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, 1998
                               ------------------
                                       or

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(D) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from                to
                               --------------   --------------
Commission File Number: 0-21214


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


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

1275 W. Washington Street, Tempe, Arizona                  85281
-----------------------------------------                ----------
(Address of principal executive offices)                 (Zip Code)

                                 (602) 286-5520
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


              ----------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X]  No [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

      25,300,190 shares of common stock outstanding as of October 30, 1998
<PAGE>
                                ORTHOLOGIC CORP.

                                      INDEX

                                                                        PAGE NO.
Part I Financial Information

       Item 1. Financial Statements

               Consolidated Balance Sheets
                 September 30, 1998 and December 31, 1997................... 1

               Consolidated Statements of Operations
                 Three Months and Nine Months ended September 30, 1998
                 and 1997................................................... 2

               Consolidated Statements of Cash Flows
                 Nine Months ended September 30, 1998 and 1997.............. 3

               Notes to Consolidated Financial Statements................... 4

       Item 2. Management's Discussion and Analysis of
                Financial Condition and Results of Operations............... 9


Part II Other Information

       Item 1.  Legal Proceedings...........................................12

       Item 2.  Changes in Securities and Use of Proceeds...................12

       Item 6.  Exhibits and Reports on Form 8-K............................13
<PAGE>
                                ORTHOLOGIC CORP.
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                    UNAUDITED

                                                  September 30,     December 31,
                                                      1998              1997
                                                      ----              ----
ASSETS

Cash and cash equivalents                          $   2,597         $   7,783
Short-term investments                                 6,135             4,569
Accounts receivable                                   24,091            34,424
Inventory                                             12,411            10,548
Prepaids and other current assets                      1,336             1,673
Deferred income taxes                                  2,646             2,596
                                                   ---------         ---------
   Total current assets                               49,216            61,593

Furniture, rental fleet and equipment                 20,058            16,455
Accumulated depreciation                              (7,332)           (4,934)
                                                   ---------         ---------
  Furniture and equipment, net                        12,726            11,521

Intangibles, net                                      30,467            29,898
Deposits and other assets                              1,043                91
                                                   ---------         ---------

   TOTAL ASSETS                                    $  93,452         $ 103,103
                                                   =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Accounts payable                                   $   2,049         $   2,896
Loan payable - current portion                           500               500
Obligations under co-promotion agreement               1,000             2,000
Accrued liabilities                                    7,704            11,340
                                                   ---------         ---------
   Total current liabilities                          11,253            16,736
                                                   ---------         ---------
Deferred rent and capital lease obligation                --               106
Loan payable - long term portion                         110               524
Obligations under co-promotion agreement                  --             1,000
                                                   ---------         ---------
   Total liabilities                                  11,363            18,366
                                                   ---------         ---------

Series B convertible preferred stock                  13,558

STOCKHOLDERS' EQUITY

Common stock                                              13                13
Additional paid-in capital                           120,130           119,413
Accumulated deficit                                  (51,612)          (34,689)
                                                   ---------         ---------
   Total stockholders' equity                         68,531            84,737
                                                   ---------         ---------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY    $  93,452         $ 103,103
                                                   =========         =========
See notes to consolidated financial statements.

                                                                          Page 1
<PAGE>
                                ORTHOLOGIC CORP.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                      (in thousands, except per share data)
                                    UNAUDITED

                                      Three months ended    Nine months ended
                                      ------------------    -----------------
                                       1998        1997      1998        1997
                                       ----        ----      ----        ----

Revenues                             $17,739    $ 18,199   $ 54,350    $ 53,818

Cost of revenues                       4,293       4,449     12,912      13,772
                                     -------    --------   --------    --------

Gross profit                          13,446      13,750     41,438      40,046

Operating expenses
 Selling, general and administrative  15,824      14,259     56,344      43,460
 Research and development              1,425         632      2,468       1,821
 Restructuring and other charges          --      13,844       (399)     13,844
                                     -------    --------   --------    --------

      Total operating expenses        17,249      28,735     58,413      59,125
                                     -------    --------   --------    --------

Operating loss                        (3,803)    (14,985)   (16,975)    (19,079)

