10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

or

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

For the transition period from to

Commission File Number: 0-21214

ORTHOLOGIC CORP.

(Exact name of registrant as specified in its charter)

Delaware	86-0585310
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
1275 W. Washington Street, Tempe, Arizona	85281
(Address of principal executive offices)	(Zip Code)

(602) 286-5520

(Registrant's telephone number, including area code)

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

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

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No x.

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

41,594,491 shares of common stock outstanding as of April 28, 2007.

1

ORTHOLOGIC CORP.

(A Development Stage Company)

INDEX

			Page No.
Part I	Financial Information
	Item 1.	Financial Statements (Unaudited)
		Condensed Balance Sheets as of March 31, 2007 and December 31, 2006	3
		Condensed Statements of Operations for the three months ended March 31, 2007 and 2006	4
		Condensed Statements of Cash Flows for the three months ended March 31, 2007 and 2006	5
		Notes to Condensed Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 4.	Controls and Procedures	15
Part II	Other Information
	Item 1A.	Risk Factors	16
	Item 6.	Exhibits	16

EXHIBIT 4.1

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32

2

PART I – Financial Information

Item 1. Financial Statements

ORTHOLOGIC CORP.

(A Development Stage Company)

CONDENSED BALANCE SHEETS

(in thousands, except share and per share data)

	March 31, 2007			December 31, 2006
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	19,896		$	18,047
Short-term investments		24,266			35,977
Prepaids and other current assets		1,048			1,950
Total current assets		45,210			55,974
Furniture and equipment, net		402			409
Long-term investments		23,107			16,206
Total assets	$	68,719		$	72,589
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	1,045		$	1,621
Accrued compensation		441			584
Accrued clinical		94			133
Accrued severance and other restructuring costs		298			366
Other accrued liabilities		574			737
Total current liabilities		2,452			3,441
Stockholders' Equity
Common Stock  $.0005 par value; 100,000,000 shares authorized; 41,594,491 and 41,564,291 shares issued and outstanding		21			21
Additional paid-in capital		188,268			188,236
Accumulated deficit		(122,022	)		(119,109	)
Total stockholders' equity		66,267			69,148
Total liabilities and stockholders' equity	$	68,719		$	72,589

See notes to unaudited condensed financial statements

3

ORTHOLOGIC CORP.

(A Development Stage Company)

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except share and  per share data)

(Unaudited)

	Three months ended						As a Development Stage Company
	March 31,						August 5, 2004 -
	2007			2006			March 31, 2007
OPERATING EXPENSES
General and administrative	$	979		$	2,093		$	14,325
Research and development		2,818			6,716			56,003
Other divestiture and related gains		-			-			(375	)
Purchased in-process research and development		-			8,434			34,311
Total operating expenses		3,797			17,243			104,264
Interest and other income, net		(884	)		(762	)		(8,158	)
Loss from continuing operations before taxes		2,913			16,481			96,106
Income tax expense		-			-			356
Loss from continuing operations		2,913			16,481			96,462
Discontinued operations - net gain on sale of the bone device business, net of taxes ($267)		-			-			(2,202	)
NET LOSS	$	2,913		$	16,481		$	94,260
Per Share Information:
Net loss, basic and diluted	$	0.07		$	0.42
Basic and diluted shares outstanding		41,594,491			39,250,851

See notes to unaudited condensed financial statements

4

ORTHOLOGIC CORP.

(A Development Stage Company)

CONDENSED STATEMENTS OF CASH FLOW

(in thousands)

(Unaudited)

	Three months ended						As a Development Stage Company
	March 31,						August 5th 2004 -
	2007			2006			March 31, 2007
OPERATING ACTIVITIES
Net loss	$	(2,913	)	$	(16,481	)	$	(94,260	)
Non cash items:
Deferred tax asset		-			-			770
Depreciation and amortization		67			357			3,332
Non-cash stock compensation		32			952			2,975
Gain on sale of bone device business		-			-			(2,298	)
In-process research and development		-			8,434			34,311
Change in other operating items:
Prepaids and other current assets		902			100			661
Accounts payable		(576	)		264			74
Accrued liabilities		(413	)		(788	)		(1,346	)
Cash flows used in operating activities		(2,901	)		(7,162	)		(55,781	)
INVESTING ACTIVITIES
Expenditures for furniture and equipment, net		(60	)		(83	)		(575	)
Proceeds from sale of assets		-			-			7,000
Cash paid for assets of AzERx/CBI		-			(390	)		(4,058	)
Cash paid for patent assignment rights		-			(100	)		(650	)
Purchases of investments		(13,817	)		(10,068	)		(159,711	)
Maturities of investments		18,627			19,226			170,276
Cash flows provided by investing activities		4,750			8,585			12,282
FINANCING ACTIVITIES
Net proceeds from stock option exercises		-			2,962			4,612
Net proceeds from sale of stock		-			1,933			3,376
Cash flows provided by financing activities		-			4,895			7,988
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,849			6,318			(35,511	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		18,047			35,111			55,407
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	19,896		$	41,429		$	19,896

Supplemental Disclosure of Non-Cash Investing Activities	AzERx			AzERx and CBI
AzERx/CBI Acquisition
Current assets acquired	$	-		$	29
Patents acquired		-			2,142
Liabilities acquired, and accrued acquisition costs		(280	)		(457	)
Original investment reversal		-			(750	)
In-process research and development acquired		8,434			34,311
Common stock issued for acquisition		(7,764	)		(31,217	)
Cash paid for acquisition	$	390		$	4,058

See notes to unaudited condensed financial statements

5

ORTHOLOGIC CORP.

(A Development Stage Company)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

March 31, 2007

OVERVIEW OF BUSINESS

Description of the business

OrthoLogic is a biotechnology company committed to developing a pipeline of novel peptides and other molecules aimed at helping patients with under-served conditions.  The Company is focused on the development and commercialization of two product platforms:  Chrysalin® (TP508) and AZX100.

Chrysalin, the Company’s first novel synthetic peptide, has two lead indications, both of which represent areas of significant unmet medical need – fracture repair and diabetic foot ulcer healing.  The Company owns exclusive worldwide rights to Chrysalin.

