UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended            June 30, 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)

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

  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

                      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 July 31, 1998

<PAGE>
                                ORTHOLOGIC CORP.



                                      INDEX

                                                                        Page No.
Part I     Financial Information

           Item 1.  Financial Statements

           Consolidated Balance Sheets
             June 30, 1998 and December 31, 1997----------------------------   1

           Consolidated Statements of Operations
             Three Months and Six Months ended June 30, 1998 and 1997-------   2

           Consolidated Statements of Cash Flows
             Six Months ended June 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 4. Submission of Matters to a Vote of Security Holders------  12
                                                                            
           Item 5. Other Information - Deadline for Shareholders Proposals--  12
                                                                            
           Item 6. Exhibits and Reports on Form 8-K-------------------------  13
<PAGE>
                                OrthoLogic Corp.
                           Consolidated Balance Sheets
                                 (in thousands)
                                    Unaudited



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

Cash and cash equivalents                           $     788      $   7,783
Short-term investments                                   --            4,569
Accounts receivable                                    25,114         34,424
Inventory                                              12,884         10,548
Prepaids and other current assets                       1,602          1,673
Deferred income taxes                                   2,592          2,596
                                                    ---------      ---------
   Total current assets                                42,980         61,593

Furniture, rental fleet and equipment                  20,843         16,455
Accumulated depreciation                               (7,088)        (4,934)
                                                    ---------      ---------
  Furniture and equipment, net                         13,755         11,521

Intangibles, net                                       30,965         29,898
Deposits and other assets                               1,138             91
                                                    ---------      ---------

   Total Assets                                     $  88,838      $ 103,103
                                                    =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities

Accounts payable                                    $   3,581      $   2,896
Loan payable - current portion                          2,003            500
Obligations under co-promotion agreement                2,000          2,000
Accrued liabilities                                     9,129         11,340
                                                    ---------      ---------
   Total current liabilities                           16,713         16,736
                                                    ---------      ---------

Deferred rent and capital lease obligation               --              106
Loan payable - long term portion                          238            524
Obligations under co-promotion agreement                 --            1,000
                                                    ---------      ---------
   Total liabilities                                   16,951         18,366
                                                    ---------      ---------


Stockholders' Equity

Common stock                                               13             13
Additional paid-in capital                            119,653        119,413
Accumulated deficit                                   (47,779)       (34,689)
                                                    ---------      ---------
   Total stockholders' equity                          71,887         84,737
                                                    ---------      ---------

     Total Liabilities and Stockholders' Equity     $  88,838      $ 103,103
                                                    =========      =========

See notes to consolidated financial statements.

                                                                          Page 1
<PAGE>
                                OrthoLogic Corp.
                      Consolidated Statement of Operations
                      (in thousands, except per share data)
                                    Unaudited
<TABLE>
<CAPTION>
                                              Three months ended June 30,   Six months ended June 30,
                                              ---------------------------   -------------------------
                                                   1998         1997          1998         1997
                                                   ----         ----          ----         ----

<S>                                             <C>           <C>           <C>           <C>     
REVENUES                                        $ 17,501      $ 18,317      $ 36,610      $ 35,619

COST OF REVENUES                                   4,203         4,578         8,619         9,324
                                                ----------------------      ----------------------

GROSS PROFIT                                      13,298        13,739        27,991        26,295

OPERATING EXPENSES
     Selling, general and administrative          16,694        16,311        40,515        29,200
     Research and development                        545           613         1,043         1,189
     Restructuring and other charges                --            --            (399)         --
                                                ----------------------      ----------------------

          Total Operating Expenses                17,239        16,924        41,159        30,389
                                                ----------------------      ----------------------

OPERATING LOSS                                    (3,941)       (3,185)      (13,168)       (4,094)

OTHER INCOME
     Grant revenue                                  --              25          --              99
     Interest income                                  40           389           137           951
                                                ----------------------      ----------------------

     Total Other Income                               40           414           137         1,050
                                                ----------------------      ----------------------

LOSS BEFORE TAXES                                 (3,901)       (2,771)      (13,031)       (3,044)

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

NET LOSS                                          (3,901)       (2,771)      (13,031)       (3,044)
                                                ----------------------      ----------------------

BASIC EARNINGS PER SHARE
------------------------

NET LOSS PER COMMON WEIGHTED SHARES
OUTSTANDING                                        (0.15)        (0.11)        (0.52)        (0.12)
                                                ----------------------      ----------------------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING                                       25,293        25,096        25,276        25,066
                                                ----------------------      ----------------------

DILUTED EARNINGS PER SHARE
--------------------------

NET LOSS PER COMMON AND DILUTED SHARES             (0.15)        (0.11)        (0.52)        (0.12)
                                                ----------------------      ----------------------

