UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q


(Mark
One)





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





For
      the quarterly period ended
                
                September
      30, 2008





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
      or other jurisdiction of incorporation or organization)
              (IRS
      Employer 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.  xYes ̈No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


Large accelerated
      filer ̈
            Accelerated
      filer  x
            Non-accelerated
      filer ̈
            Smaller
      reporting company   ̈





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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





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





40,731,642
shares of common stock outstanding as of  October 31,
2008.







1




ORTHOLOGIC CORP.


(dba
Capstone Therapeutics)


(A
Development Stage Company)


INDEX





Page
      No.Part
      I
                                                                                
                                                                                Financial
      InformationItem
      1.
                                                                                
                                                                                Financial Statements (Unaudited)Condensed Balance Sheets as of September 30, 2008 and December
      31, 2007
                                                                                3Condensed Statements of Operations for the three and nine
      months ended September 30, 2008 and 2007
                                                                                4Condensed Statements of Cash Flows for the nine months ended
      September 30, 2008 and 2007
                                                                                5Notes to Unaudited Condensed Financial
      Statements
                                                                                6Item
      2.
                                                                                
                                                                                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                                                                                10Item
      4.
                                                                                
                                                                                Controls and Procedures
                                                                                13Part
      II
                                                                                
                                                                                Other
      InformationItem
      1A.
                                                                                
                                                                                Risk Factors
                                                                                13Item
      2.
                                                                                
                                                                                Unregistered Sales of Equity Securities and Use of
      Proceeds
                                                                                15Item
      5.
                                                                                
                                                                                Other Information
                                                                                15Item
      6.
                                                                                
                                                                                Exhibits
                                                                                15EXHIBIT
      10.1EXHIBIT
      10.2EXHIBIT
      31.1EXHIBIT
      31.2EXHIBIT
      32





2
 Index




PART
I – Financial Information
 Item
      1.
              Financial
      Statements
 
 ORTHOLOGIC CORP.
 (dba
Capstone Therapeutics)
 (A
Development Stage Company)
 CONDENSED
BALANCE SHEETS
 (in
thousands, except share and per share data)
 
 
 September 30,
      2008
                        
                        
                        December 31,
      2007(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                        
                        $
                        7,162
                        
                        
                        $
                        20,943Short-term
      investments
                        
                        
                        39,322
                        
                        
                        
                        18,236Prepaids
      and other current assets
                        
                        
                        1,142
                        
                        
                        
                        906Total
      current assets
                        
                        
                        47,626
                        
                        
                        
                        40,085Furniture
      and equipment, net
                        
                        
                        366
                        
                        
                        
                        318Long-term
      investments
                        
                        
                        4,508
                        
                        
                        
                        21,459Total
      assets
                        
                        $
                        52,500
                        
                        
                        $
                        61,862LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                        
                        $
                        905
                        
                        
                        $
                        702Accrued
      compensation
                        
                        
                        839
                        
                        
                        
                        824Other
      accrued liabilities
                        
                        
                        629
                        
                        
                        
                        875Total
      current liabilities
                        
                        
                        2,373
                        
                        
                        
                        2,401Stockholders'
      EquityCommon
      Stock  $.0005 par value; 100,000,000 shares authorized;
      40,731,642 in 2008 and 41,758,065 in 2007 shares issued and
      outstanding
                        
                        
                        20
                        
                        
                        
                        21Additional
      paid-in capital
                        
                        
                        188,244
                        
                        
                        
                        189,013Accumulated
      deficit
                        
                        
                        (138,137
                        )
                        
                        
                        (129,573
                        )Total
      stockholders' equity
                        
                        
                        50,127
                        
                        
                        
                        59,461Total
      liabilities and stockholders' equity
                        
                        $
                        52,500
                        
                        
                        $
                        61,862
 
 See
notes to unaudited condensed financial statements
  3
 Index
  ORTHOLOGIC CORP.
 (dba
Capstone Therapeutics)
 (A
Development Stage Company)
 CONDENSED
STATEMENTS OF OPERATIONS
 (in
thousands, except per share data)
 (Unaudited)
 
 
 Three
      months ended September 30,
                                                                                    
                                                                                    
                                                                                    Nine
      months ended September 30,
                                                                                    
                                                                                    
                                                                                    As a Development
                                                                                      Stage Company
                                                                                      August 5, 2004 -2008
                                                                                    
                                                                                    
                                                                                    2007
                                                                                    
                                                                                    
                                                                                    2008
                                                                                    
                                                                                    
                                                                                    2007
                                                                                    
                                                                                    
                                                                                    September 30, 2008OPERATING
      EXPENSESGeneral
      and administrative
                                                                                    
                                                                                    $
                                                                                    815
                                                                                    
                                                                                    
                                                                                    $
                                                                                    889
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,378
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,797
                                                                                    
                                                                                    
                                                                                    $
                                                                                    19,462Research
      and development
                                                                                    
                                                                                    
                                                                                    2,817
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,369
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,845
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,439
                                                                                    
                                                                                    
                                                                                    
                                                                                    70,671Purchased
      in-process research and development
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    34,311Other
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (375
                                                                                    )Total
      operating expenses
                                                                                    
