UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended                    September 30, 1997
                                        ----------------------------------------

                                       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                                   (I.R.S. Employer 
of incorporation or organization)                            Identification No.)


2850 S. 36th Street, #16, Phoenix, Arizona                           85034
--------------------------------------------------------------------------------
(Address of principal executive offices)                           (Zip Code)

                                 (602) 437-5520
--------------------------------------------------------------------------------
              (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.

      25,192,846 shares of common stock outstanding as of October 31, 1997
<PAGE>
                                ORTHOLOGIC CORP.



                                      INDEX

                                                                        Page No.
Part I             Financial Information

                   Item 1.  Financial Statements

                   Condensed Consolidated Balance Sheets
                       September 30, 1997 and December 31, 1996--------------  1

                   Consolidated Statements of Operations
                       Three Months and Nine Months ended September 30, 1997
                       and 1996----------------------------------------------  2

                   Consolidated Statements of Cash Flows                        
                       Nine Months ended September 30, 1997 and 1996---------  3

                   Notes to Consolidated Financial Statements ---------------  4

                   Item 2.  Management's Discussion and Analysis of
                                 Financial Condition and Results of Operations 7

                   Item 3.  Quantitative and Qualitative Disclosures
                                About Market Risk---------------------------- 10


Part II            Other Information

                   Item 1.  Legal Proceedings-------------------------------- 11


                   Item 6.  Exhibits and Reports on Form 8-K ---------------- 11
<PAGE>
PART I    FINANCIAL INFORMATION

Item 1.   Financial Statements

                                OrthoLogic Corp.
                      Condensed Consolidated Balance Sheets
                                 (in thousands)

                                                   September 30, December 31,
                                                       1997          1996
                                                     ---------    ---------
ASSETS                                              (Unaudited)

Cash and cash equivalents                            $  11,345    $  13,494
Short-term investments                                   4,355       35,307
Accounts receivable                                     29,866       26,856
Inventory                                                9,659        6,551
Prepaids and other current assets                        2,451        1,195
Deferred income taxes                                    2,678        2,401
                                                     ---------    ---------
   Total current assets                                 60,354       85,804

Furniture, rental fleet and equipment                   14,522       11,364
Accumulated depreciation                                (3,737)      (2,282)
                                                     ---------    ---------
  Furniture and equipment, net                          10,785        9,082

Intangibles, net                                        30,339       17,847
Deposits and other assets                                   91           93
Note receivable - Officer                                 --            200
                                                     ---------    ---------

   Total Assets                                      $ 101,569    $ 113,026
                                                     =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities

Accounts payable                                     $   1,781    $   2,042
Loan payable - current portion                             500         --

Accrued liabilities                                     13,270        8,777
                                                     ---------    ---------
   Total current liabilities                            15,551       10,819

Deferred rent and capital lease obligation                 143          280
Loan payable - long term portion                           524         --
Obligations under co-promotion agreement                 1,000         --
                                                     ---------    ---------
   Total liabilities                                    17,218       11,099
                                                     ---------    ---------

Commitments                                               --           --

Stockholders' Equity

Common stock                                                13           13
Additional paid-in capital                             119,061      118,832
Deficit                                                (34,723)     (16,918)
                                                     ---------    ---------
   Total stockholders' equity                           84,351      101,927

     Total Liabilities and Stockholders' Equity      $ 101,569    $ 113,026
                                                     =========    =========

See notes to consolidated financial statements.
                                                                          Page 1
<PAGE>
                                OrthoLogic Corp.
                      Consolidated Statements of Operations
                                    Unaudited
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                          Three months ended September 30,      Nine months ended September 30,
                                          ---------------------------------     ---------------------------------
                                                 1997            1996                 1997             1996
                                          ---------------------------------     ---------------------------------
<S>                                       <C>              <C>                  <C>             <C>             
REVENUES
  Net sales                               $          8,220 $         7,754      $        27,169 $         22,425
  Net rentals                                        9,186           2,654               25,856            2,654
  Fee Revenue                                          793               -                  793                -
                                          ---------------------------------     ---------------------------------
     Total Revenues                                 18,199          10,408               53,818           25,079
                                          ---------------------------------     ---------------------------------

COST OF REVENUES
  Cost of goods sold                                 2,719           1,315                7,737            3,689
  Cost of rentals                                    1,730             676                6,035              676
                                          ---------------------------------     ---------------------------------
     Total Cost of Revenue                           4,449           1,991               13,772            4,365
                                          ---------------------------------     ---------------------------------