WEIGHTED SHARES OUTSTANDING                       25,293        25,096        25,276        25,066
                                                ----------------------      ----------------------
</TABLE>

See notes to consolidated financial
statements
                                                                          Page 2
<PAGE>
                                OrthoLogic Corp.
                      Consolidated Statements of Cash Flows
                                 (in thousands)
                                    Unaudited
<TABLE>
<CAPTION>
                                                                Six Months Ending June 30,
                                                                --------------------------
                                                                    1998          1997
                                                                    ----          ----
<S>                                                              <C>           <C>      
OPERATING ACTIVITIES
    Net Loss                                                     $(13,031)     $ (3,044)
        Non cash items:
        Depreciation and amortization                               3,913         3,078

        Other                                                        --             (15)
        Provision for bad debt                                      7,892            79
 
        Net change in other operating items:
        Accounts receivable                                          (548)          445
        Inventory                                                  (2,346)         (610)
        Prepaids and other current assets                              75          (657)
        Deposits and other assets                                    (297)            2
        Accounts payable                                              685          (496)
        Accrued liabilities                                        (2,201)         (423)
                                                                 --------      -------- 
                  Cash flows used in operating activities          (5,858)       (1,641)
                                                                 --------      -------- 

INVESTING ACTIVITIES
            Purchase of fixed assets                               (5,167)       (2,797)
            Cash paid for acquisitions, net of cash acquired          (81)      (20,907)
            Investment in Chrysalis                                  (750)         --
            Sales (Purchases) of short term investments             4,568        22,373
            Collection of note receivable                            --             200
            Intangible from dealer transactions                      --            (486)
                                                                 --------      -------- 
                  Cash flows used in investing activities          (1,430)       (1,617)
                                                                 --------      -------- 

FINANCING ACTIVITIES
            Payments on capital leases                               (402)          (32)
            Payments on loan payable                                1,504          (295)
            Payments under co-promotion agreement                  (1,000)       (1,011)
            Proceeds from issuance of common stock                   --            --
            Foreign exchange                                          (49)         --
            Net proceeds from stock option exercises                  240           148
                                                                 --------      -------- 
                  Cash flows used in financing activities             293        (1,190)
                                                                 --------      -------- 

NET DECREASE IN CASH AND CASH EQUIVALENTS                          (6,995)       (4,448)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      7,783        13,494
                                                                 --------      -------- 
CASH AND CASH EQUIVALENTS, END OF PERIOD                         $    788      $  9,046
                                                                 ========      ========

</TABLE>

See notes to consolidated financial statements.
                                                                          Page 3
<PAGE>
                                ORTHOLOGIC CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

     The  consolidated  balance sheet as of June 30, 1998, and the  consolidated
     statements of  operations  and cash flows for the six months ended June 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 six months  ended June 30, 1997 would
     have been $37.5 million net revenues,  ($3.4 million) net earnings  (loss),
     and (.14) net earnings  (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
     "Agreement') with Sanofi Pharmaceuticals,  Inc. ("Sanofi") on June 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 agreement
     ends on December 31, 2002. Upon the expiration of the initial term,  Sanofi
     may terminate  the  agreement,  extend the agreement for an additional  one
     year  period,  or enter into a revised  agreement  with the  Company.  Upon
     termination of the  Agreement,

                                                                          Page 4
<PAGE>
     Sanofi  must  pay  the  Company  an  amount  equal  to  50%  of  the  gross
     compensation  paid  to the  Company,  pursuant  to the  Agreement,  for the
     immediately preceding year.

     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 six months of 1998,  the Company paid
     $2.0 million of this amount.  The Company has recorded the  remaining  $2.0
     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  has been  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.
     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.

     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 

                                                                          Page 5
<PAGE>
     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.

     At  June  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.

                                                                          Page 6
<PAGE>
6.   New Accounting Pronouncements
     -----------------------------

     Effective  January 1, 1998,  the Company  adopted  Statement  of  Financial
     Accounting Standard No. 130 "Reporting  Comprehensive  Income." For the six
     month period and the quarter ended June 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.  At June 30, 1998, the outstanding  balance was $1.5
     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.

9.   Label Change for the OL 1000
     ----------------------------

     The  Company  has  received  approval  for  its PMA  (Pre-Market  Approval)
     Supplement  from the FDA to change  the  label for the OL 1000 Bone  Growth
     Stimulator. The revised label states that the OL 1000 is safe and effective
     for use in treating non-union fractures. A fracture is considered non-union
     when the fracture site shows no visibly  progressive signs of healing.  The
     former reference on the label to the nine-month  post-injury time frame has
     been removed. OL 1000s may now be prescribed when the physician  determines
     that a non-union exists.

