**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        DC 20549**
 
 **FORM
        10-Q**
  (Mark
        One)
 
 **x**
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES  EXCHANGE ACT OF
                  1934**
 
 For
                  the quarterly period ended
              March
                  31, 2007
  or
  ** ̈**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 For
                    the transition period from
                
                to
  Commission
          File Number: 0-21214
 ORTHOLOGIC
                  CORP.(Exact
                  name of registrant as specified in its
                  charter)
 
 Delaware
              
              86-0585310(State
                  or other jurisdiction of incorporation or organization)
              
              (IRS
                  Employer Identification No.)1275
                  W. Washington Street, Tempe, Arizona
              
              85281(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 (602)
                  286-5520(Registrant's
                  telephone number, including area code)
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.    x Yes ̈
        No
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
  Large
                  accelerated filer  ̈
              Accelerated
                  filer x
              Non-accelerated
                  filer  ̈
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).    Yes  ̈    No
x.
 
 APPLICABLE
        ONLY TO CORPORATE ISSUERS:
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date.
 
 41,594,491
        shares of common stock outstanding as of April 28, 2007.
  
 1
 
 **ORTHOLOGIC
        CORP.**
 **(A
        Development Stage Company)**
 **INDEX**
 
 Page
                No.Part
                  I
              
              Financial
                  InformationItem
                  1.
              
              Financial
                  Statements (Unaudited)Condensed
                  Balance Sheets as of March 31, 2007 and December
                  31, 2006
              3Condensed
                  Statements of Operations for the three months
                  ended March 31, 2007 and 2006
              4Condensed
                  Statements of Cash Flows for the three months
                  ended March 31, 2007 and 2006
              5Notes
                  to Condensed Financial Statements
              6Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              12Item
                  4.
              
              Controls
                  and Procedures
              15Part
                  II
              
              Other
                  InformationItem
                  1A.
              
              Risk
                  Factors
              16Item
                  6.
              
              Exhibits
              16
 
 EXHIBIT
        4.1
 EXHIBIT
        31.1
 EXHIBIT
        31.2
 EXHIBIT
        32
  2
 ***Index***
  **PART
        I – Financial Information**
 **Item
                  1.**
              **Financial
                  Statements**
 **ORTHOLOGIC
          CORP.**
 **(A
        Development Stage Company)**
 **CONDENSED
        BALANCE SHEETS**
 ***(in
        thousands, except share and per share data)***
 
 **March
                  31,**
                **2007**
              
              
              **December
                  31,**
                **2006****(Unaudited)****ASSETS**Current
                  assetsCash
                  and cash equivalents
              
              $
              19,896
              
              
              $
              18,047Short-term
                  investments
              
              
              24,266
              
              
              
              35,977Prepaids
                  and other current assets
              
              
              1,048
              
              
              
              1,950Total
                  current assets
              
              
              45,210
              
              
              
              55,974Furniture
                  and equipment, net
              
              
              402
              
              
              
              409Long-term
                  investments
              
              
              23,107
              
              
              
              16,206**Total
                  assets**
              
              $
              68,719
              
              
              $
              72,589**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilitiesAccounts
                  payable
              
              $
              1,045
              
              
              $
              1,621Accrued
                  compensation
              
              
              441
              
              
              
              584Accrued
                  clinical
              
              
              94
              
              
              
              133Accrued
                  severance and other restructuring costs
              
              
              298
              
              
              
              366Other
                  accrued liabilities
              
              
              574
              
              
              
              737Total
                  current liabilities
              
              
              2,452
              
              
              
              3,441**Stockholders'
                  Equity**Common
                  Stock  $.0005 par value; 100,000,000 shares authorized;
                  41,594,491 and 41,564,291 shares issued and outstanding
              
              
              21
              
              
              
              21Additional
                  paid-in capital
              
              
              188,268
              
              
              
              188,236Accumulated
                  deficit
              
              
              (122,022
              )
              
              
              (119,109
              )Total
                  stockholders' equity
              
              
              66,267
              
              
              
              69,148**Total
                  liabilities and stockholders' equity**
              
              $
              68,719
              
              
              $
              72,589
 
 *See
        notes to unaudited condensed financial statements*
 
 3
 ***Index***
  **ORTHOLOGIC
        CORP.**
 **(A
        Development Stage Company)**
 **CONDENSED
        STATEMENTS OF OPERATIONS**
 ***(in
        thousands, except share and  per share
        data)***
 **(Unaudited)**
 
 Three
                  months ended
              
              
              As
                  a Development
                Stage
                  CompanyMarch
                  31,
              
              
              August
                  5, 2004 -2007
              
              
              2006
              
              
              March
                  31, 2007OPERATING
                  EXPENSESGeneral
                  and administrative
              
              $
              979
              
              
              $
              2,093
              
              
              $
              14,325Research
                  and development
              
              
              2,818
              
              
              
              6,716
              
              
              
              56,003Other
                  divestiture and related gains
              
              
              -
              
              
              
              -
              
              
              
              (375
              )Purchased
                  in-process research and development
              
              
              -
              
              
              
              8,434
              
              
              
              34,311Total
                  operating expenses
              
              
              3,797
              
              
              
              17,243
              
              
              
              104,264Interest
                  and other income, net
              
              
              (884
              )
              
              
              (762
              )
              
              
              (8,158
              )Loss
                  from continuing operations before taxes
              
              
              2,913
              
              
              
              16,481
              
              
              
              96,106Income
                  tax expense
              
              
              -
              
              
              