Other income
 Grant revenue                             2          12          2         108
 Interest income                         130         231        267       1,182
                                     -------    --------   --------    --------

 Total other income                      132         243        269       1,290
                                     -------    --------   --------    --------

Loss before taxes                     (3,671)    (14,742)   (16,706)    (17,789)

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

Net loss                              (3,671)    (14,742)   (16,706)    (17,789)
                                     =======    ========   ========    ========
Accretion of non-cash preferred
stock dividend                          (618)         --       (618)         --
                                     -------    --------   --------    --------
Net loss applicable to common
stockholders                          (4,289)    (14,742)   (17,324)    (17,789)
                                     =======    ========   ========    ========
BASIC EARNINGS PER SHARE

Net loss per share                     (0.17)      (0.59)     (0.69)      (0.71)
                                     =======    ========   ========    ========
Weighted average of common
shares outstanding                    25,300      25,113     25,287      25,082
                                     =======    ========   ========    ========
DILUTED EARNINGS PER SHARE

Net loss per share                     (0.17)      (0.59)     (0.69)      (0.71)
                                     =======    ========   ========    ========
Weighted average and common
shares outstanding                    25,300      25,113     25,287      25,082
                                     =======    ========   ========    ========

See notes to consolidated financial statements
                                                                          Page 2
<PAGE>
                                ORTHOLOGIC CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                    UNAUDITED

                                                Nine Months Ending September 30,
                                                --------------------------------
                                                       1998            1997
                                                       ----            ----
OPERATING ACTIVITIES
 Net Loss                                           $(17,324)        $(17,789)
   Non cash items:
   Depreciation and amortization                       6,082            4,551
   Restructuring charge                                                13,844
   Other                                                                 (433)
   Net change in other operating items:
   Accounts receivable                                 8,340            1,905
   Inventory                                          (1,863)            (604)
   Prepaids and other current assets                     287           (1,430)
   Deposits and other assets                            (203)               2
   Accounts payable                                     (847)          (1,808)
   Accrued liabilities                                (3,624)            (807)
                                                    --------         --------
      Cash flows used in operating activities         (9,152)          (2,569)
                                                    --------         --------
INVESTING ACTIVITIES
 Purchase of fixed assets                             (5,186)          (3,434)
 Cash paid for acquisitions, net of cash acquired        (81)         (25,327)
 Investment in Chrysalis                                (750)              --
 Sales (Purchases) of short term investments          (1,567)          30,952
 Collection of note receivable                            --              200
 Intangible from dealer transactions                      --             (705)
                                                    --------         --------
      Cash flows used in investing activities         (7,584)           1,686
                                                    --------         --------
FINANCING ACTIVITIES
 Payments on capital leases                             (155)             (75)
 Payments on loan payable                               (375)            (420)
 Payments under co-promotion agreement                (2,000)          (1,000)
 Proceeds from issuance of convertible preferred
   stock and warrants (Net)                           14,034               --
 Net proceeds from stock option exercises                240              229
 Foreign exchange                                       (194)              --
                                                    --------         --------
      Cash flows used in financing activities         11,550           (1,266)
                                                    --------         --------
NET DECREASE IN CASH AND CASH EQUIVALENTS             (5,186)          (2,149)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD         7,783           13,494
                                                    --------         --------
CASH AND CASH EQUIVALENTS, END OF PERIOD            $  2,597         $ 11,345
                                                    ========         ========

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 accounts of the Company
   and its subsidiaries.  All significant intercompany accounts and transactions
   have been eliminated.

   The consolidated balance sheet as of September 30, 1998, and the consolidated
   statements of operations  and cash flows for the nine months ended  September
   30,  1998 and 1997 are  unaudited,  however,  in the  opinion of  management,
   include all adjustments  (consisting  only of normal  recurring  adjustments)
   necessary for the fair  presentation  of the 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.  The Balance  Sheet as of December 31, 1997 is derived from the
   Company's audited financial statements included in the 1997 Annual Report. It
   is suggested that these financial  statements be read in conjunction with the
   financial  statements and notes thereto included in the Company's 1997 Annual
   Report.