                                                                                    
                                                                                    3,632
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,258
                                                                                    
                                                                                    
                                                                                    
                                                                                    10,223
                                                                                    
                                                                                    
                                                                                    
                                                                                    10,236
                                                                                    
                                                                                    
                                                                                    
                                                                                    124,069Interest
      and other income, net
                                                                                    
                                                                                    
                                                                                    (488
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (833
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (1,659
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,558
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (12,211
                                                                                    )Loss
      from continuing operations
                                                                                    
                                                                                    
                                                                                    3,144
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,425
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,564
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,678
                                                                                    
                                                                                    
                                                                                    
                                                                                    111,858Income
      tax expense
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    356Loss
      from continuing operations
                                                                                    
                                                                                    
                                                                                    3,144
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,425
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,564
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,678
                                                                                    
                                                                                    
                                                                                    
                                                                                    112,214Discontinued
      operations - net gain on sale of the bone device business, net of taxes
      ($267)
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (2,202
                                                                                    )NET
      LOSS
                                                                                    
                                                                                    $
                                                                                    3,144
                                                                                    
                                                                                    
                                                                                    $
                                                                                    2,425
                                                                                    
                                                                                    
                                                                                    $
                                                                                    8,564
                                                                                    
                                                                                    
                                                                                    $
                                                                                    7,678
                                                                                    
                                                                                    
                                                                                    $
                                                                                    110,012Per
      Share Information:Net
      loss, basic and diluted
                                                                                    
                                                                                    $
                                                                                    0.08
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.06
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.21
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.18Basic
      and diluted shares outstanding
                                                                                    
                                                                                    
                                                                                    40,775
                                                                                    
                                                                                    
                                                                                    
                                                                                    41,671
                                                                                    
                                                                                    
                                                                                    
                                                                                    41,200
                                                                                    
                                                                                    
                                                                                    
                                                                                    41,634
 
 See
notes to unaudited condensed financial statements
  4
 Index
  ORTHOLOGIC CORP.
 (dba
Capstone Therapeutics)
 (A
Development Stage Company)
 CONDENSED
STATEMENTS OF CASH FLOWS
 (in
thousands)
 (Unaudited)
   Nine
      months ended September 30,
                      
                      
                      As a Development
                        Stage Company
                        August 5th 2004
      -2008
                      
                      
                      2007
                      
                      
                      September 30, 2008OPERATING
      ACTIVITIESNet
      loss
                      
                      $
                      (8,564
                      )
                      
                      $
                      (7,678
                      )
                      
                      $
                      (110,012
                      )Non
      cash items:Deferred
      tax expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      770Depreciation
      and amortization
                      
                      
                      99
                      
                      
                      
                      107
                      
                      
                      
                      3,533Non-cash
      stock compensation
                      
                      
                      246
                      
                      
                      
                      591
                      
                      
                      
                      3,966Gain
      on sale of bone device business
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,298
                      )In-process
      research and development
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      34,311Change
      in other operating items:Prepaids
      and other current assets
                      
                      
                      (237
                      )
                      
                      
                      1,048
                      
                      
                      
                      566Accounts
      payable
                      
                      
                      203
                      
                      
                      
                      (1,013
                      )
                      
                      
                      (66
                      )Accrued
      liabilities
                      
                      
                      (229
                      )
                      
                      
                      (486
                      )
                      
                      
                      (1,546
                      )Cash
      flows used in operating activities
                      
                      
                      (8,482
                      )
                      
                      
                      (7,431
                      )
                      
                      
                      (70,776
                      )INVESTING
      ACTIVITIESExpenditures
      for furniture and equipment, net
                      
                      
                      (148
                      )
                      
                      
                      (158
                      )
                      
                      
                      (841
                      )Proceeds
      from sale of assets
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7,000Cash
      paid for assets of AzERx/CBI
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (4,058
                      )Cash
      paid for patent assignment rights
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (650
                      )Purchases
      of investments
                      
                      
                      (28,845
                      )
                      
                      
                      (33,077
                      )
                      
                      
                      (226,134
                      )Maturities
      of investments
                      
                      
                      24,711
                      
                      
                      
                      40,802
                      
                      
                      
                      240,243Cash
      flows (used in) provided by investing activities
                      
                      
                      (4,282
                      )
                      
                      
                      7,567
                      
                      
                      
                      15,560FINANCING
      ACTIVITIESNet
      proceeds from stock option exercises
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      4,612Net
      proceeds from sale of stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,376Common
      stock purchases
                      
                      
                      (1,017
                      )
                      
                      
                      -
                      
                      
                      
                      (1,017
                      )Cash
      flows (used in) provided by financing activities
                      
                      
                      (1,017
                      )
                      
                      
                      -
                      
                      
                      
                      6,971NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      (13,781
                      )
                      
                      
                      136
                      
                      
                      
                      (48,245
                      )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                      
                      
                      20,943
                      
                      
                      $
                      18,047
                      
                      
                      
                      55,407CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                      
                      $
                      7,162
                      
