<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>e-7298.txt
<DESCRIPTION>QUARTERLY REPORT FOR THE QTR ENDED 06/30/2001
<TEXT>
                                  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, 2001

                                       or

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

             For the transition period from __________ to __________

                         Commission File Number: 0-21214

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

               Delaware                                          86-0585310
    (State of other jurisdiction of                            (IRS Employer
     incorporation or organization)                          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

                      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.

        31,463,664 shares of common stock outstanding as of July 31, 2001
<PAGE>
                                ORTHOLOGIC CORP.
                                      INDEX

                                                                        Page No.
Part I    Financial Information

          Item 1. Financial Statements

                  Condensed Consolidated Balance Sheets
                  June 30, 2001 and December 31, 2000                          3

                  Condensed Consolidated Statements of Operations
                  and of Comprehensive Income Three months and
                  Six months ended June 30, 2001 and 2000                      4

                  Condensed Consolidated Statements of Cash Flows
                  Six months ended June 30, 2001 and 2000                      5

                  Notes to Condensed Consolidated Financial Statements         6

          Item 2. Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                         10

          Item 3. Quantitative and Qualitative Disclosure about
                  Market Risk                                                 12

Part II   Other Information

          Item 1. Legal Proceedings                                           14

          Item 4. Submission of Matters to Vote of Security Holders           14

          Item 6. Exhibits and Reports on Form 8-K                            14

                                        2
<PAGE>
PART I - Financial Information
Item 1.  Financial Statements

                                OrthoLogic Corp.
                      Condensed Consolidated Balance Sheet
                                 (in thousands)

                                                       June 30,     December 31,
                                                         2001          2000
                                                       ---------     ---------
ASSET                                                 (Unaudited)

Cash and cash equivalents                              $  11,610     $   6,753
Short term investments                                     3,630         2,492
Accounts receivable, net                                  19,119        29,951
Inventory, net                                             2,530        10,007
Prepaids and other current assets                            994         1,019
Net assets of CPM business held for sale                  12,000            --
Deferred income tax                                        2,631         2,631
                                                       ---------     ---------
  Total current assets                                    52,514        52,853

Furniture, rental fleet and equipment                      8,162        28,891
Accumulated depreciation                                  (6,070)      (17,797)
                                                       ---------     ---------
  Furniture and equipment, net                             2,092        11,094

Investments                                                  750           750
Deposits and other assets                                    191           338
                                                       ---------     ---------
  Total assets                                         $  55,547     $  65,035
                                                       =========     =========

LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities

Accounts payable                                       $   2,973     $   3,030
Accrued liabilities                                       11,746         6,767
                                                       ---------     ---------
  Total current liabilities                               14,719         9,797

Deferred rent and capital lease obligations                  141            88
                                                       ---------     ---------
  Total liabilities                                       14,860         9,885
                                                       ---------     ---------

SERIES B CONVERTIBLE PREFERRED STOCK                         600         3,240

STOCKHOLDERS' EQUITY

Common stock                                                  16            15
Additional paid-in capital                               135,067       132,332
Common stock to be used for legal settlement               2,969         2,969
Accumulated deficit                                      (97,965)      (83,183)
Other comprehensive loss                                      --          (223)
                                                       ---------     ---------
  Total stockholders' equity                              40,087        51,910
                                                       ---------     ---------

  Total liabilities and stockholders' equity           $  55,547     $  65,035
                                                       =========     =========

See notes to Condensed Consolidated Financial Statements

                                        3
<PAGE>
                                OrthoLogic Corp.
   Condensed Consolidated Statement of Operations and of Comprehensive Income
                      (in thousands, except per share data)
                                    Unaudited

<TABLE>
<CAPTION>
                                              Three months ended June 30    Six months ended June 30,
                                              --------------------------    -------------------------
                                                   2001        2000             2001        2000
                                                 --------    --------         --------    --------
<S>                                              <C>         <C>              <C>         <C>
Revenues                                           22,094      22,540           43,776      45,031
Cost of Revenues                                    3,899       4,295            8,631       9,104
                                                 --------    --------         --------    --------

