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 March 31, 2002

                                       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. Yes [X] 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.

       31,917,144 shares of common stock outstanding as of April 30, 2002
<PAGE>
                                ORTHOLOGIC CORP.
                                      INDEX

                                                                        Page No.
Part I   Financial Information

         Item 1. Financial Statements

         Condensed Consolidated Balance Sheets March 31, 2002 and
         December 31, 2001..................................................   3

         Condensed Consolidated Statements of Operations and of
         Comprehensive Income for the Three months ending
         March 31, 2002 and 2001............................................   4

         Condensed Consolidated Statements of Cash Flows for the three
         months ending March 31, 2002 and 2001..............................   5

         Notes to Unaudited Condensed Consolidated
         Financial Statements...............................................   6

         Item 2. Management's Discussion and Analysis of Financial
                 Condition and Results of Operations........................  12

         Item 3. Quantitative and Qualitative Disclosures about
                 Market Risk................................................  16

Part II  Other Information

         Item 1. Legal Proceedings..........................................  23

         Item 6. Exhibits and Reports on Form 8-K...........................  23

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


                                OrthoLogic Corp.
                      Condensed Consolidated Balance Sheets
                                 (in thousands)

                                                       March 31,    December 31,
                                                          2002          2001
                                                       ---------     ---------
                                                      (Unaudited)
ASSETS
Cash and cash equivalents                              $  15,162     $  19,503
Short term investments                                    16,158        11,008
Accounts receivable, net                                  10,792        11,361
Inventory, net                                             2,090         1,762
Prepaids and other current assets                            711           688
Deferred income tax                                        2,631         2,631
                                                       ---------     ---------
   Total current assets                                   47,544        46,953

Furniture and equipment                                    8,428         8,325
Accumulated depreciation                                  (6,596)       (6,423)
                                                       ---------     ---------
   Furniture and equipment, net                            1,832         1,902

Investment in Chrysalis BioTechnology                        750           750
Deposits and other assets                                    130            92
                                                       ---------     ---------
   Total assets                                        $  50,256     $  49,697
                                                       =========     =========
LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities

Accounts payable                                       $   1,277     $   1,031
Accrued liabilities                                        4,693         5,883
                                                       ---------     ---------
   Total current liabilities                               5,970         6,914

Deferred rent obligations                                    303           287
                                                       ---------     ---------
   Total liabilities                                       6,273         7,201
                                                       ---------     ---------

Series B Convertible Preferred Stock                         600           600

Stockholders' Equity

Common stock                                                  16            16
Additional paid-in capital                               135,367       135,326
Common stock to be used for legal settlement               2,969         2,969
Accumulated deficit                                      (94,832)      (96,278)
Treasury stock                                              (137)         (137)
                                                       ---------     ---------
   Total stockholders' equity                             43,383        41,896
                                                       ---------     ---------

   Total liabilities and stockholders' equity          $  50,256     $  49,697
                                                       =========     =========

See Notes to Unaudited Condensed Consolidated Financial Statements.

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

                                                            Three months ending
                                                                 March 31,
                                                            -------------------
                                                              2002       2001
                                                            --------   --------
Revenues                                                    $  9,609   $ 21,682
Cost of Revenues                                               1,313      4,733
                                                            --------   --------

Gross Profit                                                   8,296     16,949

Operating expenses
  Selling, general and administrative                          6,704     16,103
  Research and development                                       920        704
  Change in estimated collectability of CPM receivables         (600)        --
                                                            --------   --------
      Total operating expenses                                 7,024     16,807
                                                            --------   --------

Operating income                                               1,272        142

Other income                                                     187        129
                                                            --------   --------
Income before income taxes                                     1,459        271

Provision for income taxes                                        13         67
                                                            --------   --------

Net income                                                  $  1,446   $    204
                                                            ========   ========

BASIC EARNINGS PER SHARE
 Net income per common share                                $   0.04   $   0.01
                                                            --------   --------
Weighted average number of
    common shares outstanding                                 32,515     31,140
                                                            --------   --------
DILUTED EARNINGS PER SHARE
Net income per common
   and equivalent shares                                    $   0.04   $   0.01
                                                            --------   --------

Weighted shares outstanding                                   33,300     31,649
                                                            --------   --------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Net income                                                  $  1,446   $    204
Foreign currency translation adjustment                                     (13)
                                                            --------   --------
Comprehensive income                                        $  1,446   $    191
                                                            ========   ========

See Notes to Unaudited Condensed Consolidated Financial Statements.

