The third quarter of 2009 was
favorably impacted by reduced costs related to the decision by the Securities
and Exchange Commission to defer, for one more year, the requirement for the
Company to have its independent registered public accountant give an opinion on
the Company’s internal control over financial reporting, as well as the
previously announced staff reduction.





Research and Development
Expenses:  Research and development expenses were $2,843,000
for the third quarter of 2009 compared to $2,817,000 for the third quarter in
2008.  Our research and development expenses reflect a comparable
level of research and development activity in the third quarter of 2009 compared
to the same period in 2008.  However, in comparison to the third
quarter of 2008, expenditures were greater on clinical trials and less on
pre-clinical research in the third quarter of 2009.





Interest and Other Income,
Net:  Interest and other income, net decreased from $488,000 in
the third quarter of 2008 to $150,000 in the third quarter of 2009 due to the
decrease in interest rates earned on investments between the two periods and
reduction in the amount available for investment.





Net Loss:  We
incurred a net loss in the third quarter of 2009 of $3.3 million compared to a
net loss of $3.1 million in the third quarter of 2008.  The $0.2
million increase in the net loss for the three months ended September 30, 2009
compared to the same period in 2008 resulted primarily from  reduced
interest income, due to the decrease in interest rates earned on investments
between the two periods and reduction in the amount available for
investment.  The impact of the decrease in interest income was
partially offset by the previously described G&A cost
reduction.





Results
of Operations Comparing Nine-Month Period Ended September 30, 2009 to the
Corresponding Period in 2008.





General and Administrative
(“G&A”) Expenses:  G&A expenses related to our ongoing
development operations were $2,172,000 in the nine months ended September 30,
2009 compared to $2,378,000 in the same period in 2008.  Our
administrative expenses during the nine months ended September 30, 2009 reflect
a comparable level of administrative activity to the same period of
2008.    The nine months ended September 30, 2009 were
favorably impacted by reduced costs related to the decision by the Securities
and Exchange Commission to defer, for one more year, the requirement for the
Company to have its independent registered public accountant give an opinion on
the Company’s internal control over financial reporting, as well as the
previously announced staff reduction.




Research and Development
Expenses:  Research and development expenses were $9,030,000
for the nine months ended September 30, 2009, compared to $7,845,000 for the
same period in 2008.  Our research and development expenses increased
$1,185,000 in the nine months ended September 30, 2009 compared to the same
period in 2008 primarily due to an increase in AZX100 clinical trial activity
and a $600,000 purchase of peptide for pre-clinical studies.  Given
the overlapping nature of our research efforts it is not possible to clearly
separate research expenditures between Chrysalin and AZX100; however, the
majority of our research and development expenses in 2009 and 2008 were directed
toward AZX100 development efforts.


12
 Index


Interest and Other Income,
Net:  Interest and other income, net decreased from $1,659,000
in the nine months ended September 30, 2008 to $641,000 in the same period in
2009 due to the decrease in interest rates earned on investments between the two
periods and reduction in the amount available for investment.





Net Loss:  We
incurred a net loss in the nine months ended September 30, 2009 of $10.6 million
compared to a net loss of $8.6 million in the same period in
2008.  The $2.0 million increase in the net loss for the nine months
ended September 30, 2009 compared to the same period in 2008 resulted primarily
from an increase in AZX100 clinical trial activity, purchases of peptide for
pre-clinical studies, and reduced interest income, due to the decrease in
interest rates earned on investments between the two periods and reduction in
the amount available for investment.