AZX100, the Company’s second peptide, is a novel synthetic pre-clinical 24-amino acid peptide, one of a new class of compounds in the field of smooth muscle relaxation called Intracellular Actin Relaxing Molecules, or ICARMs™.  AZX100 is currently being evaluated for medically and commercially significant applications, such as the treatment of vasospasm associated with subarachnoid hemorrhage, the prevention of keloid scarring, pulmonary fibrosis, and the treatment of asthma.  OrthoLogic has an exclusive worldwide license to AZX100.

We continue to explore other biopharmaceutical compounds that can complement our research activity internally and broaden our potential pipeline for successful products.

Company History

Prior to November 26, 2003, we developed, manufactured and marketed proprietary, technologically advanced orthopedic products designed to promote the healing of musculoskeletal bone and tissue, with particular emphasis on fracture healing and spine repair.  Our product lines included bone growth stimulation and fracture fixation devices including the OL1000 product line, SpinaLogic® and OrthoFrame/Mayo, which we sometimes refer to as our “Bone Device Business.”

On November 26, 2003, we sold our Bone Device Business.  Our principal business remains focused on tissue repair, although through biopharmaceutical approaches rather than through the use of medical devices.

On August 5, 2004, we purchased substantially all of the assets and intellectual property of Chrysalis Biotechnology, Inc. (“CBI”), including its exclusive worldwide license for Chrysalin for all medical indications, for $2.5 million in cash and $25.0 million in OrthoLogic common stock, with an additional $7.0 million in OrthoLogic common stock due should certain triggering events occur.  We became a development stage company commensurate with the acquisition.  Subsequently, all of our collective efforts were focused on research and development of our Chrysalin Product Platform, with the goal of commercializing our products.

On February 27, 2006, the Company purchased certain assets and assumed certain liabilities of AzERx, Inc.  Under the terms of the transaction, OrthoLogic acquired an exclusive license for the core intellectual property relating to AZX100.

6

Our development activities for the Chrysalin Product Platform and AZX100 represent a single operating segment as they share the same product development path and utilize the same Company resources.  As a result, we have determined that it is appropriate to reflect our operations as one reportable segment. Through March 31, 2007, we have incurred $94 million in net losses as a development stage company.

In these notes, references to “we”, “our” and the “Company” refer to OrthoLogic Corp.  References to our Bone Device Business refer to our former business line of bone growth stimulation and fracture fixation devices, including the OL1000 product line, SpinaLogic®, OrthoFrame® and OrthoFrame/Mayo.

Financial Statement Presentation

In the opinion of management, the unaudited condensed interim financial statements include all adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the complete fiscal year.

Use of estimates: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, and expenses in our financial statements and accompanying notes.  Management bases its estimates on historical experience and various other assumptions believed to be reasonable.  Although these estimates are based on management’s assumptions regarding current events and actions that may impact the Company in the future, actual results may differ from these estimates and assumptions.  Our critical accounting policies are those that affect, or could affect, our financial statements materially and involve a significant level of judgment by management. The accounting policies and related risks described in our Annual Report for the year ended December 31, 2006 are those that depend most heavily on these judgments and estimates.  As of March 31, 2007, there have been no material changes to any of the critical accounting policies contained therein.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading.  It is suggested that these unaudited condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report for the year ended December 31, 2006.  Information presented as of December 31, 2006 is derived from audited statements.

New Accounting Pronouncement:  We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

7

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements or adjustments to our deferred tax assets and related valuation allowance. Our evaluation was performed for the tax years ended December 31, 2003, 2004, 2005 and 2006, the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2007.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.

A. STOCK BASED COMPENSATION

Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment”, (SFAS 123(R)).  SFAS 123(R) requires all share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each employee stock option and employee stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements.  We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payments.  The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.  We use historical volatility adjusted for future expectations. The expected life of stock options is based on historical data and future expectations.  The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our stock options and stock purchase rights.  The dividend yield assumption is based on our history and expectation of dividend payouts.  The fair value of our restricted stock units is based on the fair market value of our common stock on the date of grant.  Stock-based compensation expense recognized in our financial statements in 2006 and thereafter is based on awards that are ultimately expected to vest.  We recognize compensation cost for an award with only service conditions that has a graded vesting schedule on a straight line basis over the requisite service period as if the award was, in-substance, a multiple award.  However, the amount of compensation cost recognized at any date must at least equal the portion of grant-date fair value of the award that is vested at that date. The amount of stock-based compensation expense in 2006 and thereafter will be reduced for estimated forfeitures.  Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  We evaluate the assumptions used to value stock awards on a quarterly basis.  If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past.  The Company chose the modified-prospective transition alternatives in adopting SFAS 123(R).  Under the modified-prospective transition method, compensation cost is recognized in financial statements issued subsequent to the date of adoption for all stock-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption.  Because the Company previously adopted only the pro forma disclosure provisions of SFAS 123, we recognize compensation cost relating to the unvested portion of awards granted prior to January 1, 2006, the date of adoption, using the same estimate of the grant-date fair value and the same attribution method used to determine the pro forma disclosure under SFAS 123, except that a forfeiture rate will be estimated for all options, as required by SFAS 123(R).

8

Stock Options issued prior to December 31, 2005:

Unrecognized non-cash stock compensation expense related to unvested options outstanding as of December 31, 2005 was approximately $1 million (includes 328,124 shares valued at $500,000 unvested and cancelled on April 5, 2006 upon the resignation of James M. Pusey, MD). Because of the significant expected forfeiture rate (54%) caused by the options cancelled at the time of Dr. Pusey’s resignation, the expected compensation cost for unvested options at December 31, 2005, was approximately $388,000.  At March 31, 2007,  the remaining compensation cost related to unvested options outstanding at December 31, 2005, is approximately $46,000, which will be recognized over the remaining vesting period of approximately 2.5 years, with an estimated weighted average period of 1.3 years.

2006 Stock Options

Using an estimated forfeiture rate of 13%, compensation cost recorded for the three months ended March 31, 2007, for options issued in 2006, was a credit of $8,000 due to the adjustment of the forfeiture rate from 5% as of December 31, 2006 to 13% at March 31, 2007. The options granted generally vest over a two to four-year period from the date of grant and, accordingly, the remaining unamortized cost at March 31, 2007 of approximately $686,000 will be amortized ratably over the period ending December 31, 2009, with an estimated weighted average period of one year.