              -
              
              
              
              356Loss
                  from continuing operations
              
              
              2,913
              
              
              
              16,481
              
              
              
              96,462Discontinued
                  operations - net gain on sale of the bone device business, net
                  of taxes
                  ($267)
              
              
              -
              
              
              
              -
              
              
              
              (2,202
              )NET
                  LOSS
              
              $
              2,913
              
              
              $
              16,481
              
              
              $
              94,260Per
                  Share Information:Net
                  loss, basic and diluted
              
              $
              0.07
              
              
              $
              0.42Basic
                  and diluted shares outstanding
              
              
              41,594,491
              
              
              
              39,250,851
 
 *See
        notes to unaudited condensed financial statements*
 
 4
 ***Index***
 
 **ORTHOLOGIC
        CORP.**
 **(A
        Development Stage Company)**
 **CONDENSED
        STATEMENTS OF CASH FLOW**
 ***(in
        thousands)***
 **(Unaudited)**
 
 Three
                  months ended
              
              
              As
                  a Development
                Stage
                  CompanyMarch
                  31,
              
              
              August
                  5th 2004 -2007
              
              
              2006
              
              
              March
                  31, 2007OPERATING
                  ACTIVITIESNet
                  loss
              
              $
              (2,913
              )
              
              $
              (16,481
              )
              
              $
              (94,260
              )Non
                  cash items:Deferred
                  tax asset
              
              
              -
              
              
              
              -
              
              
              
              770Depreciation
                  and amortization
              
              
              67
              
              
              
              357
              
              
              
              3,332Non-cash
                  stock compensation
              
              
              32
              
              
              
              952
              
              
              
              2,975Gain
                  on sale of bone device business
              
              
              -
              
              
              
              -
              
              
              
              (2,298
              )In-process
                  research and development
              
              
              -
              
              
              
              8,434
              
              
              
              34,311Change
                  in other operating items:Prepaids
                  and other current assets
              
              
              902
              
              
              
              100
              
              
              
              661Accounts
                  payable
              
              
              (576
              )
              
              
              264
              
              
              
              74Accrued
                  liabilities
              
              
              (413
              )
              
              
              (788
              )
              
              
              (1,346
              )Cash
                  flows used in operating activities
              
              
              (2,901
              )
              
              
              (7,162
              )
              
              
              (55,781
              )INVESTING
                  ACTIVITIESExpenditures
                  for furniture and equipment, net
              
              
              (60
              )
              
              
              (83
              )
              
              
              (575
              )Proceeds
                  from sale of assets
              
              
              -
              
              
              
              -
              
              
              
              7,000Cash
                  paid for assets of AzERx/CBI
              
              
              -
              
              
              
              (390
              )
              
              
              (4,058
              )Cash
                  paid for patent assignment rights
              
              
              -
              
              
              
              (100
              )
              
              
              (650
              )Purchases
                  of investments
              
              
              (13,817
              )
              
              
              (10,068
              )
              
              
              (159,711
              )Maturities
                  of investments
              
              
              18,627
              
              
              
              19,226
              
              
              
              170,276Cash
                  flows provided by investing activities
              
              
              4,750
              
              
              
              8,585
              
              
              
              12,282FINANCING
                  ACTIVITIESNet
                  proceeds from stock option exercises
              
              
              -
              
              
              
              2,962
              
              
              
              4,612Net
                  proceeds from sale of stock
              
              
              -
              
              
              
              1,933
              
              
              
              3,376Cash
                  flows provided by financing activities
              
              
              -
              
              
              
              4,895
              
              
              
              7,988NET
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              1,849
              
              
              
              6,318
              
              
              
              (35,511
              )CASH
                  AND CASH EQUIVALENTS, BEGINNING OF PERIOD
              
              
              18,047
              
              
              
              35,111
              
              
              
              55,407CASH
                  AND CASH EQUIVALENTS, END OF PERIOD
              
              $
              19,896
              
              
              $
              41,429
              
              
              $
              19,896
 
 **Supplemental
                  Disclosure of Non-Cash Investing Activities**
              
              **AzERx**
              
              
              **AzERx
                  and CBI****AzERx/CBI
                  Acquisition**Current
                  assets acquired
              
              $
              -
              
              
              $
              29Patents
                  acquired
              
              
              -
              
              
              
              2,142Liabilities
                  acquired, and accrued acquisition costs
              
              
              (280
              )
              
              
              (457
              )Original
                  investment reversal
              
              
              -
              
              
              
              (750
              )In-process
                  research and development acquired
              
              
              8,434
              
              
              
              34,311Common
                  stock issued for acquisition
              
              
              (7,764
              )
              
              
              (31,217
              )Cash
                  paid for acquisition
              
              $
              390
              
              
              $
              4,058
 
 *See
        notes to unaudited condensed financial statements*
 
 5
 ***Index***
  **ORTHOLOGIC
        CORP.**
 **(A
        Development Stage Company)**
 **NOTES
        TO UNAUDITED CONDENSED FINANCIAL
        STATEMENTS**
 **March
        31, 2007**
  **OVERVIEW
          OF BUSINESS**
 
 **Description
                  of the business**
 
 OrthoLogic
        is a biotechnology company committed to developing a pipeline of novel peptides
        and other molecules aimed at helping patients with under-served
        conditions.  The Company is focused on the development and
        commercialization of two product platforms:  Chrysalin® (TP508) and
        AZX100.
 