2. ACQUISITION

   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 $7.2 million for
   Toronto and $11 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.

   Had the Toronto and DMTI acquisitions  occurred on January 1, 1997,  combined
   unaudited pro forma results for the nine months ended September 30,1997 would
   have been $57.1  million net  revenues,  $17.8 million net loss and (.71) net
   loss per common share.  The operations were fully integrated in the Company's
   financial statements for 1998.

3. CO-PROMOTION AGREEMENT

   The  Company   entered  into  an  exclusive,   co-promotion   agreement  (the
   "Co-Promotion  Agreement') with Sanofi  Pharmaceuticals,  Inc.  ("Sanofi") on
   September 23, 1997 for the purpose of marketing  Hyalgan,  a hyaluronic  acid
   sodium salt, to orthopedic surgeons in the United States for the treatment of
   pain in patients  with  osteoarthritis  of the knee.  The initial term of the
   Co-Promotion  Agreement ends on December 31, 2002. Upon the expiration of the
   initial term,  Sanofi may terminate the  Co-Promotion  Agreement,  extend the
   agreement  for an  additional  one  year  period,  or  enter  into a  revised

                                                                          Page 4
<PAGE>

   Co-Promotion Agreement with the Company. Upon termination of the Co-Promotion
   Agreement,  Sanofi must pay the  Company an amount  equal to 50% of the gross
   compensation paid to the Company, pursuant to the Co-Promotion Agreement, for
   the immediately preceding year.

   The Company is paid a commission which is based upon the number of units sold
   at the  wholesale  acquisition  costs less  amounts for  distribution  costs,
   discounts, rebates and returns. In addition, 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 a product  transfer price 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  million.  In  addition,  the Company is obligated to pay a total of $4.0
   million  during the first eighteen  months of the agreement.  During 1997 and
   the first nine months of 1998,  the Company paid $3.0 million of this amount.
   The Company has  recorded  the  remaining  $1.0 million as a liability in its
   financial statements.

   The  Company's  sales force began to promote  Hyalgan in the third quarter of
   1997.

4. LICENSING AGREEMENT

   The Company  announced in January 1998 that it had acquired a minority equity
   interest in a biotech firm, Chrysalis  BioTechnology,  Inc. for $750,000.  As
   part of the  transaction,  the Company was  awarded a  nine-month  world-wide
   exclusive  option to license the  orthopedic  applications  of  Chrysalin,  a
   patented  23-amino  acid peptide that has shown promise in  accelerating  the
   healing  process.   Chrysalis  is  currently  developing  the  technology  to
   stimulate  the  skin-wound  healing  process and has  completed  an extensive
   pre-clinical  safety and  efficacy  profile of the product.  In  pre-clinical
   animal  studies,  Chrysalin  was also  shown to double  the rate of  fracture
   healing with a single  injection  into the fresh  fracture gap. The Company's
   agreement with Chrysalis contains  provisions for the Company to continue and
   expand its option to license Chrysalin contingent upon regulatory  approvals,
   successful  pre-clinical  trials,  and certain  trials and certain  milestone
   payments to Chrysalis by the Company.  An additional  fee of $750,000 for the
   initial  license was recognized in the third quarter.  The agreement has been
   extended  to the  earlier of January  1, 1999 or until the  Company  collects
   sufficient  additional  preclinical  data to complete its  evaluation  of the
   Technology. The Company will pursue commercialization of Chrysalis, initially
   seeking Food and Drug  Administration  (FDA)  approval for the human clinical
   trials  for  the  fracture-healing  indication.  The  Company  projects  that
   Chrysalis  could receive all the necessary FDA approvals and be introduced in
   the market during 2000. There can be no assurance, however, that the clinical
   trials will result in favorable data or that FDA approvals,  if sought,  will
   be obtained.

5. LITIGATION

   During 1996,  certain lawsuits were filed in the United States District Court
   for the  District of Arizona  against the  Company and certain  officers  and
   directors,  alleging  violations of Section 10(b) of the Securities  Exchange
   Act of 1934 and SEC Rule 10b-5 promulgated thereunder.