Gross Profit                                       18,195      18,245           35,145      35,927

Operating expenses
  Selling, general and administrative              17,087      17,188           33,190      33,503
  CPM divestiture and non-recurring charges        14,327          --           14,327          --
  Research and development                          1,957         548            2,661       1,214
                                                 --------    --------         --------    --------
      Total operating expenses                     33,371      17,736           50,178      34,717

Operating income (loss)                           (15,176)        509          (15,033)      1,210

Other income                                          130         101              259         186
                                                 --------    --------         --------    --------
Income (loss) before income taxes                 (15,046)        610          (14,774)      1,396

Provision for income taxes                            (60)         61                8         151
                                                 --------    --------         --------    --------
Net Income (loss)                                $(14,986)   $    549         $(14,782)   $  1,245
                                                 ========    ========         ========    ========
BASIC EARNINGS PER SHARE
Net income (loss) per common share               $  (0.48)   $   0.02         $  (0.47)   $   0.04
                                                 --------    --------         --------    --------
Weighted average number of
  common share outstanding                         31,444      29,962           31,293      29,511
                                                 --------    --------         --------    --------
DILUTED EARNINGS PER SHARE
Net income (loss) per common
  and equivalent share                           $  (0.48)   $   0.02         $  (0.47)   $   0.04
                                                 --------    --------         --------    --------

Weighted  shares outstanding                       31,444      31,057           31,293      30,849
                                                 --------    --------         --------    --------

Consolidated Statement of Comprehensive Income

Net income applicable to common shareholders     $(14,986)   $    549         $(14,782)   $  1,245
                                                 --------    --------         --------    --------
Foreign translation adjustment                        236         (61)             223         (74)
                                                 --------    --------         --------    --------
Comprehensive income (loss) applicable
  to common shareholders                         $(14,750)   $    488         $(14,559)   $  1,171
                                                 ========    ========         ========    ========
</TABLE>

See notes to Condensed Consolidated Financial Statements.

                                        4
<PAGE>
                                OrthoLogic Corp.
                 Condensed Consolidated Statements of Cash Flows
                                 (in thousands)
                                    Unaudited

                                                        Six months ended June 30
                                                        ------------------------
                                                            2001         2000
                                                          --------     --------
OPERATING ACTIVITIES

Net income (loss)                                         $(14,782)    $  1,245
Non-cash items:
Depreciation and amortization                                  586        2,741
Loss on sale of assets and non-recurring charges            14,327            0

Net change on other operating items:
Accounts receivable                                          2,970         (418)
Inventory                                                    1,195         (188)
Prepaids and other current assets                             (385)        (247)
Deposits and other assets                                      147          104
Accounts payable                                             1,355           75
Accrued liabilities                                            822         (327)
                                                          --------     --------
Cash flows provided by (used in) operating activities        6,235        2,985
                                                          --------     --------

INVESTING ACTIVITIES

Sale (Purchase) of fixed assets, net                          (612)      (1,103)
Sales (Purchases) of short-term investments                 (1,138)         250
                                                          --------     --------
Cash flows used in investing activities                     (1,750)        (853)
                                                          --------     --------

FINANCING ACTIVITIES

Payments on capital leases                                      53          (24)
Foreign exchange                                               223          (74)
Net proceeds from stock option exercises                        96          185
                                                          --------     --------
Cash flows provided by financing activities                    372           87
                                                          --------     --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         4,857        2,219


CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               6,753        6,023
                                                          --------     --------
CASH AND CASH EQUIVALENTS, END OF PERIOD                  $ 11,610     $  8,242
                                                          ========     ========
Supplemental disclosure of cash flow information
  Cash paid during the period for interest                $     47     $     77
  Cash paid during the period for income taxes                  --            1

See notes to Condensed Consolidated Financial Statements

                                        5
<PAGE>
                                ORTHOLOGIC CORP.
         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.   FINANCIAL STATEMENT PRESENTATION

