UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q


(Mark
One)





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





For
      the quarterly period ended
              March
      31, 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.


TYeso No





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).


o Yeso No





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 oAccelerated
filer o Non-accelerated
filer o(do
not check if a smaller reporting company)Smaller reporting
company T





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes oNo T





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 April 30, 2009.







1





ORTHOLOGIC CORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)





INDEX





Page
      No.Part
      I
                                            
                                            Financial
      InformationItem
      1.
                                            
                                            Financial Statements (Unaudited)Condensed Balance Sheets as of March 31, 2009 and December 31,
      2008
                                            
                                            3Condensed Statements of Operations for the three months ended
      March 31, 2009 and 2008
                                            
                                            4Condensed Statements of Cash Flows for the three months ended
      March 31, 2009 and 2008
                                            
                                            5Notes to Condensed Financial Statements
                                            
                                            6Item
      2.
                                            
                                            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                            
                                            10Item
      4.
                                            
                                            Controls and Procedures
                                            
                                            12Part
      II
                                            
                                            Other
      InformationItem
      1A.
                                            
                                            Risk Factors
                                            
                                            12Item
      6.
                                            
                                            Exhibits
                                            
                                            13








EXHIBIT
31.1


EXHIBIT
31.2


EXHIBIT
32





2
 Index





PART
I – Financial Information


Item1.
            Financial
      Statements





ORTHOLOGIC CORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


CONDENSED
BALANCE SHEETS


(in
thousands, except share data)





March
      31,
                                              
                                              
                                              December
      31,2009
                                              
                                              
                                              2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                                              
                                              $
                                              20,620
                                              
                                              
                                              $
                                              23,088Short-term
      investments
                                              
                                              
                                              22,959
                                              
                                              
                                              
                                              22,675Prepaids
      and other current assets
                                              
                                              
                                              853
                                              
                                              
                                              
                                              1,094Total
      current assets
                                              
                                              
                                              44,432
                                              
                                              
                                              
                                              46,857Furniture
      and equipment, net
                                              
                                              
                                              404
                                              
                                              
                                              
                                              436Long-term
      investments
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,221Total
      assets
                                              
                                              $
                                              44,836
                                              
                                              
                                              $
                                              49,514LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                                              
                                              $
                                              651
                                              
                                              
                                              $
                                              1,063Accrued
      compensation
                                              
                                              
                                              421
                                              
                                              
                                              
                                              648Other
      accrued liabilities
                                              
                                              
                                              310
                                              
                                              
                                              
                                              281Total
      current liabilities
                                              
                                              
                                              1,382
                                              
                                              
                                              
                                              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
                                              
                                              
                                              188,394
                                              
                                              
                                              
                                              188,314Accumulated
      deficit
                                              
                                              
                                              (144,960
                                              )
                                              
                                              
                                              (140,812
                                              )Total
      stockholders' equity
                                              
                                              
                                              43,454
                                              
                                              
                                              
                                              47,522Total
      liabilities and stockholders' equity
                                              
                                              $
                                              44,836
                                              
                                              
                                              $
                                              49,514See
      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
                                                          March
      31,
                                                        
                                                        
                                                        As
      a Development
                                                          Stage
      Company
                                                          August
      5, 2004 –
                                                          March
      31,2009
                                                        
                                                        
                                                        2008
                                                        
                                                        
                                                        2009OPERATING
      EXPENSESGeneral
      and administrative
                                                        
                                                        $
                                                        807
                                                        
                                                        
                                                        $
                                                        821
                                                        
                                                        
                                                        $
                                                        20,882Research
      and development
                                                        
                                                        
                                                        3,608
                                                        
                                                        
                                                        
                                                        2,442
                                                        
                                                        
                                                        
                                                        77,127Purchased
      in-process research and development
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        34,311Other
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (375
                                                        )Total
      operating expenses
                                                        
                                                        
                                                        4,415
                                                        
                                                        
                                                        
                                                        3,263
                                                        
                                                        
                                                        
                                                        131,945Interest
      and other income, net
                                                        
                                                        
                                                        (267
                                                        )
                                                        
