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 June 30, 2003

                                       or

[ ]  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 of other jurisdiction of                           (IRS Employer
      incorporation or organization)                         Identification No.)


1275 W. Washington Street, 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] Yes [ ] No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act): [X] Yes [ ] 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.

        32,951,896 shares of common stock outstanding as of July 25, 2003
<PAGE>
                                ORTHOLOGIC CORP.
                                      INDEX

                                                                        Page No.
Part I    Financial Information

          Item 1. Financial Statements

                  Condensed Consolidated Balance Sheets as of
                  June 30, 2003 and December 31, 2002                          3

                  Condensed Consolidated Statements of Operations for the
                  Three months and Six months ended June 30, 2003 and 2002     4

                  Condensed Consolidated Statements of Cash Flows for the
                  Six months ended June 30, 2003 and 2002                      5

                  Notes to Unaudited Condensed Consolidated Financial
                  Statements                                                   6

          Item 2. Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                         13

          Item 3. Quantitative and Qualitative Disclosures about Market Risk  20

          Item 4. Controls and Procedures                                     20

Part II   Other Information

          Item 1. Legal Proceedings                                           27

          Item 4. Submission of Matters to a Vote of Security Holders         27

          Item 6. Exhibits and Reports                                        27

                                       2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                                ORTHOLOGIC CORP.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                 (in thousands except share and per share data)

<TABLE>
<CAPTION>
                                                     June 30, 2003   December 31, 2002
                                                     -------------   -----------------
                                                      (Unaudited)
<S>                                                  <C>               <C>
ASSETS
Current assets
  Cash and cash equivalents                          $     12,927      $     11,286
  Short-term investments                                   17,969            18,660
  Accounts receivable less allowance for doubtful
    accounts of $3,047 and $3,111                           8,960             9,641
  Inventory, net                                            2,445             2,568
  Prepaids and other current assets                           454               598
  Deferred income taxes - current                           1,667             1,667
                                                     ------------      ------------
        Total current assets                               44,422            44,420
                                                     ------------      ------------

Furniture and equipment                                     7,632             8,572
Accumulated depreciation                                   (6,303)           (7,074)
                                                     ------------      ------------
  Furniture and equipment, net                              1,329             1,498

Long-term investments                                       6,642             5,659
Deferred income taxes - non-current                           964               964
Investment in Chrysalis BioTechnology                         750               750
Deposits and other assets                                     110               129
                                                     ------------      ------------
  TOTAL ASSETS                                       $     54,217      $     53,420
                                                     ============      ============

LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities
  Accounts payable                                   $        703      $        477
  Accrued liabilities                                       3,932             4,148
  Accrued CPM divestiture costs                                38               210
                                                     ------------      ------------
        Total current liabilities                           4,673             4,835

Deferred rent                                                 316               352
                                                     ------------      ------------
  TOTAL LIABILITIES                                         4,989             5,187
                                                     ------------      ------------

STOCKHOLDERS' EQUITY

Common stock, $.0005 par value:
  50,000,000 shares authorized; 32,933,096
  and 32,088,821 shares issued; 32,891,296 and
  32,047,021 shares outstanding                                16                16
Additional paid-in capital                                139,318           136,945

Common stock to be used for legal settlement                   --             2,078
Accumulated deficit                                       (89,969)          (90,669)
Treasury stock at cost, 41,800 shares                        (137)             (137)
                                                     ------------      ------------
  TOTAL STOCKHOLDERS' EQUITY                               49,228            48,233
                                                     ------------      ------------

  TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $     54,217      $     53,420
                                                     ============      ============
</TABLE>

See Notes to Unaudited Condensed Consolidated Financial Statements.

                                       3
<PAGE>
                                OrthoLogic Corp.
                 Condensed Consolidated Statement of Operations
                      (in thousands, except per share data)
                                    Unaudited

<TABLE>
<CAPTION>
                                                       Three months ended June 30,      Six months ended June 30,
                                                       ----------------------------    ----------------------------
                                                           2003            2002            2003            2002
                                                       ------------    ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>             <C>
Revenues
   Net sales                                           $     11,366    $      9,238    $     21,740    $     17,942
   Royalties from co-promotion agreement                         --             467              --           1,371
                                                       ------------    ------------    ------------    ------------
      Total net revenues                                     11,366           9,705          21,740          19,313
                                                       ------------    ------------    ------------    ------------

Cost of Revenues
  Cost of goods sold                                          1,682           1,443           3,161           2,755
                                                       ------------    ------------    ------------    ------------
    Total cost of revenues                                    1,682           1,443           3,161           2,755
                                                       ------------    ------------    ------------    ------------

Gross Profit                                                  9,684           8,262          18,579          16,558
                                                       ------------    ------------    ------------    ------------

Operating expenses
  Selling, general and administrative                         7,272           6,652          14,683          13,356
  Research and development                                    2,318             749           3,778           1,669
  CPM divestiture and related gains                            (345)           (226)           (345)           (826)
                                                       ------------    ------------    ------------    ------------
      Total operating expenses                                9,245           7,175          18,116          14,199
                                                       ------------    ------------    ------------    ------------

Operating income                                                439           1,087             463           2,359

Other income                                                    131             181             263             368
                                                       ------------    ------------    ------------    ------------

Income before income taxes                                      570           1,268             726           2,727

Provision for income taxes                                       12              12              26              25
                                                       ------------    ------------    ------------    ------------

NET INCOME                                             $        558    $      1,256    $        700    $      2,702
                                                       ============    ============    ============    ============

Net income per common share - basic                    $       0.02    $       0.04    $       0.02    $       0.08
                                                       ------------    ------------    ------------    ------------

Net income per common and equivalent share - diluted   $       0.02    $       0.04    $       0.02    $       0.08
                                                       ------------    ------------    ------------    ------------

Basic shares outstanding                                     32,889          32,609          32,849          32,556

Equivalent shares                                               242             806             230             808
                                                       ------------    ------------    ------------    ------------

Diluted shares outstanding                                   33,131          33,415          33,079          33,364
                                                       ------------    ------------    ------------    ------------
</TABLE>

See Notes to Unaudited Condensed Consolidated Financial Statements.

                                       4
<PAGE>
                                ORTHOLOGIC CORP.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (in thousands)
                                    Unaudited

<TABLE>
<CAPTION>
                                                                Six months ending June 30,
                                                               ----------------------------
                                                                   2003            2002
                                                               ------------    ------------
<S>                                                            <C>             <C>
OPERATING ACTIVITIES

  Net income                                                   $        700    $      2,702
  Non-cash items:
    Depreciation                                                        339             347

  Change in operating assets and liabilities:
    Accounts receivable                                                 681           1,047
    Inventories                                                         123            (767)
    Prepaids and other current assets                                   144            (134)
    Deposits and other assets                                            19              (4)
    Accounts payable                                                    226             276
    Accrued liabilities                                                (252)           (719)
    Accrued liabilities on CPM divestiture and related gains           (172)           (549)
                                                               ------------    ------------
      Net cash provided by operating activities                       1,808           2,199
                                                               ------------    ------------

INVESTING ACTIVITIES

  Expenditures for equipment and furniture                             (170)           (198)
  Purchases of investments                                          (12,989)        (16,125)
  Maturities of investments                                          12,697           5,068
                                                               ------------    ------------
    Net cash used in investing activities                              (462)        (11,255)
                                                               ------------    ------------

FINANCING ACTIVITIES

  Net proceeds from stock option exercises                              295              48
                                                               ------------    ------------
    Net cash provided by financing activities                           295              48
                                                               ------------    ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                             1,641          (9,008)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                       11,286          19,503
                                                               ------------    ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                       $     12,927    $     10,495
                                                               ============    ============

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITES:
  Cash paid during the period for interest                     $          7    $        600
  Cash paid during the period for income taxes                 $         27    $          3
  Common stock issued for legal settlement                     $      2,078    $          9
</TABLE>

See Notes to Unaudited Condensed Consolidated Financial Statements.

                                       5
<PAGE>
                                ORTHOLOGIC CORP.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     DESCRIPTION OF THE BUSINESS. OrthoLogic Corp. ("OrthoLogic" or the
"Company") develops, manufactures and markets proprietary, technologically
advanced orthopedic products designed to promote the healing of musculoskeletal
tissue, with particular emphasis on fracture healing and spinal repair.
OrthoLogic's products are designed to enhance the healing of diseased, damaged,
degenerated or recently repaired musculoskeletal tissue. The Company's products
focus on improving the clinical outcomes and cost-effectiveness of orthopedic
procedures that are characterized by compromised healing, high-cost, potential
for complication and long recuperation time.

FINANCIAL STATEMENT PRESENTATION

     In the opinion of management, the unaudited interim financial statements
include all adjustments necessary for the fair presentation of the Company's
financial position, results of operations, and cash flows. The results of
operations for the interim periods are not indicative of the results to be
expected for the complete fiscal year. The balance sheet as of December 31, 2002
is derived from the Company's audited financial statements included in the 2002
Annual Report on Form 10-K. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2002 Annual Report on Form 10-K.

     USE OF ESTIMATES. The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates. Significant estimates include the allowance for doubtful
accounts (approximately $3.0 million at June 30, 2003 and $3.1 million at
December 31, 2002), which is based primarily on trends in historical collection
rates, consideration of current events, payor mix and other considerations. The
Company derives a significant amount of its revenues in the United States from
third-party payors, including Medicare and certain commercial insurance
carriers, health maintenance organizations, and preferred provider
organizations. Amounts paid under these plans are generally based on fixed or
allowable reimbursement rates. Revenues are recorded at the expected or
pre-authorized reimbursement rates when earned and include unbilled receivables
of $575,000 and $860,000 on June 30, 2003 and December 31, 2002, respectively.
The decrease in the unbilled receivables from December 31, 2002 to June 30, 2003
was primarily the result of changes to the Company's product placement
procedures made in late 2002, resulting in improved billing process. Billings
are subject to review by third party payors and may be subject to adjustments.
Any differences between estimated reimbursement and final determinations are
reflected in the period finalized. The Company maintained a reserve for
inventory shrinkage and obsolescence of $754,000 and $687,000 on June 30, 2003
and December 31, 2002, respectively. In the opinion of management, adequate
allowances have been provided for doubtful accounts, contractual adjustments and
inventory reserves.

     PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of OrthoLogic and its subsidiaries. All inter-company accounts and
transactions have been eliminated. The Company prepares its consolidated
financial statements in accordance with accounting principles generally accepted
in the United States of America. The following briefly describes the significant
accounting policies used in the preparation of the financial statements of the
Company:

     A. CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of cash on
hand and cash deposited with financial institutions, including money market
accounts, and commercial paper purchased with an original maturity of three
months or less.

                                       6
<PAGE>
     B. INVENTORIES. Business inventories are stated at the lower of cost (first
in, first out method) or market. The Company writes down its inventory for
inventory shrinkage and obsolescence. Inventory is written down to estimated
market value based on a number of assumptions, including future demand and
market conditions.

     C. FURNITURE AND EQUIPMENT. Furniture and equipment are stated at cost or,
in the case of leased assets under capital leases, at the present value of
future lease payments at inception of the lease. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the various assets, which
range from three to seven years. Leasehold improvements and leased assets under
capital leases are amortized over the life of the asset or the period of the
respective lease using the straight-line method, whichever is the shortest.

     The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
effective January 1, 2002. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supersedes
Statement of Financial Accounting Standards No. 121, ACCOUNTING OF THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 144 requires that the Company evaluate long-lived assets based on the
net future cash flow expected to be generated from the asset on an undiscounted
basis whenever significant events or changes in circumstances occur that
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS No. 144 did not have a significant impact on the Company's
operating results or financial position.

     D. INVESTMENT IN CHRYSALIS. The Company owns a minority ownership interest
in Chrysalis BioTechnology, Inc., which is recorded at cost (see Note 4).

     E. INCOME TAXES. Under Financial Accounting Standards Board ("FASB") SFAS
No. 109, ACCOUNTING FOR INCOME TAXES, income taxes are recorded based on current
year amounts payable or refundable, as well as the consequences of events that
give rise to deferred tax assets and liabilities. The Company bases its estimate
of current and deferred taxes on the tax laws and rates that are currently in
effect in the appropriate jurisdiction. Pursuant to SFAS No. 109, the Company
has determined that the majority of the deferred tax asset at June 30, 2003
requires a valuation allowance.

     F. RESTRUCTURING AND OTHER RELATED CHARGES. The Company recorded
restructuring charges during the second quarter of 2001 using the authoritative
guidance in Emerging Issues Task Force Issue No. 94-3 ("EITF No. 94-3"),
LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS
TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). In
June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"). The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002, with earlier adoption encouraged. The Company adopted SFAS No. 146
effective January 1, 2003. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF No. 94-3. Under SFAS No. 146, the liability for costs associated with exit
or disposal activities is recognized and measured initially at fair value only
when the liability is incurred, rather than at the date the Company committed to
the exit plan. The adoption of SFAS No. 146 did not have a significant impact on
the Company's operating results or financial position.

     G. REVENUE. Revenue is recognized for sales of the OL1000 and SpinaLogic
products at the time the product is delivered to and accepted by the patient, as
verified by the patient signing a "Patient Agreement Form" accepting financial
responsibility. If the sale of either product is to a commercial buyer, a
purchase order is required, and the revenue is recognized at the time of
shipment to the commercial buyer. The Company's shipping terms are FOB shipping
point.

     The amount of revenue recorded at the time of sale is based on contractual
terms, or if the Company does not have a contract with the third-party payor,
then the amount of revenue recorded is the pricing expected to be approved by
the third-party payor, based on historical experience with that payor. The
Company records differences, if any, between the net revenue amount recognized
at the time of the sale and the ultimate pricing by the primary third-party
payor as an adjustment to sales in the period the Company receives payments from

                                       7
<PAGE>
the third-party payor or earlier if the Company becomes aware of circumstances
that warrant a change in estimate.

     The Hyalgan royalties were recorded in accordance with the Co-Promotion
Agreement and the Termination Agreement the Company had with Hyalgan's
distributor. The agreements with Hyalgan's distributor concluded in December
2002. The Company will receive no subsequent Hyalgan related revenues (see Note
3).

     The Company maintains a warranty reserve for the expected cost to replace
or repair products. Warranty costs are recorded in cost of goods sold.

     H. "TECHNOLOGY YOU CAN TRUST" A REIMBURSEMENT GUARANTEE PROGRAM. In
November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF THE INDEBTEDNESS OF OTHERS, which clarifies the requirements of
SFAS No. 5, ACCOUNTING FOR CONTINGENCIES, relating to a guarantor's accounting
for and disclosures of certain guarantees issued. FIN 45 requires enhanced
disclosures for certain guarantees. FIN 45 also requires certain guarantees that
are issued or modified after December 31, 2002, to be initially recorded on the
balance sheet at fair value. The Company introduced a "Technology You Can Trust"
guarantee program for the OL1000 product beginning March 1, 2003. With this
program, the payments made for the product will be refunded if there is no
progression towards healing provided the treatment plan and other certain
requirements are met. The reserve is based on the percentage of patients who
meet specific documentation and treatment requirements with a further assessment
of the historical percentages of the overall population experiencing an
unsuccessful clinical outcome using the product. The requirements include
specific adherence to product utilization compliance, the exclusion of specific
medical conditions, required documentation by the patient and payor(s) of record
and other certain requirements. At June 30, 2003, the reserve for this program
was $79,400. Management feels that adequate reserves have been established for
this program.

<TABLE>
<CAPTION>
Guarantee reserve                       Increase       Adjustments     Guarantee reserve
December 31, 2002   Use of reserve   to the reserve   to the reserve     June 30, 2003
-----------------   --------------   --------------   --------------     -------------
<S>                   <C>               <C>             <C>                 <C>
        0                 --             $79,400            --              $79,400
</TABLE>

     I. RESEARCH AND DEVELOPMENT. Research and development represents both costs
incurred internally for research and development activities, as well as costs
incurred by the Company to fund the research activities with which the Company
has contracted and certain milestone payments regarding the continued clinical
testing of Chrysalin. All research and development costs are expensed when
incurred.

     J. STOCK-BASED COMPENSATION. In December 2002, the FASB issued SFAS No.
148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE ("SFAS
No. 148") which is effective for fiscal years ended after December 15, 2002.
SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition to
SFAS No. 123's fair value method of accounting for stock-based employee
compensation if a company elects to account for its equity awards under this
method. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and
APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require disclosure of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in both annual and
interim financial statements. The Company is currently evaluating the impact if
it were to adopt the fair value method of accounting for stock-based employee
compensation under all three methods.

     At June 30, 2003, the Company has two stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table presents pro forma disclosures required by
SFAS No. 148 of net income and basic and diluted earnings per share as if
stock-based employee compensation had been recognized during the six months
ended June 30, 2003 and 2002, as determined under the fair value method using
the Black-Scholes pricing model.

                                       8
<PAGE>
<TABLE>
<CAPTION>
                                                     Three months ended             Six months ended
                                                          June 30,                      June 30,
                                                  -------------------------     -------------------------
                                                     2003           2002           2003           2002
                                                  ----------     ----------     ----------     ----------
<S>                                               <C>            <C>            <C>            <C>
Estimated weighted-average fair value
  of options granted during the year:             $     1.16     $     2.32     $     1.23     $     2.19
Net income attributable to common stockholders:
  As reported                                     $      558     $    1,256     $      700     $    2,702
  Stock based compensation expense                $     (137)    $     (171)    $     (266)    $     (360)
                                                  ----------     ----------     ----------     ----------
  Pro forma                                       $      421     $    1,085     $      434     $    2,342
Basic net income per share:
  As reported                                     $     0.02     $     0.04     $     0.02     $     0.08
  Pro forma                                       $     0.01     $     0.03     $     0.01     $     0.07
Diluted net income per share:
  As reported                                     $     0.02     $     0.04     $     0.02     $     0.08
  Pro forma                                       $     0.01     $     0.03     $     0.01     $     0.07
Black Scholes model assumptions:
  Risk free interest rate                                1.4%           3.1%           1.4%           3.1%
  Expected volatility                                     36%            47%            40%            48%
  Expected term                                    2.7 Years      2.7 Years      2.7 Years      2.7 Years
  Dividend yield                                           0%             0%             0%             0%
</TABLE>

     K. INCOME PER COMMON SHARE. Income per common share is computed on the
weighted average number of common or common and equivalent shares outstanding
during each year. Basic earnings per share is computed as net income divided by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur from
common shares issuable through stock options, warrants, and other convertible
securities when the effect would be dilutive.

     L. NEW ACCOUNTING PRONOUNCEMENTS. In January 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES,
which clarifies the application of Accounting Research Bulletin No. 51,
CONSOLIDATED FINANCIAL Statements, relating to consolidation of certain
entities. First, FIN 46 will require identification of the Company's
participation in variable interest entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit it to operate on a stand alone basis. For entities
identified as a VIE, FIN 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE (if any) bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. Interpretation No. 46 applies to VIEs created
or acquired after January 31, 2003. For VIEs existing at January 31, 2003, FIN
46 is effective for accounting periods beginning after June 15, 2003. The
application of FIN 46 did not have a material effect on the Company's financial
statements.

     In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT NO. 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 149"). SFAS No. 149
amended and refined certain characteristics of derivative instruments and
hedges. The application of SFAS No. 149 did not have a material effect on the
Company's financial statements.

     In May 2003, the FASB issued a SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS
No. 150"). SFAS No. 150 requires the classification of certain financial
instruments, previously classified within the equity section of the balance
sheet, to be included in liabilities. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and June 15, 2003 for
all other instruments. The application of SFAS No. 150 did not have a material
effect on the Company's financial statements.