     The Condensed Consolidated Balance Sheet as of June 30, 2001 and the
Condensed Consolidated Statements of Operations and Comprehensive Income for the
six months ended June 30, 2001 and 2000 and the Condensed Consolidated
Statements of Cash Flows for the six months ended June 30, 2001 and 2000 are
unaudited. However, in the opinion of management, the unaudited interim
financial statements include all adjustments necessary for the fair presentation
of the Company's financial position, results of operations, and cash flows,
including adjustments to write-down the carrying value of net assets of the CPM
business held for sale to the fair value less costs to sell and accrue for costs
of exiting the CPM business (See Note 3). The results of operations for the
interim periods are not indicative of the results to be expected for the
complete fiscal year primarily because the Company exited the CPM business in
July 2001, and the CPM business accounted for approximately two-thirds of the
Company's revenues . The Balance Sheet as of December 31, 2000 is derived from
the Company's audited financial statements included in the 2000 Annual Report on
Form 10-K. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 2000 Annual
Report on Form 10-K.

     The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. A significant estimate
in the accompanying financial statements is the allowance for doubtful accounts
and sales discounts and adjustments, which are based primarily on trends in
historical collection statistics, consideration of current events, payer mix and
other considerations. The Company derives a significant amount of its revenues
in the United States from third-party health insurance plans, including
Medicare. Amounts paid under these plans are generally based on fixed or
allowable reimbursement rates. In the opinion of management, adequate allowances
have been provided for doubtful accounts and contractual adjustments. However,
these estimates are subject to adjustments in the near term, which could be
material. Any differences between estimated reimbursement and final
determinations are reflected in the year finalized.

2.   CO-PROMOTION AGREEMENT FOR HYALGAN

     The Company entered into an exclusive Co-Promotion agreement (the
"Agreement") with Sanofi Pharmaceuticals Inc. ("Sanofi") at a cost of $4.0
million 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 Company's sales force began to promote Hyalgan in the third quarter of
1997. Fee revenue of $9.3, $8.3, and $8.7 million was recognized during 2000,
1999, and 1998 respectively. In the fourth quarter of 2000, the Company and
Sanofi mutually agreed to terminate this Agreement. The Company has returned the
rights to sell Hyalgan back to Sanofi. The Company received $4 million cash
during the fourth quarter of 2000 and the first quarter of 2001 for the return
of the rights and successful transition of the business back to Sanofi, and will
receive continuing royalties for the next two years. Of the $4 million cash
received, $1 million was received in the quarter ended March 31, 2001. Royalty
revenues for Hyalgan were $578,000 in the quarter ended June 30, 2001 compared
to Hyalgan sales revenues of $2.3 million in the same period in 2000.

                                        6
<PAGE>
3.   LOSS OF CPM BUSINESS AND OTHER NON-RECURRING CHARGES

     On July 13, 2001, the Company announced the sale of its Continuous Passive
Motion ("CPM") business. In early July 2001, the company received $12.0 million
in cash, with the purchaser assuming approximately $2.0 million in liabilities
in connection with the sale of certain CPM related assets that had been recorded
in the Company's financial statements at a carrying value of approximately $20.7
million. The Company recorded a $6.9 million charge in the accompanying 2001
second quarter financial statements to write down the sold CPM assets to their
fair value, less direct costs of selling the assets, with such costs totalling
approximately $757,000. The Company may receive up to an additional $2.5 million
of cash if certain objectives are achieved by the purchaser of the business.
Because there is no reasonable basis for estimating the degree of certainty that
these objectives will be reached, the additional contingent consideration has
not and will not be recorded in the accompanying financial statements until the
cash is actually received by the Company.

     The Company retained all the billed account receivable related to the CPM
business, with a net carrying value of approximately $10.8 million. (Net of a
$5.2 million allowance for doubtful accounts). The collection staff and
supervisor previously responsible for the collection of these receivables are
part of the employee team hired by the purchaser of the CPM business. Company
management believes that there will initially be some negative effect to the
efficiency of the collection team as the Company hires contractors to replace
the previous collection personnel. As a result, a charge of $2.8 million has
been included in the "CPM divestiture and non-recurring charges" total in the
accompanying 2001 Statement of Operations. Actual collection results could
differ materially from these estimates. Any difference between estimated
reimbursement and final determinations will be reflected in the period
finalized.