 Chrysalin,
        the Company’s first novel synthetic peptide, has two lead indications, both of
        which represent areas of significant unmet medical need – fracture repair and
        diabetic foot ulcer healing.  The Company owns exclusive worldwide
        rights to Chrysalin.
 
 AZX100,
        the Company’s second peptide, is a novel synthetic pre-clinical 24-amino acid
        peptide, one of a new class of compounds in the field of smooth muscle
        relaxation called Intracellular Actin Relaxing Molecules, or
        ICARMsTM.  AZX100 is currently being evaluated for medically and
        commercially significant applications, such as the treatment of vasospasm
        associated with subarachnoid hemorrhage, the prevention of keloid scarring,
        pulmonary fibrosis, and the treatment of asthma.  OrthoLogic has an
        exclusive worldwide license to AZX100.
 
 We
        continue to explore other biopharmaceutical compounds that can complement
        our
        research activity internally and broaden our potential pipeline for successful
        products.
 
 **Company
        History**
 
 Prior
        to
        November 26, 2003, we developed, manufactured and marketed proprietary,
        technologically advanced orthopedic products designed to promote the healing
        of
        musculoskeletal bone and tissue, with particular emphasis on fracture healing
        and spine repair.  Our product lines included bone growth stimulation
        and fracture fixation devices including the OL1000 product line, SpinaLogic® and
        OrthoFrame/Mayo, which we sometimes refer to as our “Bone Device
        Business.”
 
 On
        November 26, 2003, we sold our Bone Device Business.  Our principal
        business remains focused on tissue repair, although through biopharmaceutical
        approaches rather than through the use of medical devices.
 
 On
        August 5, 2004, we purchased
        substantially all of the assets and intellectual property of Chrysalis
        Biotechnology, Inc. (“CBI”), including its exclusive worldwide license for
        Chrysalin for all medical indications, for $2.5 million in cash and $25.0
        million in OrthoLogic common stock, with an additional $7.0 million in
        OrthoLogic common stock due should certain triggering events
        occur.  We became a development stage company commensurate with the
        acquisition.  Subsequently, all of our collective efforts were focused
        on research and development of our Chrysalin Product Platform, with the goal
        of
        commercializing our products.
 
 On
        February 27, 2006, the Company purchased certain assets and assumed certain
        liabilities of AzERx, Inc.  Under the terms of the transaction, OrthoLogic
        acquired an exclusive license for the core intellectual property relating
        to
        AZX100.
 
 6
 ***Index***
  Our
        development activities for the Chrysalin Product Platform and AZX100 represent
        a
        single operating segment as they share the same product development path
        and
        utilize the same Company resources.  As a result, we have determined
        that it is appropriate to reflect our operations as one reportable segment.
        Through March 31, 2007, we have incurred $94 million in net losses as a
        development stage company.
 
 In
        these
        notes, references to “we”, “our” and the “Company” refer to OrthoLogic
        Corp.  References to our Bone Device Business refer to our former
        business line of bone growth stimulation and fracture fixation devices,
        including the OL1000 product line, SpinaLogic®, OrthoFrame® and
        OrthoFrame/Mayo.
  **Financial
        Statement Presentation**
 
 In
        the
        opinion of management, the unaudited condensed interim financial statements
        include all adjustments necessary for the fair presentation of our financial
        position, results of operations, and cash flows.  The results of
        operations for the interim periods are not necessarily indicative of the
        results
        to be expected for the complete fiscal year.
 
 Use
        of
        estimates: The preparation of financial statements in accordance with accounting
        principles generally accepted in the United States of America requires that
        management make a number of assumptions and estimates that affect the reported
        amounts of assets, liabilities, and expenses in our financial statements
        and
        accompanying notes.  Management bases its estimates on historical
        experience and various other assumptions believed to be
        reasonable.  Although these estimates are based on management’s
        assumptions regarding current events and actions that may impact the Company
        in
        the future, actual results may differ from these estimates and
        assumptions.  Our critical accounting policies are those that affect,
        or could affect, our financial statements materially and involve a significant
        level of judgment by management. The accounting policies and related risks
        described in our Annual Report for the year ended December 31, 2006 are those
        that depend most heavily on these judgments and estimates.  As of
        March 31, 2007, there have been no material changes to any of the critical
        accounting policies contained therein.
 
 Certain
        information and footnote disclosures normally included in financial statements
        prepared in accordance with generally accepted accounting principles have
        been
        condensed or omitted pursuant to Securities and Exchange Commission rules
        and
        regulations, although the Company believes that the disclosures herein are
        adequate to make the information presented not misleading.  It is
        suggested that these unaudited condensed financial statements be read in
        conjunction with the financial statements and the notes thereto included
        in the
        Company’s Annual Report for the year ended December 31,
        2006.  Information presented as of December 31, 2006 is derived from
        audited statements.
 
 New
        Accounting Pronouncement:  We adopted the provisions of Financial
        Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
        Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN
        48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in
        income taxes recognized in an enterprise’s financial statements in accordance
        with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a
        recognition threshold and measurement process for financial statement
        recognition and measurement of a tax position taken or expected to be taken
        in a
        tax return. FIN 48 also provides guidance on derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition.
 
 7
 ***Index***
 
 Based
        on
        our evaluation, we have concluded that there are no significant uncertain
        tax
        positions requiring recognition in our financial statements or adjustments
        to
        our deferred tax assets and related valuation allowance. Our evaluation was
        performed for the tax years ended December 31, 2003, 2004, 2005 and 2006,
        the
        tax years which remain subject to examination by major tax jurisdictions
        as of
        March 31, 2007.
 