                                       9
<PAGE>
2.   CPM DIVESTITURE AND RELATED GAINS

     CPM DIVESTITURE AND CHANGE IN ESTIMATED COLLECTABILITY OF CPM RECEIVABLES.
In July 2001, the Company announced the sale of its CPM business to OrthoRehab,
Inc. The Company received $12.0 million in cash, with the purchaser assuming
approximately $2.0 million in liabilities in connection with the sale of certain
CPM related assets that had been recorded in the Company's financial statements
at a carrying value of approximately $20.7 million. The Company recorded a $6.9
million charge to write down the CPM assets to their fair value less direct
costs of selling the assets. Under the CPM Asset Purchase Agreement, the Company
was eligible to receive up to an additional $2.5 million of cash if certain
objectives were achieved by the purchaser of the CPM business.

     The parties settled litigation over the $2.5 million payment and other
matters in April 2003. OrthoRehab, Inc. agreed to pay $1.2 million to settle the
contingent payment due to OrthoLogic, and all outstanding claims between the two
companies. Total cash payment of $345,000 was received during the second quarter
of 2003, and is included in the "CPM divestiture and related charges" line item
on the Consolidated Statement of Operations for the three and six month periods
ended June 30, 2003. The remaining $855,000 balance plus interest is scheduled
to be paid over the next 33 months and will be reflected when received. The
litigation is described in greater detail in Note 5.

     At December 31, 2001, the Company had collected $10.2 million of the
remaining $10.8 million of the retained CPM receivables. During 2002, collection
of these receivables was better than anticipated. Based on the improved
collection trends, the Company revised its estimates and increased the estimated
total collection of the retained CPM accounts receivable by $600,000 in the
quarter ended March 31, 2002 which is included in the "CPM Divestiture and
Related Charges" line item in the Consolidated Statement of Operations for the
year ended December 31, 2002 ("2002 Statement of Operations").

     In connection with the sale of the CPM business, the Company notified
approximately 331 of the Company's 505 employees that their positions were being
eliminated. The Consolidated Statement of Operations for the year ended December
31, 2001 ("2001 Statement of Operations") included a charge of approximately
$3.3 million in the "CPM Divestiture and Related Charges" total for severance
and related benefits. The Company also recorded additional exit charges of
approximately $1.4 million for CPM commissions, write offs of prepaid rents,
space build out costs relating to the purchaser's sublease with the Company and
other similar charges, and other CPM related prepaid expenses for which no
future benefits were expected to be received by the Company. These additional
exit costs were also included in the "CPM Divestiture and Related Charges" total
in the 2001 Statement of Operations.

     A summary of the severance and other reserve balances at June 30, 2003 and
2002 are as follows (in thousands):

<TABLE>
<CAPTION>
                                   Reserves        Amount Charged     Cash          Reserves
                               December 31, 2002   Against Assets     Paid        June 30, 2003
                               -----------------   --------------   ----------    -------------
<S>                               <C>                <C>            <C>            <C>
Severance                         $      161         $       --     $     (161)    $       --
Other exit costs                          49                 --            (11)            38
                                  ----------         ----------     ----------     ----------
Total non-recurring charges       $      210         $       --     $     (172)    $       38

                                   Reserves        Amount Charged     Cash          Reserves
                               December 31, 2001   Against Assets     Paid        June 30, 2002
                               -----------------   --------------   ----------    -------------
Severance                         $      946         $       --     $     (538)    $      408
Other exit costs                          76                 --            (11)            65
                                  ----------         ----------     ----------     ----------
Total non-recurring charges       $    1,022         $       --     $     (549)    $      473
</TABLE>

                                       10
<PAGE>
     Cash requirements for the severance and ex it costs were funded from the
Company's current cash balances. Subsequent to  the sale, the Company is no
longer in the CPM business. Substantially all c osts, expenses and impairment
charges related to CPM exit activities were recorded prior to the end of the
second quarter of 2001.

3.   CO-PROMOTION AGREEMENT FOR HYALGAN

     In June 1997, the Company signed an exclusive Co-Promotion Agreement with
Sanofi Synthelabo, Inc. ("Sanofi") at a cost of $4.0 million, which provided the
Company with the right to market the Hyalgan product to orthopedic surgeons in
the United States. The Company capitalized the $4.0 million investment in the
agreement.

     In the fourth quarter of 2000, the Company and Sanofi mutually agreed to
terminate this Co-Promotion Agreement. The Termination Agreement stipulated that
the Company would receive royalties of $5 for each unit of the Hyalgan product
distributed by Sanofi during the two-year period from January 1, 2001 through
December 31, 2002. During 2001, the Company received approximately $3.0 million
in royalties from Sanofi in accordance with the Termination Agreement. During
2002, the Company received an additional $2.2 million in royalties. During the
six month period ended June 30, 2002, the Company received $1.4 million in
royalty payments. The royalty payments ended December 2002. All of the royalties
and co-promotion fees received from Sanofi have been included in the Company's
respective Statements of Operations in the line item entitled "Royalties from
co-promotion agreement."

4.   LICENSING AGREEMENT FOR CHRYSALIN

     In January 1998, the Company acquired a minority equity investment (less
than 10%) in a biotech firm, Chrysalis BioTechnology, Inc. ("Chrysalis"), for
$750,000. As part of the transaction, the Company was awarded a worldwide
exclusive option to license the orthopedic applications of Chrysalin, a patented
23-amino acid peptide that had shown promise in accelerating the healing
process. The Company's agreement with Chrysalis contains provisions for the
Company to continue and expand its option to license Chrysalin contingent upon
regulatory approvals, successful pre-clinical trials, and certain trials and
milestone payments to Chrysalis by the Company.

     In January 1999, the Company exercised its option to license the United
States development, marketing and distribution rights for Chrysalin for fracture
indications. As part of the license agreement, and in conjunction with the Food
and Drug Administration ("FDA") authorization of an Investigational New Drug
("IND") application to begin human clinical trials for fracture repair,
OrthoLogic made a $500,000 milestone payment to Chrysalis in the fourth quarter
of 1999. In January 2000, the Company began enrolling patients in the combined
Phase I/II clinical trial for Chrysalin. In July 2000, the Company made a $2.0
million payment to Chrysalis and announced it was expanding its license
agreement to include all Chrysalin orthopedic indications worldwide.

     In July 2001, the Company paid $1.0 million to Chrysalis to extend its
worldwide license for Chrysalin to include the rights for orthopedic "soft
tissue" indications including cartilage, tendon and ligament repair. The license
agreement calls for the Company to pay certain additional milestone payments and
royalty fees, based upon products developed and achievement of commercial
services.

     In March 2002, the Company received authorization from the FDA to commence
a Phase I/II clinical trial under an IND application for a spinal fusion
indication and made a $500,000 milestone payment to Chrysalis for receiving this
FDA clearance. The Company began enrolling patients during the fourth quarter of
2002. The clinical trial will include approximately 330 patients and will be
performed at 15 to 20 centers in the United States. The purpose of the study is
to evaluate the safety and preliminary efficacy of Chrysalin in combination with
allograft. The patient enrollment process is expected to take approximately 18
to 24 months with a nine-month follow-up period.

                                       11
<PAGE>
     The Company completed a Phase I/II clinical trial utilizing Chrysalin for
fresh fracture repair, and in July of 2002, announced that the FDA had
authorized a Phase III trial for that indication. The trial will be performed at
25 to 30 clinical sites with approximately 500 patients. In addition, the
Company is currently moving forward towards an IND application for a human
clinical trial for Chrysalin for articular cartilage repair. There can be no
assurance that any of these clinical trials will result in favorable data or
that New Drug Application ("NDA") approvals by the FDA, if sought, will be
obtained.

     A payment of $250,000 was expensed in the quarter ended March 31, 2003 and
is included in research and development and reflects a payment made to Chrysalis
in anticipation of a potential IND filing with the FDA for a human clinical
trial for a cartilage indication.

     At this stage of research, the Company is not yet able to apply for FDA
approval to market Chrysalin. The process of obtaining necessary government
approvals is time consuming and expensive. There can be no assurance that the
necessary approvals for new products or applications will be obtained by the
Company or, if they are obtained, that they will be obtained on a timely basis.
Significant additional costs for the Company will be necessary to complete
development of these products.

     OrthoLogic does not own the patents to Chrysalin. Chrysalin was developed
by and patented by Chrysalis. Except for the $750,000 minority equity investment
in Chrysalis, all payments made to Chrysalis have been expensed as research and
development. The license agreement with Chrysalis calls for the Company to pay
certain other additional milestone payments and royalty fees, based upon the
product's development and achievement of commercial introduction.

5.   LITIGATION

     UNITED STATES OF AMERICA EX REL. DAVID BARMAK V. SUTTER CORP., UNITED
STATES ORTHOPEDIC CORP., ORTHOLOGIC CORP., ET AL., United States District Court,
Southern District of New York, Civ Action No 95 Civ 7637. The complaint in this
matter was filed in September 1997 under the Qui Tam provisions of the Federal
False Claims Act and primarily relate to events occurring prior to the Company's
acquisition of Sutter Corporation. The allegations relate to the submission of
claims for reimbursement for continuous passive motion exercisers to various
federal health care programs. In June 2001, the U.S. Department of Justice and
the Company entered into a settlement agreement and the government's amended
complaint was dismissed with prejudice. In October 2001, Plaintiff Barmak filed
a second amended complaint, pursuing the claim independent of the U.S.
Department of Justice, which was dismissed by the court in March 2002. In June
2002, Plaintiff Barmak filed his third amended complaint, which was dismissed
with prejudice by the court on June 19, 2003.