     In connection with exiting the CPM business, in June 2001, the Company
notified approximately 331 of the Company's 505 employees that their positions
would be eliminated. The accompanying Statement of Operations includes a charge
of approximately $3.3 million included in "CPM divestiture and non-recurring
charges" for severance and stay-on bonuses that will be paid to individuals
during the next year. The Company also recorded additional exit charges of
approximately $1.4 million for various costs relating to the CPM divestiture.

A summary of the severance and other reserve balances at June 30, 2001 are as
follows:

                                    Total      Applied       Cash       Reserve
                                   Charges    to Assets      Paid      @ 6/30/01
                                   -------    ---------     ------     ---------
Severance and stay-on bonus         $3,300          0       $ (177)      $3,123

Other exit costs                     1,387     $ (245)           0        1,142
                                    ------     ------       ------       ------
Total non-recurring charges         $4,687     $ (245)      $ (177)      $4,265
                                    ======     ======       ======       ======

                                        7
<PAGE>
     As noted above, the CPM business and related assets were sold in early July
2001. Subsequent to the sale, the Company is no longer in the CPM business. The
revenues and cost of revenues attributable to the CPM business were:

                                               Three months ended June 30,
                                               ---------------------------
                                                  2001            2000
                                                 -------         -------
     Revenues                                    $13,963         $15,059
     Cost of revenues                              2,497           3,352
                                                 -------         -------
     Gross profit                                $11,466         $11,707
                                                 =======         =======

                                                Six months ended June 30,
                                                -------------------------
                                                 2001             2000
                                                -------          -------
     Revenues                                   $28,015          $30,674
     Cost of revenues                             5,943            7,147
                                                -------          -------
     Gross profit                               $22,072          $23,527
                                                =======          =======

     Most operating expenses were not directly allocated between the Company's
various lines of business. Cash requirements for the severance and exit costs
are currently estimated to be funded from the Company's current cash balances.

4.   LICENSING AGREEMENT FOR CHRYSALIN

     The Company announced in January 1998 that it had acquired a minority
interest in a Biotech firm, Chrysalis Bio Technology, Inc. ("Chrysalis") for
$750,000. As part of the transaction, the Company was awarded a nine-month
worldwide exclusive option to license the orthopedic applications of Chrysalin,
a patented 23-amino acid peptide that has shown promise in accelerating the
healing process and has completed an extensive pre-clinical safety and efficacy
profile of the product. In pre-clinical animal studies, Chrysalin was 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 options to license Chrysalin contingent upon
regulatory approvals, successful pre-clinical trials, and certain milestone
payments to Chrysalis by the Company. As part of the equity investment,
OrthoLogic acquired options to license Chrysalin for orthopedic applications. An
additional fee of $750,000 for the initial license was expensed in the third
quarter of 1998 and the Agreement was extended to January 1999. In January 1999,
the Company exercised its option to license the U.S. development, marketing and
distribution rights of Chrysalin, for fracture indications. As part of the
license agreement, and in conjunction to the U.S. Food and Drug Administration
(the "FDA") clearance to begin human clinical trials, OrthoLogic made a $500,000
milestone payment to Chrysalis in the fourth quarter of 1999. In January 2000,
the Company began enrolling patients in the combined Phase I/II clinical trial
for Chrysalin. The Company is preparing to file an application for a Phase III
human clinical trial. In July 2000, the Company paid $2 million to Chrysalis and
announced it was expanding its license agreement to include all Chrysalin
orthopedic indications worldwide. In July 2001, the Company paid $1 million to
Chrysalis to extend its worldwide license for Chrysalin to include the rights
for orthopedic "soft tissue" indications - including cartilage, tendon, and
ligament repair. In addition, the agreement calls for the Company to pay certain
other milestone payments and royalty fees, bases upon products developed and
achievement of commercial services. Except for the $750,000 minority equity
interest, all payments made to Chrysalis have been expensed as research and
development expenses.