                                       4
<PAGE>
                                OrthoLogic Corp.
                 Condensed Consolidated Statements of Cash Flows
                                 (in thousands)
                                    Unaudited

                                                           Three months ending
                                                                 March 31,
                                                           -------------------
                                                             2002       2001
                                                           --------   --------
OPERATING ACTIVITIES

  Net income                                               $  1,446   $    204
  Noncash items:
    Depreciation and amortization                               173        281

  Change in operating assets and liabilities:
    Accounts receivable                                         569      2,502
    Inventory                                                  (328)     1,413
    Prepaids and other current assets                           (23)      (517)
    Deposits and other assets                                   (38)        81
    Accounts payable                                            246       (841)
    Accrued liabilities                                      (1,174)      (977)
                                                           --------   --------
      Net cash provided in operating activities                 871      2,146
                                                           --------   --------
INVESTING ACTIVITIES

  Expenditures for rental fleet, equipment and furniture       (103)      (430)
  (Purchases) sales of short term investments                (5,150)     1,333
                                                           --------   --------
    Net cash (used) provided in investing activities         (5,253)       903
                                                           --------   --------
FINANCING ACTIVITIES

  Net proceeds from stock option exercises and other             41         27
                                                           --------   --------
    Net cash provided by financing activities                    41         27
                                                           --------   --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                    (4,341)     3,076

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               19,503      6,753
                                                           --------   --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                   $ 15,162   $  9,829
                                                           ========   ========
Supplemental schedule of non-cash investing and
financing activities:
   Cash paid during the period for interest                $     23   $     20
   Cash paid during the period for income taxes            $      2   $     --

See Notes to Unaudited Condensed Consolidated Financial Statements.

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


1.   FINANCIAL STATEMENT PRESENTATION

     The Condensed Consolidated Balance Sheet as of March 31, 2002 and the
Condensed Consolidated Statements of Operations and Comprehensive Income for the
three months ending March 31, 2002 and 2001 and the Condensed Consolidated
Statements of Cash Flows for the three months ending March 31, 2002 and 2001 are
unaudited. 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, 2001
is derived from the Company's audited financial statements included in the 2001
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 2001 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 and sales discounts and adjustments of approximately $3.3 million and
$12.7 million at March 31, 2002 and 2001, respectively, which are based
primarily on trends in historical collection statistics, consideration of
current events, payor mix and other considerations. The Company derives a
significant amount of its revenues 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 $2.3 million and $7.8 million on March 31, 2002 and 2001,
respectively. Some billings are subject to review by such third party payors and
may be subject to adjustments. In the opinion of management, adequate allowances
have been provided for doubtful accounts and contractual adjustments. However,
these estimates are always subject to adjustment, which could be material. Any
differences between estimated reimbursement and final determinations are
reflected in the period finalized.

     In January 2001, the Company announced plans to divest its Continuous
Passive Motion ("CPM") business to refocus the Company on its core business of
fracture healing and spinal repair (See Note 3).

2.   CO-PROMOTION AGREEMENT FOR HYALGAN

     The Company began selling Hyalgan to orthopedic surgeons in July 1997,
under a Co-Promotion Agreement with Sanofi Synthelabo, Inc. (the "Co-Promotion
Agreement"). In October 2000, the Company and Sanofi mutually agreed to
terminate the agreement. The Company received an up-front cash payment to
complete the transition of the business and continuing royalties through 2002.

                                       6
<PAGE>
Hyalgan royalty revenue in the quarter ended March 31, 2002 was $904,000 as
compared to Hyalgan royalty revenue of $716,000 for the same period in 2001.

3.   CPM DIVESTITURE AND CHANGE IN ESTIMATED COLLECTABILITY OF CPM RECEIVABLES

     In January 2001, the Company announced plans to divest its CPM business to
refocus the Company on its core business of fracture healing and spinal repair.
The sale of the CPM business was completed in July 2001. As part of the
divestiture, the Company retained the billed accounts receivable related to the
CPM business with a net carrying value of approximately $10.8 million (net of a
$5.2 million allowance for doubtful accounts). During the first quarter of 2002,
the Company changed its estimate of the collectability of the CPM accounts
receivable and now anticipates that it will collect $600,000 more in CPM
accounts receivable than was estimated at the time of the divestiture.

