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 June 30, 2010

or

o 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

CAPSTONE THERAPEUTICS 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,  Suite 101, 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.

xYes  oNo 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes  oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.    Large accelerated filer o   Accelerated filer o   Non-accelerated filer o (do not check if a smaller reporting company)    Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

oYes  xNo

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.

40,775,411 shares of common stock outstanding as of July 31, 2010.

CAPSTONE THERAPEUTICS CORP.

(formerly OrthoLogic Corp.)

(A Development Stage Company)

INDEX

			Page No.
	Forward Looking Statements		3
Part I	Financial Information
	Item 1.	Financial Statements (Unaudited)
		Condensed Balance Sheets as of June 30, 2010 and December 31, 2009	4
		Condensed Statements of Operations for the three and six months ended June 30, 2010 and 2009	5
		Condensed Statements of Cash Flows for the six months ended June 30, 2010 and 2009	6
		Notes to Condensed Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 4.	Controls and Procedures	16
Part II	Other Information
	Item 1.	Legal Proceedings	16
	Item 1A.	Risk Factors	16
	Item 6.	Exhibits	17

EXHIBIT 3.1

EXHIBIT 10.1

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32

2

Forward Looking Statements

We 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 our Annual Report on Form 10-K for the year ended December 31, 2009, and contains forward-looking statements made pursuant to that safe harbor.  These forward-looking statements relate to future ev ents 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 actu al 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:

·   unfavorable results of our product candidate development efforts;

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

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

·   increases or changes in regulation by the FDA and other agencies;

·   the introduction of competitive products;

·   impairment of license, patent or other proprietary rights;

·   failure to achieve market acceptance of our products;

·   the impact of present and future collaborative agreements;

·   failure to successfully implement our drug development strategy;

·   failure in the future to meet the requirements for continued listing on the Nasdaq Capital Market; and

·   effect of the Put Rights on our stock price, liquidity or our ability to continue operations.

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.  The forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events and are 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.

3

PART I – Financial Information

Item 1.  Financial Statements

CAPSTONE THERAPEUTICS CORP.

(formerly OrthoLogic Corp.)

(A Development Stage Company)

CONDENSED BALANCE SHEETS

(in thousands, except share data)
 

	June 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	9,131		$	12,874
Short-term investments		20,873			22,268
Interest, income taxes and other current assets		471			1,660
Total current assets		30,475			36,802
Furniture and equipment, net		304			333
Total assets	$	30,779		$	37,135
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	562		$	719
Accrued compensation		456			549
Accrued clinical and other accrued liabilities		751			1,139
Total current liabilities		1,769			2,407
Potentially Redeemable Equity - see Note D		13,382			-
Stockholders' Equity
Common Stock  $.0005 par value; 100,000,000 shares authorized; 40,775,411 shares issued and outstanding in 2010 and 2009		20			20
Additional paid-in capital		188,799			188,643
Accumulated deficit ($145,429 at June 30, 2010 and $126,173 at December 31, 2009, accumulated during development stage period)		(173,191	)		(153,935	)
Total stockholders' equity		15,628			34,728
Total liabilities, potentially redeemable equity, and stockholders' equity	$	30,779		$	37,135

See notes to unaudited condensed financial statements

4

CAPSTONE THERAPEUTICS CORP.

(formerly OrthoLogic Corp.)

(A Development Stage Company)

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

													As a Development
	Three months ended June 30,						Six months ended June 30,						Stage Company
													August 5, 2004 -
	2010			2009			2010			2009			June 30, 2010
OPERATING EXPENSES
General and administrative	$	789		$	761		$	1,762		$	1,568		$	24,738
Research and development		2,160			2,579			4,183			6,187			89,670
Purchased in-process research and development		-			-			-			-			34,311
Other		-			-			-			-			(375	)
Total operating expenses		2,949			3,340			5,945			7,755			148,344
Interest and other income, net		(26	)		(224	)		(71	)		(491	)		(13,442	)
Loss from continuing operations before taxes		2,923			3,116			5,874			7,264			134,902
Income tax benefit		-			-			-			-			(1,016	)
Loss from continuing operations		2,923			3,116			5,874			7,264			133,886
Discontinued operations - net gain on sale of the bone device business, net of taxes of $267		-			-			-			-			(2,202	)
NET LOSS	$	2,923		$	3,116		$	5,874		$	7,264		$	131,684
Per Share Information:
Net loss, basic and diluted	$	0.07		$	0.08		$	0.14		$	0.18
Basic and diluted shares outstanding		40,775			40,775			40,775			40,775

See notes to unaudited condensed financial statements

5

CAPSTONE THERAPEUTICS CORP.