2007 Stock Options

On January 1, 2007, the Board of Directors granted each Director a fully vested option to purchase 10,000 shares of the Company’s common stock at an exercise price of $1.43.  Additionally, during the three months ended March 31, 2007, the Company granted a fully vested option to purchase 13,889 shares of the Company’s common stock to a consultant at an exercise price of $1.44 and an option to purchase 5,000 shares that vests over a four-year period, to an employee, at an exercise price of $1.45.

The Company used the Black-Scholes model with the following assumptions, to determine the total fair market value of $52,000 for options to purchase 78,889 shares of the Company’s common stock issued during the three months ended March 31, 2007:

	Three months ended March 31, 2007
Risk free interest rate	4.6%
Volatility	66%
Expected term from vesting	2.8 Years
Dividend yield	0%

Using an estimated forfeiture rate of 16%, compensation cost recorded for the three months ended March 31, 2007, for options issued in 2007, was $48,000.  The options granted, that did not vest on the grant date, vest over a four-year period from the date of grant and, accordingly, the remaining unamortized cost at March 31, 2007 of approximately $4,000 will be amortized ratably over the period ending December 31, 2010, with an estimated weighted average period of two years.

9

2007 Restricted Stock

On January 1, 2007, the Board of Directors of the Company awarded 104,898 shares of restricted stock (17,843 shares to each director), which vest on January 1, 2008.  The total fair market value of the grants, determined using the closing price of the Company’s common stock on the date of grant, was $150,000, of which $31,000 has been recognized as compensation cost in the three months ended March 31, 2007.

Summary

Non-cash stock compensation cost for the three months ended March 31, 2007, totaled $32,000.  In the condensed Statements of Operations for the three months ended March 31, 2007, non-cash stock compensation expense of $49,000 was recorded as a general and administrative expense and $17,000 was recorded as a reduction (credit) of research and development expense.

Non-cash stock compensation cost for the three months ended March 31, 2006, totaled $952,000 of which $426,000 related to restricted stock.  In the condensed Statements of Operations for the three months ended March 31, 2006, non-cash stock compensation expense of $827,000 was recorded as a general and administrative expense and $125,000 was recorded as a research and development expense.

During the three months ended March 31, 2006, options to purchase 670,400 shares of the Company’s common stock were exercised resulting in the receipt by the Company of net cash proceeds of $2,962,000.  The intrinsic value of options exercised during the three months ended March 31, 2006 was $689,000.  No options were exercised in the three months ended March 31, 2007.

A summary of option activity under our stock option plans for the three months ended March 31, 2007, is as follows:

	Number of Options			Weighted average exercise price		Weighted average remaining contractual term (years)
Options outstanding December 31, 2006		3,438,126		$	3.69
Plus:  Options granted		78,889			1.43
Less:
Options exercised		-
Options expired/forfeited		(265,190	)		4.45
Options oustanding at March 31, 2007		3,251,825			3.57		6.94
Options exercisable at March 31, 2007		2,196,283			3.95		5.95
Options vested and expected to vest at March 31, 2007		2,972,553			3.61		6.75

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A summary of the status of the Company’s unvested shares as of March 31, 2007, and changes during the three months ended March 31, 2007, is presented below:

Unvested Shares	Number of Options		Weighted average Grant date Fair Value
Unvested shares at December 31, 2006		-	$	-
Granted		104,898	$	1.43
Vested		-	$	-
Canceled/forfeited		-	$	-
Unvested shares at March 31, 2007		104,898	$	1.43

It is the Company’s policy to issue options from shareholder approved incentive plans. However, if the options are issued as an inducement for an individual to join the Company, the Company may issue stock options outside of shareholder approved plans.  The options granted under shareholder approved incentive plans have a ten-year term and vest over a two to four-year period of service.  All options and stock purchase rights are granted with an exercise price equal to the current market value on the date of grant and, accordingly, options or stock purchase rights have no intrinsic value on the date of grant.  Based on the closing market price of the Company’s common stock at March 31, 2007 of $1.56, stock options exercisable or expected to vest at March 31, 2007, have intrinsic value of $15,000.  At March 31, 2007, 648,185 shares remain available to grant under the Company’s existing stock option plans.

Warrants

At March 31, 2007, the Company has warrants outstanding to purchase 46,706 shares of the Company’s common stock with an exercise price of $6.39 per share which expire in February 2016, and warrants outstanding to purchase 117,423 shares of the Company’s common stock with an exercise price of $1.91 per share which expire in July 2016.

Additionally, (as described in Note 15 to our Annual Report on Form 10-K for the year ended December 31, 2006), performance based warrants to purchase 240,000 shares of the Company’s common stock with an exercise price of $1.91, which expire in February 2016, are outstanding but unvested at March 31, 2007.  The total cost of the performance based warrants will be charged to expense over the period of performance. The costs will be determined based on the fair market value of the warrants determined by using the Black-Scholes model, revalued at each Company reporting date until fully vested.  The fair market value of the milestone warrants using the Black-Scholes model, 64% volatility, 0% dividend yield, expected term of 8.9 years, and 4.5% interest rate was $271,000 at March 31, 2007.  No costs were charged to expense at March 31, 2007 as it is not yet probable that any milestone warrants will vest.

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

The following is management’s discussion of significant events in the quarter ended March 31, 2007 and factors that affected OrthoLogic’s interim financial condition and results of operations.  This should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2006 and Item 1A. Risk Factors included in Part II of this quarterly report.

Overview of the Business

OrthoLogic is a biotechnology company focused on the development and commercialization of the novel synthetic peptides Chrysalin® (TP508) and AZX100.

Chrysalin^® (TP508)

Chrysalin, or TP508, is a 23-amino acid synthetic peptide representing a receptor-binding domain of the human thrombin molecule, a naturally occurring agent responsible for blood clotting and initiating the natural healing cascade of cellular events responsible for tissue repair in both soft tissue and bone.

During the first quarter of 2006, we announced topline results of the Chrysalin Phase 3 clinical trial in distal radius fracture.  While the study showed that Chrysalin did not meet its primary endpoint in the overall evaluable patient population, it did demonstrate that Chrysalin has biologic activity, as evidenced by statistically significant results observed along key radiographic secondary endpoints.

We interrupted enrollment in the concurrent Chrysalin Phase 2b dose-ranging study in the first quarter of 2006 in order to perform an interim analysis of subjects enrolled to that date.  Given the equivocal information obtained from the interim analysis we chose to terminate the study.