                                                                          Page 5
<PAGE>

   Plaintiffs  in these  actions  allege  that  correspondence  received  by the
   Company from the FDA  regarding  the  Company's  OrthoLogic  1000 Bone Growth
   Stimulator was material and undisclosed,  leading to an artificially inflated
   stock price.  Plaintiffs  further  alleged that  practices  referenced in the
   correspondence  operated as a fraud against  plaintiffs and that once the FDA
   letter  became  known,  a material  decline in the stock price of the Company
   occurred, causing damage to the plaintiffs.

   All plaintiffs seek class action status,  unspecified  compensatory  damages,
   fees and costs.  Plaintiffs  also seek  extraordinary,  all equitable  and/or
   injunctive  relief as permitted by law. The actions were consolidated for the
   purposes in the United States  District court for the District of Arizona and
   lead plaintiffs and counsel were appointed.  The Company and its officers and
   directors moved to dismiss the consolidated  amendment  complaint for failure
   to state a claim. The Court dismissed the consolidated  amended  complaint in
   its entirety  against the Company and its officers  and  directors,  but gave
   plaintiffs  leave to amend all  claims to cure all  deficiencies.  An amended
   complaint was filed in April 1998, and the Company has moved again to dismiss
   the amended complaint on virtually the same grounds as it did before.

   In addition,  the Company has been served with a substantially similar action
   filed in Arizona State Court alleging state law causes of action  grounded in
   the  same  set  of  facts.   This  action  remains  stayed  pending   further
   developments in the Federal action.

   In addition to the foregoing,  a shareholder  derivative  complaint alleging,
   among other things,  breach of fiduciary duty in connection  with the conduct
   alleged in the  aforesaid  federal and state court class  actions,  have also
   been filed in Arizona State Court. That action remains stayed pending further
   developments in the Federal consolidated class action.

   In March  1998,  the  former  owner of the CPM  assets  acquired  in the DMTI
   acquisition  filed a lawsuit in the Court of Common Pleas in Franklin County,
   Ohio against the Company. The plaintiff alleges that the Company breached the
   acquisition agreement by not satisfying certain liabilities it assumed in the
   acquisition  and that the Company  breached an  ancillary  agreement  for the
   temporary provision of services following the acquisition. Plaintiff has also
   demanded from the Court of Common Pleas a declaration that the Company is not
   entitled to cash  escrowed  in the  acquisition.  The Company had  previously
   requested  delivery to it of the escrowed  cash and demanded  indemnification
   for  the  plaintiff's  breaches  of  representations  and  warranties  in the
   acquisition agreement.  The costs associated with defending these allegations
   and the potential outcome cannot be determined at this time and, accordingly,
   no estimate for such costs have been included in these financial statements.

   Management   believes  that  the  allegations  are  without  merit  and  will
   vigorously defend them.

                                                                          Page 6
<PAGE>

   At  September  30,  1998,  the  Company is  involved  in various  other legal
   proceedings  that arose in the ordinary  course of business.  In management's
   opinion,  the ultimate  resolution of these other legal  proceedings will not
   have a material affect on the financial position,  results of operations,  or
   cash flow of the Company.

6. NEW ACCOUNTING PRONOUNCEMENTS

   Effective  January  1, 1998,  the  Company  adopted  Statement  of  Financial
   Accounting  Standard No. 130 "Reporting  Comprehensive  Income." For the nine
   month  period  and  the  quarter  ended   September  30,  1998,   net  income
   approximated comprehensive income.

7. DEBT

   The Company has a revolving line of credit agreement with Silicon Valley bank
   for $7.5 million.

8. ALLOWANCE FOR DOUBTFUL ACCOUNTS

   The  allowance  for doubtful  accounts was  increased by  approximately  $9.3
   million during the first quarter of 1998, over and above the normal quarterly
   activity.  The  increase  was a  result  of a  management  decision  to focus
   resources on collection of current  sales and on  re-engineering  the overall
   process of billing and  collections.  It is no longer  considered  to be cost
   effective  to expend  significant  resources on the  collection  of the older
   receivables as had been done in the past.  For the quarter  ending  September
   30, 1998,  total gross  accounts  receivable  decreased by $281,881 while the
   total  allowances  for bad debt increased  $740,715.  For the same quarter in
   1997,  gross  accounts  receivable  decreased  $1.1  million  and  the  total
   allowance for bad debt increased $250,701.