 We
        may
        from time to time be assessed interest or penalties by major tax jurisdictions,
        although any such assessments historically have been minimal and immaterial
        to
        our financial results. In the event we have received an assessment for interest
        and/or penalties, it has been classified in the financial statements as selling,
        general and administrative expense.
  **A.**
              **STOCK
                  BASED COMPENSATION**
 
 Effective
        January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment”,
        (SFAS 123(R)).  SFAS 123(R) requires all share-based payments,
        including grants of stock options, restricted stock units and employee stock
        purchase rights, to be recognized in our financial statements based on their
        respective grant date fair values. Under this standard, the fair value of
        each
        employee stock option and employee stock purchase right is estimated on the
        date
        of grant using an option pricing model that meets certain
        requirements.  We currently use the Black-Scholes option pricing model
        to estimate the fair value of our share-based payments.  The
        determination of the fair value of share-based payment awards utilizing the
        Black-Scholes model is affected by our stock price and a number of assumptions,
        including expected volatility, expected life, risk-free interest rate and
        expected dividends.  We use historical volatility adjusted for future
        expectations. The expected life of stock options is based on historical data
        and
        future expectations.  The risk-free interest rate assumption is based
        on observed interest rates appropriate for the terms of our stock options
        and
        stock purchase rights.  The dividend yield assumption is based on our
        history and expectation of dividend payouts.  The fair value of our
        restricted stock units is based on the fair market value of our common stock
        on
        the date of grant.  Stock-based compensation expense recognized in our
        financial statements in 2006 and thereafter is based on awards that are
        ultimately expected to vest.  We recognize compensation cost for an
        award with only service conditions that has a graded vesting schedule on
        a
        straight line basis over the requisite service period as if the award was,
        in-substance, a multiple award.  However, the amount of compensation
        cost recognized at any date must at least equal the portion of grant-date
        fair
        value of the award that is vested at that date. The amount of stock-based
        compensation expense in 2006 and thereafter will be reduced for estimated
        forfeitures.  Forfeitures are required to be estimated at the time of
        grant and revised, if necessary, in subsequent periods if actual forfeitures
        differ from those estimates.  We evaluate the assumptions used to
        value stock awards on a quarterly basis.  If factors change and we
        employ different assumptions, stock-based compensation expense may differ
        significantly from what we have recorded in the past.  The Company
        chose the modified-prospective transition alternatives in adopting SFAS
        123(R).  Under the modified-prospective transition method,
        compensation cost is recognized in financial statements issued subsequent
        to the
        date of adoption for all stock-based payments granted, modified or settled
        after
        the date of adoption, as well as for any unvested awards that were granted
        prior
        to the date of adoption.  Because the Company previously adopted only
        the pro forma disclosure provisions of SFAS 123, we recognize compensation
        cost
        relating to the unvested portion of awards granted prior to January 1, 2006,
        the
        date of adoption, using the same estimate of the grant-date fair value and
        the
        same attribution method used to determine the pro forma disclosure under
        SFAS
        123, except that a forfeiture rate will be estimated for all options, as
        required by SFAS 123(R).
 
 8
 ***Index***
 
 **Stock
        Options issued prior to December 31, 2005:**
 
 Unrecognized
        non-cash stock compensation expense related to unvested options outstanding
        as
        of December 31, 2005 was approximately $1 million (includes 328,124 shares
        valued at $500,000 unvested and cancelled on April 5, 2006 upon the resignation
        of James M. Pusey, MD). Because of the significant expected forfeiture rate
        (54%) caused by the options cancelled at the time of Dr. Pusey’s resignation,
        the expected compensation cost for unvested options at December 31, 2005,
        was
        approximately $388,000.  At March 31, 2007,  the remaining
        compensation cost related to unvested options outstanding at December 31,
        2005,
        is approximately $46,000, which will be recognized over the remaining vesting
        period of approximately 2.5 years, with an estimated weighted average period
        of
        1.3 years.
 
 **2006
        Stock Options**
 
 Using
        an
        estimated forfeiture rate of 13%, compensation cost recorded for the three
        months ended March 31, 2007, for options issued in 2006, was a credit of
        $8,000
        due to the adjustment of the forfeiture rate from 5% as of December 31, 2006
        to
        13% at March 31, 2007. The options granted generally vest over a two to
        four-year period from the date of grant and, accordingly, the remaining
        unamortized cost at March 31, 2007 of approximately $686,000 will be amortized
        ratably over the period ending December 31, 2009, with an estimated weighted
        average period of one year.
 
 **2007
        Stock Options**
 
 On
        January 1, 2007, the Board of Directors granted each Director a fully vested
        option to purchase 10,000 shares of the Company’s common stock at an exercise
        price of $1.43.  Additionally, during the three months ended March 31,
        2007, the Company granted a fully vested option to purchase 13,889 shares
        of the
        Company’s common stock to a consultant at an exercise price of $1.44 and an
        option to purchase 5,000 shares that vests over a four-year period, to an
        employee, at an exercise price of $1.45.
 
 The
        Company used the Black-Scholes model with the following assumptions, to
        determine the total fair market value of $52,000 for options to purchase
        78,889
        shares of the Company’s common stock issued during the three months ended March
        31, 2007:
 
 Three
                  months ended
                March
                  31, 2007Risk
                  free interest rate
              4.6%Volatility
              66%Expected
                  term from vesting
              2.8
                  YearsDividend
                  yield
              0%
 
 Using
        an
        estimated forfeiture rate of 16%, compensation cost recorded for the three
        months ended March 31, 2007, for options issued in 2007, was
        $48,000.  The options granted, that did not vest on the grant date,
        vest over a four-year period from the date of grant and, accordingly, the
        remaining unamortized cost at March 31, 2007 of approximately $4,000 will
        be
        amortized ratably over the period ending December 31, 2010, with an estimated
        weighted average period of two years.
 