In December 2006 we announced a presentation at the American Society for Cell Biology describing results of an experiment demonstrating that TP508 increases the ability of endothelial cells to produce nitric oxide and that TP508 prevents negative effects caused by oxygen deprivation, a condition found in myocardial ischemia and chronic wounds.  This discovery raises the possibility that TP508 could be useful in treating a number of vascular diseases.  Laboratory-based validation work continues in this area.

In January 2007 we announced publication in the journal Wound Repair and Regeneration the results of a randomized, double-blind, placebo-controlled 60-subject Phase 1/2 study of Chrysalin in diabetic foot ulcers.  The article described statistically and clinically significant results achieved with twice-weekly topical application of Chrysalin, combined with good wound care and standard off-loading, in subjects with chronic diabetic foot ulcers.  The study was conducted by Chrysalis Biotechnology prior to its acquisition by OrthoLogic in 2004.

We announced on February 16, 2007 findings of a post hoc subgroup analysis of data from the Phase 3 clinical trial showed that within the subset of 157 female osteopenic subjects, treatment with 10 μg Chrysalin demonstrated a statistically significant benefit compared to placebo in the primary efficacy endpoint of time to removal of immobilization.  Secondary endpoints including clinical assessment of fracture healing (pain or motion at the fracture site), time to radial cortical bridging and time to overall radiographic healing also showed a significant effect of Chrysalin treatment.  These data are part of a post hoc subgroup analysis, and therefore provide only supporting - rather than pivotal - evidence of safety and efficacy.

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Chrysalin Product Platform Status

Ÿ Demonstration of statistically significant healing in the primary endpoint and multiple secondary endpoints within the osteopenic female cohort from the Phase 3 distal radius fracture study.  This is a patient population where bone tissue was physiologically compromised.

Ÿ Demonstration of statistically significant healing with respect to wound closure endpoints in the Phase 1/2 diabetic foot ulcer trial, an example of Chrysalin’s biologic activity in compromised dermal tissue.

Ÿ Laboratory experiments tying Chrysalin to potential modulation of the health of endothelial tissue in blood vessels.

Ÿ Progress has been shown in the mechanism of action studies that are ongoing with Dr. Darrell Carney, inventor of Chrysalin, at the University of Texas, Medical Branch, Galveston.

We previously announced that we have no immediate plans to re-enter clinical trials for Chrysalin-based product candidates and a strategic shift in our development approach to our Chrysalin Product Platform.  We currently intend to pursue development partnering or licensing opportunities for our Chrysalin-based product candidates, a change from our previous development history of independently conducting human clinical trials necessary to advance our Chrysalin-based product candidates to market, and to continue efforts to explore the science behind and potential of Chrysalin.

AZX100

We strengthened and diversified our development pipeline during the first quarter of 2006 with the acquisition of the 24-amino acid synthetic peptide AZX100.  AZX100 relaxes smooth muscle, which modulates blood pressure and the function of blood vessels, airways, sphincters, the gastrointestinal tract and the genitourinary tract.  Sustained abnormal contraction of any of these muscles is called spasm.  Any disorders known to be associated with excessive constriction or inadequate dilation of smooth muscle represent potential applications for AZX100.

AZX100 may also inhibit the fibrotic phenotype of fibroblasts and smooth muscle cells in a mechanism similar to that which causes vasorelaxation.  Through phenotypic modulation of fibroblasts and smooth muscle cells, AZX100 may inhibit the scarring that results from wound healing and disease states in the dermis, blood vessels, lungs, liver and other organs.

 We are executing a development plan for this peptide, with the goal of filing an IND by year-end 2007.  We continue to make progress with respect to toxicology, pharmacology and GMP manufacturing efforts.  We have chosen to explore partnering opportunities for pulmonary and vascular indications, and will continue to pursue in-house development of other selected indications.

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Results of Operations Comparing Three-Month Period Ended March 31, 2007 to the Corresponding Period in 2006.

General and Administrative (“G&A”) Expenses:  G&A expenses related to our ongoing development operations decreased by $1,114,000 from $2,093,000 in the first quarter of 2006 to $979,000 in the first quarter of 2007.  Our administrative expenses during the first quarter of 2007 were lower than the same period of 2006 primarily as a result of a decrease of non-cash stock compensation expense of $778,000 and general cost containment efforts.

Research and Development Expenses:  Research and development expenses were $2,818,000 for the first three months in 2007 compared to $6,716,000 for the first three months in 2006.  Our research and development expenses decreased $3,898,000 in the first quarter of 2007 compared to the same period in 2006 primarily due to a $3.6 million decline in clinical costs related to our fracture repair Phase 3 and Phase 2b clinical trials, which were substantially completed as of December 31, 2006.  Given the overlapping nature of our research efforts it is not possible to clearly separate research expenditures between Chrysalin and AZX100; however, currently we anticipate that the substantial majority of our research and development expenses in 2007 will be directed towards AZX100 development efforts.

Interest and Other Income, Net:  Interest and Other Income Net increased from $762,000 in the first quarter of 2006 to $884,000 in the first quarter of 2007 due to the  increase in interest rates between the two periods.

Net Loss:  We incurred a net loss in the first three months of 2007 of $2.9 million compared to a net loss of $16.5 million in the first three months of 2006.  The $13.6 million decrease in the net loss in the three months ended March 31, 2007 compared to the same period in 2006, results primarily from $8.4 million in-process research and development costs in 2006, a decrease of $900,000 in non-cash stock compensation expense and a $3.6 million decline in clinical costs related to our fracture repair Phase 3 and Phase 2b clinical trials, which were substantially completed as of December 31, 2006.

Liquidity and Capital Resources

We historically financed our operations through operating cash flows and the public and private sales of equity securities.  However, with the sale of our Bone Device Business in November 2003, we sold all of our revenue producing operations.  We received approximately $93.0 million in cash from the sale of our Bone Device Business.  On December 1, 2005, we received the additional $7.2 million, including interest, from the escrow balance related to the sale of the Bone Device Business.  On February 27, 2006, the Company entered into an agreement with Quintiles (see Note 15 in our Annual Report on Form 10-K for the year ended December 31, 2006), which provided an investment by Quintiles in the Company’s common stock,  of which $2,000,000 was received on February 27, 2006 and $1,500,000 was received on July 3, 2006.  We also received net proceeds of $4,612,000 from the exercise of stock options during our development stage period. At March 31, 2007, we had cash and cash equivalents of $19.9 million, short-term investments of $24.3 million and long-term investments of $23.1 million.