9. EQUITY PLACEMENT

   In July 1998,  the Company  completed  a private  equity  placement  with two
   investors,  an  affiliate of Credit  Suisse  First  Boston Corp.  and Capital
   Ventures International. Under the terms of the Purchase Agreement, OrthoLogic
   sold 15,000  shares of Series B Convertible  Preferred  Stock for $15 million
   (prior to costs).  The Series B Convertible  Preferred  Stock is  convertible
   into shares of Common Stock 300 days after  issuance  and will  automatically
   convert, to the extent not previously converted, into Common Stock four years
   following the date of issuance.  Each share of Series B Convertible Preferred
   Stock is  convertible  into  Common  Stock at a per share  price equal to the
   lesser of the average of the 10 lowest  closing bids during the 30 days prior
   to  conversion  and 103% of the average of the  closing  bids for the 10 days
   prior to the 300th day  following  the  issuance.  The  Series B  Convertible
   Preferred Stock is convertible into Common Stock prior to the 300th day after
   issuance upon the  occurrence of certain events (in which case the conversion
   price will be the  average of the 10 lowest  closing  bids during the 30 days
   prior to conversion).  This Agreement  contains strict covenants that protect

                                                                          Page 7
<PAGE>

   against  hedging  and  short-selling  of  OrthoLogic  Common  Stock while the
   purchaser holds shares of the Series B Convertible Preferred Stock.

   In  connection  with  the  private  placement  of the  Series  B  Convertible
   Preferred Stock,  OrthoLogic issued to the purchasers warrants to purchase 40
   shares of  Common  Stock for each  share of  Series B  Convertible  Preferred
   Stock, exercisable at $5.50. The warrants are valued at $1,093,980.  The cost
   of the Equity  Offering  was  approximately  $966,000.  Both the value of the
   warrants and the cost of the equity  offering will be recognized  over the 10
   month  conversion  period  as  an  "accretion  of  non-cash  Preferred  Stock
   Dividends"  for the amount of $617,994 per  quarter.  The Company has filed a
   registration statement covering the underlying Series B Convertible Preferred
   Common Stock and Warrants.

   Proceeds  from  the  private  placement  will be used  to  fund  new  product
   opportunities,  including  SpinaLogic,  Chrysalin and Hyalgan,  as well as to
   complete the re-engineering of the Company's key business processes.

10. LEGAL SETTLEMENT

   The Company settled a false claims matter with the U.S. Department of Justice
   in a case that was filed under qui tam provisions of the Federal False Claims
   Act. The allegations  included the submission of claims for reimbursement for
   a small number of custom  medical  devices to various  federal care  programs
   including  Medicare,  TRICARE  (formerly  known as CHAMPUS) and various state
   Medicaid programs.

   The  Company   denies  any  wrongdoing  or  liability  with  respect  to  the
   allegations  in this  matter.  Nevertheless,  in effort to avoid the expense,
   burden and  uncertainty  of  litigation in this case as well as the potential
   distraction  this case could have on the  Company's  management,  the Company
   agreed to settle this matter.  Under the terms of the  definitive  settlement
   agreement,  the Company paid to the U.S.  Department of Justice, on behalf of
   several federal health care programs including Medicare, TRICARE, and various
   state  Medicaid  programs,  the amount of  $1,000,000.  In  return,  the U.S.
   Department  of  Justice  has  agreed  to  release  the  Company's   officers,
   employees,  and  directors  from any causes of actions  for civil  damages or
   civil penalties for the various allegations being settled in this matter. The
   original complaint was dismissed with prejudice.

   The Company recognized the costs associated with this settlement agreement in
   the second quarter of 1998.

11. PRE-MARKET APPROVAL SUBMISSION FOR SPINALOGIC-1000

   In August 1998, the Company submitted a Pre-Market  Approval (PMA) Supplement
   to the U.S. Food and Drug Administration (FDA) for the SpinaLogic-1000, a new
   product  for the  stimulation  of spinal  fusion.  The FDA has  accepted  the
   filing, with a filing date of August 20, 1998.  Acceptance of the application
   for filing  means that the FDA has made a  threshold  determination  that the
   application is sufficiently complete to permit substantive review.