                      
                      $
                      18,183
                      
                      
                      $
                      7,162
 
 Supplemental
      Disclosure of Non-Cash Investing Activities
                    
                    AzERx
      and CBIAzERx/CBI
      AcquisitionsCurrent
      assets acquired
                    
                    $
                    29Patents
      acquired
                    
                    
                    2,142Liabilities
      acquired, and accrued acquisition costs
                    
                    
                    (457
                    )Original
      investment reversal
                    
                    
                    (750
                    )In-process
      research and development acquired
                    
                    
                    34,311Common
      stock issued for acquisition
                    
                    
                    (31,217
                    )Cash
      paid for acquisition
                    
                    $
                    4,058
 
 See notes to unaudited condensed
financial statements
  5
 Index
  ORTHOLOGIC CORP.
 (dba
Capstone Therapeutics)
 (A
Development Stage Company)
 NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
 September
30, 2008
 
 OVERVIEW
OF BUSINESS
 
 Description
of the business
 
 On
October 1, 2008, OrthoLogic Corp. began doing business under the trade name of
Capstone Therapeutics.
 
 OrthoLogic
Corp., referred to herein as “OrthoLogic”, “Capstone Therapeutics”,
“Capstone”, “the Company”, “we”, “us”, or “our”, is a biotechnology company
committed to developing a pipeline of novel therapeutic peptides aimed at
helping patients with under-served medical conditions.  The Company is
focused on development and commercialization of two product platforms: AZX100
and Chrysalin® (TP508 or rusalatide acetate).
 
 AZX100
 
 AZX100, a
novel 24-amino acid peptide, relaxes smooth muscle which modulates blood
pressure and the function of blood vessels, airways, sphincters, the
gastrointestinal tract and the genitourinary tract.  Sustained
abnormal contraction of any of these muscles is called a spasm.  Any
disorders known to be associated with excessive constriction or inadequate
dilation of smooth muscle represent potential applications for
AZX100.
 
 AZX100
may also inhibit the fibrotic phenotype of fibroblasts and smooth muscle cells
in a mechanism similar to that which causes vasorelaxation.  Through
phenotypic modulation of fibroblasts and smooth muscle cells, AZX100 may inhibit
the scarring that results from wound healing and may mitigate fibrotic disease
states in the dermis, blood vessels, lungs, liver and other organs.
 
 AZX100 is
currently being evaluated for medically and commercially significant
applications, such as treatment of pulmonary disease, prevention of hypertrophic
and keloid scarring and intimal hyperplasia.  We are executing a
development plan for this peptide which included filing an IND for dermal
scarring in 2007 and commencement of Phase 1 safety studies in this indication
in the first quarter of 2008.  Our Phase 1a study was completed in May
2008.  The study’s Safety Committee reviewing all safety-related
aspects of the clinical trial was satisfied with the profile of
AZX100.  On this basis, we initiated a second safety study in dermal
scarring (Phase 1b), completion of which is planned for fourth quarter of
2008.  Subject to the findings of the Phase 1b study’s Safety
Committee, the Company is preparing to initiate Phase 2 human clinical efficacy
studies of AZX100 in dermal scarring in the first quarter of 2009.  We
continue to perform further pre-clinical studies supporting multiple indications
for AZX100.
 
 Chrysalin
 
 Chrysalin
(TP508), a novel synthetic 23-amino acid peptide, is believed to produce
angiogenic and other tissue repair effects in part by 1) activating or
upregulating endothelial nitric oxide synthase (eNOS); 2) upregulating vascular
endothelial growth factor; 3) inhibiting apoptosis (programmed cell death); and
4) cytokine modulation resulting in an anti-inflammatory effect.  It
may have therapeutic value in diseases associated with endothelial
dysfunction.
  6
 Index
  We have
conducted clinical trials for two potential Chrysalin
applications:  acceleration of fracture repair and diabetic foot ulcer
healing.  We previously conducted a pilot human study for spine
fusion, and pre-clinical testing for cartilage defect repair, cardiovascular
repair, dental bone repair, and tendon repair.  Currently, we are
focusing our efforts on pre-clinical studies in vascular applications, such as
acute myocardial infarction and chronic myocardial ischemia.  If
successful, these studies will provide additional support for partnering
Chrysalin’s future development.
 
 Company
History
 
 Prior to
November 26, 2003, we developed, manufactured and marketed proprietary,
technologically advanced orthopedic products designed to promote the healing of
musculoskeletal bone and tissue, with particular emphasis on fracture healing
and spine repair.  Our product lines included bone growth stimulation
and fracture fixation devices including the OL1000 product line, SpinaLogic® and
OrthoFrame/Mayo, which we sometimes refer to as our “Bone Device
Business.”
 
 On
November 26, 2003, we sold our Bone Device Business.  Our principal
business remains focused on tissue repair, although through biopharmaceutical
approaches rather than through the use of medical devices.
 
 On August
5, 2004, we purchased substantially all of the assets and intellectual property
of Chrysalis Biotechnology, Inc. (“CBI”), including its exclusive worldwide
license for Chrysalin for all medical indications.  We became a
development stage company commensurate with the
acquisition.  Subsequently, all of our collective efforts were focused
on research and development of our Chrysalin Product Platform, with the goal of
commercializing our products.
 