Liquidity
and Capital Resources





We
historically financed our operations through operating cash flows and the public
and private sales of equity securities.  However, with the sale of our
Bone Device Business in November 2003, we sold all of our revenue producing
operations.  We received approximately $93.0 million in cash from the
sale of our Bone Device Business.  On December 1, 2005, we received
the additional $7.2 million, including interest, from the escrow balance related
to the sale of the Bone Device Business.  On February 27, 2006, we
entered into an agreement with Quintiles (see Note 15 in our Annual Report on
Form 10-K for the year ended December 31, 2007), which provided an investment by
Quintiles in our common stock, of which $2,000,000 was received on February 27,
2006 and $1,500,000 was received on July 3, 2006.  We also received
net proceeds of $4,612,000 from the exercise of stock options during our
development stage period.   As of September 30, 2009, we had cash
and cash equivalents of $15 million and short-term investments of $23.6
million.





For
AZX100 in 2009, we are continuing research and development expenditures for
further pre-clinical studies supporting multiple indications for AZX100 and
continuing our Phase 2 dermal scarring following shoulder surgery and keloid
revision clinical trials.





We
announced that we have no immediate plans to re-enter clinical trials for
Chrysalin-based product candidates and a strategic shift in our development
approach to our Chrysalin product candidates.  We currently intend to
pursue development partnering or licensing opportunities for our Chrysalin-based
product candidates, a change from our previous development history of
independently conducting human clinical trials necessary to advance our
Chrysalin-based product candidates to market.  We will, to the extent
necessary to support our development partnering or licensing efforts, continue
to explore Chrysalin’s therapeutic value in tissues and diseases exhibiting
endothelial dysfunction as well as the science behind and potential of
Chrysalin.





Our
future research and development expenses may vary significantly from prior
periods depending on our decisions on our future Chrysalin and AZX100
development plans.





On March
5, 2008, we announced a stock repurchase program and through September 30, 2009,
we had repurchased and retired 1,131,622 shares of our common stock, at a total
cost of $1,041,000, and have allocated approximately $1,000,000 to fund possible
future stock repurchases.





We
anticipate that our cash and short-term investments will be sufficient to meet
our presently projected cash and working capital requirements for the next year.
However, the timing and amounts of cash used will depend on many
factors.  To complete the clinical trials and supporting research and
production efforts necessary to obtain FDA approval for either AZX100 or
Chrysalin product candidates would require us to seek other sources of
capital.  New sources of funds, including raising capital through the
sales of securities, joint venture or other forms of joint development
arrangements, sales of development rights, or licensing agreements, may not be
available or may only be available at terms that would have a material adverse
impact on our existing stockholders’ interests.


13
 Index


Item4.
            Controls
      and Procedures





Disclosure Controls and
Procedures





Our
management, with the participation of our principal executive officer and
principal financial and accounting officer,  has reviewed and
evaluated our disclosure controls and procedures (as defined in the Securities
Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form
10-Q. Based on that evaluation, our management, including our principal
executive officer and principal financial and accounting officer, has concluded
that our disclosure controls and procedures were effective as of the end of the
period covered by this Form 10-Q in ensuring that information required to be
disclosed in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and is accumulated and communicated to management, including our principal
executive officer and principal financial and accounting officer, as
appropriate, to allow timely decisions regarding required
disclosure.





Internal Control Over
Financial Reporting





There were no changes in our internal
control over financial reporting during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





PartII – Other Information





Item
      1.
            Legal
      Proceedings





On or
about April 20, 2009, we became aware of a qui tam complaint that was filed
under seal by Jeffrey J. Bierman on March 28, 2005 in the United States District
Court for the District of Massachusetts against us and other companies that have
allegedly manufactured bone growth stimulation devices, including Orthofix
International N.V., Orthofix, Inc., DJO Incorporated, Reable Therapeutics, Inc.,
the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI
Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith &
Nephew, Inc.  By order entered on March 24, 2009, the court unsealed
the amended complaint.  The amended complaint alleges various causes
of action under the federal False Claims Act and state and city false claims
acts premised on the contention that the defendants improperly promoted the
sale, as opposed to the rental, of bone growth stimulation
devices.  The amended complaint also includes claims against the
defendants for, among other things, allegedly misleading physicians and
purportedly causing them to file false claims and for allegedly violating the
Anti-kickback Act by providing free products to physicians, waiving patients’
insurance co-payments, and providing inducements to independent sales agents to
generate business.