10.  Equity Placement
     ----------------

     Subsequent  to June  30,  1998,  it was  announced  that  the  Company  has
     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

                                                                          Page 7
<PAGE>
     covenants  that protect  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 agreed
     to file a registration statement covering the underlying Common Stock.

     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.

                                                                          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

OrthoLogic   reported   revenues  of  $17.5  million  for  the  second  quarter,
representing  a 4.4%  decrease  from  revenues  of $18.3  million for the second
quarter of 1997.  OrthoLogic's  revenues  increased  2.8% to $36.6  million from
$35.6 million for the six months ended June 30, 1998.

Gross Profit

Gross profit increased from $26.3 million for the six months ended June 30, 1997
to $28.0  million for the six months ended June 30,  1998.  Gross  profit,  as a
percentage  of revenue,  was 76% for the six months ended June 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 six months ended
June 30, 1998 were $41.2 million, up $10.7 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.

                                                                          Page 9
<PAGE>
Research and Development

Research and  Development  (R&D)  expenses  were $1.0 million for the six months
ended June 30, 1998 compared to $1.2 million for the comparable 1997 period. The
decrease was 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 $137,000 in the six months ending June 30, 1998 from $1
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 $137 thousand in 1998, from $951 thousand in 1997.

Liquidity and Capital Resources

On June 30, 1998, the Company had cash and  investments of $790,000  compared to
$12.3  million  (including  short-term  investments)  at December 31, 1997.  The
decrease in cash and investments is primarily the result of a $1 million payment
under a co-promotion agreement, a $2.3 million increase in inventory, and a $2.2
million  increase in fixed  assets (net of  depreciation),  mostly for the Ortho
Rehab rental fleet  business.  In addition,  in January,  OrthoLogic  acquired a
$750,000 equity stake in pioneering biotech firm, Chrysalis BioTechnology,  Inc.
in Galveston,  Texas.  Cash used for operations  amounted to $5.8 million during
the six 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.  Cash  increased  by
accessing  a line of credit  for $1.5  million.  The line of credit was paid off
subsequent to the period end.

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, are subject to
known and unknown  risks,  uncertainties  and other  factors which 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  in 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  other filings with
the Commission; and (v) 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 10 of the Notes to Consolidated Financial Statements above.

Item 4.    Submission of Matters to Vote of Security Holders

           The annual meeting of the stockholders of the Company was held on May
           15, 1998 to vote on: the election of Class I Directors  (Proposal 1);
           an amendment to the Company's  1997 Stock Option Plan to increase the
           number of shares of common stock  available  for grant  thereunder by
           375,000  shares  (Proposal  2); and the  ratification  of  Deloitte &
           Touche LLP as  independent  accountants  for the fiscal  year  ending
           December 31, 1998 (Proposal 3). The results are as follows:

                                                                         BROKER
                                                                          NON-
                                FOR         AGAINST      ABSTAINED       VOTES

Proposal 1
  Fredric J. Feldman        23,649,127      309,343          0             0
  Thomas R. Trotter         23,658,974      299,496          0             0

Proposal 2                   22,59,510    1,233,266      125,694           0

Proposal 3                  23,825,291       52,465       80,714           0


           A more  detailed  discussion  of each  proposal  is  included  in the
           Company's   Proxy   Statement   for  the  1998   Annual   Meeting  of
           Stockholders.

Item 5.    Other Information

           Deadline for Shareholders Proposals

           Pursuant to Rule 14a05(e) under the Securities  Exchange Act of 1934,
           as amended, effective June 29, 1998:

           (1)  The deadline for submitting  shareholder proposals for inclusion
                in the Company's proxy statement and for proxy for the Company's
                1999 annual

                                                                         Page 12
<PAGE>
                meeting  of  shareholders pursuant  to Rule 14a-8 is December 8,
                1998.

           (2)  The date after which notice of a shareholder  proposal submitted
                outside the  processes of Rule 14a-8 is  considered  untimely is
                February 23, 1999.

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
                    agreed to prepare and file 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 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,  OrthoLogic  Corp.  issued a Press Release
                    regarding  the  previously  mentioned  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 13
<PAGE>
                                ORTHOLOGIC CORP.
                 EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

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

  27           Financial Data Schedule


                                                                         Page 14
<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                  August 7, 1998
-------------------------       (Principal Executive Officer)
Thomas R. Trotter               



/s/ Terry D. Meier              Sr. Vice-President and Chief Financial Officer         August 7, 1998
-------------------------       (Principal Financial and Accounting Officer)
Terry D. Meier                  
</TABLE>

                                                                         Page 15