                                                                          Page 8
<PAGE>

               MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
                      CONDITIONS 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, 1997.

RESULTS OF OPERATIONS

REVENUES

The  Company  reported   revenues  of  $17.7  million  for  the  third  quarter,
representing  a 2.5%  decrease  from  revenues  of $18.2  million  for the third
quarter of 1997. The Company's  revenues increased 1.0% to $54.3 million for the
nine months  ending  September  30, 1998 from $58.8  million for the nine months
ended  September  30,  1997.  Sales  finished  the quarter  below  expectations,
reflecting a larger than expected  impact from the seasonal effect of the summer
holiday period.

GROSS PROFIT

Gross profit  increased  from $40.0 million for the nine months ended  September
30, 1997 to $41.4 million for the nine months ended  September  30, 1998.  Gross
profit, as a percentage of revenue,  was 76% for the nine months ended September
30, 1998 compared to 74% for the comparable period during 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling,  general and  administrative  (SG&A) expenses for the nine months ended
September  30, 1998 were $56.3  million,  up $12.9  million from the  comparable
period in 1997.  The  increase  from 1997 is due in part to the  variable  costs
associated with the increased  revenue.  The first quarter of 1998 also included
an increase of $9.3  million in the  allowance  for doubtful  accounts  over the
normal  quarterly  provision.  As part of a larger  project to  re-engineer  the
sales, billings and collections process for enhanced  efficiencies,  the Company
obtained  an  independent   evaluation  of  its  billing  files  and  collection
strategies in April of 1998. The  information  obtained from this study prompted
management to change its focus for future collection  efforts to be primarily on
the more  recent  sales.  The cost of  continuing  to manage the older  accounts
receivable to the extent that had been done in the past was no longer considered
as  cost  effective  for  the  Company.  This  shift  in the  emphasis  for  the
collections policy prompted the Company to increase the bad debt reserve for the
outstanding  balances of the older receivables.  In addition, a $1 million legal
settlement (see Note 10) was recognized in the second quarter of 1998.

                                                                          Page 9
<PAGE>

RESEARCH AND DEVELOPMENT

Research and  Development  (R&D)  expenses were $2.5 million for the nine months
ended  September  30, 1998  compared to $1.8  million  for the  comparable  1997
period.  The increase was due to a $750,000  accrual for the initial license fee
for Chrysalin.  This was partially  offset due to the unveiling of a new, single
coil version of the OL-1000,  no longer in R&D. The device  extends the fracture
healing benefits of the OL-1000 to the thigh and the long bone of the upper arm,
extending from the shoulder to the elbow, and is suitable for treating non-union
fractures in most areas for larger individuals.

OTHER INCOME AND EXPENSES

Other income  declined to $269,000 in the nine months ending  September 30, 1998
from $1.3 million  during the same period in 1997.  This  decrease is attributed
to: (1) the Company not  participating  in any  research  grant  projects in the
current year; and (2) a reduction in cash and  investments,  which has yielded a
reduction in interest  income  earned to $267,000 in 1998,  from $1.2 million in
1997.

LIQUIDITY AND CAPITAL RESOURCES

On September  30,  1998,  the Company had cash and  investments  of $8.7 million
compared to $12.3 million  (including  short-term  investments)  at December 31,
1997. The change in cash and investments is primarily the result of a $2 million
payment under the Co-Promotion  Agreement, a $1.9 million increase in inventory,
and the $1 million  legal  settlement  previously  discussed.  In  addition,  in
January  1998,  the  Company  acquired  a  $750,000  equity  stake in  Chrysalis
BioTechnology,  Inc.,  a  biotech  firm,  in  Galveston,  Texas.  Cash  used for
operations  amounted to $9.2 million during the nine month period.  A portion of
operation costs included strengthening the senior management team,  reorganizing
the field sales force,  redesigning  business processes and renewing emphasis on
product  development.  In July 1998,  the  Company  completed  a private  equity
placement  (see Note 9) providing net proceeds of $14 million.  The  outstanding
line of credit was paid off during the third quarter.