GROSS PROFIT                                        13,750           8,417               40,046           20,714

OPERATING EXPENSES
  Selling, general and administrative               14,259           8,507               43,460           18,488
  Research and development                             632             530                1,821            1,627
  Restructuring Charge                              13,844               -               13,844                -
                                          ---------------------------------     ---------------------------------
     Total Operating Expenses                       28,735           9,037               59,125           20,115
                                          ---------------------------------     ---------------------------------

OPERATING INCOME (LOSS)                           (14,985)           (620)             (19,079)              599

OTHER INCOME
  Grant revenue                                          9              37                  108              131
  Interest income                                      231           1,039                1,182            2,141
                                          ---------------------------------     ---------------------------------
     Total Other Income                                240           1,076                1,290            2,272
                                          ---------------------------------     ---------------------------------

INCOME (LOSS) BEFORE INCOME TAXES                 (14,745)             456             (17,789)            2,871

Provision for income taxes                               -               -                    -                -
                                          ---------------------------------     ---------------------------------

NET INCOME (LOSS)                         $       (14,745) $           456      $      (17,789) $          2,871
                                          =================================     =================================

NET INCOME (LOSS) PER COMMON
  AND EQUIVALENT SHARE                    $         (0.59) $          0.02      $        (0.71) $           0.12
                                          =================================     =================================

WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES OUTSTANDING
                                                    25,113          25,801               25,082           23,759
                                          =================================     =================================
</TABLE>
See notes to consolidated financial statements.
                                                                          Page 2
<PAGE>
                                OrthoLogic Corp.
                      Consolidated Statements of Cash Flows
                                    Unaudited
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended September 30
                                                                                     ------------------------------
                                                                                          1997        1996
                                                                                        --------    --------
<S>                                                                                     <C>         <C>     
OPERATING ACTIVITIES
    Net Income (Loss)                                                                   $(17,789)   $  2,871

                  Noncash items:
                  Depreciation and amortization                                            4,551         825
                  Restructuring charge and other                                          13,844        --
                  Other                                                                     (433)       --

                  Net change in Other Operating items:
                  Accounts receivable                                                      1,905      (6,718)
                  Inventory                                                                 (604)     (2,218)
                  Prepaids and other current assets                                       (1,430)       (812)
                  Deposits and other assets                                                    2           5
                  Accounts payable                                                        (1,808)        376
                  Accrued liabilities                                                       (807)      1,082
                                                                                        --------    --------
                                    Cash Flows (used in) Operating Activities             (2,569)     (4,589)
                                                                                        --------    --------

INVESTING ACTIVITIES
                  Purchase of fixed assets                                                (3,434)       (829)
                  Cash paid for acquisitions, net of cash acquired                       (25,327)    (24,907)
                  Sales (Purchases) of short term investments                             30,952     (27,921)
                  Collection of note receivable                                              200         125
                  Intangible from dealer transactions                                       (705)     (9,279)
                                                                                        --------    --------
                                    Cash Flows provided by (used in)
                                    Investing Activities                                   1,686     (62,811)
                                                                                        --------    --------

FINANCING ACTIVITIES
                  Payments on Capital Leases                                                 (75)       --
                  Payments on Loan Payable                                                  (420)       --
                  Payments under co-promotion agreement                                   (1,000)       --
                  Proceeds from issuance of common stock                                    --        74,952
                  Net proceeds from stock option exercises                                   229        --
                                                                                        --------    --------
                                    Cash Flows (used in) provided by                      (1,266)     74,952
                                                                                        --------    --------
                                    Financing Activities

NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                                                      (2,149)      7,552
CASH AND CASH EQUIVALENTS,
    BEGINNING OF PERIOD                                                                   13,494       8,831
                                                                                        --------    --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                $ 11,345    $ 16,383
                                                                                        ========    ========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                  Cash paid during the period for:
                  Interest                                                              $     81    $      0
                                                                                        ========    ========
                  Income Taxes                                                          $    317    $     81
                                                                                        ========    ========
</TABLE>
See notes to consolidated financial statements.
                                                                          Page 3
<PAGE>
                                ORTHOLOGIC CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Financial Statement Presentation
      --------------------------------

      The  consolidated  financial  statements  have been prepared in accordance
      with generally accepted accounting  principles and include the accounts of
      OrthoLogic  Corp. and its subsidiaries  (the  "Company").  All significant
      intercompany accounts and transactions have been eliminated.

      The condensed  consolidated  balance  sheet as of September 30, 1997,  the
      consolidated statements of operations for the three months and nine months
      ended September 30, 1997 and 1996 and the  consolidated  statement of cash
      flows for the nine months ended September 30, 1997 and 1996 are unaudited;
      however, in the opinion of management, all adjustments (consisting only of
      normal  recurring  adjustments)  necessary  for  a  fair  presentation  of
      financial  position,  results  of  operations  and cash  flows  have  been
      included.  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. It is suggested that
      these  financial  statements  be read in  conjunction  with the  financial
      statements and notes thereto  included in the Company's 1996 Annual Report
      on Form 10-K.