                                        8
<PAGE>
5.   Litigation

     During 1996, certain class action 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-6 promulgated thereunder and to other
defendants Section 20(a) of the Exchange Act.

     Plaintiffs in these actions alleged generally that information concerning
the May 31, 1996 letter received by the Company from the FDA regarding the
Company's OrthoLogic 1000 Bone Growth Stimulator, and the matters set forth
therein, were material and undisclosed, leading to an artificially inflated
stock price Plaintiffs further allege that the Company's non-disclosure of the
FDA correspondence and of the alleged practices referenced in that
correspondence operated as a fraud against plaintiffs, in that the Company
allegedly made untrue statements of material facts or omitted to state material
facts in order to make the statement not misleading. Plaintiffs further alleged
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 sought
class action status, unspecified compensatory damages, fees and costs.
Plaintiffs also sought extraordinary, equitable and/or injunctive relief as
permitted by law. The actions were consolidated for all purposes in the United
States District Court for the District of Arizona. On March 31,1999, the judge
in the consolidated case before the United States District Court granted the
Company Motion to Dismiss and entered an order dismissing all claims in the
suite against the Company and two individual officers/directors. The Judge
allowed certain narrow claims based on insider trading theories to proceed
against certain individual defendants. On December 21, 1999, the District Court
granted plaintiffs' motion for class certification to include purchasers of
common stock between June 4 through June 18, 1996, inclusive.

     On or about June 20, 1996, a lawsuit entitled Norman Cooper, et. al. v.
OrthoLogic, Corp., et. al, and Case No. CV 96-10799 was filed in the Superior
Court, Maricopa County, and Arizona. The plaintiffs allege violations of Arizona
Revised Statutes Sections 44-1991 (state securities fraud) and 44-1522 (consumer
fraud) and common-law fraud based upon factual allegations substantially similar
to those alleged in the federal court class action complaints. Plaintiffs'
sought class action status, unspecified compensatory and punitive damages, fees
and costs. Plaintiffs also sought injunction and/ or equitable relief. The
Company filed a Motion to Dismiss the Complaint in the Arizona State Court in
May 1999. The Court denied the motion in July 1999, and granted the plaintiffs'
motion for the class certification on November 24, 1999.

     In October 2000, the Company announced that it had entered a Memorandum of
Understanding regarding settlement of the remaining class action claims and the
Norman Cooper lawsuits. The settlement consists of $1 million in cash and one
million shares of newly issued OrthoLogic Common Stock valued at $2,969,00.

     A significant portion of the cash payment was funded from its directors'
and officers' liability insurance policy. The Company recorded a $3.6 million
charge, including legal expense for settlement of the litigation. The settlement
is subject to approval by the lead plaintiffs and defendants; the preparation,
exertion and filing of the formal Stipulation of Settlement; notice to the
settlement members; and final approval of the settlement by the courts at a
hearing.

     Management believes the settlement is in the best interests of the Company
and its shareholders as it frees the Company from the cost and significant
distraction of the ongoing litigation. The agreement to the Memorandum of
Understanding does not constitute, and should not be construed as, an admission
that the defendants have any liability or acted wrongfully in any way with
respect to the plaintiffs or any other person.

                                        9
<PAGE>
     At June 30, 2001, in addition to the matters disclosed above, the Company
is involved in various other legal proceedings that arose in the ordinary course
of business. The costs associated with defending the above allegations and the
potential outcome cannot be determined at this time and accordingly, no estimate
for such costs have been included in the accompanying Financial Statements. In
management's opinion, the ultimate resolution of the above legal proceedings
will not have a material effect on the financial position of the Company.