 On
February 27, 2006, the Company purchased certain assets and assumed certain
liabilities of AzERx, Inc.  Under the terms of the transaction,
OrthoLogic acquired an exclusive license for the core intellectual property
relating to AZX100.
 
 Our
development activities for the Chrysalin Product Platform and AZX100 represent a
single operating segment as they share the same product development path and
utilize the same Company resources.  As a result, we have determined
that it is appropriate to reflect our operations as one reportable segment.
Through September 30, 2008, we have incurred $110 million in net losses as a
development stage company.
 
 Financial
Statement Presentation
 
 In the
opinion of management, the unaudited condensed interim financial statements
include all adjustments necessary for the fair presentation of our financial
position, results of operations, and cash flows.  The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for the complete fiscal year.
 
 Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to Securities and Exchange Commission rules and
regulations, although the Company believes that the disclosures herein are
adequate to make the information presented not misleading.  It is
suggested that these unaudited condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.  Information presented as of December 31, 2007 is derived from
audited financial statements.
 
 Use of
estimates: The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires that
management make a number of assumptions and estimates that affect the reported
amounts of assets, liabilities, and expenses in our financial statements and
accompanying notes.  Management bases its estimates on historical
experience and various other assumptions believed to be
reasonable.  Although these estimates are based on management’s
assumptions regarding current events and actions that may impact the Company in
the future, actual results may differ from these estimates and
assumptions.  Our critical accounting policies are those that affect,
or could affect our financial statements materially and involve a significant
level of judgment by management.  The accounting policies and related
risks described in our Annual Report on Form 10-K for the year ended December
31, 2007 are those that depend most heavily on these judgments and
estimates.  As of September 30, 2008, there have been no material
changes to any of the critical accounting policies contained
therein.
  7
 Index
  Adoption
of New Accounting Standards
 
 Effective
January 1, 2008, the Company adopted the reporting requirements of FASB
Statement No. 157 (FAS 157), “Fair Value Measurements”, and No. 159, (FAS 159)
“Fair Value Option for Financial Assets and Liabilities”.  FAS 157
establishes a standard framework for measuring fair value in generally accepted
accounting principles (GAAP), clarifies the definition of “fair value” within
that framework, and expands disclosures about the use of fair value
measurements.  FAS 159 allows entities to voluntarily choose, at
specified election dates, to measure many financial assets and liabilities (as
well as certain nonfinancial instruments that are similar to financial
instruments) at fair value (the “value option”).  The Company did not
choose to voluntarily measure any financial assets or liabilities at fair
value.  The adoption of FAS 157 and FAS 159 did not have an
effect on the Company’s results of operations or financial
position.
 
 A.   Stock
Based Compensation
 
 2008
Stock Options
 
 On
January 1, 2008, the Board of Directors granted each Director a fully vested
option to purchase 10,000 shares of the Company’s common stock at an exercise
price of $1.35.  Additionally, during the three months ended March 31,
2008, the Company granted employees options to purchase 217,173 shares of the
Company’s common stock at an exercise price of $1.02. The options vest over a
two to four year period.
 
 The
Company used the Black-Scholes model with the following assumptions to
determine the total fair value of $147,000 for options to purchase 267,173
shares of the Company’s common stock granted during the three months ended March
31, 2008:
 
 Three
      months endedMarch
      31, 2008Risk
      free interest rate
                  2.4%  -  3.4%Volatility
                  57%  -  58%Expected
      term from vesting
                  3.7
      YearsDividend
      yield
                  0%
 
 
 2008
Stock Awards
 
 On
January 1, 2008, the Board of Directors of the Company awarded 92,595 shares of
restricted stock (18,519 shares to each Director), which vest on January 1,
2009.  The total fair value of the awards, determined using the
closing price of the Company’s common stock on the date of grant, was $125,000,
of which $80,000 has been recognized as compensation cost in the nine months
ended September 30, 2008.
  8
 Index
  On
February 21, 2008, the Company awarded 56,373 fully vested shares of the
Company’s common stock, having a fair value on the date of the awards of
$57,500, to various employees.
 The fair
value of the awards was recognized as compensation cost in the three months
ended March 31, 2008.
 
 Summary
 
 Non-cash
stock compensation cost for the nine months ended September 30, 2008, totaled
$246,000.  In the condensed Statements of Operations for the nine
months ended September 30, 2008, non-cash stock compensation expense of $199,000
was recorded as a general and administrative expense and $47,000 was recorded as
a research and development expense.
 
 Non-cash
stock compensation cost for the nine months ended September 30, 2007, totaled
$591,000.  In the condensed Statements of Operations for the nine
months ended September 30, 2007, non-cash stock compensation expense of $394,000
was recorded as general and administrative expense and $197,000 was recorded as
research and development expense.
 
 No
options were exercised in the nine month periods ended September 30, 2008 and
2007.
 
 It is the
Company’s policy to issue options from shareholder approved incentive plans.
However, if the options are issued as an inducement for an individual to join
the Company, the Company may issue stock options outside of shareholder approved
plans.  Options granted to employees under shareholder approved
incentive plans have a ten-year term and vest over a two to four-year period of
service.  All options and stock purchase rights are granted with an
exercise price equal to the current market value on the date of grant and,
accordingly, options or stock purchase rights have no intrinsic value on the
date of grant.  Based on the closing market price of the Company’s
common stock at September 30, 2008 of $0.88, stock options exercisable or
expected to vest at September 30, 2008, have no intrinsic value.  At
September 30, 2008, 26,135 shares remained available to grant under the
Company’s existing stock option plans.
 