                                                        
                                                        (606
                                                        )
                                                        
                                                        
                                                        (12,901
                                                        )Loss
      from continuing operations before taxes
                                                        
                                                        
                                                        4,148
                                                        
                                                        
                                                        
                                                        2,657
                                                        
                                                        
                                                        
                                                        119,044Income
      tax benefit
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (7
                                                        )Loss
      from continuing operations
                                                        
                                                        
                                                        4,148
                                                        
                                                        
                                                        
                                                        2,657
                                                        
                                                        
                                                        
                                                        119,037Discontinued
      operations - net gain on sale of the bone device business, net of taxes of
      $267
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (2,202
                                                        )NET
      LOSS
                                                        
                                                        $
                                                        4,148
                                                        
                                                        
                                                        $
                                                        2,657
                                                        
                                                        
                                                        $
                                                        116,835Per
      Share Information:Net
      loss, basic and diluted
                                                        
                                                        $
                                                        0.10
                                                        
                                                        
                                                        $
                                                        0.06Basic
      and diluted shares outstanding
                                                        
                                                        
                                                        40,775
                                                        
                                                        
                                                        
                                                        41,763See
      notes to unaudited condensed financial statements





4
 Index





ORTHOLOGIC CORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


CONDENSED
STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





Three
      months ended
                                                        March
      31,
                                                      
                                                      
                                                      As
      a DevelopmentStage
      CompanyAugust
      5, 2004 –March
      31,2009
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009OPERATING
      ACTIVITIESNet
      loss
                                                      
                                                      $
                                                      (4,148
                                                      )
                                                      
                                                      $
                                                      (2,657
                                                      )
                                                      
                                                      $
                                                      (116,835
                                                      )Non
      cash items:Deferred
      tax expense
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      770Depreciation
      and amortization
                                                      
                                                      
                                                      32
                                                      
                                                      
                                                      
                                                      32
                                                      
                                                      
                                                      
                                                      3,597Non-cash
      stock compensation
                                                      
                                                      
                                                      79
                                                      
                                                      
                                                      
                                                      111
                                                      
                                                      
                                                      
                                                      4,140Gain
      on sale of bone device business
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (2,298
                                                      )In-process
      research and development
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      34,311Change
      in other operating items:Prepaids
      and other current assets
                                                      
                                                      
                                                      241
                                                      
                                                      
                                                      
                                                      (116
                                                      )
                                                      
                                                      
                                                      855Accounts
      payable
                                                      
                                                      
                                                      (412
                                                      )
                                                      
                                                      
                                                      (39
                                                      )
                                                      
                                                      
                                                      (320
                                                      )Accrued
      liabilities
                                                      
                                                      
                                                      (197
                                                      )
                                                      
                                                      
                                                      (433
                                                      )
                                                      
                                                      
                                                      (2,282
                                                      )Cash
      flows used in operating activities
                                                      
                                                      
                                                      (4,405
                                                      )
                                                      
                                                      
                                                      (3,102
                                                      )
                                                      
                                                      
                                                      (78,062
                                                      )INVESTING
      ACTIVITIESExpenditures
      for furniture and equipment, net
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (53
                                                      )
                                                      
                                                      
                                                      (943
                                                      )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
                                                      
                                                      
                                                      (7,549
                                                      )
                                                      
                                                      
                                                      (17,253
                                                      )
                                                      
                                                      
                                                      (234,595
                                                      )Maturities
      of investments
                                                      
                                                      
                                                      9,486
                                                      
                                                      
                                                      
                                                      5,697
                                                      
                                                      
                                                      
                                                      269,574Cash
      flows provided by (used in) provided by investing
    activities
                                                      
                                                      
                                                      1,937
                                                      
                                                      
                                                      
                                                      (11,609
                                                      )
                                                      
                                                      
                                                      36,328FINANCING
      ACTIVITIESNet
      proceeds from stock option exercises
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      4,612Net
      proceeds from sale of stock
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,376Common
      stock purchases
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (169
                                                      )
                                                      
                                                      
                                                      (1,041
                                                      )Cash
      flows (used in) provided by financing activities
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (169
                                                      )
                                                      
