UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q


(Mark
One)





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





For
      the quarterly period ended
            June
      30, 2008










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




For the
transition period from___________________________ to
_______________________




Commission
File Number: 0-21214





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





Delaware
            86-0585310(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)





1275
      W. Washington Street, 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      
oNo





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





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





40,749,642
shares of common stock outstanding as of July 31, 2008.







1


ORTHOLOGIC CORP.


(A
Development Stage Company)


INDEX





Page
      No.Part
      I
            Financial
      InformationItem
      1.
            Financial
      Statements (Unaudited)Condensed Balance Sheets as of June 30, 2008 and December 31,
      2007
            3Condensed Statements of Operations for the three and six months
      ended June 30, 2008 and 2007
            4Condensed Statements of Cash Flows for the six months ended June
      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
            12Part
      II
            Other
      InformationItem
      1A.
            Risk Factors
            13Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            15Item
      4.
            Submission of Matters to A Vote of Security
      Holders
            15Item
      6.
            Exhibits
            15EXHIBIT
      31.1EXHIBIT
      31.2EXHIBIT
      32




2
 Index


PART
I – Financial Information
 Item
1.  Financial Statements


ORTHOLOGIC CORP.


(A
Development Stage Company)


CONDENSED
BALANCE SHEETS


(in
thousands, except share and per share data)





June 30,
            
            
            December 31,2008
            
            
            2007(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            7,348
            
            
            $
            20,943Short-term
      investments
            
            
            33,660
            
            
            
            18,236Prepaids
      and other current assets
            
            
            1,140
            
            
            
            906Total
      current assets
            
            
            42,148
            
            
            
            40,085Furniture
      and equipment, net
            
            
            318
            
            
            
            318Long-term
      investments
            
            
            12,970
            
            
            
            21,459Total
      assets
            
            $
            55,436
            
            
            $
            61,862LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            714
            
            
            $
            702Accrued
      compensation
            
            
            585
            
            
            
            824Other
      accrued liabilities
            
            
            782
            
            
            
            875Total
      current liabilities
            
            
            2,081
            
            
            
            2,401Stockholders'
      EquityCommon
      Stock  $.0005 par value;
            
            
            20
            
            
            
            21100,000,000
      shares authorized; 40,923,417 in 2008 and 41,758,065 in 2007 shares issued
      and outstandingAdditional
      paid-in capital
            
            
            188,328
            
            
            
            189,013Accumulated
      deficit
            
            
            (134,993
            )
            
            
            (129,573
            )Total
      stockholders' equity
            
            
            53,355
            
            
            
            59,461Total
      liabilities and stockholders' equity
            
            $
            55,436
            
            
            $
            61,862




See
notes to unaudited condensed financial statements


3
 Index


ORTHOLOGIC CORP.


(A
Development Stage Company)


CONDENSED
STATEMENTS OF OPERATIONS


(in
thousands, except per share data)


(Unaudited)





As
      a DevelopmentThree
      months ended June 30,
            
            
            Six
      months ended June 30,
            
            
            Stage
      CompanyAugust 5,
      2004 -2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            June 30,
      2008OPERATING
      EXPENSESGeneral
      and administrative
            
            $
            742
            
            
            $
            928
            
            
            $
            1,563
            
            
            $
            1,908
            
            
            $
            18,647Research
      and development
            
            
            2,586
            
            
            
            2,252
            
            
            
            5,028
            
            
            
            5,070
            
            
            
            67,854Purchased
      in-process research and development
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            34,311Other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (375
            )Total
      operating expenses
            
            
            3,328
            
            
            
            3,180
            
            
            
            6,591
            
            
            
            6,978
            
            
            
            120,437Interest
      and other income, net
            
            
            (565
            )
            
            
            (841
            )
            
            
            (1,171
            )
            
            
            (1,725
            )
            
            
            (11,723
            )Loss
      from continuing operations
            
            
            2,763
            
            
            
            2,339
            
            
            