 Warrants
 
 At
September 30, 2008, the Company had warrants outstanding to purchase 46,706
shares of the Company’s common stock with an exercise price of $6.39 per share,
which expire in February 2016, and warrants outstanding to purchase 117,423
shares of the Company’s common stock with an exercise price of $1.91 per share,
which expire in July 2016.
 
 Additionally
(as described in Note 15 to our Annual Report on Form 10-K for the year ended
December 31, 2007), performance based warrants to purchase 240,000 shares of the
Company’s common stock with an exercise price of $1.91, which expire in February
2016, were outstanding but unvested at September 30, 2008.  The total
cost of the performance based warrants will be charged to expense over the
period of performance. The costs will be determined based on the fair value of
the warrants determined by using the Black-Scholes model, revalued at each
Company reporting date until fully vested.  The fair value of the
milestone warrants using the Black-Scholes model, 56% volatility, 0% dividend
yield, expected term of 7.4 years, and 3.0% interest rate was $90,000 at
September 30, 2008.  No costs were charged to expense at September 30,
2008 as it is not yet probable that any milestone warrants will
vest.
  9
 Index
  B.   Authorization
of Company Buy-Back of Common Stock
 
 On March
5, 2008, the Company announced that its Board of Directors approved a stock
repurchase program for up to five percent of its then outstanding common
shares.  The shares may be repurchased from time to time in open
market transactions or privately negotiated transactions at the Company’s
discretion, subject to market conditions and other factors.  There
were approximately 41.8 million shares of common stock outstanding on March 5,
2008.
 
 During
the nine month period ended September 30, 2008, the Company purchased 1,082,796
shares at a total cost of $1,017,000.
 
 Item 2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
 
 The
following is management’s discussion of significant events in the quarter ended
September 30, 2008 and factors that affected OrthoLogic’s interim financial
condition and results of operations.  This should be read in
conjunction with our “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in our Annual Report on Form 10-K
for the year ended December 31, 2007, our “Risk Factors” contained therein and
Item 1A. Risk Factors included in Part II of this quarterly report.
 
 Overview
of the Business
 
 OrthoLogic
is a biotechnology company focused on the development and commercialization of
the novel synthetic peptides AZX100 and Chrysalin® (TP508).
 
 In 2008
and 2007, our efforts were:
 
 ·
              Evaluating
      AZX100 for medically and commercially significant applications, such as
      prevention of dermal scarring, pulmonary fibrosis, the treatment of
      asthma, and vascular intimal hyperplasia.  We performed
      pre-clinical work leading to the filing of an IND for a dermal indication
      in 2007 and commenced a Phase 1a safety study in dermal scarring in the
      first quarter of 2008.  Our Phase 1a study included 30 subjects
      and was completed in May 2008.  The study’s Safety Committee
      reviewing all safety-related aspects of the clinical trial was satisfied
      with the profile of AZX100.  On this basis, we have initiated a
      second safety study for dermal scarring (Phase 1b), which included 40
      subjects and is planned to be completed in the fourth quarter of
      2008.  Subject to the findings of the Phase 1b study’s Safety
      Committee, the Company is preparing to initiate Phase 2 human clinical
      efficacy studies of AZX100 in dermal scarring in the first quarter of
      2009.  We continue to perform further pre-clinical studies
      supporting multiple indications for
AZX100.
 
 ·
              Pre-clinical
      experiments examining the potential for Chrysalin in modulating of the
      health of endothelial tissue in blood vessels.  These and other
      mechanism-of-action studies will support our strategy to partner Chrysalin
      in vascular applications. We did not perform additional pre-clinical or
      clinical studies in fracture repair, wound healing, spine fusion,
      cartilage defect repair, dental bone repair or tendon
      repair.  In 2008, we are continuing studies to support our
      vascular partnering efforts.
  10
 Index
  Results
of Operations Comparing Three-Month Period Ended September 30, 2008 to the
Corresponding Period in 2007.
 
 General and Administrative
(“G&A”) Expenses:  G&A expenses related to our ongoing
development operations decreased by $74,000 from $889,000 in the third quarter
of 2007 to $815,000 in the third quarter of 2008.  Our G&A
expenses during the third quarter of 2008 were lower than the same period of
2007 primarily as a result of general cost containment efforts.
 
 Research and Development
Expenses:  Research and development expenses were $2,817,000
for the three months ended September 30, 2008 compared to $2,369,000 for the
three months ended September 30, 2007.  Our research and development
expenses increased $448,000 in the second quarter of 2008 compared to the same
period in 2007 primarily due to costs incurred for the Phase 1 clinical trials
in dermal scarring which commenced in the first quarter of 2008.
 
 Interest and Other Income,
Net:  Interest and other income, net decreased from $833,000 in
the third quarter of 2007 to $488,000 in the third quarter of 2008 due to the
decrease in interest rates between the two periods and reduction in the amount
available for investment.
 