                                                      
                                                      6,947NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                                                      
                                                      
                                                      (2,468
                                                      )
                                                      
                                                      
                                                      (14,880
                                                      )
                                                      
                                                      
                                                      (34,787
                                                      )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                                                      
                                                      
                                                      23,088
                                                      
                                                      
                                                      
                                                      20,943
                                                      
                                                      
                                                      
                                                      55,407CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                                                      
                                                      $
                                                      20,620
                                                      
                                                      
                                                      $
                                                      6,063
                                                      
                                                      
                                                      $
                                                      20,620Supplemental
      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
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      4,058See
      notes to unaudited condensed financial statements





5
 Index





ORTHOLOGICCORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


March
31, 2009








OVERVIEW
OF BUSINESS





Description of the
business





OrthoLogic,
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 and is 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
(TP508), 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 will 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 March
31, 2009, we have incurred $117 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.





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.  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 March 31, 2009, there have been no material changes
to any of the critical accounting policies contained therein.





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.





7
 Index





Loss
per Common Share





Because
the average market price of our common stock for the three months ended March
31, 2009 was lower than the exercise prices of outstanding options and warrants,
all outstanding options and warrants were anti-dilutive at March 31, 2009 and
excluded from the calculation of loss per share.  At March 31, 2009,
options and warrants to purchase 3,392,141 shares of our common stock, at
exercise prices ranging from $1.02 to $7.83 per share, were
outstanding.





A.   Stock
Based Compensation





2009
Stock Options





On
January 1, 2009, the Board of Directors conditionally granted each Director
fully vested options to purchase 10,000 shares of our common stock, with the
exercise price of $0.42 determined by the closing market price on the date
of grant.





On
February 3, 2009, the Board of Directors conditionally granted options to
employees to purchase 375,000 shares of our common stock with the exercise price
of $0.45 determined by the closing market price on the date of
grant.





The
options were conditionally granted subject to stockholder approval of Proposal 2
in the Proxy Statement for our Annual Meeting to be held on May 8, 2009, to
amend our 2005 Equity Incentive Plan (the “Plan”) to increase the number of
shares available for issuance under the Plan by 1,250,000 shares.





2009
Stock Awards





We did
not award any shares of our common stock during the three-month period ended
March 31, 2009.





2008
Stock Options





On
January 1, 2008, the Board of Directors granted each Director a fully vested
option to purchase 10,000 shares of our common stock at an exercise price of
$1.35.  Additionally, during the three months ended March 31, 2008, we
granted employees options to purchase 217,173 shares of our common stock at an
exercise price of $1.02. The options vest over a two to four year
period.





We used
the Black-Scholes model with the following assumptions, to determine the total
fair value of $147,000 for options to purchase 267,173 shares of our common
stock issued during the three months ended March 31, 2008:





Three
      months endedMarch 31,
      2008Risk
      free interest rate
                2.4%  -  3.4%Volatility
                57%  -  58%Expected
      term from vesting
                3.7
      YearsDividend
      yield
                0%





8
 Index





2008
Stock Awards





On
January 1, 2008, our Board of Directors awarded 92,595 shares of restricted
stock (18,519 shares to each director), which vested on January 1,
2009.  The total fair value of the awards, determined using the
closing price of our common stock on the date of grant, was $125,000, of which
$26,000 was recognized as compensation cost in the three months ended March 31,
2008.





On
February 21, 2008, we awarded 56,373 fully vested shares of our common stock,
having a fair value on the date of the award of $57,500, to various
employees.  The fair value of the awards was recognized as
compensation cost in the three months ended March 31, 2008.





Summary





Non-cash
stock compensation cost for the three months ended March 31, 2009, totaled
$79,000.  In the condensed Statements of Operations for the three
months ended March 31, 2009, non-cash stock compensation expense of $55,000 was
recorded as a general and administrative expense and $24,000 was recorded as a
research and development expense.





Non-cash
stock compensation cost for the three months ended March 31, 2008, totaled
$111,000.  In the condensed Statements of Operations for the three
months ended March 31, 2008, non-cash stock compensation expense of $88,000 was
recorded as a general and administrative expense and $23,000 was recorded as a
research and development expense.