 9
 ***Index***
 
 **2007
        Restricted Stock**
 
 On
        January 1, 2007, the Board of Directors of the Company awarded 104,898 shares
        of
        restricted stock (17,843 shares to each director), which vest on January
        1,
        2008.  The total fair market value of the grants, determined using the
        closing price of the Company’s common stock on the date of grant, was $150,000,
        of which $31,000 has been recognized as compensation cost in the three months
        ended March 31, 2007.
 
 **Summary**
 
 Non-cash
        stock compensation cost for the three months ended March 31, 2007, totaled
        $32,000.  In the condensed Statements of Operations for the three
        months ended March 31, 2007, non-cash stock compensation expense of $49,000
        was
        recorded as a general and administrative expense and $17,000 was recorded
        as a
        reduction (credit) of research and development expense.
 
 Non-cash
        stock compensation cost for the three months ended March 31, 2006, totaled
        $952,000 of which $426,000 related to restricted stock.  In the
        condensed Statements of Operations for the three months ended March 31, 2006,
        non-cash stock compensation expense of $827,000 was recorded as a general
        and
        administrative expense and $125,000 was recorded as a research and development
        expense.
 
 During
        the three months ended March 31, 2006, options to purchase 670,400 shares
        of the
        Company’s common stock were exercised resulting in the receipt by the Company of
        net cash proceeds of $2,962,000.  The intrinsic value of options
        exercised during the three months ended March 31, 2006 was
        $689,000.  No options were exercised in the three months ended March
        31, 2007.
 
 A
        summary
        of option activity under our stock option plans for the three months ended
        March
        31, 2007, is as follows:
 
 
 Number
                  of
                Options
              
              
              Weighted
                average
                exercise
                price
              
              
              Weighted
                average
                remaining
                contractual
                term
                (years)Options
                  outstanding December 31, 2006
              
              
              3,438,126
              
              
              $
              3.69Plus:  Options
                  granted
              
              
              78,889
              
              
              
              1.43Less:Options
                  exercised
              
              
              -Options
                  expired/forfeited
              
              
              (265,190
              )
              
              
              4.45Options
                  oustanding at March 31, 2007
              
              
              3,251,825
              
              
              
              3.57
              
              
              
              6.94Options
                  exercisable at March 31, 2007
              
              
              2,196,283
              
              
              
              3.95
              
              
              
              5.95Options
                  vested and expected to vest at March 31, 2007
              
              
              2,972,553
              
              
              
              3.61
              
              
              
              6.75
 
 10
 ***Index***
  A
        summary
        of the status of the Company’s unvested shares as of March 31, 2007, and changes
        during the three months ended March 31, 2007, is presented below:
 
 Unvested
                  Shares
              
              Number
                  of
                Options
              
              
              Weighted
                average
                Grant
                  date
                Fair
                  ValueUnvested
                  shares at December 31, 2006
              
              
              -
              
              
              $
              -Granted
              
              
              104,898
              
              
              $
              1.43Vested
              
              
              -
              
              
              $
              -Canceled/forfeited
              
              
              -
              
              
              $
              -Unvested
                  shares at March 31, 2007
              
              
              104,898
              
              
              $
              1.43
 
 It
        is the
        Company’s policy to issue options from shareholder approved incentive plans.
        However, if the options are issued as an inducement for an individual to
        join
        the Company, the Company may issue stock options outside of shareholder approved
        plans.  The options granted under shareholder approved incentive plans
        have a ten-year term and vest over a two to four-year period of
        service.  All options and stock purchase rights are granted with an
        exercise price equal to the current market value on the date of grant and,
        accordingly, options or stock purchase rights have no intrinsic value on
        the
        date of grant.  Based on the closing market price of the Company’s
        common stock at March 31, 2007 of $1.56, stock options exercisable or expected
        to vest at March 31, 2007, have intrinsic value of $15,000.  At March
        31, 2007, 648,185 shares remain available to grant under the Company’s existing
        stock option plans.
 
 **Warrants**
 
 At
        March
        31, 2007, the Company has warrants outstanding to purchase 46,706 shares
        of the
        Company’s common stock with an exercise price of $6.39 per share which expire in
        February 2016, and warrants outstanding to purchase 117,423 shares of the
        Company’s common stock with an exercise price of $1.91 per share which expire in
        July 2016.
 
 Additionally,
        (as described in Note 15 to our Annual Report on Form 10-K for the year ended
        December 31, 2006), performance based warrants to purchase 240,000 shares
        of the
        Company’s common stock with an exercise price of $1.91, which expire in February
        2016, are outstanding but unvested at March 31, 2007.  The total cost
        of the performance based warrants will be charged to expense over the period
        of
        performance. The costs will be determined based on the fair market value
        of the
        warrants determined by using the Black-Scholes model, revalued at each Company
        reporting date until fully vested.  The fair market value of the
        milestone warrants using the Black-Scholes model, 64% volatility, 0% dividend
        yield, expected term of 8.9 years, and 4.5% interest rate was $271,000 at
        March
        31, 2007.  No costs were charged to expense at March 31, 2007 as it is
        not yet probable that any milestone warrants will vest.
 