2.     New Accounting Pronouncements
       -----------------------------

      In February 1997, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial  Accounting  Standards  ("SFAS") No. 128, "Earnings
      per Share",  effective  for both interim and annual  periods  ending after
      December 15, 1997. This statement specifies the computation,  presentation
      and  disclosure  of earnings per share for  entities  with  publicly  held
      common  stock or  potential  common  stock.  The Company  will provide the
      required  disclosures in its year-end report.  The effect on the Company's
      earnings per share disclosure is not material for the periods presented.

      The Financial  Accounting  Standards Board recently issued SFAS No. 130 on
      "Reporting  Comprehensive  Income" and SFAS No. 131 on "Disclosures  about
      Segments  of  an  Enterprise  and  Related  Information."  The  "Reporting
      Comprehensive  Income"  standard is effective  for fiscal years  beginning
      after  December 15, 1997.  The standard  changes the  reporting of certain
      items  currently  reported  in the  stockholders'  equity  section  of the
      balance  sheet.  The  Company is  currently  evaluating  what  impact this
      standard will have on the Company's financial statements. The "Disclosures
      about  Segments  of an  Enterprise  and Related  Information"  standard is
      effective  for fiscal  years  beginning  after  December  15,  1997.  This
      standard  requires that public companies report certain  information about
      operating  segments in their  financial  statements.  It also  establishes
      related  disclosures  about products and services,  geographic  areas, and
      major  customers.  The Company is  currently  evaluating  what impact this
      standard will have on its disclosures.

3.    Preferred Stock Purchase Rights
      -------------------------------

      On February 25, 1997 the Company  declared a dividend  distribution of one
      Preferred Stock Purchase Right (the "Rights") for each  outstanding  share
      of the Company's common stock, payable March 12, 1997 to holders of record
      on that date. The Rights will expire on March 11, 2007.
                                                                          Page 4
<PAGE>
                                ORTHOLOGIC CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


      Each Right will entitle  shareholders  to buy 1/100 of a share of Series A
      Preferred Stock at an exercise price of $25.00.

      Initially, no separate Rights certificates will be distributed; the Rights
      will trade with the  Company's  common  stock and will not be  exercisable
      until the earlier of 10 business days following the  acquisition of 15% or
      more of the  Company's  common  stock by a person or group or 15  business
      days following the  commencement  of a tender offer for 20% or more of the
      Company's common stock.

      At the discretion of the Board of Directors of the Company, the Rights can
      be  redeemed  at any time  prior to the  10th day  following  the date the
      Rights  become  exercisable.  If the Rights are not redeemed by the Board,
      and  the  Company  is  acquired,  holders  of the  Rights  (other  than an
      "acquiring  person")  will be entitled to  purchase  additional  shares of
      common stock of either the Company or the acquiring corporation (whichever
      survives) at one-half the market price.

4.     Acquisitions
       ------------

      On March 3, 1997 and March 12, 1997, the Company  acquired  certain assets
      and assumed  certain  liabilities of Toronto  Medical Corp.  (Toronto) and
      Danninger  Medical  Technology,  Inc. (DMTI).  After paying certain of the
      assumed  liabilities,  the net cash outlay was approximately  $7.5 million
      for Toronto and $10.7 million for DMTI. Both  acquisitions  were accounted
      for as a purchase which resulted in goodwill of $4 million for Toronto and
      $7.7 million for DMTI. The goodwill is being amortized over 20 years.  The
      Company  has  substantially  completed  its  restructuring  of  operations
      related to these  acquisitions  and the acquisition of Sutter  Corporation
      (acquired in August 1996).  The additional  costs incurred  related to the
      restructuring for all acquisitions, totaling $7.1 million, is reflected as
      additional  acquisition  costs in the  allocation of purchase  price.  The
      goodwill  is being  amortized  over the  remaining  goodwill  period of 20
      years.

      Had the  Toronto  and DMTI  acquisitions  occurred  on  January  1,  1996,
      combined  unaudited pro forma results for the nine months ended  September
      30, 1997 and 1996, would have been: net revenues - $57.1 million and $37.8
      million;  net  (loss) - $(17.8)  million  and  $(114,000);  net (loss) per
      common share - $(0.71) and $(0.00).