 Net Loss:  We
incurred a net loss in the three months ended September 30, 2008 of $3.1 million
compared to a net loss of $2.4 million in the three months ended September 30,
2007.  The increase in the net loss for the three months ended
September 30, 2008 compared to the same period in 2007, resulted primarily from
costs related to our Phase 1 clinical trials in dermal scarring in 2008, and
reduced interest income, due to the decrease in interest rates between the two
periods and reduction in the amount available for investment.
 
 
 Results
of Operations Comparing Nine-Month Period Ended September 30, 2008 to the
Corresponding Period in 2007.
 
 General and Administrative
(“G&A”) Expenses:  G&A expenses related to our ongoing
development operations decreased by $419,000 from $2,797,000 in the nine months
ended September 30, 2007, to $2,378,000 in the nine months ended September 30,
2008.  Our G&A expenses during the nine months ended September 30,
2008, were lower than the same period of 2007 primarily as a result of general
cost containment efforts.
 
 Research and Development
Expenses:  Research and development expenses were $7,845,000
for the first nine months in 2008 compared to $7,439,000 for the first nine
months in 2007.  Our research and development expenses increased
$406,000 in the nine months ended September 30, 2008, compared to the same
period in 2007, primarily due to costs related to our Phase 1 clinical trials in
dermal scarring and our previously announced completion of a pre-clinical study
to assess the affects of Chrysalin in a model of acute myocardial infarction
(heart attack), partially offset by a decline in AZX100 pre-clinical costs
related to the filing of an IND in a dermal scarring indication, which was
completed as of December 31, 2007.  Given the overlapping nature of
our research efforts it is not possible to clearly separate research
expenditures between Chrysalin and AZX100; however, the substantial majority of
our research and development expenses in 2008 and 2007 are directed towards
AZX100 development efforts.
 
 Interest and Other Income,
Net:  Interest and other income, net decreased from $2,558,000
in the nine months ended September 30, 2007 to $1,659,000 in the nine months
ended September 30, 2008, due to the decrease in interest rates between the two
periods and reduction in the amount available for investment.
  11
 Index
  Net Loss:  We
incurred a net loss in the first nine months of 2008 of $8.6 million compared to
a net loss of $7.7 million in the first nine months of 2007.  The
increase in the net loss for the nine months ended September 30, 2008 compared
to the same period in 2007, resulted primarily from costs related to our Phase 1
clinical trials in dermal scarring in 2008, and reduced interest income, due to
the decrease in interest rates between the two periods and reduction in the
amount available for investment, partially offset by lower general and
administrative expenses, due to general cost containment efforts, and reduced
AZX100 pre-clinical costs related to the filing of an IND for a dermal scarring
indication, which was completed as of December 31, 2007.
 
 Liquidity
and Capital Resources
 
 We
historically financed our operations through operating cash flows and the public
and private sales of equity securities.  However, with the sale of our
Bone Device Business in November 2003, we sold all of our revenue producing
operations.  We received approximately $93.0 million in cash from the
sale of our Bone Device Business.  On December 1, 2005, we received
the additional $7.2 million, including interest, from the escrow balance related
to the sale of the Bone Device Business.  On February 27, 2006, the
Company entered into an agreement with Quintiles (see Note 15 in our Annual
Report on Form 10-K for the year ended December 31, 2007), which provided an
investment by Quintiles in the Company’s common stock, of which $2,000,000 was
received on February 27, 2006 and $1,500,000 was received on July 3,
2006.  We also received net proceeds of $4,612,000 from the exercise
of stock options during our development stage period.   As of
September 30, 2008, we had cash and cash equivalents of $7.1 million, short-term
investments of $39.3 million and long-term investments of $4.5
million.
 
 We
announced that we have no immediate plans to re-enter clinical trials for
Chrysalin-based product candidates and a strategic shift in our development
approach to our Chrysalin Product Platform.  We currently intend to
pursue development partnering or licensing opportunities for our Chrysalin-based
product candidates, a change from our previous development history of
independently conducting human clinical trials necessary to advance our
Chrysalin-based product candidates to market.  We will continue to
explore Chrysalin’s therapeutic value in tissues and diseases exhibiting
endothelial dysfunction as well as the science behind and potential of
Chrysalin. We will also continue research and development expenditures for
further pre-clinical studies supporting multiple indications for AZX100 and plan
to continue AZX100 dermal scarring human clinical trials.
 
 Our
future research and development expenses may vary significantly from prior
periods depending on the Company’s decisions on its future Chrysalin and AZX100
development plans.
 
 On March
5, 2008, the Company announced a stock repurchase program and at September 30,
2008, the Company had repurchased 1,082,796 shares of its common stock, at a
total cost of $1,017,000, and has allocated approximately $1,100,000 to fund
possible future stock repurchases.
 