     ORTHOREHAB, INC. AND ORTHOMOTION, INC. V. ORTHOLOGIC CORPORATION AND
ORTHOLOGIC CANADA, LTD., Superior Court of the State of Delaware, County of New
Castle, Case No. C.A. No. 01C-11-224 WCC. In November 2001, OrthoRehab, Inc.,
filed a complaint in connection with its acquisition of certain assets used in
the Company's CPM business in July 2001 alleging, among other things, that some
of the assets purchased were overvalued and that the Company had breached its
contract. The Company settled the dispute in April 2003. Under the terms of the
settlement agreement, OrthoRehab, Inc. agreed to pay $1.2 million to settle all
outstanding claims between the two companies. Cash payments totaling $345,000
were received during second quarter and are included in the "CPM divestiture and
related gains" line item on the Consolidated Statement of Operations in the
period ended June 30, 2003. The remaining $855,000 balance plus interest is
scheduled to be paid over the next 33 months and will be reflected when
received.

     In addition to the matters disclosed above, the Company is involved in
various other legal proceedings that arise in the ordinary course of business.
In management's opinion, the ultimate resolution of these other legal
proceedings are not likely to have a material adverse effect on the financial
position, results of operations or cash flows of the Company.

     The health care industry is subject to numerous laws and regulations of
federal, state, and local governments. Compliance with these laws and
regulations, specifically those relating to the Medicare and Medicaid programs,
can be subject to government review and interpretations, as well as regulatory

                                       12
<PAGE>
actions unknown and unasserted at this time. Recently, federal government
activity has increased with respect to investigations and allegations concerning
possible violations by health care providers of regulations, which could result
in the imposition of significant fines and penalties, as well as significant
repayments of previously billed and collected revenues from patient services.
Management believes that the Company is in substantial compliance with current
laws and regulations.

6.   LINE OF CREDIT

     The Company has a $4.0 million accounts receivable revolving line of credit
with a lending institution. The Company may borrow up to 75% of the eligible
accounts receivable, as defined in the agreement. The interest rate is at the
prime rate. Interest accruing on the outstanding balance and a monthly
administration fee is due in arrears on the first day of each month. The line of
credit was extended in 2002 and expires February 28, 2005. There are certain
financial covenants and reporting requirements associated with the line of
credit. Included in the financial covenants are (1) tangible net worth of not
less than $30.0 million, (2) a quick ratio of not less than 2.0 to 1.0, (3) a
debt to tangible net worth ratio of not less than 0.50 to 1.0, and (4) capital
expenditures will not exceed more than $7.0 million dollars during any fiscal
year. The Company has not utilized this line of credit. As of June 30, 2003, the
Company was in compliance with all the financial covenants.

7.   SEGMENT INFORMATION

     The Company operates as one segment. The various types of revenues and cost
of goods sold are separately identified by product line in the Statement of
Operations. Operating expenses were not directly allocated between the Company's
various lines of business.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     The following is management's discussion of significant factors that
affected the Company's interim financial condition and results of operations.
This should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's Annual
Report on Form 10-K for the year ending December 31, 2002 and the "Special Note
Regarding Forward Looking Statements" below following Item 4.

OVERVIEW OF THE COMPANY'S PRODUCTS AND OTHER PRODUCT DEVELOPMENT

     OrthoLogic's product line includes bone growth stimulation and fracture
fixation devices. The Company's OL1000 product line is sold primarily through
the Company's direct sales force supplemented by regional distributors. The
Company uses an international spine product distributor for the sales and
marketing of its bone growth stimulation device, SpinaLogic(R).

     BONE GROWTH STIMULATION PRODUCTS

     OL1000, OL1000 SC. The OL1000 is a U.S. Food and Drug Administration
("FDA") approved portable, noninvasive, physician-prescribed, electromagnetic
bone growth stimulator designed for patients with nonunion fractures. The OL1000
comprises two magnetic field treatment transducers (coils) and a
microprocessor-controlled signal generator that delivers a highly specific, low
energy signal to the injured area. The device is attached to the patient's arm,
leg or other area where there is a nonunion fracture. The OL1000 then evenly
distributes a magnetic field over the patient's injured area. As a result,
specific placement of the device over the nonunion fracture is not crucial for
product efficacy as it is for some of our competitors' products.

                                       13
<PAGE>
     The patient wears the device for 30 minutes each day. The Company believes
the reduced treatment time leads to increased patient compliance with treatment
protocol. In addition, the micro-controller tracks the patient's daily treatment
compliance.

     The OL1000 is used for the noninvasive treatment of an established nonunion
fracture acquired secondary to trauma, excluding vertebrae and all flat bones. A
nonunion fracture is considered to be established when the fracture site shows
no visibly progressive signs of healing.

     The OL1000 SC is an FDA approved single coil device, which utilizes the
same combined magnetic field as the OL1000, is available in three sizes and is
designed to be more comfortable for patients with certain types of fractures.

     SPINALOGIC(R). SpinaLogic is a portable, noninvasive, electromagnetic bone
growth stimulator, which enhances the healing process as an adjunct to spinal
fusion surgery. The Company believes that SpinaLogic offers benefits similar to
those of the OL1000 in that it is relatively easy to use, requires a small power
supply and requires only 30 minutes of treatment per day. The patient attaches
the device to the lumbar injury location where it provides localized magnetic
field treatment to the fusion site. Like the OL1000, the SpinaLogic device
contains a micro-controller that tracks the patient's daily treatment compliance
and can easily be checked by the surgeon upon follow-up visits. SpinaLogic is
approved by the FDA as an adjunct treatment for primary lumbar spinal fusions of
one or two levels. It is designed for single patient use and is programmed for
270 consecutive, 30-minute daily treatments.

     Sales of bone growth stimulation products were 100% and 95.2% of the
Company's total revenues in the six-month periods ended June 30, 2003 and 2002,
respectively.

     FRACTURE FIXATION DEVICES

     ORTHOFRAME(R)/MAYO(R). The Company began to manufacture and distribute the
OrthoFrame line of external fixation products in 1993. The OrthoFrame/Mayo
product is an external fixation device used in conjunction with surgical
procedures. It is low profile, lightweight, and primarily sold to hospitals. The
Company temporarily ceased manufacturing this product in 2000 to improve the
product packaging, and it was relaunched in the fourth quarter of 2002.

     DISCONTINUED OR DIVESTED PRODUCTS

     In July 2001, the Company sold its continuous passive motion ("CPM")
business. CPM devices provide controlled, continuous movement to joints and
limbs and are designed to reduce swelling, increase joint range of motion,
reduce the length of hospital stay and reduce the incidence of post-trauma and
post-surgical complications.

     The Company also distributed HYALGAN(R) (sodium hyaluronate), a therapeutic
injectable for relief of pain from osteoarthritis of the knee under the terms of
an exclusive Co-Promotion Agreement with Hyalgan's United States distributor,
Sanofi Synthelabo, Inc. The rights to distribute this product began in 1997 and
were terminated in October 2000. The Company received royalties from Hyalgan's
distributor through December 2002. Hyalgan revenues were 7.1% of the Company's
total revenues in the six months ended June 30, 2002. There will be no
subsequent royalties.

     PRODUCTS IN RESEARCH

     In 1999, the Company exercised its option to license the United States
development, marketing, and distribution rights for the fracture indications for
Chrysalin(TM), a new tissue repair synthetic peptide. In 2000, the Company
exercised its options to license Chrysalin worldwide for all orthopedic
applications. The Company's research and development focus is on its Chrysalin
product development program. The Company has three potential Chrysalin products
either in human clinical trials or in late-stage pre-clinical development.

                                       14
<PAGE>
     The Company has not yet applied for FDA approval to market Chrysalin and
there is no assurance that the Company will do so or that it would receive such
approval if sought. OrthoLogic does not own the patents to Chrysalin. Chrysalin
was developed by and patented by Chrysalis BioTechnology, Inc., a company in
which OrthoLogic holds a minority equity interest. OrthoLogic obtained the
worldwide rights to use Chrysalin for all orthopedic indications through a
series of licensing agreements with Chrysalis BioTechnology, Inc.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     USE OF ESTIMATES. The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates. Significant estimates include the allowance for doubtful
accounts (approximately $3.0 million at June 30, 2003 and $3.1 million at
December 31, 2002), which is based primarily on trends in historical collection
rates, consideration of current events, payor mix and other considerations. The
Company derives a significant amount of its revenues in the United States from
third-party payors, including Medicare and certain commercial insurance
carriers, health maintenance organizations, and preferred provider
organizations. Amounts paid under these plans are generally based on fixed or
allowable reimbursement rates. Revenues are recorded at the expected or
pre-authorized reimbursement rates when earned and include unbilled receivables
of $575,000 and $860,000 on June 30, 2003 and December 31, 2002, respectively.
The decrease in the unbilled receivables from December 31, 2002 to June 30, 2003
was primarily the result of changes to the Company's billing processes made in
2002. Billings are subject to review by third party payors and may be subject to
adjustments. Any differences between estimated reimbursement and final
determinations are reflected in the period finalized. In the opinion of
management, adequate allowances have been provided for doubtful accounts and
contractual adjustments.

     ALLOWANCE FOR DOUBTFUL ACCOUNTS. The allowance for doubtful accounts
(approximately $3.0 million at June 30, 2003 and $3.1 million at December 31,
2002) is based primarily on trends in historical collection rates, consideration
of current events, payor mix and other considerations. On a quarterly basis, the
Company evaluates historical collection trends and tracks the percent of
billings that are typically received by the first month after billing, the
second month, etc. This quarterly analysis of collections allows the Company to
develop trends and expectations for collection rates based on product, payor
category and date of billing. If the Company identifies any change in the
collection rate or anticipates that future trends will not correspond to
previous collection experience, the reserve is adjusted to correspond with the
expected change. The Company derives a significant amount of its revenues in the
United States from third-party payors, including Medicare and certain commercial
insurance carriers, health maintenance organizations, and preferred provider
organizations. Amounts paid under these plans are generally based on fixed or
allowable reimbursement rates. Accounts receivable are recorded at the expected
or pre-authorized reimbursement rates. Billings are subject to review by
third-party payors and may be subject to adjustments. Any differences between
estimated reimbursement and final determinations are reflected in the period
finalized. The Company maintained a reserve for inventory shrinkage and
obsolescence of $754,000 and $687,000 on June 30, 2003 and December 31, 2002,
respectively. In the opinion of management, adequate allowances have been
provided for doubtful accounts, contractual adjustments and inventory reserves.
If the financial condition of the third-party payors were to deteriorate,
resulting in an inability to make payments, or the other considerations
underlying the estimates were to change, additional allowances might be
necessary.