On November 2, 2006, the Company announced that it has no immediate plans to re-enter clinical trials for Chrysalin-based product candidates and a strategic shift in its development approach to its Chrysalin Product Platform.  The Company currently intends to pursue development partnering or licensing opportunities for its Chrysalin-based product candidates, a change from its previous development history of independently conducting human clinical trials necessary to advance its Chrysalin-based product candidates to market.  We will continue expenditures related to ongoing regulatory requirements for the Phase 2b clinical trial for Chrysalin in fracture repair, and expenditures necessary to continue to explore the science behind and potential of Chrysalin. We will also continue research and development expenditures for further pre-clinical studies for AZX100.

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Our future research and development expenses may vary significantly from prior periods depending on the Company’s decisions on its future Chrysalin and AZX100 development plans.

We anticipate that our cash and short-term investments will be sufficient to meet our presently projected cash and working capital requirements for the next year. However, the timing and amounts of cash used will depend on many factors, including our ability to continue to control our expenditures related to our current research and development programs.  If we enter into new clinical trials or if we consider other opportunities in the market, our expense levels may change, which could require us to seek other sources of capital.  If additional funding is required, we would be required to seek new sources of funds, including raising capital through the sales of securities or licensing agreements.  These sources of funds may not be available or could only be available at terms that would have a material adverse impact on our existing stockholders’ interests.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our principal executive officer and chief financial officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on their evaluation, the principal executive officer and chief financial officer have each concluded that, as of the end of such period, our disclosure controls and procedures are effective and provide reasonable assurance that we record, process, summarize, and report information required to be disclosed in the reports we file under the Securities Exchange Act of 1934 within the time periods specified by the Securities and Exchange Commission’s rules and forms.

Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II – Other Information

Item 1A. Risk Factors

Forward looking statements

OrthoLogic may from time to time make written or oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and our reports to stockholders.  The safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 protects companies from liability for their forward looking statements if they comply with the requirements of that Act.  This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, and contains forward-looking statements made pursuant to that safe harbor.  These forward-looking statements relate to future events or to our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology.  You should not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect actual results, levels of activity, performance or achievements.  Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

Ÿ unfavorable results of our product candidate development efforts;

Ÿ unfavorable results of our pre-clinical or clinical testing;

Ÿ delays in obtaining, or failure to obtain FDA approvals;

Ÿ increased regulation by the FDA and other agencies;

Ÿ the introduction of competitive products;

Ÿ impairment of license, patent or other proprietary rights;

Ÿ failure to achieve market acceptance of our products;

Ÿ the impact of present and future collaborative agreements; and

Ÿ failure to successfully implement our drug development strategy.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement you read in this Quarterly Report on Form 10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, business strategy and liquidity.  We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

There are no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

Item 6. Exhibits

See Exhibit List following this report

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ORTHOLOGIC CORP.

(Registrant)

Signature	Title	Date
/s/ John M. Holliman, III	Executive Chairman	May 7, 2007
John M. Holliman, III	(Principal Executive Officer)
/s/ Les M. Taeger	Senior Vice-President and Chief	May 7, 2007
Les M. Taeger	Financial Officer
	(Principal Financial and Accounting Officer)

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OrthoLogic Corp.

(the “Company”)

Exhibit Index to Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2007

No.	Description	Incorporated by Reference To:	Filed Herewith
4.1	Amended and Restated Class C Warrant Agreement related to the Common Stock and Warrant Purchase Agreement by and between OrthoLogic Corp. and PharmaBio Development, Inc.		X
31.1	Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14		X
31.2	Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14		X
32	Certification of Principal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350*

* Furnished herewith

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EX-4.1

EXHIBIT 4.1

AMENDED AND RESTATED

CLASS C WARRANT AGREEMENT

This AMENDED AND RESTATED CLASS C WARRANT AGREEMENT (this “Warrant Agreement”) is dated and made as of February 24, 2006 and amended and restated as of June 30, 2006 (the “Restatement Date”), by and between ORTHOLOGIC CORP., a Delaware corporation (the “Company”), and PHARMABIO DEVELOPMENT INC., a North Carolina corporation, doing business as NovaQuest (“NovaQuest”).

WHEREAS, the Company and NovaQuest have entered into the Common Stock and Warrant Purchase Agreement (the “Purchase Agreement”), dated as of February 24, 2006, pursuant to which the Company granted to NovaQuest the rights set forth in that certain Class C Warrant Agreement (the “Prior Warrant Agreement”), dated as of February 24, 2006 (the “Prior Warrant Issuance Date”), and the Registration Rights Agreement (the “Registration Rights Agreement”), dated as of February 24, 2006;

WHEREAS, the Company and Quintiles, Inc. (“Quintiles”), an affiliate of NovaQuest, have entered into a Master Services Agreement also dated as February 24, 2006 (the “Services Agreement”);

WHEREAS, pursuant to the Purchase Agreement, as modified by that certain letter agreement between NovaQuest and the Company of even date herewith regarding a waiver of blocking events, the parties desire to amend and restate the Prior Warrant Agreement as set forth in this Warrant Agreement;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the parties agree as follows:

1.             The Warrant.

(a)           The Company hereby agrees to issue and sell to NovaQuest, its designee or assigns (the “Holder”) 80,000 shares (the “Warrant Shares”) of the Company’s Common Stock, $0.0005 par value per share (“Common Stock”), at an exercise price of One Dollar and Ninety-One Cents ($1.91) per share (the “Exercise Price”) (such Exercise Price was calculated as follows: the average of the closing prices of the shares of Common Stock for the 15 trading days prior to the Restatement Date, multiplied by 115%), upon the terms and conditions herein set forth, including the vesting schedule set forth in this Section 1.  The Exercise Price and the number of Warrant Shares purchasable upon exercise of this Warrant Agreement are subject to adjustment from time to time as provided in Section 4 of this Warrant Agreement.