6.   LINE OF CREDIT

     Prior to the CPM divestiture, the Company had available a $10.0 million
account receivable revolving line of credit with a lending institution. The
Company is currently negotiating with the bank regarding a revised lower credit
facility amount. The Company may borrow up to 75% of the eligible account
receivable, as defined in the agreement. The interest rate is at prime rate.
Interest accruing on the outstanding balance and a monthly administration fee is
due in arrears on the first day of each month. The line of credit expires
February 28, 2003. There are certain financial covenants and reporting
requirements associated with the loan. Included in the financial covenants are
(1) tangible net worth of not less than $43 million, (2) a quick ratio of not
less than 2.0 to 1.0, (3) a debt to tangible net worth ratio of not less than
0.50 to 1.0, and (4) capital expenditures will not exceed more than $7.0 million
during any fiscal year. The Company has not utilized this line of credit.

7.   SERIES B CONVERTIBLE PREFERRED STOCK

     As of June 30, 2001 14,400 shares of series B Convertible Preferred Stock
had been converted into 5,746,584 Shares of Common Stock.

Item 2. Management's Discussion 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, 2000.

                                       10
<PAGE>
RESULTS OF OPERATIONS

     For the quarter ended June 30, 2001, the Company reported a net loss of $15
million or $0.48 cents per diluted share, on sales of $22.1 million compared
with a net profit of $549,000, or $0.02 cents per diluted share, on sales of
$22.5, million for the second quarter of 2000. Excluding the one-time costs of
$14.3 million associated with the sale of OrthoLogic's CPM business, and the
$1.0 million charge for the license extension for Chrysalin, the Company would
have earned $341,000, or $0.01 per diluted share, for the second quarter of
2001.

     For the six months ended June 30, 2001, the Company reported a net loss of
$14.8 million, or $0.47 per diluted share, on sales of $43.8 million compared
with the net profit of $1.2 million, or $0.04 per diluted share, on sales of
$45.0 million for the six months of 2000. Excluding the one-time costs
associated with the sale of the CPM business and the charge for the license
extension for Chrysalin, the Company would have earned $545,000, or $0.02 per
diluted share, for the first six months of 2001.

REVENUES

     The Company reported revenues of $22.1 million for the second quarter of
2001 representing a 1.8% decrease from revenues of $22.5 million for the same
quarter of 2000. The Company's revenues decrease 2.6% to $43.8 million for the
six months ended June 30, 2001 from $45 million for the six months ended June
30, 2000. The decline in sales was primarily attributable to the loss of sales
due to the termination of Company's distribution of Hyalgan and a decline in
revenue from the sale of the Continuous Passive Motion ("CPM") products. Revenue
from the CPM products declined 6.6% from $15.0 million for the three months
ended June 30, 2000 to $14.0 million for the same period in 2001. Revenue for
the CPM products declined 8.8% from $30.7 million for the six months ended June
30, 2000 to $28.0 million for the same period in 2001. This decrease was off set
by increased sales of the fracture healing and spine products which increased
47% from $5.1 million for the three months ended June 30, 2000 to $7.5 million
for the same period in 2001. The fracture healing and spine product sales
increased 41% from $10.3 million for the six months ended June 30, 2000 to $14.5
million for the same period in 2001.

     As noted above, the CPM business and related assets were sold in early July
2001. Subsequent to the sale, the Company is no longer in the CPM business. The
revenues and cost of revenues attributable to the CPM business were:

                                               Three months ended June 30,
                                               ---------------------------
                                                  2001            2000
                                                 -------         -------
     Revenues                                    $13,963         $15,059
     Cost of revenues                              2,497           3,352
                                                 -------         -------
     Gross profit                                $11,466         $11,707
                                                 =======         =======

                                                Six months ended June 30,
                                                -------------------------
                                                 2001             2000
                                                -------          -------
     Revenues                                   $28,015          $30,674
     Cost of revenues                             5,943            7,147
                                                -------          -------
     Gross profit                               $22,072          $23,527
                                                =======          =======