      The pro forma  amounts  disclosed  above  include  revenue  and net income
      derived from product sales to competing independent dealers of orthopaedic
      rehabilitation  products.  Subsequent  to  the  acquisition,  the  Company
      discontinued  selling  products  to these  dealers.  Excluding  the dealer
      product  sales,  combined  unaudited pro forma results for the nine months
      ended  September 30, 1997 and 1996,  would have been: net revenues - $55.7
      million and $32.7 million;  net (loss) - $(18.2)  million and  $(779,000);
      net (loss) per common share - $(0.72) and $(0.03).

5.     Co-promotion Agreement
       ----------------------

      The  Company  entered  into  an  exclusive   co-promotion  agreement  (the
      "agreement") with Sanofi Pharmaceuticals, Inc. ("Sanofi") on June 23, 1997
      for the purpose of marketing  Hyalgan,  a hyaluronic  acid sodium salt, to
      orthopaedic  surgeons in the United  States for the  treatment  of pain in
      patients with
                                                                          Page 5
<PAGE>
                                ORTHOLOGIC CORP.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


      osteoarthritis  of the knee.  The initial  term of the  agreement  ends on
      December 31, 2002.  Upon the  expiration of the initial  term,  Sanofi may
      terminate the  agreement,  extend the agreement for an additional one year
      period,  or  enter  into  a  revised  agreement  with  the  Company.  Upon
      termination of the agreement, Sanofi shall pay the Company an amount equal
      to 50% of the gross  compensation  paid to the  Company,  pursuant  to the
      agreement, for the immediately preceding year.

      Under the terms of the  agreement,  the Company is  obligated  to: use its
      best efforts to market and promote Hyalgan; to pay Sanofi a royalty of 10%
      of the net selling  price,  as  defined;  and to pay the  manufacturer  of
      Hyalgan  certain  pre-determined  amounts and a pro-rata  portion of a 10%
      royalty on combined  annual net sales of Hyalgan by Sanofi and the Company
      in excess of $30.0 million. In addition, the Company is obligated to pay a
      total of $4.0 million in payments  during the first eighteen months of the
      agreement.  During the second quarter, the Company incurred a $1.0 million
      payment of this  amount.  The  Company has  recorded  the  remaining  $3.0
      million in its financial statements.

      The Company's  sales force began  efforts to promote  Hyalgan in the third
      quarter of 1997.  Fee  revenue of  $793,000  recorded  during the  quarter
      represents  the Company's  estimate of its share of revenue in the quarter
      under the agreement.

      The final  determination  of the  Company's  fees  recognized  under  this
      agreement is dependent upon  Medicare's  ultimate  assignment of a billing
      code and a reimbursement amount.

6.     Restructure Charge
       ------------------

      During the third  quarter of 1997,  the  Company  restructured  its sales,
      marketing and managed care groups. As a result of this restructuring and a
      second consecutive  quarter of declining sales of the OrthoLogic 1000 bone
      growth stimulator,  the Company determined that certain dealer intangibles
      acquired in the transition to a direct sales force have been impaired. The
      Company  recorded  a  restructuring  charge of $13.8  million in the third
      quarter,  composed of a $10.0 million write-off of its dealer  intangibles
      and $3.8 million in severance, facility closing and related costs.
                                                                          Page 6
<PAGE>
ITEM 2.      MANAGEMENTS'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 ended December 31, 1996.

Results of Operations

              OrthoLogic has completed  three recent  acquisitions  which affect
              the  year-to-year  comparability  of  its  consolidated  financial
              position  and results of  operations:  the  acquisition  of Sutter
              Corporation  (Sutter)  on August 30, 1996 and the  acquisition  of
              certain  assets and the  assumption of certain  liabilities of two
              other orthopaedic rehabilitation related companies in March 1997.

          Nine Months Ended September 30, 1997 and September 30, 1996

              Revenues

              OrthoLogic's  revenues  increased  115% from $25.1 million for the
              nine months ended September 30, 1996 to $53.8 million for the nine
              months ended  September 30, 1997.  The increase in revenue was due
              primarily to revenues from its orthopaedic rehabilitation products
              ($34.6  million in 1997  compared  to $3.3  million in 1996).  The
              orthopaedic rehabilitation area is engaged primarily in the direct
              rental of  continuous  passive  motion  devices to  patients.  The
              Company   entered  this  area  upon  the   acquisition  of  Sutter
              Corporation  (Sutter) on August 30, 1996 and the assets of Toronto
              Medical Corp.  (Toronto) and Danninger  Medical  Technology,  Inc.
              (Danninger) in March of 1997.  The Company  believes that revenues
              for its orthopaedic  rehabilitation products may be seasonal, with
              the strongest sales occurring in the fourth quarter.