     REVENUE RECOGNITION. Revenue is recognized for sales of the OL1000 and
SpinaLogic products at the time the product is delivered to and accepted by the
patient, as verified by the patient signing a "Patient Agreement Form" accepting
financial responsibility. If the sale of either product is to a commercial
buyer, a purchase order is required, and the revenue is recognized at the time
of shipment to the commercial buyer. The Company's shipping terms are FOB
shipping point. The amount of revenue recorded at the time of sale, net of sales
discounts and contractual adjustments, is based on contractual terms. If the
Company does not have a contract with the third-party payor then the amount of
revenue recorded is the pricing expected to be approved by the third-party payor

                                       15
<PAGE>
based on historical experience with that payor. The Company records differences,
if any, between the net revenue amount recognized at the time of the sale and
the ultimate pricing by the primary third-party payor as an adjustment to sales
in the period the Company receives payments from the third-party payor or
earlier if the Company becomes aware of circumstances that warrant a change in
estimate. In the opinion of management, adequate allowances have been provided
for sales discounts and contractual adjustments

     The Company recognized royalties from the Co-Promotion Agreement of
Hyalgan, based on a flat royalty fee of $5 for each unit distributed by
Hyalgan's distributor between January 1, 2001 and December 31, 2002, in
accordance with the termination agreement with Hyalgan's distributor.

     RESERVES. The Company maintains a warranty reserve for the expected cost to
replace or repair products. Warranty costs are recorded in cost of goods sold.

     The Company introduced a guarantee for the OL1000 product beginning March
1, 2003. Management feels that adequate reserves have been established for the
program based on historical data.

     INVENTORY VALUATION. The Company writes-down its inventory for inventory
shrinkage and obsolescence. Inventory is written down to estimated market value
based on a number of assumptions, including future demand and market conditions.
If actual conditions used in determining these valuations change, future
additional inventory write-downs would be necessary.

     INCOME TAXES. Under Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," income taxes are recorded based on current year amounts payable or
refundable, as well as the consequences of events that give rise to deferred tax
assets and liabilities. We base our estimate of current and deferred taxes on
the tax laws and rates that are currently in effect in the appropriate
jurisdiction. Changes in tax laws or rates may affect the current amounts
payable or refundable as well as the amount of deferred tax assets or
liabilities.

     SFAS No. 109 requires that a valuation allowance be established when it is
more likely than not that all or a portion of a deferred tax asset will not be
realized. Changes in valuation allowances from period to period are included in
our tax provision in the period of change. In determining whether a valuation
allowance is required, we take into account all evidence with regard to the
utilization of a deferred tax asset including our past earnings history,
expected future earnings, the character and jurisdiction of such earnings,
unsettled circumstances that, if unfavorably resolved, would adversely affect
utilization of a deferred tax asset, carry-back and carry-forward periods, and
tax strategies that could potentially enhance the likelihood of realization of a
deferred tax asset.

     The Company has accumulated approximately $64.0 million in federal and
state net operating loss carryforwards ("NOLs") and approximately $800,000 of
general business and alternative minimum tax credit carryforwards. Management
has evaluated the available evidence about future taxable income and other
possible sources of realization of deferred tax assets and has established a
valuation allowance of approximately $31.8 million at June 30, 2003. The
valuation allowance reduces deferred tax assets to an amount that management
believes will more likely than not be realized. We believe that the net deferred
tax asset of $2.6 million at June 30, 2003, will be realized based primarily on
our historical and projected future earnings. However the amount of the deferred
tax assets actually realized could differ if we have little or no future
earnings. In the event the Company determines it is unable to realize deferred
tax assets in the future, an adjustment to the deferred tax asset and charge to
income would be necessary in the period such a determination is made.
Conversely, in the event the Company determines it is able to realize deferred
tax assets in the future, an adjustment to the valuation allowance and an income
tax benefit would be necessary in the period such as determination is made.

     INVESTMENT IN CHRYSALIS. The Company owns a minority ownership interest in
Chrysalis BioTechnology, Inc., which is recorded at cost. Chrysalis is not
publicly traded so it is difficult to determine the value of the investment.
However, the Company does not believe the value of its investment has been
impaired. Should sometime in the future the investment be determined to be
permanently impaired, a charge to income would be recorded in the period such a
determination is made.

                                       16
<PAGE>
     LEASE COST. The Company leases its headquarters facility in Tempe, Arizona
under an operating lease arrangement. This lease has an expiration date of
November 2007. As a result of the Company's sale of its CPM business during 2001
the Company occupies approximately 50% of all the available lease space. The
Company had subleased the unused space to the purchaser of the CPM business. The
sublease expired in 2002. While the Company believes the facility is well
maintained and adequate for use in the foreseeable future, there can be no
guarantee that a different lessee will assume the remaining lease obligation.
The Company recorded a charge of $400,000 in the quarter ended September 30,
2002 to establish a reserve for the period the available sublease space was
anticipated to be vacant. The Company has a sublease agreement for approximately
17% of the building with a different subtenant through June 2005. In the opinion
of management, the reserve balance of $160,000 at June 30, 2003 is adequate to
allow for time necessary to acquire an additional tenant for the building.

RESULTS OF OPERATIONS COMPARING THREE-MONTH PERIOD ENDED JUNE 30, 2003 TO THE
CORRESPONDING PERIOD IN 2002.

     REVENUES. The Company's total revenues increased 17.0% from $9.7 million in
the second quarter of 2002 to $11.4 million in the second quarter of 2003.
Revenues for the first quarter of 2002 included Hyalgan royalty payments from
the termination of the Co-Promotion Agreement of $467,000. The Hyalgan royalty
payments ended December 31, 2002. Sales recorded for the bone growth stimulation
products, the OL1000 and SpinaLogic, increased by 23.0% in the second quarter of
2003 as compared to the same period in 2002. The Company believes the
significant increase in bone growth stimulation sales signifies an expansion in
the market and growth in market share for both the OL1000 and SpinaLogic
products.

     GROSS PROFIT. Gross profit for the three month period ended June 30,
increased from $8.3 million in 2002 to $9.7 million in 2003. Gross profit, as a
percent of revenue, was 85.3% for the quarter ended June 30, 2003. Gross profit
for the same period in 2002 was 85.1%. Gross profit as a percent of the bone
growth stimulation sales increased over the period due to improved pricing on
material costs.

     SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
increased 9.3% from $6.7 million in the three month period ended June 30, 2002
to $7.3 million in the same period in 2003. SG&A expenses, as a percentage of
total revenues, were 64.0% in the three month period ended June 30, 2003 and
68.5% in the same period in 2002. The decrease in SG&A expenses as a percentage
of total revenues was a result of the stabilization in fixed administrative cost
for the bone growth stimulation business. While revenues and variable expenses
are increasing, fixed costs such as salaries and administrative expenses, have
remained constant.

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$2.3 million in the three month period ended June 30, 2003, compared to $749,000
for the same period in 2002. The research and development costs for the three
month period ended June 30, 2003 included a $250,000 milestone payment made to
Chrysalis BioTechnology, Inc. in anticipation of a potential IND filing with the
FDA for a human clinical trial for cartilage repair. Research and development
expenses in the quarter ended June 30, 2003 are for the overall Chrysalin
development program, which include pre-clinical studies in cartilage and
continuation of the Phase I/II human clinical trial under an IND for spinal
fusion and the Phase III human clinical trial under an IND for fracture repair.
The increase in research and development expenses is directly related to the
Chrysalin clinical trials. The Company anticipates the research and development
expenses to increase over the next several quarters as patient enrollment occurs
for the clinical trials.

     OTHER INCOME. Other income consisting primarily of interest income,
decreased from $181,000 in the three month period ended June 30, 2002 to
$131,000 for the same period in 2003. The decrease is the result of declining
interest rate returns on the investment portfolio.

     NET INCOME. The Company had a net income in the three month period ended
June 30, 2003 of $558,000 compared to a net income of $1.3 million in the same
period in 2002.

                                       17
<PAGE>
RESULTS OF OPERATIONS COMPARING SIX-MONTH PERIOD ENDED JUNE 30, 2003 TO THE
CORRESPONDING PERIOD IN 2002.

     REVENUES. The Company's total revenues increased 13.0% from $19.3 million
in the first six month period ended June 30, 2002 to $21.7 million in the first
six month period ended June 30, 2003. Revenues for the first six months of 2002
included Hyalgan royalty payments from the termination of the Co-Promotion
Agreement of $1.4 million. The Hyalgan royalty payments ended December 31, 2002.
Sales recorded for the bone growth stimulation products, the OL1000 and
SpinaLogic, increased by 21.1% in the first six months of 2003 as compared to
the same period in 2002. The Company believes the significant increase in bone
growth stimulation sales signifies an expansion in the market and growth in
market share for both the OL1000 and SpinaLogic products.

     GROSS PROFIT. Gross profit for the six months ended June 30, increased from
$16.6 million in 2002 to $18.6 million in 2003. Gross profit, as a percent of
revenue, was 85.5% for the six months ending June 30, 2003. Gross profit for the
same period in 2002 was 85.7%. Gross profit as a percent of the bone growth
stimulation sales increased over the period due to improved pricing on material
costs.

     SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
increased 9.9% from $13.4 million in the six month period ended June 30, 2002 to
$14.7 million in the same period in 2003. SG&A expenses, as a percentage of
total revenues, were 67.5% in the six month period ended June 30, 2003 and 69.2%
in the same period in 2002. The decrease in SG&A expenses as a percentage of
total revenues was a result of the stabilization in fixed administrative costs
for the bone growth stimulation business. While revenues and variable expenses
are increasing, fixed costs such as salaries and other administrative expenses,
have remained constant.

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$3.8 million in the six month period ended June 30, 2003, compared to $1.7
million for the same period in 2002. The research and development costs for the
six month period ended June 30, 2003 included a $250,000 milestone payment made
to Chrysalis BioTechnology, Inc. in anticipation of a potential IND filing with
the FDA for a human clinical trial for cartilage repair. Research and
development expenses in the six month period ended June 30, 2003 are for the
overall Chrysalin development program, which include pre-clinical studies in
cartilage and continuation of the Phase I/II human clinical trial under an IND
for spinal fusion and the Phase III human clinical trial under an IND for
fracture repair. The increase in research and development expenses is directly
related to the Chrysalin clinical trials. The Company anticipates the research
and development expenses to increase over the next several quarters as patient
enrollment occurs for the clinical trials.

     OTHER INCOME. Other income consisting primarily of interest income,
decreased from $368,000 in the six month period ended June 30, 2002 to $263,000
for the same period in 2003. The decrease is the result of declining interest
rate returns on the investment portfolio.

     NET INCOME. The Company had a net income in the six month period ended June
30, 2003 of $700,000 compared to a net income of $2.7 million in the same period
in 2002.

LIQUIDITY AND CAPITAL RESOURCES

     On June 30, 2003, the Company had cash and cash equivalents of $12.9
million compared to $11.3 million as of December 31, 2002. The Company also had
$18.0 million of short-term investments as of June 30, 2003 compared to $18.7
million at December 31, 2002. The total of both cash and cash equivalents and
short-term investments increased to $30.9 million at June 30, 2003 compared to
$29.9 million as of December 31, 2002. The Company also had long-term
investments of $6.6 million, as of June 30, 2003, mostly consisting of
government-backed securities with maturities of fewer than 18 months, compared
to long-term investments of $5.7 million as of December 31, 2002.

                                       18
<PAGE>
     The total of cash and cash equivalents, short-term investments, and
long-term investments increased to $37.5 million at June 30, 2003 compared to
$35.6 million at December 31, 2002. The most important factors in the increase
in total cash and investments were a decrease in accounts receivable ($681,000),
proceeds from stock options exercised ($295,000), a decrease in accrued
liabilities ($252,000) and an increase in accounts payable ($226,000) during the
six months ended June 30, 2003.

     In addition, the Company has a $4.0 million accounts receivable revolving
line of credit with a bank. The Company may borrow up to 75% of the eligible
accounts receivable, as defined in the agreement. The interest rate is at the
prime rate. Interest accruing on the outstanding balance and a monthly
administration fee is due in arrears on the first day of each month. The line of
credit expires February 28, 2005. There are certain financial covenants and
reporting requirements associated with the line of credit. Included in the
financial covenants are (1) tangible net worth of not less than $30.0 million,
(2) a quick ratio of not less than 2.0 to 1.0, (3) a debt to tangible net worth
ratio of not less than 0.50 to 1.0, and (4) capital expenditures will not exceed
more than $7.0 million dollars during any fiscal year. The Company has not
utilized this line of credit. As of June 30, 2003, the Company was in compliance
with all the financial covenants.

     Net cash provided by operations during the six-month period ended June 30,
2003 was $1.8 million compared to $2.2 million for the same period in 2002. The
primary reason for this decline is due to the decrease in net income from $2.7
million in the six months ended June 30, 2002 compared to net income of $700,000
in the six months ended June 30, 2003. The decrease in net income was primarily
caused by (1) the absence of Hyalgan revenue in the six month period ended June
30, 2003 with corresponding revenues of $1.4 million in the same period in 2002,
(2) an increase in research and development expenses from $1.7 million in the
six months ended June 30, 2002 to expenses of $3.8 million in the same period in
2003, and (3) the recovery of $826,000 in collected receivables from the
divested CPM business in the six month period ended June 30, 2002, compared to
the settlement payments collected from the buyer of the CPM assets of $345,000
during the first six months of 2003. The decrease in liabilities is primarily
due to the timing of payments of standard expenses and non-recurring payments in
2002 for severance and other residual exit costs related to the CPM divestiture.

     The Company does not expect to make significant capital investments in 2003
and anticipates that its cash and short term investments on hand, cash from
operations and the funds available from its $4.0 million line of credit will be
sufficient to meet the Company's presently projected cash and working capital
requirements for the next 12 months. The amount of cash the Company will be
required to use in the next 12 months will depend on many factors, including the
Company's ability to continue to increase revenues, reduce and control its
expenditures, continue profitability and collect amounts due from third-party
payors. Additional funds may be required if the Company is not successful in any
of these areas. The Company's ability to continue funding its planned operations
beyond the next 12 months is dependent on its ability to generate sufficient
cash flow to meet its obligations on a timely basis, or to obtain additional
funds through equity or debt financing, as may be required.

     In March 2003, the Company announced that its Board of Directors authorized
a repurchase of up to one million of the Company's outstanding shares over the
subsequent 12 months. The repurchased shares will be held as treasury shares to
reduce the dilution from the Company stock option plans. No shares were
repurchased as of June 30, 2003 under this plan. The repurchase period will end
March 6, 2004. Previously, the Company had repurchased 41,800 shares at a cost,
net of fees, of $137,300 or an average price of $3.28 per share.

                                       19
<PAGE>
     The following table sets forth all known commitments as of June 30, 2003
and the year in which these commitments become due, or are expected to be
settled (in thousands):

                                         ACCOUNTS PAYABLE
        YEAR       OPERATING LEASES   AND ACCRUED LIABILITIES     TOTAL
        ----       ----------------   -----------------------   ----------
     2003             $      539            $    4,673          $    5,212
     2004             $    1,078                    --          $    1,078
     2005             $    1,078                    --          $    1,078
     2006             $    1,078                    --          $    1,078
     Thereafter       $      989                    --          $      989
                      ----------            ----------          ----------

     Total            $    4,762            $    4,673          $    9,435

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company has no debt outstanding and no derivative instruments at June
30, 2003.

     The Company's Canadian operations were sold as part of the CPM asset sale,
and consequently the Company has no exposure to foreign currency exchange rate
risks at June 30, 2003.

ITEM 4. CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures designed to ensure
that the information the Company must disclose in its filings with the
Securities and Exchange Commission is recorded, processed, summarized and
reported on a timely basis. The Company's Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the Company's disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation date, the Company's
disclosure controls and procedures are effective in bringing to their attention
on a timely basis material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.

     There have not been any changes in the Company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders. This Report
contains forward-looking statements made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. In
connection with these "safe harbor" provisions, the Company identifies important
factors that could cause actual results to differ materially from those
contained in any forward-looking statements made by or on behalf of the Company.
Any such forward-looking statement is qualified by reference to the following
cautionary statements.

                                       20
<PAGE>
RISKS RELATED TO OUR INDUSTRY

THE COMPANY IS IN A HIGHLY REGULATED FIELD AND WE MUST OBTAIN GOVERNMENT
APPROVAL BEFORE SELLING ANY NEW PRODUCTS.

     The Federal Drug Administration and comparable agencies in many foreign
countries and in state and local governments impose substantial limitations on
the introduction of medical devices through costly and time-consuming laboratory
and clinical testing and other procedures. The process of obtaining FDA and
other required regulatory approvals is lengthy, expensive and uncertain.
Moreover, regulatory approvals, if granted, typically include significant
limitations on the indicated uses for which a product may be marketed. In
addition, approved products may be subject to additional testing and
surveillance programs required by regulatory agencies, and product approvals
could be withdrawn and labeling restrictions may be imposed for failure to
comply with regulatory standards or upon the occurrence of unforeseen problems
following initial marketing.

     The Company's current and future products and manufacturing activities are
and will be regulated under the Medical Devices Amendment Act of 1976 to the
Federal Food, Drug and Cosmetics Act, as amended, the Safe Medical Devices acts
of 1990 and 1992, and the Food and Drug Administration Modernization Act of
1997, as amended, (collectively the "FDC Act"). The Company's current BioLogic
technology-based products and fracture fixation devices are marketed for their
current uses with clearance from the FDA. Before the Company is able to market
these products for any other use, it would have to seek the approval of the FDA,
which may require lengthy and costly testing and review by the FDA. In addition,
the FDA may, if it believes the Company's products have problems unforeseen at
the time of the initial approval, require additional testing to retain FDA
approval.

     Chrysalin, as a new drug, is subject to the most stringent level of FDA
review. The Company has received authorization to begin human clinical trials
for fracture repair and spinal fusion indications and is currently seeking
approval to conduct human testing for articular cartilage repair. Even if the
results of the current clinical trials are favorable, there can be no guarantee
that the FDA will grant approval of Chrysalin for the indicated uses or if it
will do so in a timely manner. In addition, changes in existing regulations or
interpretations of existing regulations or adoption of new or additional
restrictive regulations could prevent or delay obtaining regulatory approvals.

THE COMPANY MUST ADHERE TO CURRENT AND EVOLVING REGULATORY COMPLIANCE STANDARDS
IN ORDER TO MAINTAIN THE APPROVAL TO SELL ITS PRODUCTS.

     The Company is also required to adhere to applicable requirements for FDA
Good Manufacturing Practices, to engage in extensive record keeping and
reporting and to make available its manufacturing facilities for periodic
inspections by governmental agencies, including the FDA and comparable agencies
in other countries. Failure to comply with these and other applicable regulatory
requirements could result in, among other things, significant fines, suspension
of approvals, seizures or recalls of products, or operating restrictions and
criminal prosecutions. From time to time, the Company may receive letters from
the FDA regarding regulatory compliance. The Company has responded to all such
letters and believes all issues raised in such letters have been resolved.