GROSS PROFIT

     Gross profits decreased from $18.2 million for the three months ended June
30, 2000 to $18.1 million for the three months ended June 30, 2001, a 0.5%
decrease. Gross profits, as a percentage of revenues was 82.3% for the quarter
compared to 80.9% for the same period last year. For the six months ended June
30, 2001, gross profits was $35.1 million as compared to $35.9 million for the
six months ended June 30, 2000. Gross profits as a percentage of revenues were
79.8% for the six-month period ended June 30, 2000 and increased to 80.3% for
the same period in 2001. Gross profits improved due to increased sales of the
Company's higher margin products: the OL-1000 and SpinaLogic.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative ("SG&A") expenses for the three months
ended June 30, 2001 were $17.1 million, a decrease from $17.2 million for the
three months ended June 30, 2000. SGA expenses for the six months ended June 30,
2001 were $33.2 million, an increase from $33.5 million for the six months ended
June 30, 2000.

                                       11
<PAGE>
RESEARCH AND DEVELOPMENT

     Research and development ("R&D") expenses increased to $1.9, million in the
three-month period ended June 30, 2001 compared to $548,000 for the same period
last year. R&D expenses for the six months ended June 30, 2000 totaled 2.7
million, an increase from the $1.2 million for the six months ended June 30,
2000. The increase reflects expenses associated with the Chrysalin clinical
trials and the $1 million payment to Chrysalis to extend the Company's worldwide
license for soft tissue indications for Chrysalin.

OTHER INCOME AND EXPENSES

     Other income, consisting primarily of interest income, increased from
$101,000 to $130,000 for the three-month periods ended June 30, 2001 and 2000
respectively. For six-month period ended June 30, 2001, other income increased
to 259,000 from $186,000 for the same period in the previous year.

LIQUIDITY AND CAPITAL RESOURCES

     On June 30, 2001 the Company had cash and equivalents of $15.2 million
compared to $9.2 million as of December 31, 2000. Prior to the CPM divestiture,
the Company had an available $10.0 million accounts receivable revolving line of
credit with a bank. The Company is negotiating with the bank regarding a
revised, lower credit facility amount. Subsequent to June 30, 2001 the Company
received a cash payment of $12 million in conjunction with the CPM divestiture.

     The Company anticipates that its cash and short-term investments on hand,
cash from operations 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 assurances, however, that
this will prove to be the case. The timing and amounts of cash used will depend
on many factors, including the Company's ability to continue to increase
revenues, reduce and control its expenditures, and collect amounts due from
third party payers. Additional funds may be required if the Company is not
successful in any of these areas. The Company's ability to continue funding its
planned operations beyond the next 12 months is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, or to
obtain additional fund's through equity or debt financing, or from other sources
of financing, as may be required. Cash requirements to fund the severance and
costs of exiting the CPM businesses are currently estimated to be funded from
the Company's current cash balances.

Item 3. Market Risks

     The Company has no debt and no derivative instruments at June 30, 2001.

     The Company has very limited exposure to foreign exchange rates at June 30,
2001.

                                       12
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including projections of
results of operations and financial condition, statements of future economic
performance, and general or specific statements of future expectations and
beliefs. The matters covered by such forward-looking statements are subject to
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to differ materially
from those contemplated or implied by such forward-looking statements. Important
factors which may cause actual results to differ include, but are not limited
to, the following matters, which are discussed in more detail in the Company's
Form 10-K for the 2000 fiscal year.

     The Company has recently sold its CPM division in the United States and
Canada. There will be costs to the Company associated with the smooth transition
of this business and the related employees to the buyer. Some of these costs
will be directly monetary; others will involve the costs associated with the
time and effort of the Company's executives involved in the transition and the
time it takes to reposition the Company's direction after the sale. In addition,
the Company will be moving portions or its operations within its current
principal office to make room to sublet space to the buyers of the CPM business.
Although the Company does not expect these transition costs to have a materially
adverse effect on the Company, there can be no assurance how long the transition
will take and what the total cost will be.

     To the extent that the Company presently enjoys perceived technological
advantages over competitors, technological innovation by present or future
competitors many of whom are larger than the Company may erode the Company's
position in the market. To sustain long-term growth, the Company must develop
and introduce new products and expand applications of existing products, as it
is currently doing with the human trials of Chrysalin; however, there can be no
assurance that the Company will be able to do so or that the market or FDA
regulators will accept any such new products or applications or will do so in a
timely manner.