     A summary of the severance and other reserve balances at March 31, 2001 are
as follows:

<TABLE>
<CAPTION>
                                   Total Charges      Amount Charged       Cash           Reserves
                                   June 30, 2001      Against Assets       Paid        March 31, 2001
                                   -------------      --------------      -------      --------------
<S>                                <C>                <C>                 <C>          <C>
Severance and stay-on bonus           $ 3,300             $    --         $(2,668)         $   632
Other exit costs                        1,387                (245)         (1,066)              76
                                      -------             -------         -------          -------
Total non-recurring charges           $ 4,687             $  (245)        $(3,734)         $   708
</TABLE>

     Subsequent to the sale, the Company is no longer in the CPM business.
Substantially all costs, expenses and impairment charges related to CPM exit
activities were recorded prior to the end of the second quarter of 2001. The
revenue and cost of revenue attributable to the CPM business were:

                                          2001            2000            1999
                                        --------        --------        --------
Revenue                                 $ 28,861        $ 60,259        $ 62,862
Cost of revenue                            5,811          14,103          15,947
                                        --------        --------        --------
Gross profit                            $ 23,050        $ 46,156        $ 46,915

4.   LICENSING AGREEMENT FOR CHRYSALIN

     The Company announced in January 1998, that it had 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 has shown promise in
accelerating the healing process and has completed a pre-clinical safety and
efficacy profile of the product. 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 certain milestone payments to Chrysalis by the Company.
As part of the equity investment, OrthoLogic acquired options to license
Chrysalin for orthopedic applications. A fee of $750,000 for the initial license
was expensed in the third quarter of 1998. In January 1999, the Company
exercised its option to license the U. S. development, marketing and

                                       7
<PAGE>
distribution rights for Chrysalin, for fresh fracture indications. As part of
the license agreement, and in conjunction to FDA clearance 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 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 made a
$500,000 milestone payment to Chrysalis for receiving clearance from the FDA to
begin a Phase I/II trial for spinal fusion. Except for the $750,000 minority
equity interest, all payments made to Chrysalis have been expensed as research
and development.

     During 2001 the Company completed a Phase I/II clinical trial utilizing
Chrysalin for fresh fracture repair and is currently seeking approval to begin a
Phase III trial for that indication. In March 2002, the Company received
approval by the FDA to commence a Phase I/II clinical trial for a spinal fusion
indication and anticipates initiating a trial in 2002. The Company is currently
moving forward with an Investigational New Drug application for Phase I/II human
clinical trial for Chrysalin for articular cartilage repair in 2002. There can
be no assurance, however, that the clinical trials will result in favorable data
or that FDA approvals, if sought, will be obtained. Significant additional costs
for the Company will be necessary to complete development of these products.

5.   LITIGATION

     SETTLEMENT OF CLASS ACTION SUIT NORMAN COOPER, ET AL. V. ORTHOLOGIC CORP.
ET AL., MARICOPA COUNTY SUPERIOR COURT, ARIZONA, CASE NO. CV 96-10799, AND
RELATED FEDERAL CASES. During 1996, certain class actions lawsuits were filed in
the United States District Court for the District of Arizona against the Company
and certain officers and directors alleging violations of Sections 10(b) of the
Securities Exchange Act if 1934 ("Exchange Act") and SEC Rule 10b-5 promulgated
thereunder, and, as to other defendants, Section 20(a) of the Exchange Act.

     The cases were originally filed in 1996, alleged generally that information
concerning the May 31, 1996 letter received by the Company from the FDA
regarding the Company's OL1000 Bone Growth Stimulator, and the matters set forth
therein, were material and undisclosed, leading to an artificially inflated
stock price. Plaintiffs further allege that the Company's non-disclosure of the
FDA correspondence and of the alleged practices referenced in that
correspondence operated as a fraud against plaintiffs, in that the Company
allegedly made untrue statements of material facts or omitted to state material
facts in order to make the statement not misleading. Plaintiffs further alleged
that once the FDA letter became known a material decline in the stock price of
the Company occurred, causing damage to the plaintiffs. All plaintiffs sought
class action status, unspecified compensatory damages, fees and costs. The
actions were consolidated for all purposes in the United States District Court
for the District of Arizona. On March 31, 1999, the judge in the consolidated
case before the United States District Court granted the Company Motion to
Dismiss and entered an order dismissing all claims in the suit against the
Company and two individual officers/directors. The judge allowed certain narrow
claims based on insider trading theories to proceed against certain individual
defendants. On December 21, 1999, the District Court granted plaintiffs' motion

                                       8
<PAGE>
for class certification to include purchasers of common stock between June 4
through June 18, 1996, inclusive.

     On or about June 20, 1996, a lawsuit entitled Norman Cooper, et. al. v.
OrthoLogic, Corp., et. al, and Case No. CV 96-10799 was filed in the Superior
Court, Maricopa County, Arizona. The plaintiffs allege violations of Arizona
Revised Statutes sections 44-1991 (state securities fraud) and 44-1522 (consumer
fraud) and common law fraud based upon factual allegations substantially similar
to those alleged in the federal court class action complaints. Plaintiffs sought
class action status, unspecified compensatory and punitive damages, fees and
costs. Plaintiffs also sought injunction and or equitable relief. The court
granted the plaintiffs' motion for the class certification on November 24, 1999.