 11
 ***Index***
 
 **Item
                  2.**
              **Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations.**
 
 The
        following is management’s discussion of significant events in the quarter ended
        March 31, 2007 and factors that affected OrthoLogic’s interim financial
        condition and results of operations.  This should be read in
        conjunction with our “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations” included in our Annual Report on Form 10-K
        for the year ended December 31, 2006 and Item 1A. Risk Factors included in
        Part
        II of this quarterly report.
 
 **Overview
        of the Business**
 
 OrthoLogic
        is a biotechnology company focused on the development and commercialization
        of
        the novel synthetic peptides Chrysalin® (TP508) and AZX100.
 
 **Chrysalin®
        (TP508)**
 
 Chrysalin,
        or TP508, is a 23-amino acid synthetic peptide representing a receptor-binding
        domain of the human thrombin molecule, a naturally occurring agent responsible
        for blood clotting and initiating the natural healing cascade of cellular
        events
        responsible for tissue repair in both soft tissue and bone.
 
 During
        the first quarter of 2006, we announced topline results of the Chrysalin
        Phase 3
        clinical trial in distal radius fracture.  While the study showed that
        Chrysalin did not meet its primary endpoint in the overall evaluable patient
        population, it did demonstrate that Chrysalin has biologic activity, as
        evidenced by statistically significant results observed along key radiographic
        secondary endpoints.
 
 We
        interrupted enrollment in the concurrent Chrysalin Phase 2b dose-ranging
        study
        in the first quarter of 2006 in order to perform an interim analysis of subjects
        enrolled to that date.  Given the equivocal information obtained from
        the interim analysis we chose to terminate the study.
 
 In
        December 2006 we announced a presentation at the American Society for Cell
        Biology describing results of an experiment demonstrating that TP508 increases
        the ability of endothelial cells to produce nitric oxide and that TP508 prevents
        negative effects caused by oxygen deprivation, a condition found in myocardial
        ischemia and chronic wounds.  This discovery raises the possibility
        that TP508 could be useful in treating a number of vascular
        diseases.  Laboratory-based validation work continues in this
        area.
 
 In
        January 2007 we announced publication in the journal *Wound Repair and
        Regeneration* the results of a randomized, double-blind, placebo-controlled
        60-subject Phase 1/2 study of Chrysalin in diabetic foot ulcers.  The
        article described statistically and clinically significant results achieved
        with
        twice-weekly topical application of Chrysalin, combined with good wound care
        and
        standard off-loading, in subjects with chronic diabetic foot
        ulcers.  The study was conducted by Chrysalis Biotechnology prior to
        its acquisition by OrthoLogic in 2004.
 
 We
        announced on February 16, 2007 findings of a *post hoc* subgroup analysis
        of data from the Phase 3 clinical trial showed that within the subset of
        157
        female osteopenic subjects, treatment
        with 10
μg Chrysalin demonstrated a statistically significant benefit compared to
        placebo in the primary efficacy endpoint of time to removal of
        immobilization.  Secondary endpoints including clinical assessment of
        fracture healing (pain or motion at the fracture site), time to radial
        cortical bridging and time to overall radiographic healing also showed a
        significant effect of Chrysalin treatment.  These data are part of a
*post hoc* subgroup analysis, and therefore provide only supporting -
        rather than pivotal - evidence of safety and efficacy.
 
 12
 ***Index***
  **Chrysalin
        Product Platform Status**
 
 Ÿ
              Demonstration
                  of statistically significant healing in the primary endpoint and
                  multiple
                  secondary endpoints within the osteopenic female cohort from the
                  Phase 3
                  distal radius fracture study.  This is a patient population
                  where bone tissue was physiologically
                  compromised.
 
 Ÿ
              Demonstration
                  of statistically significant healing with respect to wound closure
                  endpoints in the Phase 1/2 diabetic foot ulcer trial, an example
                  of
                  Chrysalin’s biologic activity in compromised dermal
                  tissue.
 
 Ÿ
              Laboratory
                  experiments tying Chrysalin to potential modulation of the health
                  of
                  endothelial tissue in blood
                  vessels.
 
 Ÿ
              Progress
                  has been shown in the mechanism of action studies that are ongoing
                  with
                  Dr. Darrell Carney, inventor of Chrysalin, at the University of
                  Texas,
                  Medical Branch, Galveston.
 
 We
        previously announced that we have no immediate plans to re-enter clinical
        trials
        for Chrysalin-based product candidates and a strategic shift in our development
        approach to our Chrysalin Product Platform.  We currently intend to
        pursue development partnering or licensing opportunities for our Chrysalin-based
        product candidates, a change from our previous development history of
        independently conducting human clinical trials necessary to advance our
        Chrysalin-based product candidates to market, and to continue efforts to
        explore
        the science behind and potential of Chrysalin.
 
 **AZX100**
 
 We
        strengthened and diversified our development pipeline during the first quarter
        of 2006 with the acquisition of the 24-amino acid synthetic peptide
        AZX100.  AZX100 relaxes smooth muscle, which modulates blood pressure
        and the function of blood vessels, airways, sphincters, the gastrointestinal
        tract and the genitourinary tract.  Sustained abnormal contraction of
        any of these muscles is called spasm.  Any disorders known to be
        associated with excessive constriction or inadequate dilation of smooth muscle
        represent potential applications for AZX100.
 