              Excluding the effects of the Company's acquisitions, revenues from
              the OrthoLogic  1000 were down 16.5% to $17.5 million for the nine
              months  ended  September  30,  1997  from  $21.0  million  for the
              comparable period in 1996. The Company does not believe that there
              is a single factor  causing the decline in OrthoLogic  1000 sales.
              The Company attributes the decline to multiple factors,  including
              the shift from a  distribution  network to a direct  sales  force,
              fewer  total  salespeople  selling  the  OrthoLogic  1000  in 1997
              compared  to 1996,  and the  quality  and  effectiveness  of sales
              management. During the second quarter of 1997, the Company changed
              its estimate for allowance for bad debt  expense,  increasing  its
              allowance by $2.0 million related to Medicare  receivables for the
              OrthoLogic 1000 which are outside Medicare's coverage  definition.
              Prior  to  the  second  quarter,   Medicare   reimbursed  for  the
              OrthoLogic 1000 even when physicians  prescribed use of the device
              outside  Medicare's  own  definition  of  a  non-union   fracture.
              Prescriptions of that kind covered by Medicare typically accounted
              for 7 percent to 9 percent of OrthoLogic 1000 revenue. The Company
              no longer recognizes  Medicare revenue from prescriptions  outside
              the coverage definition.

              During the third  quarter of 1997,  the  Company  began  marketing
              Hyalgan to  orthopaedic  surgeons  in the United  States.  For the
              quarter  ended  September  30, 1997,  the Company  recognized  fee
              revenue of $793,000  related to these efforts,  with an associated
              approximate $700,000 in SG&A expenses.
                                                                          Page 7
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (continued)

              Gross Profit

              Gross  profit  increased  from $20.7  million  for the nine months
              ended  September  30,  1996 to $40.0  million  for the nine months
              ended  September  30,  1997.  The increase in gross profit was due
              primarily  to the  increase  in  gross  profit  of  Sutter  ($19.1
              million) and the recently  acquired  operations  ($2.8 million) of
              Toronto and Danninger. Gross profit as a percentage of revenue was
              74.4% for the nine months  ended  September  30, 1997  compared to
              82.6% for the  comparable  period  during 1996.  The overall gross
              profit  percentage  declined as a result of the recently  acquired
              orthopaedic  rehabilitation  operations  which have a lower  gross
              profit percentage than the Company's fracture healing products.

              Selling, General and Administrative Expenses

              Selling,  general and administrative  (SG&A) expenses for the nine
              months  ended  September  30,  1997 were $43.5  million,  up $25.0
              million from the comparable 1996 period.  The 1997 period included
              the SG&A  from the  acquisitions,  which  comprise  a  significant
              portion of the  Company's  SG&A.  Additionally,  SG&A for the nine
              months ended  September 30, 1997 includes $2.0 million in bad debt
              expense incurred in the second quarter of 1997 related to Medicare
              receivables for the OrthoLogic  1000 which are outside  Medicare's
              coverage definition. During late 1996, the fixed component of SG&A
              increased due to the addition of employees,  including salespeople
              added to support the Company's transition to a direct sales force,
              and other  infrastructure  required  to support  the  growing  and
              projected revenue volume.

              In the third quarter of 1997, the Company substantially  completed
              its consolidation of duplicate  facilities and eliminated expenses
              from redundant  operations  from within the three  businesses that
              were recently acquired.

              Research and Development

              Research and Development  (R&D) expenses were $1.8 million for the
              nine months ended  September 30, 1997 compared to $1.6 million for
              the comparable  1996 period.  The increase in R&D expenses was due
              to the  acquisitions,  while R&D for the  remainder of the Company
              remained stable.

              Restructuring Charge

              The  Company  restructured  and  reduced  the  size of its  sales,
              marketing  and managed care groups in the third quarter of 1997 in
              an effort to gain  efficiencies  in the management and function of
              its  salespeople.  The Company also incurred costs relating to the
              restructuring  of  its  operations,   including  consolidation  of
              facilities and reorganization of management.  Associated with this
              restructuring,  the  Company  incurred a charge of $13.8  million,
              comprised  primarily  of a $10.0  million  write-off of its dealer
              intangibles  which have been impaired and a $3.8 million write-off
              related to management and sales force severance,  facility closing
              and related costs.
                                                                          Page 8
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (continued)


              Other Income

              Other income of $1.3  million for the nine months ended  September
              30, 1997  consisted  of interest  income of $1.2 million and grant
              revenue of $108,000.  Other income for the comparable  1996 period
              consisted of interest  income of $2.1 million and grant revenue of
              $131,000. The decrease in interest income was due to cash used for
              acquisitions of $25.3 million and to cash used to fund operations.