 We
anticipate that our cash and short-term investments will be sufficient to meet
our presently projected cash and working capital requirements for the next year.
However, the timing and amounts of cash used will depend on many factors,
including our ability to continue to control our expenditures related to our
current research and development programs.  If we enter into new
clinical trials or if we consider other opportunities in the market, our expense
levels may change, which could require us to seek other sources of
capital.  If additional funding is required, we would be required to
seek new sources of funds, including raising capital through the sales of
securities or licensing agreements.  These sources of funds may not be
available or could only be available at terms that would have a material adverse
impact on our existing stockholders’ interests.
  12
 Index
  Item 4.
              Controls
      and Procedures
 
 Disclosure Controls and
Procedures
 
 Our
principal executive officer and principal financial officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Form 10-Q. Based on their evaluation, the
principal executive officer and principal financial officer have each concluded
that, as of the end of such period, our disclosure controls and procedures are
effective and provide reasonable assurance that we record, process, summarize,
and report information required to be disclosed in the reports we file under the
Securities Exchange Act of 1934 within the time periods specified by the
Securities and Exchange Commission’s rules and forms.
 
 Internal Control Over
Financial Reporting
 
 There
have not been any changes in our internal control over financial reporting
during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
 
 
 Part
II – Other Information
 
 Item1A.  Risk Factors
 
 Forward
looking statements
 
 OrthoLogic
Corp. (“OrthoLogic”, “Capstone Therapeutics”, “Capstone”, “the Company”, “we”,
“us” or “our”) may from time to time make written or oral forward-looking
statements, including statements contained in our filings with the Securities
and Exchange Commission and our reports to stockholders.  The safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 protects companies from liability for their
forward looking statements if they comply with the requirements of that
Act.  This Quarterly Report on Form 10-Q should be read in conjunction
with the Company’s Annual Report on Form 10-K for the year ended December 31,
2007, and contains forward-looking statements made pursuant to that safe
harbor.  These forward-looking statements relate to future events or
to our future financial performance, and involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements.  In some cases, you can
identify forward-looking statements by the use of words such as “may,” “could,”
“expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” “continue,” or the negative of these terms or other
comparable terminology.  You should not place undue reliance on
forward-looking statements since they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond our control and
which could materially affect actual results, levels of activity, performance or
achievements.  Factors that may cause actual results to differ
materially from current expectations include, but are not limited
to:
 
 ·
              unfavorable
      results of our product candidate development
  efforts;
 ·
              unfavorable
      results of our pre-clinical or clinical
testing;
 ·
              delays
      in obtaining, or failure to obtain FDA
  approvals;
 ·
              increased
      regulation by the FDA and other
agencies;
 ·
              the
      introduction of competitive
products;
 ·
              impairment
      of license, patent or other proprietary
rights;
 ·
              failure
      to achieve market acceptance of our
products;
 ·
              the
      impact of present and future collaborative
  agreements;
 ·
              failure
      to successfully implement our drug development strategy,
    and
 ·
              failure
      in the future to meet the requirements for continued listing on the NASDAQ
      Markets.
  13
 Index
  If one or
more of these or other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary significantly from
what we projected. Any forward-looking statement you read in this Quarterly
Report on Form 10-Q reflects our current views with respect to future events and
is subject to these and other risks, uncertainties and assumptions relating to
our operations, results of operations, business strategy and
liquidity.  We assume no obligation to publicly update or revise these
forward-looking statements for any reason, or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the
future.
 
 Other
than as described below, there are no material changes from the risk factors
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2007.
 
 
 Our
stock price is volatile and fluctuates due to a variety of factors.
 
 Our stock
price has varied significantly in the past (from a high of $9.32 to a low of
$0.51during the
period of January 1, 2004 through October 31, 2008) and may vary in the future
due to a number of factors, including:
 
 ·
              announcement
      of the results of, or delays in, preclinical and clinical
      studies;
 ·
              fluctuations
      in our operating results;
 ·
              developments
      in litigation to which we or a competitor is
  subject;
 ·
              announcements
      and timing of potential acquisitions, divestitures, capital raising
      activities or issuance of preferred
stock;
 ·
              announcements
      of technological innovations or new products by us or our
      competitors;
 ·
              FDA
      and other regulatory actions;
 ·
              developments
      with respect to our or our competitors’ patents or proprietary
      rights;
 ·
              public
      concern as to the safety of products developed by us or
      others;
 ·
              changes
      in stock market analyst recommendations regarding us, other drug
      development companies or the pharmaceutical industry generally;
      and
 ·
              if
      we are unable in the future to meet the requirements for continued listing
      on the NASDAQ Markets.
 
 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 our stock.
 
 
 If
we fail to meet the requirements for continued listing on the NASDAQ Markets,
our common stock could be delisted from trading, which would adversely affect
the liquidity of our common stock and our ability to raise additional
capital.
 