            5,420
            
            
            
            5,253
            
            
            
            108,714Income
      tax expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            356Loss
      from continuing operations
            
            
            2,763
            
            
            
            2,339
            
            
            
            5,420
            
            
            
            5,253
            
            
            
            109,070Discontinued
      operations - net gain on sale of the bone device business, net of taxes
      ($267)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,202
            )NET
      LOSS
            
            $
            2,763
            
            
            $
            2,339
            
            
            $
            5,420
            
            
            $
            5,253
            
            
            $
            106,868Per
      Share Information:Net
      loss, basic and diluted
            
            $
            0.07
            
            
            $
            0.06
            
            
            $
            0.13
            
            
            $
            0.13Basic
      and diluted shares outstanding
            
            
            41,186
            
            
            
            41,637
            
            
            
            41,415
            
            
            
            41,616





See
notes to unaudited condensed financial statements


4
 Index


ORTHOLOGIC CORP.


(A
Development Stage Company)


CONDENSED
STATEMENTS OF CASH FLOWS


(in
thousands)


(Unaudited)





As
      a DevelopmentSix
      months ended
            
            
            Stage
      CompanyJune 30,
            
            
            August 5th
      2004 -2008
            
            
            2007
            
            
            June 30,
      2008OPERATING
      ACTIVITIESNet
      loss
            
            $
            (5,420
            )
            
            $
            (5,253
            )
            
            $
            (106,868
            )Non
      cash items:Deferred
      tax expense
            
            
            -
            
            
            
            -
            
            
            
            770Depreciation
      and amortization
            
            
            69
            
            
            
            39
            
            
            
            3,503Non-cash
      stock compensation
            
            
            170
            
            
            
            354
            
            
            
            3,890Gain
      on sale of bone device business
            
            
            -
            
            
            
            -
            
            
            
            (2,298
            )In-process
      research and development
            
            
            -
            
            
            
            -
            
            
            
            34,311Change
      in other operating items:Prepaids
      and other current assets
            
            
            (235
            )
            
            
            791
            
            
            
            568Accounts
      payable
            
            
            12
            
            
            
            (1,201
            )
            
            
            (257
            )Accrued
      liabilities
            
            
            (332
            )
            
            
            (605
            )
            
            
            (1,649
            )Cash
      flows used in operating activities
            
            
            (5,736
            )
            
            
            (5,875
            )
            
            
            (68,030
            )INVESTING
      ACTIVITIESExpenditures
      for furniture and equipment, net
            
            
            (69
            )
            
            
            (99
            )
            
            
            (762
            )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
            
            
            (19,842
            )
            
            
            (23,906
            )
            
            
            (217,131
            )Maturities
      of investments
            
            
            12,908
            
            
            
            26,128
            
            
            
            228,440Cash
      flows (used in) provided by investing activities
            
            
            (7,003
            )
            
            
            2,123
            
            
            
            12,839FINANCING
      ACTIVITIESNet
      proceeds from stock option exercises
            
            
            -
            
            
            
            -
            
            
            
            4,612Net
      proceeds from sale of stock
            
            
            -
            
            
            
            -
            
            
            
            3,376Common
      stock purchases
            
            
            (856
            )
            
            
            -
            
            
            
            (856
            )Cash
      flows (used in) provided by financing activities
            
            
            (856
            )
            
            
            -
            
            
            
            7,132NET
      DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (13,595
            )
            
            
            (3,752
            )
            
            
            (48,059
            )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            20,943
            
            
            $
            18,047
            
            
            
            55,407CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            7,348
            
            
            $
            14,295
            
            
            $
            7,348Supplemental
      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.


(A
Development Stage Company)


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS


June
30, 2008





OVERVIEW
OF BUSINESS





Description
of the business





OrthoLogic
Corp., referred to herein as “OrthoLogic”, “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).