          Three Months Ended September 30, 1997 and September 30, 1996

              Revenues  increased  75% to $18.2 million for the third quarter of
              fiscal 1997,  as compared to $10.4  million for the same period in
              1996. Gross profit rose 63% to $13.7 million for the third quarter
              of fiscal 1997 from $8.4  million for the third  quarter of fiscal
              1996.  During the third  quarter,  SG&A expenses rose 68% to $14.3
              million as compared to $8.5 million for the same period last year.
              The Company  incurred a  restructuring  charge of $13.8 million in
              the third  quarter of 1997.  Other income fell 78% to $240,000 for
              the third  quarter of fiscal 1997 compared to $1.1 million for the
              third quarter of fiscal 1996.  The business  factors  resulting in
              these changes and relevant trends affecting the Company's business
              during the third quarters of 1997 and 1996 are comparable to those
              described in the preceding discussion for the nine-month period.

          Liquidity and Capital Resources

              At September  30, 1997,  the Company had cash and  investments  of
              $15.7  million  compared to $48.8  million at December  31,  1996.
              Working capital  decreased from $75.0 million at December 31, 1996
              to $44.8 million at September  30, 1997.  The decrease in cash and
              investments is primarily the result of cash used for  acquisitions
              and related  costs of $25.3  million.  Other uses of cash included
              $3.3 million for  operating  activities,  $1.0 million in payments
              under the Hyalgan co-promotion agreement, and $3.4 million for the
              purchase  of  fixed  assets,   primarily  rental  assets  for  the
              Company's orthopedic rehabilitation division.

              The change in intangibles  from $17.8 million at December 31, 1996
              to $30.3  million at September  30, 1997 is primarily due to costs
              associated with the  acquisitions of Toronto and DMTI, cost of the
              co-promotion  agreement with Sanofi and offset by the write-off of
              dealer intangibles described under Restructuring  Change.  Accrued
              liabilities  increased  from $8.8  million at December 31, 1996 to
              $13.3 million at September 30, 1997  primarily from the accrual of
              a $2 million  obligation to Sanofi  payable in the next 12 months,
              and the accrual of management and sales force severance,  facility
              closing and related costs from the restructuring charge.

              Under the terms of the  co-promotion  agreement  with Sanofi,  the
              Company is  obligated  to pay a total of $4  million  in  payments
              during  the first  eighteen  months of the  agreement.  During the
              second  quarter,  the Company  paid $1.0  million of the  required
              payment under the  co-promotion  agreement for the right to market
              and promote Hyalgan. Because such required payments are paid every
              six months, no payment was made during the third quarter.
                                                                          Page 9
<PAGE>
         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                        RESULTS OF OPERATIONS (continued)

              The Company  currently  believes that cash  generated from product
              sales  and  rentals  and  its  available  cash  resources  will be
              sufficient to meet its current operating requirements and internal
              development  and  integration   initiatives  for  the  foreseeable
              future. There can be no assurance,  however, that the Company will
              not require  additional  financing  in the future.  If the Company
              were required to obtain additional  financing in the future, there
              can be no assurance that such sources of capital will be available
              on terms favorable to the Company, if at all.

              The Company  has signed a lease and will  relocate  its  corporate
              offices in the fourth  quarter  of 1997 to a 100,000  square  foot
              office/manufacturing  facility in Tempe, Arizona. The terms of the
              lease are for a ten year period  commencing  December 1, 1997 with
              equal monthly rental  payments.  The Company is accounting for the
              lease as an operating lease.

              There are currently no other material  definitive  commitments for
              future use of the Company's  available  cash  resources;  however,
              management  continually  evaluates  opportunities  to  expand  its
              operations,  which includes  internal  development of new products
              and may include additional acquisitions.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

              Certain of the statements  contained in this document that are not
              historical facts,  including,  without  limitation,  statements of
              future expectations of revenue from Hyalgan sales, availability of
              cash,  and  projections  of results of  operations  and  financial
              condition,  are  forward-looking  statements within the meaning of
              the Private  Securities  Litigation  Reform Act of 1995, which are
              subject  to known  and  unknown  risks,  uncertainties  and  other
              factors  which  may  cause  the  actual  results,  performance  or
              achievements  of the  Company  to  differ  materially  from  those
              contemplated in such  forward-looking  statements.  In addition to
              the specific matters referred to herein,  important  factors which
              may cause actual results to differ from those contemplated in such
              forward-looking  statements  include,  but are not limited to: (i)
              the results of the  Company's  efforts to  implement  its business
              strategy;  (ii)  actions  of the  Company's  competitors  and  the
              Company's  ability to respond to such  actions;  (iii)  changes in
              governmental  regulation,  tax rates  and  similar  matters;  (iv)
              dependence on  reimbursement  from third parties;  (v) other risks
              detailed in the Company's  other filings with the  Securities  and
              Exchange  Commission;  and (vi) the costs and  results  of pending
              litigation.   Additional   factors   which   might   affect   such
              forward-looking   statements   are   discussed   in   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 ended December 31, 1996.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

              Item not applicable.
                                                                         Page 10
<PAGE>
PART II - OTHER INFORMATION


Item 1.        Legal Proceedings

               See the information under the caption "Item 3 Legal  Proceedings"
               of the  Company's  Annual Report on Form 10-K for the fiscal year
               ended December 31, 1996.