 Our
common stock is currently listed on the NASDAQ Global Market.  We are
required to meet specified financial requirements to maintain our listing on the
NASDAQ Markets.  One such requirement is that we maintain a minimum
bid price of at least $1.00 per share for our common stock.  Our
common stock has recently closed at prices that are below the minimum bid price
requirement and on August 11, 2008, we received a notice from NASDAQ, dated
August 8, 2008, that the minimum bid price for our common stock had closed under
$1.00 per share for over 30 business days, causing a violation of the continuing
listing standard of the NASDAQ Global Market.  If, after the periods
provided by NASDAQ rules, our stock price remains below the minimum bid price,
or if we fail to satisfy any other continued listing requirement of the NASDAQ
Markets in the future, our common stock could be delisted from the NASDAQ
Markets. A delisting of our common stock from the NASDAQ Markets would make it
more difficult for our shareholders to sell our stock in the public market and
would likely result in decreased liquidity and increased volatility for our
common stock.  Our securities may also trade at a lower market price
than they otherwise would.
  14
 Index
  If we
fail to satisfy any of the NASDAQ Markets’ continued listing requirements, we
cannot assure you that we would be successful in regaining compliance with those
requirements in the future.  In the event of delisting, trading, if
any, could continue to be conducted on the over the counter market in the so
called “pink sheets” or on the OTC Bulletin Board.  Selling our common
stock would be more difficult because, among other things, smaller quantities of
shares would likely be bought and sold, transactions could be delayed, security
analysts’ coverage of us could be reduced and shareholders may find it more
difficult to obtain accurate quotations as to the market value of our common
stock.  Also, a delisting (or a notice or other action indicating the
possible future delisting of our common stock) could have a material adverse
effect on the price for our shares and our ability to issue additional
securities or to secure additional financing.  In addition, delisting
from the NASDAQ Markets may subject our common stock to “penny stock” rules
under the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended.  These rules impose additional sales practice and
other requirements on broker-dealers who sell and/or make a market in securities
deemed penny stocks under SEC rules.  Consequently, the delisting of
our securities and the applicability of the penny stock rules may adversely
affect the liquidity and price of our common stock.
 
 
 Item2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds
 
 The
following table summarizes information regarding shares purchased during the
three months ended September 30, 2008.
 
 Month
                              
                              Total
      Number of shares purchased
                              
                              
                              Average
      price paid per share
                              
                              
                              Total
      number of shares purchased as part of publicly announced
      program
                              
                              
                              Maximum
      number of shares that may yet be purchased under the
    programJuly
      1 - 31, 2008
                              
                              
                              173,775
                              
                              
                              $
                              0.85
                              
                              
                              
                              173,775August
      1 - 31, 2008
                              
                              
                              18,000
                              
                              
                              $
                              0.77
                              
                              
                              
                              18,000
                              
                              
                              
                              1,005,000
 
 
 On March
5, 2008, the Company announced that its Board of Directors had approved a stock
repurchase program for up to five percent of its then outstanding common
shares.  The shares may be repurchased from time to time in open
market transactions or privately negotiated transactions at the Company’s
discretion, subject to market conditions and other factors.  There
were approximately 41.8 million shares of common stock outstanding at March 5,
2008.
 
 During
the nine months ended September 30, 2008, the Company purchased a total of
1,082,796 shares at a total cost of $1,017,000.
 Item
      5.
                Other
      Information
 On
November 4, 2008, the Company, as further described in Exhibits 10.1 and 10.2
filed with this Form 10-Q, amended the Employment Agreement of Randolph C.
Steer, MD. Ph.D., President, and the Management Services Agreement of John M.
Holliman, III, Executive Chairman, to increase their severance benefits if
terminated without cause.  If terminated for other than cause, each
would be entitled to continuation of his then current monthly base salary or
management fee for a period of twelve months after the date of
termination.
 Item
      6.
              Exhibits
 
 See the
Exhibit Index following this report.
  15
 Index
  SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 ORTHOLOGIC
CORP.
 (Registrant)
  Signature
                      Title
                      Date/s/ John M. Holliman,
      III
                      Executive
      Chairman
                      November
      6, 2008John
      M. Holliman, III
                      (Principal
      Executive Officer)/s/ Les M. Taeger
                      Senior
      Vice-President and Chief
                      November
      6, 2008Les
      M. Taeger
                      Financial
      Officer(Principal
      Financial and Accounting Officer)
  16
 Index
  OrthoLogic
Corp.
 (the
“Company”)
 Exhibit
Index to Quarterly Report on Form 10-Q
 For
the Quarterly Period Ended September 30, 2008
 
 
 Exhibit
      No.
                            Description
                            Incorporated by Reference
    to:
                            Filed
      Herewith10.1
                            Amendment
      No. 3, dated November 4, 2008, to the Management Services Agreement
      effective May 12, 2006 by and between AGP Management, LP, John M.
      Holliman, III, Executive Chairman, and OrthoLogic Corp.
(1)
                            
                            X10.2.
                            Amendment
      No. 3, dated November 4, 2008, to the Employment Agreement effective May
      12, 2006, between Randolph C. Steer, MD, Ph.D., President, and OrthoLogic
      Corp. (1)
                            
                            X31.1
                            Certification
      of Principal Executive Officer Pursuant to Rule 13a -14(a) of
      the  Securities Exchange Act of 1934, as amended
                            
                            X31.2
                            Certification
      of Principal Financial and Accounting Officer Pursuant to  Rule
      13a -14(a) of the  Securities Exchange Act of 1934, as
      amended
                            
                            X32
                            Certification
      of Principal Executive Officer and Principal Financial and Accounting
      Officer Pursuant to 18 U.S.C. Section 1350*
 
 *Furnished
herewith
 (1)
Management contract or compensatory plan or arrangement
   17