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 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 prevention of dermal scarring, treatment of asthma,
pulmonary fibrosis and vascular intimal hyperplasia.  We are executing
a development plan for this peptide which included filing an IND for dermal
scarring in 2007 and commencement of Phase 1 safety studies in this indication
in the first quarter of 2008.  Our Phase 1a study 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 is planned to include 40 subjects and be
completed in the fourth quarter of 2008. In 2008,
we also intend 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.





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.  If successful, these studies will provide additional
support for partnering Chrysalin’s future development.


6
 Index


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 June 30, 2008, we have incurred $107 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 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 June 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 FASB Statements No. 157 and No. 159 did not
have any effect on the Company 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 issued during the three months ended March
31, 2008:





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








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 $53,000 has been recognized as compensation cost in the six months
ended June 30, 2008.





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.


8
 Index


Summary





Non-cash
stock compensation cost for the six months ended June 30, 2008, totaled
$170,000.  In the condensed Statements of Operations for the six
months ended June 30, 2008, non-cash stock compensation expense of $148,000 was
recorded as a general and administrative expense and $22,000 was recorded as a
research and development expense.





Non-cash
stock compensation cost for the six months ended June 30, 2007, totaled
$354,000.  In the condensed Statements of Operations for the six
months ended June 30, 2007, non-cash stock compensation expense of $251,000 was
recorded as general and administrative expense and $103,000 was recorded as
research and development expense.





No
options were exercised in the six month periods ended June 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 June 30, 2008 of $1.00, stock options exercisable or expected to
vest at June 30, 2008, have no intrinsic value.  At June 30, 2008,
26,135 shares remained available to grant under the Company’s existing stock
option plans.





Warrants





At June
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 June 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, 57% volatility, 0% dividend yield,
expected term of 7.7 years, and 3.3% interest rate was $115,000 at June 30,
2008.  No costs were charged to expense at June 30, 2008 as it is not
yet probable that any milestone warrants will vest.





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 six month period ended June 30, 2008, the Company purchased 891,021 shares
at a total cost of $856,000.


9
 Index


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
June 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 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 is planned to
      include 40 subjects and be completed in the fourth quarter of
      2008.  Pending further favorable results, we will initiate Phase
      2 dose-ranging studies for dermal scarring in 2009.  In 2008, we
      also intend to perform further pre-clinical studies supporting multiple
      indications for AZX100.





·
            Pre-clinical
      experiments tying Chrysalin to potential modulation of the health of
      endothelial tissue in blood vessels and other mechanism-of-action studies
      to support our strategy to partner our vascular product
      candidates.  We did not perform additional pre-clinical or
      clinical studies in fracture repair, wound healing, spine fusion,
      cartilage defect repair, dental bone repair or tendon
      repair.  In 2008, we will continue studies to support our
      vascular partnering efforts.








Results
of Operations Comparing Three-Month Period Ended June 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 $186,000 from $928,000 in the second quarter
of 2007 to $742,000 in the second quarter of 2008.  Our G&A
expenses during the second quarter of 2008 were lower than the same period of
2007 primarily as a result of the timing of expenditures as well as the effect
of general cost containment efforts.





Research and Development
Expenses:  Research and development expenses were $2,586,000
for the three months ended June 30, 2008 compared to $2,252,000 for the three
months ended June 30, 2007.  Our research and development expenses
increased $334,000 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.


10
 Index


Interest and Other Income,
Net:  Interest and other income, net decreased from $841,000 in
the second quarter of 2007 to $565,000 in the second 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 June 30, 2008 of $2.8 million
compared to a net loss of $2.3 million in the three months ended June 30,
2007.  The increase in the net loss for the three months ended June
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 the timing of expenditures and
general cost containment efforts








Results
of Operations Comparing Six-Month Period Ended June 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 $345,000 from $1,908,000 in the six months
ended June 30, 2007, to $1,563,000 in the six months ended June 30,
2008.  Our G&A expenses during the six months ended June 30, 2008,
were lower than the same period of 2007 primarily as a result of the timing of
expenditures as well as the effect of general cost containment
efforts.