(b)Upon completion of patient enrollment for the existing Phase 2b clinical study of the TP508 distal radius fracture study by or on behalf of the Company or its affiliates (the “Milestone”), the Holder’s right to exercise this Warrant Agreement will vest as follows:

(i) if the Milestone is achieved by September 30, 2006, One Hundred Percent (100%) of the Warrant Shares shall vest;

(ii) if the Milestone is achieved after September 30, 2006, but before December 31, 2006, Fifty Percent (50%) of the Warrant Shares shall vest;

(iii) if the Milestone is not achieved by December 31, 2006, none of the Warrant Shares shall vest; and

(iv) any Warrant Shares not vested by December 31, 2006 shall expire.

(c)           In the event that the Milestone fails to be achieved, or fails to be achievable, by September 30, 2006, or by another date specified in the vesting schedule set forth in Section 1(b) above, and such failure is not caused solely by Quintiles, then the Joint Development Committee (as defined in the Services Agreement) shall promptly and in good faith review the Milestone, the existing vesting schedule, and the events and circumstances that caused or resulted in such failure; and the Joint Development Committee shall determine a new vesting schedule that shall extend each date within the existing vesting schedule by the duration of the events or circumstances that caused or resulted in such failure, up to one year; provided that the vesting schedule shall be extended pursuant to this Section 1(c) only once. The parties hereto promptly shall enter into an appropriate amendment to this Warrant Agreement reflecting such extension.

(d)           Notwithstanding Section 1(b), the Holder’s right to exercise this Warrant Agreement will vest upon a Change of Control.  “Change of Control” means the occurrence of any of the following: (a) any “person” or “group” (as such terms are defined in Section 13(d) and Section 14(d) of the Securities Exchange Act of 1934, as amended, or any successor provisions (the “Exchange Act”)) becomes the “beneficial owner” (as determined in accordance with Rule 13d-3 under the Exchange Act), directly or indirectly, of shares of voting securities of the Company representing 50% or more of the total voting power of all outstanding voting securities of the Company; (b) the sale, lease, license, exchange or other transfer (in one or a series of transactions) of all or substantially all of the assets of the Company, or all or substantially all of the assets relating to TP508; or (c)  any merger, consolidation, share exchange, business combination or similar transaction in which the Company is not the surviving entity or in which the holders of the outstanding shares of stock of the Company immediately prior to such transaction hold, immediately after such transaction, less that 51% of the total voting power of the outstanding securities of the surviving or resulting entity in such transaction.

2.             Expiration Date.  This Warrant Agreement, and the Holder’s right to purchase any of the Warrant Shares, will expire at 5:00 p.m. Eastern Time on the tenth anniversary of the Prior Warrant Issuance Date (the “Expiration Date”).

3.             Exercise of this Warrant Agreement.  (a) The Holder may exercise this Warrant Agreement, on any Business Day, at any time from and after the date hereof and prior to the Expiration Date, in whole or in part, as adjusted from time to time as provided in Section 4 of this Warrant Agreement, by:  (a) the surrender of this Warrant Agreement, with the Exercise Form substantially in the form attached hereto as Annex A properly completed and executed, at the principal office of the Company, and (b) upon payment by the delivery of a certified check or official bank check or wire transfer of immediately available funds, payable to the order of the Company in an amount equal to the aggregate purchase price for the Warrant Shares being purchased upon such exercise.  Upon receipt thereof by the Company, the Holder will be deemed to be the holder of record of the Warrant Shares issuable upon such exercise as of the close of business on the date of such receipt by the Company, and the Company will promptly execute or cause to be executed and delivered to the Holder, a certificate or certificates representing the aggregate number of Warrant Shares specified in the Exercise Form.  If this Warrant Agreement is exercised only in part, the Company will, at the time of delivery of said stock certificate or certificates, deliver to the Holder a new Warrant Agreement of like tenor evidencing the right of the Holder to purchase the remaining Warrant Shares then covered by this Warrant Agreement.  “Business Day” shall mean any day, other than a Saturday, Sunday or legal holiday during which banks in North Carolina, United States are open for the conduct of their banking business.

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(b)           In lieu of exercising this Warrant Agreement, the Holder may elect to receive shares equal to the value of this Warrant Agreement (or the portion of the Warrant Shares hereunder being cancelled or surrendered) by sending written notice of such election to the Company, in which event the Company shall deliver to the Holder a stock certificate representing a number of shares of Common Stock computed using the following formula:

X=Y(A-B)

 A

Where:

X =the number of shares of Common Stock to be issued to the Holder

Y =the number of shares of Common Stock purchasable under this Warrant Agreement as to which the Holder is then exercising this Warrant Agreement

A =the fair market value of one share of Common Stock

B =the Exercise Price (as adjusted to the date of such calculations)

(c)           For purposes of this Section, “fair market value” of one share of Common Stock shall mean the closing price reported on the Nasdaq National Market or the principal exchange on which the Common Stock is listed, or the average of the closing bid and asked prices of the Common Stock quoted in the Over-The-Counter market, whichever is applicable, in each such case averaged over a period of fifteen (15) consecutive trading days immediately preceding the date that the Exercise Form is delivered to the Company. If the Common Stock is not traded on such market or exchange, or Over-The-Counter, the fair market value of the Common Stock will be the price per share which the Company could obtain from a willing buyer for shares sold by the Company from authorized but unissued shares, as agreed upon by the Company and the Holder in good faith or, absent such agreement, as shall be determined by arbitration instituted by either party under the rules of the American Arbitration Association.

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(d)           If this Warrant Agreement has not been exercised prior to the Expiration Date, the Holder shall be deemed to have elected, prior to the close of business on the Expiration Date, to receive shares pursuant to this Section 3.

4.             Certain Adjustments.  The Exercise Price at which Warrant Shares may be purchased and the number of Warrant Shares to be purchased upon exercise of this Warrant Agreement are subject to change or adjustment from time to time as follows:

(a)           Merger, Sale of Assets, etc.  If at any time while this Warrant Agreement, or any portion hereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation or entity in which the Company is not the surviving entity, or a reverse triangular merger or share exchange in which the Company is the surviving entity but the shares of the Company’s capital stock outstanding immediately prior to the merger or share exchange are exchanged or converted by virtue of the merger or share exchange into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale, lease, license or other transfer of all or substantially all of the Company’s properties or assets to any other person or entity, then, as a part of such reorganization, merger, consolidation, exchange or other transfer, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant Agreement, during the period specified herein and upon payment of the Exercise Price then in effect, the number of shares of stock or other securities or property resulting from such reorganization, merger, consolidation, exchange or other transfer that a holder of the shares deliverable upon exercise of this Warrant Agreement would have been entitled to receive in such reorganization, merger, consolidation, exchange or other transfer if this Warrant Agreement had been exercised immediately before the record date of (or the date of, if no record date is fixed) such reorganization, merger, consolidation, exchange or other transfer, all subject to further adjustment as provided in this Section 4.  The foregoing provisions of this Section 4(a) shall similarly apply to successive reorganizations, mergers, consolidations, exchanges or other transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant Agreement.  If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be reasonably determined in good faith by the Company’s Board of Directors.  In all events, appropriate adjustment (as reasonably determined in good faith by the Company’s Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interests of the Holder after any of the above-referenced transactions, to the end that the provisions of this Warrant Agreement shall be applicable after such event, as near as reasonably may be, in relation to any shares or other property deliverable after such event upon exercise of this Warrant Agreement.