Item 6.        Exhibits and Reports on Form 8-K

                  (a)    See Exhibit Index  following the Signatures  page which
                         is incorporated herein by reference.

                  (b)    Reports on Form 8-K

                         1. On March  18,  1997,  the  Company  filed a  Current
                            Report on Form 8-K dated March 3, 1997, to report in
                            Item 2, the  consummation  of its acquisition of all
                            the  assets  and  business  and  the  assumption  of
                            substantially  all of  the  liabilities  of  Toronto
                            Medical Corp., an Ontario corporation, pursuant to a
                            Purchase and Sale Agreement dated as of December 30,
                            1996.  The Form 8-K was  amended on May 19,  1997 to
                            include   in   Item   7  the   following   financial
                            statements:

                            Unaudited  Pro-Forma   Consolidated   Statements  of
                               Income/(Loss)  for the three month  period  ended
                               March 31,  1997 and for the year  ended  December
                               31, 1996.

                            Audited  Consolidated  Balance Sheet at May 31, 1996
                               and    1995;     Consolidated    Statements    of
                               Income/(Loss) and Consolidated Statements of Cash
                               Flows for the years  ended May 31, 1996 and 1995;
                               and independent auditor's report.

                            The Form 8-K was amended again on August 13, 1997 to
                               include  in  Item  7  the   following   financial
                               statements:

                            Audited  Consolidated  Balance Sheet at February 28,
                               1997;    Consolidated    Statement   of   Income,
                               Consolidated  Statement of Shareholders'  Equity,
                               and Consolidated  Statement of Cash Flows for the
                               period June 1, 1996 to  February  28,  1997;  and
                               independent auditor's report.

                         2. On August  22,  1997,  the  Company  filed a Current
                            Report on Form 8-K dated  August 21, 1997  reporting
                            in Item 5 the press  release  attached as an exhibit
                            in Item 7 announcing changes in the Company's senior
                            management.

                         3. On October 10,  1997,  the  Company  filed a Current
                            Report on Form 8-K dated October 10, 1997  reporting
                            in Item 5 the  appointment  of Thomas R.  Trotter as
                            the Company's  president and chief executive officer
                            effective October 20, 1997.
                                                                         Page 11
<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           November 14, 1997
---------------------   (Principal Executive Officer)
Thomas R. Trotter                 



/s/ Allen R. Dunaway    Vice-President and Chief Financial Officer      November 14, 1997
--------------------    (Principal Financial and Accounting Officer)
Allen R. Dunaway                             
</TABLE>
                                                                         Page 12
<PAGE>
                                ORTHOLOGIC CORP.
                 EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
    Exhibit                                                              Incorporated by                       Filed
      No.                   Description                                   Reference to:                       Herewith
----------------   ---------------------------------------     ----------------------------------------    --------------
<S>                <C>                                         <C>                                            <C>
      2.1          Stock Purchase Agreement dated August       Exhibit 2.1 to the Company's Current
                   30, 1996 by and among the Company,          Report on Form 8-K filed on September
                   Sutter Corporation and Smith                13, 1996
                   Laboratories, Inc.

      2.2          Purchase and Sale Agreement dated as of     Exhibit 2.1 to the Company's Current
                   December 30, 1996 by and among the          Report on Form 8-K filed on March 18,
                   Company and Toronto Medical Corp., an       1997 ("March 18, 1997 8-K")
                   Ontario corporation

      2.3          Amendment to Purchase and Sale              Exhibit 2.2 to March 18, 1997 8-K
                   Agreement dated as of January 13,  
                   1997 by and  among  the Company and 
                   Toronto Medical Corp., an Ontario 
                   corporation

      2.4          Second Amendment to Purchase and Sale       Exhibit 2.3 to March 18, 1997 8-K
                   Agreement  dated as of March 1, 
                   1997 by and among the Company and 
                   Toronto Medical Corp., an Ontario
                   corporation