     In early October 2000, the parties negotiated a global settlement of this
state court class action and the federal class action described below. In return
for dismissal of both the state and federal class actions, and releases by a
settlement class comprised of all purchasers of OrthoLogic common stock during
the period from January 18 through June 18, 1996, inclusive, the settlement
called for $1 million in cash and 1 million shares of newly-issued OrthoLogic
common stock. The settlement was presented to the Arizona superior court for
approval. The court granted preliminary approval of the settlement and ordered
notice to the settlement class by order dated April 30, 2001. Following notice
to the settlement class and a hearing on whether to give final approval of the
settlement, on August 17, 2001, the superior court gave final approval of the
settlement and signed and filed a judgment of dismissal of the action with
prejudice. We are not aware of any appeal from the judgment or other challenge
to the final approval of the settlement. Pursuant to the terms of the
settlement, the cash portion of the settlement fund has already been paid into
the settlement fund, with the substantial portion of the $1 million paid from
the proceeds of the Company's directors' and officers' liability insurance
policy, and the remaining cash paid by the Company. The Company recorded a $3.6
million charge in 2000, including legal expenses, for settlement. Pursuant to
the terms of the settlement and order of the superior court, and the Company has
issued and delivered 300,000 shares of common stock to plaintiffs' settlement
counsel as part of the plaintiffs' counsel's fee award. The remaining 700,000
shares remain to be delivered to the settlement fund pending administration of
the claims process under the settlement. Notices have been sent to stockholders
of record for the relevant time period to calculate the settlement pool each
stockholder is to receive.

     Management believes the settlement is in the best interests of the Company
and its shareholders as it frees the Company from the cost and significant
distraction of the ongoing litigation. The settlement does not constitute, and
should not be construed as, an admission that the defendants have any liability
or acted wrongfully in any way with respect to the plaintiffs or any other
person.

     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 relates 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. The Company filed a motion to dismiss the second

                                       9
<PAGE>
amended complaint on various grounds including that the allegations are barred
because of the earlier settlement. The case has just begun discovery. At the
present stage, it is not possible to evaluate the likelihood of an unfavorable
outcome or the amount or a range of potential loss, if any, which may be
experienced by the Company.

     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.,
the company which purchased the assets related to the CPM business of OrthoLogic
Corp., filed a complaint in connection with the acquisition of the Company's
continuous passive motion business in July 2001 alleging, among other things,
that some of the assets purchased were over valued and that the Company had
breached its contract. The case is being heard in the Superior Court of the
State of Delaware. The Company has denied the Plaintiffs' allegations and
intends to defend the matter vigorously. The case is currently in discovery. At
the present stage, it is not possible to evaluate the likelihood of an
unfavorable outcome or the amount or a range of potential loss, if any, which
may be experienced by 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
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.

     As of December 31, 2001, in addition to the matters disclosed above, the
Company is involved in various other legal proceedings that arose in the
ordinary course of business. The costs associated with defending the above
allegations and the potential outcome cannot be determined at this time and
accordingly, no estimate for such costs have been included in the accompanying
financial statements. In management's opinion, the ultimate resolution of the
above legal proceedings will not have a material effect on the Company's
financial position, results of operations or cash flows.

6.   LINE OF CREDIT

     The Company has a $4 million revolving line of credit with a lending
institution. The Company may borrow up to 75% of eligible account receivable, as
defined in the agreement. The interest rate is at prime rate. Interest accruing
on any 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, 2003. There
are certain financial covenants and reporting requirements associated with the
loan. Included in the financial covenants are (1) tangible net worth of not less
than $30 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 during any fiscal year. As
of March 31, 2002, the Company has not utilized this line of credit.

                                       10
<PAGE>
7.   SERIES B CONVERTIBLE PREFERRED STOCK

     As of March 31, 2002, 14,400 shares of Series B Convertible Preferred Stock
had been converted into 5,746,584 Shares of common stock. Subsequent to March
31, 2002, an additional 300 shares of Series B Convertible Preferred Stock was
converted to an additional 98,838 Shares of Common Stock.

                                       11
<PAGE>
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, 2001.

OVERVIEW

     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.

     In July 2001, the Company sold its Continuous Passive Motion ("CPM")
business. The Company's decision to divest the CPM business was based on its
desire to refocus all of its activities in the fracture healing and spinal
repair segments of the orthopedic market. The CPM business, which is focused in
the rehabilitation segment of the orthopedic market, no longer fit in the
Company's long-term strategic plans.

     OrthoRehab., Inc. purchased the CPM business for $12.0 million in cash, the
assumption of approximately $2.0 million in liabilities and a potential
additional payment to OrthoLogic of up to $2.5 million in cash, conditioned on
OrthoRehab's ability to collect on certain accounts receivable in the year
following the sale. OrthoLogic is currently in litigation with OrthoRehab, Inc.
regarding this $2.5 million contingent payment. The litigation is described in
greater detail in Note 5.