(b)           Reclassification, etc.  If the Company, at any time while this Warrant Agreement, or any portion hereof, remains outstanding and unexpired, by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as the Holder would have received if this Warrant Agreement had been exercised in full immediately prior to such reclassification or other change or immediately prior to the record date with respect thereto and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 4.  The foregoing provisions of this Section 4(b) shall similarly apply to successive reclassifications or other changes.

4

(c)           Split, Subdivision or Combination of Shares.  If the Company, at any time while this Warrant Agreement, or any portion hereof, remains outstanding and unexpired, shall split, subdivide or combine the securities as to which purchase rights under this Warrant Agreement exist, into a different number of securities of the same class, the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination.  Upon each adjustment in the Exercise Price pursuant to this subsection, the number of shares of such securities purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of shares purchasable immediately prior to such adjustment in the Exercise Price by a fraction, the numerator of which shall be the Exercise Price immediately prior to such adjustment and the denominator of which shall be the Exercise Price immediately thereafter.

(d)           Certificate as to Adjustments.  Upon the occurrence of each adjustment pursuant to this Section 4, the Company at its expense shall promptly compute such adjustment in accordance with the terms hereof and furnish to any Holder of this Warrant Agreement a certificate signed by its Chief Financial Officer setting forth such adjustment and showing in detail the event requiring the adjustment, the amount of such adjustment, the method by which such adjustment was calculated, the Exercise Price at the time in effect, and the number of shares and the amount, if any, of the property that at the time would be received upon the exercise of this Warrant Agreement, together with the facts upon which such adjustment is based.  The Company shall, upon the written request, at any time, of any Holder, promptly furnish or cause to be furnished to such Holder a like certificate setting forth: (i) all such previous adjustments; (ii) the Exercise Price at the time in effect; and (iii) the number of shares and the amount, if any, of other property that at the time would be received upon the exercise of this Warrant Agreement.

(e)           No Dilution or Impairment.  The Company will not, by amendment of its certificate of incorporation or through any reorganization, recapitalization, reclassification, transfer of assets, consolidation, merger, business combination, or dissolution, avoid or seek to avoid the intent of this Section 4 or the observance or performance of any of the terms to be observed or performed by the Company under this Warrant Agreement, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant Agreement against impairment.

(f)           Conformity with Warrant Agreement.  In the event that at any time, as a result of any adjustment made pursuant to this Section 4, the Holder thereafter shall become entitled to receive any shares of capital stock of the Company other than Common Stock, thereafter the number of such other shares so receivable upon exercise of the Warrant Agreement shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 4.

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5.             Fractional Shares.  Fractional shares will not be issued upon the exercise of this Warrant Agreement, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms of this Warrant Agreement to receive a fractional share upon the exercise of this Warrant Agreement, the Company will, upon the exercise of this Warrant Agreement for the largest number of whole shares then called for, pay a sum in cash equal to the excess of the fair market value of such fractional share (determined in such reasonable manner as may be prescribed by the Board of Directors of the Company in its discretion) over the proportional part of the per share purchase price represented by such fractional share.

6.             Notices of Certain Events.  In case:

(a)           the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant Agreement) for the purpose of entitling them to receive any dividend or other distribution, or stock subdivision or combination, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or

(b)           of any reorganization or recapitalization of the Company, any reclassification of the capital stock of the Company, any consolidation, merger, share exchange or other business combination of the Company with or into another corporation or entity, or any sale, lease, license or other transfer of all or substantially all of the assets of the Company to another corporation or entity, or

(c)           of any voluntary dissolution, liquidation or winding-up of the Company,

then, and in each such case, the Company will cause written notice thereof to be delivered to the Holder specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right or (ii) the date on which such reorganization, recapitalization, reclassification, consolidation, merger, share exchange, business combination, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant Agreement) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, share exchange, business combination, transfer, dissolution, liquidation or winding-up.  Such notice shall be delivered at least ten (10) Business Days prior to the date required to be specified therein pursuant to this Section 6.

7.             No Rights as Stockholder; Limitation of Liability.  This Warrant Agreement, as distinct from the shares for which this Warrant Agreement is exercisable, will not entitle the Holder to any of the rights of a stockholder of the Company.  No provision of this Warrant Agreement, prior to the exercise of this Warrant Agreement, and no mere enumeration herein of the rights or privileges of the Holder, will give rise to any liability of the Holder for the purchase price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

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8.             Miscellaneous.

(a)           Representations by the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.  The Company has all necessary corporate power and authority to carry on its business as now conducted.  The Company has all necessary corporate power and authority to execute and deliver this Warrant Agreement and to consummate the transactions contemplated hereby.  The execution and delivery of this Warrant Agreement and consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Warrant Agreement or to consummate the transactions contemplated hereby.  No further approval or authority of the board of directors or stockholders of the Company will be required for the issuance and sale of the Warrant Shares to be issued by the Company as contemplated herein.  This Warrant Agreement has been duly and validly executed and delivered by the Company and constitutes a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms.

(b)           Successors and Assigns.  This Warrant Agreement shall be binding on and inure to the benefit of the Holder and the Company and their respective successors and assigns.

(c)           Amendments and Waivers.  This Warrant Agreement and any provision hereof may be amended, changed, waived, discharged or terminated only by an instrument in writing signed by both parties hereto.