No
options were exercised in the three month periods ended March 31, 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 March 31, 2009 of $0.55, stock options exercisable or expected to vest at
March 31, 2009, have no intrinsic value.  At March 31, 2009, 30,302
shares remain available to grant under our existing stock plans.





Warrants





At March
31, 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
(as described in Note 6 of the Notes to Financial Statements included in our
Annual Report on Form 10-K for the year ended December 31, 2008), 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
March 31, 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 by 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,
65% volatility, 0% dividend yield, expected term of 6.9 years, and 1.7% interest
rate was $50,000 at March 31, 2009.  No costs were charged to expense
at March 31, 2009 as it is not yet probable that any warrants will
vest.




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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 its 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 three month period ended March 31, 2009, we did not purchase any
shares.During the
year ended December 31, 2008, we purchased and retired 1,131,622 shares of our
common stock at a total cost of $1,041,000.






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
March 31, 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,
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
      treatment of pulmonary disease, prevention of hypertrophic and keloid
      scarring and 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 satisfied with the profile of
      AZX100.  We commenced AZX100 Phase 2 human clinical trials in
      keloid scar revision and dermal scarring following shoulder surgery in the
      first quarter of 2009.  We also expect to continue to perform
      further pre-clinical studies supporting multiple indications for AZX100 in
      2009.





·
            Pre-clinical
      experiments tying Chrysalin to potential modulation of 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 will continue studies to support our
      vascular partnering efforts.





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Results
of Operations Comparing Three-Month Period Ended March 31, 2009 to the
Corresponding Period in 2008.





General and Administrative
(“G&A”) Expenses:  G&A expenses related to our ongoing
development operations were $807,000 in the first quarter of 2009 compared to
$821,000 in the first quarter of 2008.  Our administrative expenses
during the first quarter of 2009 reflect a comparable level of administrative
activity to the same period of 2008.





Research and Development
Expenses:  Research and development expenses were $2,442,000
for the first three months in 2008 compared to $3,608,000 for the first three
months in 2009.  Our research and development expenses increased
$1,166,000 in the first quarter of 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 towards AZX100
development efforts.





Interest and Other Income,
Net:  Interest and other income, net decreased from $606,000 in
the first quarter of 2008 to $267,000 in the first quarter of 2009 due to the
decrease in interest rates between the two periods and reduction in the amount
available for investment.





Net Loss:  We
incurred a net loss in the first three months of 2009 of $4.1 million compared
to a net loss of $2.7 million in the first three months of 2008.  The
$1.4 million increase in the net loss for the three months ended March 31, 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 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 March 31, 2009, we had cash and
cash equivalents of $20.6 million and short-term investments of $23.0
million.





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 continue to
explore Chrysalin’s therapeutic value in tissues and diseases exhibiting
endothelial dysfunction as well as the science behind and potential of
Chrysalin.





11
 Index





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





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 at March 31, 2009, we had
repurchased 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 of 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.








Item4.
            Controls
      and Procedures





Disclosure Controls and
Procedures





Our
principal executive officer and principal financial officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Form 10-Q. Based on their evaluation, our
principal executive officer and principal financial officer have each concluded
that, as of the end of such period, our disclosure controls and procedures are
effective and provide reasonable assurance that we record, process, summarize,
and report information required to be disclosed in the reports we file under the
Securities Exchange Act of 1934 within the time periods specified by the
Securities and Exchange Commission’s rules and forms.








Internal Control Over
Financial Reporting





There have not been any 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.




Part
II – Other Information







Item1A.
            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:





12
 Index





·
            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.





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 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)
                          
                          May
      7, 2009/s/ Les M. Taeger
                            Les
      M. Taeger
                          
                          Senior
      Vice-President and Chief
                            Financial
      Officer
                            (Principal
      Financial and Accounting Officer)
                          
                          May
      7, 2009




14
 Index
 
 OrthoLogic
Corp.
 (the
“Company”)
 Exhibit
Index to Quarterly Report on Form 10-Q
 For
the Quarterly Period Ended March 31, 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