     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 and sales discounts and adjustments of approximately $3.3 million and
$12.7 million at March 31, 2002 and 2001, respectively, which are based
primarily on trends in historical collection statistics, consideration of
current events, payor mix and other considerations. The Company derives a
significant amount of its revenues 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 $2.3 million and $7.8 million on March 31, 2002 and 2001,
respectively. Some billings are subject to review by such third party payors and
may be subject to adjustments. In the opinion of management, adequate allowances
have been provided for doubtful accounts and contractual adjustments. However,
these estimates are always subject to adjustment, which could be material. Any

                                       12
<PAGE>
differences between estimated reimbursement and final determinations are
reflected in the period finalized.

     In January 2001, the Company announced plans to divest its CPM business to
refocus the Company on its core business of fracture healing and spinal repair.
As a result of the decision to divest of the CPM business, and as reflected in
the 2000 statement of operations, the Company wrote off the remaining $23.3
million of goodwill related to the CPM business. The goodwill was assessed to be
impaired in accordance with Statement of Financial Accounting Standards, No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The Company's discussion and analysis of the financial conditions and
results of operations are based upon the Unaudited Condensed Consolidated
Financial Statements prepared in conformity with accounting principles generally
accepted in the United States of America. The preparation of these statements
necessarily 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 revenues and expenses during the reported period. These estimates and
assumptions form the basis for the carrying values of assets and liabilities. On
an on-going basis, the Company evaluates these estimates, including those
related to allowance for doubtful accounts, sales adjustments and discounts,
inventories, investments, restructuring, income taxes, contingencies, and
litigation. Management bases its estimates on historical experience and various
other assumptions and believes its estimates are reasonable under the
circumstances, the results of which form the basis for making judgments. Actual
results may differ from these estimates.

     The Company recognizes revenue when the product is placed on the patient,
or if the sale is to a commercial buyer, at the time of shipment. Estimated
reductions to revenues are in the form of sales discounts and adjustments from
certain commercial carriers, health maintenance organizations and preferred
provider organizations. Changes to estimated revenues are recognized in the
period in which the facts that give rise to the changes become known. Allowances
for doubtful accounts are maintained for estimated losses resulting from the
inability of its customers and third-party payors inability to make the required
payments. If the financial condition of the third-party payors were to
deteriorate, resulting in an ability to make payments, additional allowances
might be necessary.

     The Company writes-down its inventory for inventory shrinkage and
obsolescence equal to the difference between the cost of the inventory and the
estimated market value based upon assumptions about future demand and market
conditions. If conditions used in determining these valuations changed, future
additional inventory write-downs would be necessary.

     The Company considers future taxable income and tax planning strategies in
determining the need for valuation allowances. 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.

     The Company holds a minority interest in a company in the technological
field in which the Company has a strategic focus. The Company is not publicly
traded so it is difficult to determine the value of the investment. Should the

                                       13
<PAGE>
investment be determined to be permanently impaired, a charge to income would be
recorded in the period such a determination is made.

RESULTS OF OPERATIONS COMPARING THREE MONTH PERIOD ENDING MARCH 31, 2002 TO 2001

REVENUES: The Company's total revenues decreased 55.8% from $21.7 million in
2001 to $9.6 million in the first quarter of 2002. Revenues for the first
quarter of 2001 included sales of $14.1 million from the divested CPM business.
Sales recorded for our bone growth stimulation products, the OL1000 and
SpinaLogic, increased by 25.9% from the first quarter of 2001 to 2002. The
significant increase in bone growth stimulation sales is related to the growth
in market share for both the OL1000 and SpinaLogic.

Hyalgan royalty revenue was $904,000 in the three month period ended March 31,
2002 compared to Hyalgan fees and sales of $716,000 in 2001. The royalty
agreement for Hyalgan will terminate at the end of fiscal year 2002. We
anticipate receiving additional royalties of $1.3 million during the remainder
of the year.

GROSS PROFIT: Gross profit decreased from $16.9 million in 2001 to $8.3 million
in 2002. Gross profit, as a percent of revenue, was 86.3% for the quarter ending
March 31, 2002. Gross profit for the same period in 2001 was 78.2%. The majority
of the profit margin improvement is the result of the change in the product mix
to higher margins since the divestiture of the lower margin CPM business
products.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses decreased
58.4% from $16.1 million in the three month period ended March 31, 2001 to $6.7
million in the same period in 2002. The decrease is mainly attributable to the
sale of the CPM business and the variable expenses related to that business.
SG&A expenses, as a percentage of total revenues, were 69.8% in the three month
period ended March 31, 2002 and 74.3% in the same period in 2001.

RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses were
$920,000 in the three month period ended March 31, 2002, compared to $704,000
for the same period in 2001. This increase is due to $500,000 milestone payment
in March 2002 to Chrysalis BioTechnology, Inc. for initiating the Investigative
New Drug ("IND") application for a combined Phase I/II human clinical trial of
Chrysalin for spinal fusion. Research and development expenses in the first
quarter of 2001 reflect the clinical costs of the Phase I/II human clinical
trials for fracture repair.

CPM DIVESTITURE AND CHANGE IN ESTIMATED COLLECTABILITY OF CPM RECEIVABLES: In
the second quarter of 2001, the Company recorded a $6.9 million charge to write
down the CPM assets to their fair value, plus the direct costs of selling the
assets. The Company retained all the billed accounts receivable related to the
CPM business, with a net carrying value of approximately $10.8 million (net of a
$5.2 million allowance for doubtful accounts.) The collection staff and
supervisor previously responsible for the collection of these receivables were
part of the employee team hired by the purchaser of the CPM business. Company
management believed that there would be some negative affects on collections, so
an additional charge of $2.8 million was recognized in the second quarter of
2001. During the first quarter of 2002, the Company changed its estimate of the

                                       14
<PAGE>
collectability of the CPM Accounts Receivable and now anticipates that it will
collect $600,000 more in CPM accounts receivable than was estimated at the time
of the divestiture.

     A summary of the severance and other reserve balances at March 31, 2001 are
as follows:

<TABLE>
<CAPTION>
                                   Total Charges      Amount Charged       Cash           Reserves
                                   June 30, 2001      Against Assets       Paid        March 31, 2001
                                   -------------      --------------      -------      --------------
<S>                                <C>                <C>                 <C>          <C>
Severance and stay-on bonus           $ 3,300             $    --         $(2,668)         $   632
Other exit costs                        1,387                (245)         (1,066)              76
                                      -------             -------         -------          -------
Total non-recurring charges           $ 4,687             $  (245)        $(3,734)         $   708
</TABLE>

OTHER INCOME. Other income in the three month periods ending 2002 and 2001
consisted primarily of interest income and increased from $129,000 in the period
ended March 31, 2000 to $187,000 for the same period in 2002. The increase is a
result of interest earned on the Company's higher cash balances.

NET PROFIT: The Company had a net profit in the period ending March 31, 2002 of
$1.4 million compared to a net profit of $204,000 in the same period in 2001.

LIQUIDITY AND CAPITAL RESOURCES

     On March 31, 2002 the Company had cash and equivalents of $15.2 million
compared to $19.5 million as of December 31, 2001. The Company had $16.2 million
of short-term investments as of March 31, 2002 compared to $11.0 million at
December 31, 2001. The total of both cash and cash equivalents and short term
investments increased to $31.3 million at March 31, 2002 compared to $30.5
million as of December 31, 2001.

     In addition, the Company has an available $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, 2003. There are certain financial covenants and
reporting requirements associated with the loan. Included in the financial
covenants are (1) tangible net worth of not less than $30 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 March 31, 2002, the Company was in compliance with all the
financial covenants.

     Net cash provided by operations during the three month period ended March
31, 2002 was $871,000 compared to $2.1 million in 2001. This decrease was
primarily attributed to (1) a smaller decrease in accounts receivable by $1.9
million (comparing the period ended March 31, 2002 to the same period in 2001)
and an increase in inventory of $328,000 (in the period ended March 31, 2002)
partially offset by (2) an increase in net income of $1.2 million in the period
ended March 31, 2002 as compared to the same period in 2001.

                                       15
<PAGE>
     The Company does not expect significant capital investments in 2002 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 timing and amounts of cash used 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 upon 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, or from other sources of financing, as may be
required.

     In August 2001, the Company announced that it authorized a repurchase of up
to 1 million shares of the Company's outstanding shares over the next 12 months.
The repurchased shares will be held as treasury shares and used in part to
reduce the dilution from the Company stock option plans. As of March 31, 2002,
the Company had repurchased 41,800 shares at a cost, net of fees, for $137,300
or an average price of $3.28 per share.

     The following table sets forth all known commitments as of March 31, 2002
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
     ----           ----------------        -----------------------      -----
     2002               $   809                    $ 5,970              $ 6,779
     2003               $ 1,078                         --              $ 1,078
     2004               $ 1,078                         --              $ 1,078
     2005               $ 1,078                         --              $ 1,078
     2006               $ 1,078                         --              $ 1,078
     Thereafter         $   989                         --              $   989
                        -------                    -------              -------

     Total              $ 6,110                    $ 5,970              $12,080

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company has no debt and no derivative instruments at March 31, 2002.