      2.5          Assignment of Purchase and Sale             Exhibit 2.4 to March 18, 1997 8-K
                   Agreement dated as of March 1, 1997 by
                   and among the Company, Toronto Medical
                   Orthopaedics Ltd., a Canada corporation
                   and Toronto Medical Corp., an Ontario
                   corporation

      2.6          Asset Purchase Agreement dated March        Exhibit 2.1 to the Company's Current
                   12, 1997 by and among the                   Report on Form 8-K filed on March 27, 
                   Company, Danninger Medical                  1997 
                   Technology,  Inc., a Delaware 
                   corporation, and Danninger 
                   Healthcare, Inc., an Ohio corporation

      3.1          Composite Certificate of Incorporation      Exhibit 3.1 to the Company's Quarterly
                   of the Company, as amended, including       Report on Form 10-Q filed on May 15,
                   Certificate of Designation in respect       1997
                   of Series A Preferred Stock

      3.2          Bylaws of the Company                       Exhibit 3.4 to Company's Amendment No.
                                                               2 to Registration Statement on Form S-1
                                                               (No. 33-47569) filed with the SEC on
                                                               January 25, 1993 ("January 1993 S-1")
</TABLE>
<PAGE>
                                ORTHOLOGIC CORP.
                 EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
          FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 (continued)
<TABLE>
<CAPTION>
    Exhibit                                                              Incorporated by                       Filed
      No.                   Description                                   Reference to:                       Herewith
----------------   ---------------------------------------     ----------------------------------------    --------------
<S>                <C>                                         <C>                                              <C>
      4.1          Articles 5, 9 and 11 of Certificate of      Exhibit 3.1 above
                   Incorporation of the Company

      4.2          Articles II and III.2(c)(ii) of Bylaws      Exhibit 3.4 to January 1993 S-1
                   of the Company

      4.3          Specimen Common Stock Certificate           Exhibit 4.1 to January 1993 S-1

      4.4          1987 Stock Option Plan of the Company,      Exhibit 4.4 to the Company's Current
                   as amended and approved by stockholders     Report on Form 10-Q filed on August 14,
                                                               1997 ("Second Quarter 1997 10-Q")

      4.5          1997 Stock Option Plan of the Company       Exhibit 4.5 to Second Quarter 1997 10-Q

      4.6          Stock Purchase Warrant, dated August        Exhibit 4.6 to the Company's Form 10-K
                   18, 1993, issued to CyberLogic, Inc.        for the fiscal year ended December 31,
                                                               1994

      4.7          Stock Purchase Warrant, dated September     Exhibit 4.6 to Company's Registration
                   20, 1995, issued to Registered              Statement on Form S-1 (No. 33-97438)
                   Consulting Group, Inc.                      filed with the SEC on September 27, 1995

      4.8          Stock Purchase Warrant, dated October       Exhibit 4.7 to the Company's Form 10-K
                   15, 1996, issued to Registered              for the fiscal year ended December 31,
                   Consulting Group, Inc.                      1996 ("1996 10-K")

      4.9          Rights Agreement dated as of March 4,       Exhibit 4.1 to the Company's
                   1997 between the Company and Bank of        Registration Statement on Form 8-A
                   New York, and Exhibits A, B and C           filed with the SEC on March 6, 1997
                   thereto

     10.1          Co-promotion Agreement dated June 23,       Exhibit 10.1 to Second Quarter 1997 10-Q
                   1997 by and between the Company and Sanofi  
                   Pharmaceuticals, Inc.

     10.2          Single-tenant Lease-net dated June 12,                                                          X
                   1997 by and between the Company and
                   Chamberlain Development, L.L.C.

     10.3          Employment Agreement dated October 20,                                                          X
                   1997 by and between the Company and
                   Thomas R. Trotter, including Letter of
                   Incentive Option Grant, OrthoLogic
                   Corp. 1987 Stock Option Plan
</TABLE>
<PAGE>
                                ORTHOLOGIC CORP.
                 EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
          FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 (continued)
<TABLE>
<CAPTION>
<S>                <C>                                                                                           <C>
     10.4          Employment Agreement dated October 17,                                                          X
                   1997 by and between the Company and
                   Frank P. Magee

     10.5          Employment Agreement dated October 17,                                                          X
                   1997 by and between the Company and
                   Allan M. Weinstein

     10.6          Severance Agreement dated May 21, 1997                                                          X
                   between the Company and David E.
                   Derminio

     10.7          Severance Agreement dated September 19,                                                         X
                   1997 between the Company and Nicholas
                   A. Skaff

      11           Statement of Computation of Net Income                                                          X
                   (Loss) per Weighted Average Number of
                   Common Shares Outstanding

      27           Financial Data Schedule                                                                         X
</TABLE>