The
United States Government declined to intervene in the case.  On
September 4, 2009, Jeffrey J. Bierman, the Relator/Plaintiff served the amended
complaint to the Company.  We sold our bone growth stimulation
business in November 2003 and have had no further activity in the bone growth
stimulation business since that date.  We intend to defend this matter
vigorously and believe that at all times our billing practices in our bone
growth stimulation business complied with applicable laws.  Based upon
the currently available information, we believe that the ultimate resolution of
this matter will not have a material effect on our financial position, liquidity
or results of operations.


14
 Index


Item 1A.
            Risk
      Factors





Forward
looking statements





We may
from time to time make written or oral forward-looking statements, including
statements contained in our filings with the Securities and Exchange Commission
and our reports to stockholders.  The safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995
protects companies from liability for their forward looking statements if they
comply with the requirements of that Act.  This Quarterly Report on
Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for
the year ended December 31, 2008, and contains forward-looking statements made
pursuant to that safe harbor.  These forward-looking statements relate
to future events or to our future financial performance, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking
statements.  In some cases, you can identify forward-looking
statements by the use of words such as “may,” “could,” “expect,” “intend,”
“plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”
“continue,” or the negative of these terms or other comparable
terminology.  You should not place undue reliance on forward-looking
statements since they involve known and unknown risks, uncertainties and other
factors which are, in some cases, beyond our control and which could materially
affect actual results, levels of activity, performance or
achievements.  Factors that may cause actual results to differ
materially from current expectations include, but are not limited
to:





·
            unfavorable
      results of our product candidate development
  efforts;


·
            unfavorable
      results of our pre-clinical or clinical
testing;


·
            delays
      in obtaining, or failure to obtain FDA
  approvals;


·
            increased
      regulation by the FDA and other
agencies;


·
            the
      introduction of competitive
products;


·
            impairment
      of license, patent or other proprietary
rights;


·
            failure
      to achieve market acceptance of our
products;


·
            the
      impact of present and future collaborative
  agreements;


·
            failure
      to successfully implement our drug development strategy;
    and


·
            failure
      in the future to meet the requirements for continued listing on the NASDAQ
      Markets.





If one or
more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary significantly from
what we projected. Any forward-looking statement you read in this Quarterly
Report on Form 10-Q reflects our current views with respect to future events and
is subject to these and other risks, uncertainties and assumptions relating to
our operations, results of operations, business strategy and
liquidity.  We assume no obligation to publicly update or revise these
forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the
future.





There are
no material changes from the risk factors disclosed in our Annual Report on Form
10-K for the year ended December 31, 2008.





Item6.  Exhibits





See
Exhibit List following this report.


15
 Index


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





ORTHOLOGIC CORP.
              (Registrant)Signature
            Title
            Date/s/ John M. Holliman, III
              John
      M. Holliman, III
            Executive
      Chairman
              (Principal
      Executive Officer)
            November
      9, 2009/s/ Les M. Taeger
              Les
      M. Taeger
            Senior
      Vice President and Chief
              Financial
      Officer
              (Principal
      Financial and Accounting Officer)
            November
      9, 2009


16
 Index


OrthoLogic
Corp.


(the
“Company”)


Exhibit
Index to Quarterly Report on Form 10-Q


For
the Quarterly Period Ended September 30, 2009





Exhibit
              No.
            Description
            Incorporated by
      Reference To:
            Filed
      Herewith31.1
            Certification
      of Principal Executive Officer Pursuant to Securities Exchange Act Rule
      13a-14(a), as amended.
            
            X31.2
            Certification
      of Principal Financial and Accounting Officer Pursuant to Securities
      Exchange Act Rule 13a-14(a), as amended
            
            X32
            Certification
      of Principal Executive Officer and Principal Financial and Accounting
      Officer Pursuant to 18 U.S.C. Section 1350*





*
Furnished herewith