     The Company's Canadian operations were sold as part of the CPM sale, and
the Company has no exposure to foreign exchange rates at March 31, 2002.

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

                                       16
<PAGE>
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.

DIVESTITURE OF THE CPM DIVISION. In 2000 the Company announced its decision to
refocus its core business in the fracture healing and spinal repair segment of
the orthopedic market. The CPM business, which was focused in the rehabilitation
segment of the orthopedic market, no longer fit in the Company's long-term
strategic plans. The sale was finalized in July 2001. Future market price of the
Common Stock of the Company could be greatly influenced by the success of the
transition back to the core bone stimulation business.

LIMITED HISTORY OF PROFITABILITY; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS.
The Company was founded in 1987 and only began generating revenues from the sale
of its primary product in 1994. The Company has experienced significant
operating losses since its inception and had an accumulated deficit of
approximately $96 million at December 31, 2001. There can be no assurance that
the Company will ever generate sufficient revenues to attain operating
profitability or retain net profitability on an on-going annual basis. In
addition, 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.

DEPENDENCE ON METHODS TO DISTRIBUTE PRODUCT. Substantial portions of the
Company's sales are generated through the Company's internal sales force of
approximately 38 employees for the OL1000. To enhance market penetration of
SPINALOGIC, the Company distributes this product through an exclusive sales
distribution agreement with DePuy AcroMed. If DePuy Acromed does not generate
sales sufficient to meet the agreed upon annual minimum sales, and if the
Company becomes dissatisfied with the SpinaLogic distribution, the Company may
terminate the distribution agreement and train its internal sales staff to
include SpinaLogic sales. The delay associated with such an event may have an
adverse effect on the Company's sales of SpinaLogic, its newest product on the
market.

POTENTIAL ADVERSE OUTCOME OF LITIGATION. In October 2000, the Company announced
that it had entered into a Memorandum of Understanding regarding settlement of
several law suits filed in 1996. See "ITEM 3 - LEGAL PROCEEDING'S." The
settlement is still subject to review by the members of the class and the judge
who will conduct a fairness hearing before the settlement is accepted.
Objections by either party could result in a nullification of the current
Memorandum of Understanding, which could result in new settlement terms that are
not as favorable to the Company.

DEPENDENCE ON KEY PERSONNEL. 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 academic institutions. There can be no assurance that the Company

                                       17
<PAGE>
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.

HISTORICAL DEPENDENCE ON PRIMARY PRODUCT: FUTURE PRODUCTS. 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, clinical and other
expenditures. There can be no assurance that the Company's technologies will
allow it to 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.

UNCERTAINTY OF MARKET ACCEPTANCE. The Company believes that the demand for bone
growth stimulators is still developing and the Company's success will depend in
part upon the growth of this demand. There can be no assurance that this demand
will develop. The long-term commercial success of the OL1000 and SpinaLogic and
the Company's other products will also depend in significant part upon its
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. As the newest product to the market, SpinaLogic's
sales and acceptance by the medical community is not certain. Failure of the
Company's products to achieve widespread market acceptance by the orthopedic
medical community and third party payors would have a material adverse effect on
the Company's business, financial condition and results of operations.

MANAGEMENT OF GROWTH. The Company's future performance will depend in part on
its ability to manage change in its operations and changes in the healthcare
industry. In addition, the Company's ability to manage its growth effectively
will require it to continue to improve its manufacturing, operational and
financial control systems and infrastructure, and management information
systems, and to attract, train, motivate, manage and retain key employees. If
the Company's management were to become unable to manage growth effectively, the
Company's business, financial condition, and results of operations could be
adversely affected.

LIMITATIONS ON THIRD PARTY PAYMENT; UNCERTAIN EFFECTS OF MANAGED CARE. The
Company's ability to commercialize its products successfully in the United
States and in other countries will depend in part on the extent to which
acceptance of payment for such products and related treatment will continue to
be available from government health administration authorities, private health
insurers and other payors. 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 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

                                       18
<PAGE>
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,
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.

UNCERTAINTY AND POTENTIAL NEGATIVE EFFECTS OF HEALTHCARE REFORM. The health care
industry is undergoing fundamental changes resulting from political, economic
and regulatory influences. In the United States, comprehensive programs have
been proposed that seek to (i) increase access to health care for the uninsured,
(ii) control the escalation of health care expenditures within the economy and
(iii) use health care reimbursement policies to help control federal
expenditures. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery systems and
methods of payment, and public debate of these issues will likely continue. Due
to uncertainties regarding the outcome of reform initiatives and their enactment
and implementation, the Company cannot predict which, if any, of such reform
proposals will be adopted and when they might be adopted. Other countries also
are considering health care reform. The Company's plans for increased
international sales are largely dependent upon other countries' adoption of
managed care systems and their acceptance of the potential benefits of the
Company's products and the belief that managed care plans will have a positive
effect on sales. For the reasons identified in this and in the preceding
paragraph, however, those assumptions may be incorrect. 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 as currently contemplated.