     The Company operates in a highly regulated environment and cannot predict
the actions of regulatory authorities. The action or non-action of regulatory
authorities may impede the development and introduction of new products and new
applications for existing products, and may have temporary or permanent effects
on the Company's marketing of its existing or planned products.

     There can be no assurance that the influence of managed care will continue
to grow either in the United States or abroad, or that such growth will result
in greater acceptance or sales of the Company's products. In particular, there
can be no assurance that existing or future decision makers and third party
payors within the medical community will be receptive to the use of the
Company's products or replace or supplement existing or future treatments.
Moreover, the transition to managed care and the increasing consolidation
underway in the managed care industry may concentrate economic power among
buyers of the Company's products, which concentration could foreseeable
adversely affect the Company's margins.

     Although the Company believes that existing securities litigation initiated
against the Company is without merit and the Company has entered into a
Memorandum of Understanding with the plaintiffs to settle the litigation. The
settlement must still be approved by the class of plaintiffs and the court.
Further, members of the class have the option to opt out of the settlement and
pursue claims on their own. If the class or court rejects the settlement, the
litigation could continue. An adverse outcome of such litigation could have a
material adverse effect on the Company's business, financial condition and
results of operation.

     The Company intends to pursue sales in international markets. The Company,
however, has had little experience in such markets. Expanded efforts at pursuing
new markets necessarily involves expenditures to develop such markets and there
can be no assurance that the results of those efforts will be profitable. There
can be no assurance that the Company's estimates of the market will not cause
the nature and extent of that market to deviate materially from the Company's
expectations.

                                       13
<PAGE>
Part II - Other information
Item 1. Legal Proceedings

See "Note 4 - Litigation" of the Notes to the Condensed Consolidated Financial
Statements above.

Item 4. Submission of Matters to Vote of Security Holders

The annual meeting of the stockholders of the Company was help on May 18, 2001
to vote on: the election of Class I Directors (Proposal 1); an amendment to the
Company's 1997 Stock Option Plan (Proposal 2) ; and the ratification of Deloitte
& Touche LLP as independent accountant for the fiscal year ending December 31,
2000 (Proposal 3). The results are as follow:

                                                                         Broker
                                   For        Against      Abstain     Non-Votes
                                ----------   ---------    ---------    ---------
Proposal 1
  Frederich J. Feldman, Ph.D.   29,735,864     365,850    1,252,996        0
  Thomas R. Trotter             28,496,768   1,604,946    1,252,996        0
Proposal 2                      28,518,779   1,536,775       46,160        0
Proposal 3                      29,833,522     233,474       34,718        0

A more detailed discussion of each proposal is included in the Company's Proxy
Statement for the 2001 Annual Meeting of Stockholders.

The Company's directors continuing in office are John Holliman III, Augustus A.
White III, M.D., Stuart H. Altman, Ph.D., and Elwood D. Howse, Jr.

Item 6. Exhibits and Reports

     (a)  Exhibit Index

          None

     (b)  Reports on Form 8-K

          Form 8-K filed July 26, 2001 announcing an Item 2 disposition of
          assets.

                                       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)


Signature                                Title                        Date
---------                                -----                        ----

/s/ Thomas R. Trotter            President and Chief             August 13, 2001
-----------------------------    Executive Officer
Thomas R. Trotter                (Principal Executive Officer)


/s/ Sherry A. Sturman            Vice-President and Chief        August 13, 2001
-----------------------------    Financial Officer
Sherry A. Sturman                (Principal Financial
                                 and Accounting Officer)

                                       15
<PAGE>
                                OrthoLogic Corp.
                 Exhibit Index to Quarterly Report on Form 10-Q
                  For the Quarterly Period Ended March 31, 2001


                                            Incorporated by             Filed
Exhibit No             Description           Reference to:             Herewith
----------             -----------          ---------------            --------
None

</TEXT>
</DOCUMENT>