     If the Company experiences a delay in receiving or fails to obtain any
governmental approval for any of its current or future products or fails to
comply with any regulatory requirements, the Company's business, financial
condition and results of operations could be materially adversely affected.

ANY LIMITATIONS ON THIRD PARTY PAYMENT REIMBURSEMENT FOR THE COMPANY'S PRODUCTS
AND RELATED SERVICES WOULD ADVERSELY AFFECT THE BUSINESS AND RESULTS OF
OPERATIONS.

     The Company's ability to sell products successfully in the United States
and in other countries will depend in part on the extent to which government
health administration authorities, private health insurers and other payors
continue to reimburse insureds for the cost of products and related treatment.
Cost control measures adopted by third party payors in recent years have had and
may continue to have a significant effect on the purchasing and practice

                                       21
<PAGE>
patterns of many health care providers, generally causing them to be more
selective in the purchase of medical products. In addition, payors are
increasingly challenging the prices and clinical efficacy of medical products
and services. Payors may deny reimbursement if they determine that the product
used in a procedure was experimental, was used for a non-approved indication or
was unnecessary, inappropriate, not cost-effective, unsafe, or ineffective.

     The Company's products are reimbursed by most payors and recent
governmental regulations have favorably made our products available to patients
earlier in their medical treatment, however, there are generally specific
product usage requirements or documentation requirements in order for the
Company to receive reimbursement. In certain circumstances, the Company is
successful in appealing reimbursement coverage for those applications which do
not comply with the payor requirements. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third party coverage will continue to be available to
the Company at current levels.

THE COMPANY OPERATES IN AN INTENSELY COMPETITIVE FIELD IN WHICH MANY OF ITS
COMPETITORS ARE BIGGER OR BETTER KNOWN.

     The orthopedic industry is characterized by intense competition. Currently,
the Company has three major competitors selling bone growth stimulation products
approved by the FDA for the treatment of nonunion fractures, which include
Electro-Biology (EBI), a subsidiary of Biomet, Inc., Orthofix International
N.V., and Exogen, Inc., a subsidiary of Smith & Nephew. There are two
competitors, EBI and Orthofix, selling bone growth stimulation products for use
with spinal fusion patients. The Company estimates that one of its competitors
has a dominant share of the market for bone growth stimulation products for
non-healing fractures in the United States, and another has a dominant share of
the market for use of their device as an adjunct to spinal fusion surgery. In
addition, several large, well-established companies sell fracture fixation
devices similar in function to those sold by the Company.

     Many participants in the medical technology industry, including the
Company's competitors, have substantially greater capital resources, research
and development staffs and facilities than the Company. Such participants have
developed or are developing products that may be competitive with the products
that have been or are being developed or researched by the Company. Other
companies are developing a variety of other products and technologies to be used
in the treatment of fractures and spinal fusions, including growth factors, bone
graft substitutes combined with growth factors, and non-thermal ultrasound.

     Many of the Company's competitors have substantially greater experience
than the Company in conducting research and development, obtaining regulatory
approvals, manufacturing, and marketing and selling medical devices. Any failure
by the Company to develop products that compete favorably in the marketplace
would have a material adverse effect on the Company's business, financial
condition and results of operations.

TECHNOLOGY IN THE MEDICAL DEVICE INDUSTRY CHANGES RAPIDLY. IF THE COMPANY IS NOT
ABLE TO KEEP UP WITH TECHNOLOGICAL ADVANCES BY ITS COMPETITORS, THE BUSINESS
WILL BE HARMED.

     The medical device industry is characterized by rapid and significant
technological change. There can be no assurance that the Company's competitors
will not succeed in developing or marketing products or technologies that are
more effective or less costly, or both, and which render the Company's products
obsolete or non-competitive. In addition, new technologies, procedures and
medications could be developed that replace or reduce the value of the Company's
products. The Company's success will depend in part on its ability to respond
quickly to medical and technological changes through the development and
introduction of new products. Because of the lengthy testing period required to
develop new products and the costly FDA approval process, there can be no
assurance that the Company's new product development efforts will result in any
commercially successful products or will do so in a timely manner. A failure to
develop new products could have a material adverse effect on the Company's
business, financial condition, and results of operations.

                                       22
<PAGE>
THE INDUSTRY FACES A HIGH RISK OF PRODUCT LIABILITY CLAIMS.

     The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its technology or products is
alleged to have resulted in adverse effects. To date, no product liability
claims have been asserted against the Company for its bone growth stimulation
products. Over the years, the Company has had limited product liability claims
associated with CPM products, all of which have been or are being managed by the
Company's insurance carrier. The Company sold the CPM business in 2001.

     The Company also faces an inherent business risk of exposure to liability
claims with the current and potential Chrysalin clinical trials.

     The Company maintains a product liability and general liability insurance
policy with coverage of an annual aggregate maximum of $2.0 million per
occurrence. The product liability and general liability policy is provided on an
occurrence basis. The policy is subject to annual renewal. In addition, the
Company maintains an umbrella excess liability policy, which covers product and
general liability with coverage of an additional annual aggregate maximum of
$25.0 million.

     Based on the history of claims, the Company believes the levels of
insurance coverage are adequate, however, there can be no assurance that
liability claims will not exceed the coverage limits of such policies or that
such insurance will continue to be available on commercially reasonable terms or
at all. If the Company does not or cannot maintain sufficient liability
insurance, its ability to market its products may be significantly impaired. In
addition, product liability claims could have a material adverse effect on the
business, financial condition and results of operations.

THERE IS AN INCREASE IN THE INVESTIGATION OF HEALTH CARE PROVIDERS.

     The health care industry is subject to numerous laws and regulations of
federal, state, and local governments. Compliance with these laws and
regulations, specifically those relating to the Medicare and Medicaid programs,
can be subject to government review and interpretations, as well as regulatory
actions unknown and unasserted at this time. Recently, federal government
activity has increased with respect to investigations and allegations concerning
possible violations by health care providers of regulations, which could result
in the imposition of significant fines and penalties, as well as significant
repayments of previously billed and collected revenues from patient services.
Management believes that the Company is in substantial compliance with current
laws and regulations.

LEGISLATIVE REFORM OF THE HEALTH CARE INDUSTRY COULD HAVE A NEGATIVE EFFECT ON
THE COMPANY'S BUSINESS.

     In response to complaints from patients against insurance companies and
recent and continued expectations of rises in the cost of health care insurance
coverage, the health care industry is being reviewed and investigated by public
and private groups to (i) increase access to health care for the uninsured and
underinsured people, (ii) control the escalation of health care expenditures
within the economy and (iii) use health care reimbursement policies to help
control federal expenditures. Although this has been an ongoing public debate
for a number of years that has not resulted in substantial federal or state
legislation fundamentally changing the health care industry business model, the
Company expects public debate of these issues to continue. The Company cannot
predict which, if any, of the current reform proposals will be adopted and when
they might be adopted and what effect such reform would have on a patient's
ability to seek reimbursement for use of our product and the costs associated
with regulatory and health care program compliance.

     Significant changes in health care systems are likely to have a substantial
impact over time on the manner in which the Company conducts its business and
could have a material adverse effect on the Company's business, financial
condition and results of operations and ability to market its products and
future products as currently contemplated.

                                       23
<PAGE>
     Medicare pricing for the bone growth stimulation products has remained
constant, increasing slightly over the past several years. However, Congress or
other governmental agencies could enact legislation at any time that could
negatively impact revenues.

RISKS RELATED TO OUR BUSINESS

THE COMPANY IS DEPENDENT ON THE SALES OF TWO PRIMARY PRODUCTS AND HAS INVESTED
HEAVILY IN A FUTURE PRODUCT, WHICH MAY NOT BE AVAILABLE FOR SALE FOR SOME TIME.

     The Company's business is focused on the sales of two primary products, the
OL1000 and SpinaLogic. The Company believes that, to sustain long-term growth,
it must continue to develop and introduce additional products and expand
approved indications for its remaining products. The development and
commercialization by the Company of additional products will require substantial
product development, regulatory review, and clinical testing, all of which may
be expensive and lengthy. There can be no assurance that the Company will
develop new products or expand indications for existing products in the future
or that the Company will be able to manufacture or market such products
successfully. Any failure by the Company to develop new products or expand
indications could have a material adverse effect on the Company's business,
financial condition and results of operations.

IF THE MEDICAL COMMUNITY DOES NOT ACCEPT THE COMPANY'S PRODUCTS AS ALTERNATIVES
TO CURRENT PRODUCTS AND PROCEDURES, SALES WILL NOT GROW AND BUSINESS WILL BE
ADVERSELY AFFECTED.

     The long-term commercial success of the OL1000 and SpinaLogic and the
Company's other products will depend in significant part upon their widespread
acceptance by a significant portion of the medical community as a safe,
efficacious and cost-effective alternative to invasive procedures. The Company
is unable to predict how quickly, if at all, members of the orthopedic medical
community may accept its products. The widespread acceptance of the Company's
primary products represents a significant change in practice patterns for the
orthopedic medical community and in reimbursement policy for third party payors.
Historically, some orthopedic medical professionals have indicated hesitancy in
prescribing bone growth stimulator products such as those manufactured by the
Company. Failure of the Company and its distributors to create widespread market
acceptance by the orthopedic medical community and third party payors of our
products would have a material adverse effect on the Company's business,
financial condition and results of operations.

THE COMPANY'S ABILITY TO COMPETE COULD BE JEOPARDIZED IF IT IS UNABLE TO OBTAIN
AND PROTECT ITS INTELLECTUAL PROPERTY OR RETAIN LICENSES FOR INTELLECTUAL
PROPERTY.

     In this industry, a company's success depends in part on its ability to
obtain and maintain patent protection for products and processes, to preserve
its trade secrets and proprietary know-how and to operate without infringing the
proprietary rights of third parties.