(d)           Loss, Theft, Destruction or Mutilation.  Upon receipt by the Company of evidence reasonably satisfactory to it that this Warrant Agreement has been lost, stolen, destroyed or mutilated, and in the case of any lost, stolen or destroyed Warrant Agreement, an indemnity reasonably satisfactory to the Company, or in the case of a mutilated Warrant Agreement, upon surrender and cancellation hereof, the Company will execute and deliver in the name of the registered holder of this Warrant Agreement, in exchange and substitution for the Warrant Agreement so lost, stolen, destroyed or mutilated, a new Warrant Agreement of like tenor and amount.

(e)           Warrant Exchangeable for Different Denominations.  This Warrant Agreement is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company for new Warrant Agreements of like tenor representing in the aggregate the right to purchase the number of shares which may be purchased hereunder, each of such new Warrant Agreements to represent the right to purchase such number of Warrant Shares as shall be designated by said Holder hereof at the time of such surrender.

(f)           Law Governing.  This Warrant Agreement will be governed by, and construed and enforced in accordance with, the laws of the State of North Carolina, without regard to conflicts-of-laws principles that would require the application of any other law.

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(g)           Entire Agreement.  This Warrant Agreement, together with the Purchase Agreement, the Registration Rights Agreement, and the other transaction documents referred to therein or contemplated thereby, constitutes the full and entire understanding and agreement among the parties with regard to the subject matter of this Warrant Agreement, and supersedes all prior agreements, understandings, inducements or conditions, express or implied, oral or written, with respect to the subject matter of this Warrant Agreement including without limitation, the Prior Warrant Agreement, which is hereby terminated in its entirety.

(h)           Notices.  Unless otherwise provided herein, all notices, requests, demands and other communications required or permitted under this Warrant Agreement shall be in writing and will be deemed to have been duly made and received:  (i) upon personal delivery; (ii) three (3) Business Days after deposit with the United States Post Office, by registered or certified mail or by first class mail, postage prepaid, addressed as set forth below; or (iii) one (1) Business Day after deposit with a nationally recognized, overnight courier (for next business day delivery), shipping prepaid, addressed as set forth below:

If to Company:	OrthoLogic Corp.
	1275 West Washington Street Tempe, Arizona 85281 Attn:  Chief Executive Officer Facsimile: (602) 470-7080
With a copy to (which shall not constitute notice):	Quarles & Brady Streich Lang LLP
	One Renaissance Square Two North Central Avenue Phoenix, Arizona 85004 Attn: Steven P. Emerick Facsimile:  (602) 417-2980
If to Purchaser:	PharmaBio Development Inc.
	(d/b/a NovaQuest) 4709 Creekstone Drive Suite 200 Riverbirch Building Durham, NC 27703 Attn:  President Facsimile:  (919) 998-2090

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With a copy to (which shall not  constitute notice):	Smith, Anderson, Blount, Dorsett
	Mitchell & Jernigan, L.L.P. 2500 Wachovia Capitol Center Raleigh, NC 27601 Attn: Christopher B. Capel Facsimile:  (919) 821-6800

Either party may change the address to which communications are to be sent by giving five (5) Business Days’ advance notice of such change of address to the other party in conformity with the provisions of this Section.

(i)           Execution; Counterparts.  This Warrant Agreement and any amendment hereto may be executed in counterparts, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument.  The exchange of copies of this Warrant Agreement or amendments thereto and of signature pages by facsimile transmission or by email transmission in portable digital format, or similar format, shall constitute effective execution and delivery of such instrument(s) as to the parties and may be used in lieu of the original Warrant Agreement or amendment for all purposes.  Signatures of the parties transmitted by facsimile or by email transmission in portable digital format, or similar format, shall be deemed to be their original signatures for all purposes.

[signature page follows]

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 [Signature Page to Amended and Restated Class C Warrant Agreement]

IN WITNESS WHEREOF, the parties have caused this Warrant Agreement to be duly executed and delivered as of the day and year first written above.

ORTHOLOGIC CORP.
By:	/s/ Les M. Taeger
Name:	Les M. Taeger
Title:	Sr.VP and Chief Financial Officer
PHARMABIO DEVELOPMENT INC.
(D/B/A NOVAQUEST)
By:	/s/ Patrick B. Jordan
Name:	Patrick B. Jordan
Title:	Vice President, Corporate Development

ANNEX A

EXERCISE FORM

TO BE EXECUTED BY THE REGISTERED HOLDER

TO EXERCISE THE ATTACHED

AMENDED AND RESTATED CLASS C WARRANT AGREEMENT OF

ORTHOLOGIC CORP.

The undersigned, [________________], pursuant to the provisions of the Class C Warrant Agreement between OrthoLogic Corp. (the “Company”) and PharmaBio Development Inc. dated as of February 24, 2006, as amended and restated on June __, 2006 (the “Warrant Agreement”), hereby elects to exercise the Warrant Agreement by agreeing to subscribe for and purchase [_______________] shares (the “Warrant Shares”) of Common Stock, $.0005 par value per share, of the Company, and hereby makes payment of $[___________] by certified or official bank check or wire transfer of immediately available funds payable to the order of the Company in payment of the exercise price therefor.

The undersigned acknowledges that the sale, transfer, assignment or hypothecation of the Warrant Shares to be issued upon exercise of this Warrant Agreement is subject to the terms and conditions of the Warrant Agreement.

	PharmaBio Development Inc.
	(d/b/a NovaQuest)
	By:
	Name:
	Title:
	Address:	4709 Creekstone Drive
		Suite 200 Riverbirch Building
		Durham, NC 27703
Dated: ___________________, _____

EX-31.1

Exhibit 31.1

CERTIFICATION

I, John M. Holliman, III certify that:

1. I have reviewed this quarterly report on Form 10-Q of OrthoLogic Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 7, 2007

By:	/s/ John M. Holliman, III
John M. Holliman, III
Principal Executive Officer

 

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Les M. Taeger, certify that:

1. I have reviewed this quarterly report on Form 10-Q of OrthoLogic Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  May 7, 2007

By:	/s/ Les M. Taeger
Les M. Taeger
Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of OrthoLogic Corp. (the “Company”) on Form 10-Q for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of John M. Holliman, III, Principal Executive Officer of the Company, and Les M. Taeger, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 7, 2007

 

/s/ John M. Holliman, III

John M. Holliman, III

Principal Executive Officer

/s/ Les M. Taeger

Les M. Taeger

Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to OrthoLogic Corp. and will be retained by OrthoLogic Corp. and furnished to the Securities and Exchange Commission or its staff upon request.