 AZX100
        may also inhibit the fibrotic phenotype of fibroblasts and smooth muscle
        cells
        in a mechanism similar to that which causes vasorelaxation.  Through
        phenotypic modulation of fibroblasts and smooth muscle cells, AZX100 may
        inhibit
        the scarring that results from wound healing and disease states in the dermis,
        blood vessels, lungs, liver and other organs.
 
 We
        are executing a development plan for this peptide, with the goal of filing
        an
        IND by year-end 2007.  We continue to make progress with respect to
        toxicology, pharmacology and GMP manufacturing efforts.  We have
        chosen to explore partnering opportunities for pulmonary and vascular
        indications, and will continue to pursue in-house development of other selected
        indications.
 
 13
 ***Index***
 
 **Results
        of Operations Comparing Three-Month Period Ended March 31, 2007 to the
        Corresponding Period in 2006.**
 
 *General
        and Administrative (“G&A”) Expenses:*  G&A expenses
        related to our ongoing development operations decreased by $1,114,000 from
        $2,093,000 in the first quarter of 2006 to $979,000 in the first quarter
        of
        2007.  Our administrative expenses during the first quarter of 2007
        were lower than the same period of 2006 primarily as a result of a decrease
        of
        non-cash stock compensation expense of $778,000 and general cost containment
        efforts.
 
 *Research
        and Development Expenses:*  Research and development expenses were
        $2,818,000 for the first three months in 2007 compared to $6,716,000 for
        the
        first three months in 2006.  Our research and development expenses
        decreased $3,898,000 in the first quarter of 2007 compared to the same period
        in
        2006 primarily due to a $3.6 million decline in clinical costs related to
        our
        fracture repair Phase 3 and Phase 2b clinical trials, which were substantially
        completed as of December 31, 2006.  Given the overlapping nature of
        our research efforts it is not possible to clearly separate research
        expenditures between Chrysalin and AZX100; however, currently we anticipate
        that
        the substantial majority of our research and development expenses in 2007
        will
        be directed towards AZX100 development efforts.
 
 *Interest
        and Other Income, Net*:  Interest and Other Income Net increased
        from $762,000 in the first quarter of 2006 to $884,000 in the first quarter
        of
        2007 due to the  increase in interest rates between the two
        periods.
 
 *Net
        Loss*:  We incurred a net loss in the first three months of 2007
        of $2.9 million compared to a net loss of $16.5 million in the first three
        months of 2006.  The $13.6 million decrease in the net loss in the
        three months ended March 31, 2007 compared to the same period in 2006, results
        primarily from $8.4 million in-process research and development costs in
        2006, a
        decrease of $900,000 in non-cash stock compensation expense and a $3.6 million
        decline in clinical costs related to our fracture repair Phase 3 and Phase
        2b
        clinical trials, which were substantially completed as of December 31,
        2006.
 
 **Liquidity
        and Capital Resources**
 
 We
        historically financed our operations through operating cash flows and the
        public
        and private sales of equity securities.  However, with the sale of our
        Bone Device Business in November 2003, we sold all of our revenue producing
        operations.  We received approximately $93.0 million in cash from the
        sale of our Bone Device Business.  On December 1, 2005, we received
        the additional $7.2 million, including interest, from the escrow balance
        related
        to the sale of the Bone Device Business.  On February 27, 2006, the
        Company entered into an agreement with Quintiles (see Note 15 in our Annual
        Report on Form 10-K for the year ended December 31, 2006), which provided
        an
        investment by Quintiles in the Company’s common stock,  of which
        $2,000,000 was received on February 27, 2006 and $1,500,000 was received
        on July
        3, 2006.  We also received net proceeds of $4,612,000 from the
        exercise of stock options during our development stage period. At March 31,
        2007, we had cash and cash equivalents of $19.9 million, short-term investments
        of $24.3 million and long-term investments of $23.1 million.
 
 On
        November 2, 2006, the Company announced that it has no immediate plans to
        re-enter clinical trials for Chrysalin-based product candidates and a strategic
        shift in its development approach to its Chrysalin Product
        Platform.  The Company currently intends to pursue development
        partnering or licensing opportunities for its Chrysalin-based product
        candidates, a change from its previous development history of independently
        conducting human clinical trials necessary to advance its Chrysalin-based
        product candidates to market.  We will continue expenditures related
        to ongoing regulatory requirements for the Phase 2b clinical trial for Chrysalin
        in fracture repair, and expenditures necessary to continue to explore the
        science behind and potential of Chrysalin. We will also continue research
        and
        development expenditures for further pre-clinical studies for
        AZX100.
 
 14
 ***Index***
  Our
        future research and development expenses may vary significantly from prior
        periods depending on the Company’s decisions on its future Chrysalin and AZX100
        development plans.
 
 We
        anticipate that our cash and short-term investments will be sufficient to
        meet
        our presently projected cash and working capital requirements for the next
        year.
        However, the timing and amounts of cash used will depend on many factors,
        including our ability to continue to control our expenditures related to
        our
        current research and development programs.  If we enter into new
        clinical trials or if we consider other opportunities in the market, our
        expense
        levels may change, which could require us to seek other sources of
        capital.  If additional funding is required, we would be required to
        seek new sources of funds, including raising capital through the sales of
        securities or licensing agreements.  These sources of funds may not be
        available or could only be available at terms that would have a material
        adverse
        impact on our existing stockholders’ interests.
 