The Company  anticipates  that its cash on hand and the funds available from the
line of credit will be sufficient to meet the Company's presently projected cash
and  working  capital  requirements  for the  next 12  months.  There  can be no
assurance,  however,  that this will prove to be the case.  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.

YEAR 2000 COMPLIANCE

The   inability   of   computers,   software  and  other   equipment   utilizing
microprocessors  to recognize  and properly  process data fields  containing a 2
digit year is commonly  referred to as the Year 2000  Compliance  issue.  As the
year 2000 approaches,  such systems may be unable to accurately  process certain
date-based information.
                                                                         Page 10
<PAGE>

The  Company has  identified  all  significant  applications  that will  require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
modification process of all significant  applications is substantially complete.
The  Company  plans  on  completing  the  testing  process  of  all  significant
applications by December 31, 1998.

In addition,  the Company has communicated  with others whom it does significant
business to determine  their Year 2000  Compliance  readiness  and the extent to
which the Company is  vulnerable  to any third party Year 2000 issues.  However,
there can be no  guarantee  that the  systems  of other  companies  on which the
Company's systems rely will be timely converted, or that a failure to convert by
another  company,  or a  conversion  that is  incompatible  with  the  Company's
systems, would not have a material adverse effect on the Company.

The total cost to the Company of these Year 2000  Compliance  activities has not
been and is not anticipated to be material to its financial  position or results
of operations  in any given year.  These costs and the date on which the Company
plans to complete the Year 2000  modification and testing processes are based on
management's best estimates,  which were derived utilizing numerous  assumptions
of future  events  including the continued  availability  of certain  resources,
third  party  modification  plans and other  factors.  However,  there can be no
guarantee that these  estimates will be achieved and actual results could differ
from those plans.

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,
projections  of results of operations  and financial  condition,  statements and
future economic  performance  and other  forward-looking  statements  within the
meaning of the Private  Securities  Litigation Reform Act of 1995, involve risks
and uncertanties  that may cause the actual results,  performance or achievement
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: (i) the results of the
Company's  efforts to implement its Securities and Exchange  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
matter;  (iv) other risks  detailed in the Company's  Annual Report on Form 10-K
for the fiscal year ended  December 31, 1997 and on the Company's  other filings
with the Securities and Exchange Commission; (v) approval of new products by the
FDA and market  acceptance  of new  products;  (vi)  dependence  on third  party
payors; and (vii) the costs and results of pending litigation.

                                                                         Page 11
<PAGE>

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities and Use of Proceeds

        See "Note 9 - Equity  Placement" of the Notes to Consolidated  Financial
        Statements above.

Item 6. Exhibits and Reports

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

        (b)     Reports on Form 8-K

                1.      On July 13, 1998,  the Company  issued  15,000 shares of
                        its Series B  Convertible  Preferred  Stock and  related
                        Warrants  in a private  placement  to two  institutional
                        investors. The Company estimates the net proceeds of the
                        offering,   after  expenses,  to  be  approximately  $14
                        million.  The Company has filed with the  Securities and
                        Exchange  Commission a registration  statement  covering
                        the  resale  of the  shares  of  Common  Stock  issuable
                        pursuant  to the  terms  of  the  Series  B  Convertible
                        Preferred  Stock and related  Warrants.  The  Securities
                        Purchase   Agreement,    Certificate   of   Designation,
                        Warrants,  and Registration  Rights Agreement were filed
                        as exhibits to the Form 8-K.

                2.      On July 13,  1998,  the Company  issued a press  release
                        regarding the private  placement of 15,000 shares of its
                        Series  B  Convertible   Preferred   Stock  and  related
                        Warrants. The press release was filed as an exhibit to a
                        report on Form 8-K.

                                                                         Page 12
<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 12, 1998
-----------------------   (Principal Executive Officer)
Thomas R. Trotter


/s/ Terry D. Meier        Sr. Vice-President and Chief Financial Officer    November 12, 1998
-----------------------   (Principal Financial and Accounting Officer)
Terry D. Meier

</TABLE>

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