INTENSE COMPETITION. The orthopedic industry is characterized by intense
competition. Currently, there are three major competitors other than the Company
selling bone growth stimulation products approved by the FDA for the treatment
of nonunion fractures, and two competitors 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 fusion's, including growth factors,
bone graft substitutes combined with growth factors, and nonthermal 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.

                                       19
<PAGE>
RAPID TECHNOLOGICAL CHANGE. 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. There can be no
assurance that the Company's new product development efforts will result in any
commercially successful products. A failure to develop new products could have a
material adverse effect on the Company's business, financial condition, and
results of operations.

GOVERNMENT REGULATION. The Company's current and future products and
manufacturing activities are and will be regulated under the FDC Act. The
Company's current BioLogic technology-based products are classified as Class III
Significant Risk Devices, which are subject to the most stringent level of FDA
review for medical devices and are required to be tested under IDE clinical
trials and approved for marketing under a PMA. The Company's fracture fixation
devices are Class II devices that are marketed pursuant to 510(k) clearance from
the FDA. Chrysalin, as a new drug, is subject to clinical trial and Good
Manufacturing Practices review similar to those that apply to the BioLogic
technology-based products. The FDA 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 is also required to adhere to
applicable requirements for FDA GMP, 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 receives letters from the
FDA regarding regulatory compliance. The Company has responded to all such
letters and believes all outstanding issues raised in such letters have been
resolved

     Changes in existing regulations or interpretations of existing regulations
or adoption of new or additional restrictive regulations could prevent the
Company from obtaining, or affect the timing of, future regulatory approvals. 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.

DEPENDENCE ON KEY SUPPLIERS. The Company purchases the microprocessor used in
the OL1000 and SpinaLogic devices from a single manufacturer. Although there are
feasible alternate microprocessors that might be used immediately, all are
produced by one single supplier. In addition, there are single suppliers for
other components used in the OL1000 and SpinaLogic devices and only two
suppliers for the magnetic field sensor employed in them. Establishment of

                                       20
<PAGE>
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. Chrysalin, which is currently only in the
clinical trial phase, is produced by a third party sole supplier. Any delay or
interruption in 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.

DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY RIGHTS. The Company's success
will depend in significant 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 patent applications, as well as licenses to numerous United
States and foreign patents, 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. In addition, although the
Company holds or licenses patents of its technologies, others may hold or
receive patents, which contain claims having a scope that covers products
developed by the Company. There can be no assurance that licensing rights to the
patents of others, if required for the Company's products, will be available at
all or at a cost acceptable to the Company.

     The Company's licenses covering the BioLogic and OrthoFrame technologies
provide for payment by the Company of royalties. Each license may be terminated
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.

     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
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.

                                       21
<PAGE>
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 and only limited claims for its former CPM products. 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
Company's 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. 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 of the Company.

POSSIBLE VOLATILITY OF STOCK PRICE. Factors such as fluctuations in the
Company's operating results, developments in litigation to which the Company is
subject, announcements and timing of potential acquisitions, divestitures,
conversion of preferred stock, announcements of technological innovations or new
products by the Company or its competitors, FDA and international regulatory
actions, actions with respect to reimbursement matters, developments with
respect to patents or proprietary rights, public concern as to the safety of
products developed by the Company or others, changes in health care policy in
the United States and internationally, changes in stock market analyst
recommendations regarding the Company, other medical device companies or the
medical device industry generally and general market conditions may have a
significant effect on the market price of the Common Stock. 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 Common Stock.

     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.

                                       22
<PAGE>
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

          See "Note 5 - Litigation" of the Notes to the Condensed Consolidated
          Financial Statements above.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

          None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

          None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          None.

ITEM 5. OTHER INFORMATION

          None.

ITEM 6. EXHIBITS AND REPORTS

     (a)  Exhibit Index

          None.

     (b)  Reports on Form 8-K

          None.

                                       23
<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              May 10, 2002
------------------------     (Principal Executive Officer)
Thomas R. Trotter


/s/ Sherry A. Sturman        Vice-President and Chief Financial Officer         May 10, 2002
------------------------     (Principal Financial and Accounting Officer)
Sherry A. Sturman
</TABLE>

                                       24
<PAGE>
                                OrthoLogic Corp.
                 Exhibit Index to Quarterly Report on Form 10-Q
                  For the Quarterly Period Ended March 31, 2002

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

None