 **Item
                  4.**
              **Controls
                  and Procedures**
 
 Disclosure
        Controls and Procedures
 
 Our
        principal executive officer and
        chief financial officer have reviewed and evaluated the effectiveness of
        our
        disclosure controls and procedures as of the end of the period covered by
        this
        Form 10-Q. Based on their evaluation, the principal executive officer and
        chief
        financial officer have each concluded that, as of the end of such period,
        our
        disclosure controls and procedures are effective and provide reasonable
        assurance that we record, process, summarize, and report information required
        to
        be disclosed in the reports we file under the Securities Exchange Act of
        1934
        within the time periods specified by the Securities and Exchange Commission’s
        rules and forms.
  Internal
        Control Over Financial Reporting
 
 There
        have not been any changes in our
        internal control over financial reporting during the fiscal quarter to which
        this report relates that have materially affected, or are reasonably likely
        to
        materially affect, our internal control over financial reporting.
  15
 ***Index***
  **Part
        II – Other Information**
 
 **Item
                  1A.**
              **Risk
                  Factors**
 
 Forward
        looking statements
 
 OrthoLogic
        may from time to time make
        written or oral forward-looking statements, including statements contained
        in
        our filings with the Securities and Exchange Commission and our reports to
        stockholders.  The safe harbor for forward-looking statements
        contained in the Private Securities Litigation Reform Act of 1995 protects
        companies from liability for their forward looking statements if they comply
        with the requirements of that Act.  This Quarterly Report on Form 10-Q
        should be read in conjunction with the Company’s Annual Report on Form 10-K for
        the year ended December 31, 2006, and contains forward-looking statements
        made
        pursuant to that safe harbor.  These forward-looking statements relate
        to future events or to our future financial performance, and involve known
        and
        unknown risks, uncertainties and other factors that may cause our actual
        results, levels of activity, performance, or achievements to be materially
        different from any future results, levels of activity, performance or
        achievements expressed or implied by these forward-looking
        statements.  In some cases, you can identify forward-looking
        statements by the use of words such as “may,” “could,” “expect,” “intend,”
“plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”
“continue,” or the negative of these terms or other comparable
        terminology.  You should not place undue reliance on forward-looking
        statements since they involve known and unknown risks, uncertainties and
        other
        factors which are, in some cases, beyond our control and which could materially
        affect actual results, levels of activity, performance or
        achievements.  Factors that may cause actual results to differ
        materially from current expectations include, but are not limited
        to:
 
 Ÿ
              unfavorable
                  results of our product candidate development
                  efforts;
 Ÿ
              unfavorable
                  results of our pre-clinical or clinical
                  testing;
 Ÿ
              delays
                  in obtaining, or failure to obtain FDA
                  approvals;
 Ÿ
              increased
                  regulation by the FDA and other
                  agencies;
 Ÿ
              the
                  introduction of competitive
                  products;
 Ÿ
              impairment
                  of license, patent or other proprietary
                  rights;
 Ÿ
              failure
                  to achieve market acceptance of our
                  products;
 Ÿ
              the
                  impact of present and future collaborative agreements;
                  and
 Ÿ
              failure
                  to successfully implement our drug development
                  strategy.
 
 If
        one or
        more of these or other risks or uncertainties materialize, or if our underlying
        assumptions prove to be incorrect, actual results may vary significantly
        from
        what we projected. Any forward-looking statement you read in this Quarterly
        Report on Form 10-Q reflects our current views with respect to future events
        and
        is subject to these and other risks, uncertainties and assumptions relating
        to
        our operations, results of operations, business strategy and
        liquidity.  We assume no obligation to publicly update or revise these
        forward-looking statements for any reason, or to update the reasons actual
        results could differ materially from those anticipated in these forward-looking
        statements, even if new information becomes available in the
        future.
 
 There
        are
        no material changes from the risk factors disclosed in our Annual Report
        on Form
        10-K for the year ended December 31, 2006.
 **Item
                      6.**
                  **Exhibits**
 
 See
        Exhibit List following this report
  16
 ***Index***
  **SIGNATURES**
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
  **ORTHOLOGIC
        CORP.**
 (Registrant)
 
 Signature
              
              Title
              
              Date/s/
                  John M. Holliman, III
              
              Executive
                  Chairman
              
              May
                  7, 2007John
                  M. Holliman, III
              
              (Principal
                  Executive Officer)/s/
                  Les M. Taeger
              
              Senior
                Vice-President and Chief
              
              May
                7, 2007Les
                  M. Taeger
              
              Financial
                  Officer(Principal
                  Financial and Accounting Officer)
 
 17
 ***Index***
 
 **OrthoLogic
        Corp.**
 **(the
        “Company”)**
 **Exhibit
        Index to Quarterly Report on Form 10-Q**
 **For
        the Quarterly Period Ended March 31, 2007**
  **No.**
              
              **Description**
              
              **Incorporated
                  by Reference To:**
              
              **Filed
                  Herewith**4.1
              
              Amended
                  and Restated Class C Warrant Agreement related to the Common Stock
                  and
                  Warrant Purchase Agreement by and between OrthoLogic Corp. and
                  PharmaBio
                  Development, Inc.
              
              
              
              X31.1
              
              Certification
                  of Principal Executive Officer Pursuant to Securities Exchange
                  Act Rule
                  13a-14
              
              
              
              X31.2
              
              Certification
                  of Chief Financial Officer Pursuant to Securities Exchange Act
                  Rule
                  13a-14
              
              
              
              X32
              
              Certification
                  of Principal Executive Officer and Chief Financial Officer Pursuant
                  to 18
                  U.S.C. Section 1350*
  *
        Furnished herewith
   18