Research and Development
Expenses:  Research and development expenses were $5,028,000
for the first six months in 2008 compared to $5,070,000 for the first six months
in 2007.  Our research and development expenses decreased $42,000 in
the six months ended June 30, 2008, compared to the same period in 2007,
primarily due to 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, partially offset by costs incurred for the Phase 1 clinical trials in
dermal scarring.  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 $1,725,000
in the six months ended June 30, 2007 to $1,171,000 in the six months ended June
30, 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 six months of 2008 of $5.4 million compared to a net
loss of $5.3 million in the first six months of 2007.  The increase in
the net loss for the six months ended June 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 the timing of expenditures and 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
June 30, 2008, we had cash and cash equivalents of $7.3 million, short-term
investments of $33.7 million and long-term investments of $13.0
million.


11
 Index


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 in 2008.





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 June 30, 2008,
the Company had repurchased 891,021 shares of its common stock, at a total cost
of $856,000, and has allocated approximately $1,200,000 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.





Item 4.  Controls and Procedures





Disclosure Controls and
Procedures





Our
principal executive officer and chief 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 chief 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.


12
 Index


Part
II – Other Information





Item 1A.  Risk Factors





Forward
looking statements





OrthoLogic
Corp. (“OrthoLogic”, “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;


·
              failure
      to successfully implement our drug development strategy,
    and


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





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





Other
than 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.


13
 Index




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 $0.72during the period of
January 1, 2004 through August 1, 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.  If, after any notice and grace period 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.
 
 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.
  14
 Index




Item 2.   Unregistered Sales of Equity Securities and Use
of Proceeds





The
following table summarizes information regarding shares purchased during the
three months ended June 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
    programApril
      1 - 30, 2008
            
            
            350,055
            
            
            $
            0.97
            
            
            
            350,055May
      1 - 31, 2008
            
            
            195,100
            
            
            $
            0.98
            
            
            
            195,100June
      1 - 30, 2008
            
            
            155,866
            
            
            $
            1.01
            
            
            
            155,866
            
            
            
            1,197,000








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 six months ended June 30, 2008, the Company purchased a total of 891,021
shares at a total cost of $856,000.




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





On May 9,
2008, the Company held its Annual Shareholder Meeting at which the shareholders
voted to elect two Class II Directors, whose terms will expire at the annual
meeting to be held in the year 2011 and to ratify the appointment of Ernst &
Young LLP, as the Company’s independent registered public accounting firm for
the fiscal year ending December 31, 2008.





John M.
Holliman, III was elected as a Class II Director with 25,020,166 votes for, and
7,519,410 votes withheld.  Augustus A. White, III, MD, Ph.D. was
elected as a Class II Director with 24,982,127 votes for, and 7,557,449 votes
withheld.  The appointment of Ernst & Young LLP, as the Company’s
independent registered public accounting firm for the fiscal year ending
December 31, 2008, was approved with 32,088,030 votes for, 410,598 votes
against, and 40,948 votes abstained.





Fredric
J. Feldman, Ph.D., Elwood D. Howse, Jr. and William M. Wardell, MD, Ph.D. are
Directors whose terms continued after the meeting.




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
            August
      7, 2008John
      M. Holliman, III
            (Principal
      Executive Officer)/s/ Les M.
      Taeger
            Senior
      Vice-President and Chief
            August
      7, 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 June 30, 2008








ExhibitNo.
            Description
            Incorporated by
      Reference to:
            Filed
              Herewith31.1
            Certification
      of Principal Executive Officer Pursuant to Rule 13a -14(a) of
      the  Securities Exchange Act of 1934, as amended
            
            X31.2
            Certification
      of Chief Financial Officer Pursuant to  Rule 13a -14(a) of
      the  Securities Exchange Act of 1934, as amended
            
            X32
            Certification
      of Principal Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350*








*
Furnished herewith




17