     While the Company holds title to numerous United States and foreign patents
and licenses, and has filed a number of patent applications, no assurance can be
given that any additional patents will be issued or that the scope of any patent
protection will exclude competitors, or that any of the patents held by or
licensed to the Company will be held valid if subsequently challenged. The
validity and breadth of claims covered in medical technology patents involves
complex legal and factual questions and therefore may be highly uncertain. The
Company licenses the technologies in the BioLogic and OrthoFrame products for
which it pays a royalty.

     There has been substantial litigation regarding patent and other
intellectual property rights in the orthopedic industry. Litigation, which could
result in substantial cost to and diversion of effort by the Company, may be
necessary to enforce patents issued or licensed to the Company, to protect trade
secrets or know-how owned by the Company, or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. There can be no assurance that the
results of such litigation would be favorable to the Company. In addition,
competitors may employ litigation to gain a competitive advantage. Adverse
determinations in litigation could subject the Company to significant

                                       24
<PAGE>
liabilities, and could require the Company to seek licenses from third parties
or prevent the Company from manufacturing, selling or using its products, any of
which determinations could have a material adverse effect on the Company's
business, financial condition and results of operations.

     In addition the licenses for the technologies used by the Company in the
BioLogic and OrthoFrame products may be terminated by the licensor if the
Company breaches any material provision of such license. The termination of any
license would have a material adverse effect on the Company's business,
financial condition and results of operations.

     The Company also relies on un-patented trade secrets and know-how. The
Company generally requires its employees, consultants, advisors and
investigators to enter into confidentiality agreements which include, among
other things, an agreement to assign to the Company all inventions that were
developed by the employee while employed by the Company that are related to its
business. There can be no assurance, however, that these agreements will protect
the Company's proprietary information or that others will not gain access to, or
independently develop similar trade secrets or know-how.

SALES FOR ONE OF THE COMPANY'S PRIMARY PRODUCTS DEPENDS ON THE SUCCESS OF A
DISTRIBUTOR, WHICH HAS BEEN GIVEN EXCLUSIVE DISTRIBUTION RIGHTS.

     To enhance the sales of the Company's SpinaLogic product line, the Company
entered into an exclusive 10-year worldwide sales agreement in August 2000 with
DePuy AcroMed ("DePuy AcroMed"), a unit of Johnson and Johnson. The sales
agreement provides DePuy AcroMed with the right to terminate its sales
activities on behalf of SpinaLogic without cause, by giving OrthoLogic a minimum
of 120 days written notice. Any significant change in the business relationship
or termination of the sales agreement with DePuy AcroMed may have a material
adverse effect on the Company's sales of SpinaLogic. The Company relies upon the
distribution of the SpinaLogic product for a large portion of its sales.

     The Company relies on distributors and sales representatives to sell the
OL1000. There can be no guarantees that the terms of the distribution and sales
representative contracts will be renewed as they currently exist.

THE COMPANY'S RELIANCE ON A PRIMARY SUPPLIER COULD RESULT IN DISRUPTION OF
OPERATIONS.

     The Company purchases some electronic components used in the OL1000 and
SpinaLogic devices from a single source supplier. In addition, there are single
source suppliers for other components used in devices. Establishment of
additional or replacement suppliers for these components cannot be accomplished
quickly. Therefore, the Company maintains sufficient inventories of such
components in an attempt to ensure availability of finished products in the
event of supply shortage or in the event that a redesign is required. The
Company maintains a supply of certain OL1000 and SpinaLogic components to meet
sales forecasts for 3 to 12 months.

     The Company is dependent on outside vendors for key parts and processes in
the manufacture of the OrthoFrame/Mayo. Chrysalin, which is currently only in
the clinical trial phase, is produced by a third party sole supplier.

     Any delay or interruption in the supply of components or products could
significantly impair the Company's ability to deliver its products in sufficient
quantities, and therefore, could have a material adverse effect on its business,
financial condition and results of operations.

IF THE COMPANY IS NOT ABLE TO RETAIN AND COMPETE FOR KEY MANAGEMENT AND
TECHNICAL EMPLOYEES, ITS LONG-TERM BUSINESS WILL BE ADVERSELY AFFECTED.

     The success of the Company is dependent in large part on the ability of the
Company to attract and retain its key management, operating, technical,
marketing and sales personnel as well as clinical investigators who are not
employees of the Company. Such individuals are in high demand, and the
identification, attraction and retention of such personnel could be lengthy,
difficult and costly. The Company competes for its employees and clinical
investigators with other companies in the orthopedic industry and research and

                                       25
<PAGE>
academic institutions. There can be no assurance that the Company will be able
to attract and retain the qualified personnel necessary for the expansion of its
business. A loss of the services of one or more members of the senior management
group, or the Company's inability to hire additional personnel as necessary,
could have an adverse effect on the Company's business, financial condition and
results of operations.

THE RESULTS OF OPERATIONS ARE AFFECTED BY A NUMBER OF CONDITIONS, WHICH ARE
OUTSIDE THE COMPANY'S CONTROL.

     The Company was founded in 1987 and only began generating revenues from the
sale of its primary product in 1994. The Company experienced significant
operating losses since its inception and had an accumulated deficit of
approximately $90.0 million at June 30, 2003. The Company has only reported
sustained profits since the third quarter of 2001. There can be no assurance
that the Company will maintain sufficient revenues to retain net profitability
on an on-going annual basis. In addition, estimations of future profits based on
our historical financial reports may be speculative given our limited
profitability history. The Company may experience fluctuations in revenues and
operating results based on such factors as demand for the Company's products;
the timing, cost and acceptance of product introductions and enhancements made
by the Company or others; levels of third party payment; alternative treatments
that currently exist or may be introduced in the future; completion of
acquisitions and divestitures; changes in practice patterns, competitive
conditions, regulatory announcements and changes affecting the Company's
products in the industry and general economic conditions. The development and
commercialization by the Company of additional products will require substantial
product development and regulatory, clinical and other expenditures.

THE COMPANY'S STOCK PRICE IS VOLATILE AND FLUCTUATES DUE TO A VARIETY OF
FACTORS.

     The stock price has varied significantly in the past and may vary in the
future due to a number of factors including:

     o    fluctuations in the Company's operating results;
     o    developments in litigation to which the Company or a competitor is
          subject;
     o    announcements and timing of potential acquisitions, divestitures,
          conversion of preferred stock;
     o    announcements of technological innovations or new products by the
          Company or its competitors;
     o    FDA and international regulatory actions;
     o    actions with respect to reimbursement matters;
     o    developments with respect to patents or proprietary rights of the
          Company or competitors;
     o    public concern as to the safety of products developed by the Company
          or others;
     o    changes in health care policy in the United States and
          internationally;
     o    changes in stock market analyst recommendations regarding the Company,
          other medical device companies or the medical device industry
          generally; and
     o    general market conditions.

     In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's stock.

     Developments in any of these areas could cause the Company's results to
differ materially from results that have been or may be projected by or on
behalf of the Company.

     The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.

                                       26
<PAGE>
PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

          See "Note 5 - Litigation" of the Notes to the Unaudited Condensed
          Consolidated Financial Statements above, which is incorporated hereto.

Item 4.   Submission of Matters to a Vote of Security Holders

          The annual meeting of the stockholders of the Company was held on May
          29, 2003 to vote on: the election of Class III Directors (Proposal 1)
          and the ratification of Deloitte & Touche LLP as independent
          accountant for the fiscal year ending December 31, 2003 (Proposal 2).
          The results are as follows:

                                             Withheld                   Broker
                                  For        Authority    Abstained    Non-Votes
                               ----------    ---------    ---------    ---------
PROPOSAL 1

Stuart H. Altman, Ph.D.        30,003,952     941,346                      0
Elwood D. Howse, Jr.           30,004,517     940,781                      0

PROPOSAL 2                     29,968,131     949,850       27,317         0

          A more detailed discussion of each proposal is included in the
          Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.

          The Company's directors continuing in office are Stuart H. Altman,
          Ph.D., Frederick J. Feldman, Ph.D., Elwood D. Howse, Jr., Augustus A.
          White III, M.D., Ph.D., John M. Holliman III and Thomas R. Trotter.

Item 6.   Exhibits and Reports

     (a)  Exhibit Index

          See Exhibit List following this report

     (b)  Reports on Form 8-K

          Form 8-K filed April 29, 2003 providing the first quarter earnings
          press release. Form 8-K filed July 24, 2003 providing the second
          quarter earnings press release.

                                       27
<PAGE>
                                   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)


<TABLE>
<CAPTION>
Signature                   Title                                               Date
---------                   -----                                               ----
<S>                         <C>                                                 <C>
/s/ Thomas R. Trotter       President and Chief Executive Officer               July 25, 2003
------------------------    (Principal Executive Officer)
Thomas R. Trotter


/s/ Sherry A. Sturman       Senior Vice-President and Chief Financial Officer   July 25, 2003
------------------------    (Principal Financial and Accounting Officer)
Sherry A. Sturman
</TABLE>

                                       28
<PAGE>
                                ORTHOLOGIC CORP.
                 EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                                                      Incorporated by    Filed
Exhibit No                Description                  Reference to:    Herewith
----------                -----------                  -------------    --------

31.1          Certification of CEO pursuant to                             X
              Securities Exchange Act Rules 13a
              - 14 and 15D - 14 as adopted pursuant
              to Section 302 of the Sarbanes-Oxley
              Act of 2002

31.2          Certification of CFO pursuant to                             X
              Securities Exchange Act Rules 13a -
              14 and 15D - 14 as adopted pursuant
              to Section 302 of the Sarbanes-Oxley
              Act of 2002

32            Certification pursuant to 18 U.S.C.                          X
              Section 1350, as adopted pursuant to
              Section 906 of the Sarbanes-Oxley Act
              of 2002.
              -- Thomas R. Trotter
              -- Sherry A. Sturman

                                       29