(formerly OrthoLogic Corp.)

(A Development Stage Company)

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

							As a
							Development
	Six months ended						Stage Company
	June 30,						August 5th 2004
	2010			2009			June 30, 2010
OPERATING ACTIVITIES
Net loss	$	(5,874	)	$	(7,264	)	$	(131,684	)
Non cash items:
Deferred tax expense		-			-			770
Depreciation and amortization		67			63			3,757
Non-cash stock compensation		156			178			4,546
Gain on sale of bone device business		-			-			(2,298	)
In-process research and development		-			-			34,311
Change in other operating items:
Interest, income taxes and other current assets		1,189			259			1,237
Accounts payable		(157	)		(68	)		(409	)
Accrued liabilities		(481	)		(71	)		(1,807	)
Cash flows used in operating activities		(5,100	)		(6,903	)		(91,577	)
INVESTING ACTIVITIES
Expenditures for furniture and equipment, net		(38	)		(3	)		(1,003	)
Proceeds from sale of assets		-			-			7,000
Cash paid for assets of AzERx/CBI		-			-			(4,058	)
Cash paid for patent assignment rights		-			-			(650	)
Purchases of investments		(21,334	)		(14,774	)		(278,732	)
Maturities of investments		22,729			13,323			315,797
Cash flows provided by (used in) investing activities		1,357			(1,454	)		38,354
FINANCING ACTIVITIES
Net proceeds from stock option exercises		-			-			4,612
Net proceeds from sale of stock		-			-			3,376
Common stock purchases		-			-			(1,041	)
Cash flows provided by financing activities		-			-			6,947
NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,743	)		(8,357	)		(46,276	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		12,874			23,088			55,407
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	9,131		$	14,731		$	9,131
Supplemental Disclosure of Non-Cash Investing Activities							AzERx and CBI
AzERx/CBI Acquisitions
Current assets acquired							$	29
Patents acquired								2,142
Liabilities acquired, and accrued acquisition costs								(457	)
Original investment reversal								(750	)
In-process research and development acquired								34,311
Common stock issued for acquisition								(31,217	)
Cash paid for acquisition							$	4,058

See notes to unaudited condensed financial statements

6

 CAPSTONE THERAPEUTICS CORP.

(formerly OrthoLogic Corp.)

(A Development Stage Company)

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

June 30, 2010

OVERVIEW OF BUSINESS

Description of the Business

Capstone Therapeutics Corp. (formerly OrthoLogic Corp.), is a biotechnology company committed to developing a pipeline of novel peptides and other molecules aimed at helping patients with under-served conditions.  We are focused on the development and commercialization of two product platforms:  AZX100 and Chrysalin (TP508).

AZX100 is a novel synthetic 24-amino acid peptide that is believed to have smooth muscle relaxation and anti-fibrotic properties.  AZX100 is currently being evaluated for medically and commercially significant applications, such as prevention or reduction of hypertrophic and keloid scarring, treatment of pulmonary fibrosis and vascular intimal hyperplasia.  We filed an IND for a dermal scarring indication in 2007 and in 2008 we completed Phase 1a and Phase 1b safety clinical trials supporting AZX100 safety in this indication.  We commenced in the first quarter of 2009 Phase 2 clinical trials in dermal scarring following arthroscopic shoulder surgery and keloid scar revision.   In 2010 we expect to continue our Phase 2 clinical trials and perform further pre-clinical studies supporting multiple indications for AZX100.  We have an exclusive worldwide license to AZX100.

Chrysalin, a novel synthetic 23-amino acid peptide, is believed to produce angiogenic and other tissue repair effects in part by 1) activating or upregulating endothelial nitric oxide synthase (eNOS); 2) modulating inflammatory cytokines; 3) inhibiting apoptosis (programmed cell death); and 4) promoting angiogenesis and revascularization.  Chrysalin may have therapeutic value in diseases associated with endothelial dysfunction.  We own exclusive worldwide rights to Chrysalin.

We have conducted clinical trials for two potential Chrysalin applications:  acceleration of fracture repair and diabetic foot ulcer healing.  We previously conducted a pilot clinical trial for spine fusion, and pre-clinical testing for cartilage defect repair, cardiovascular repair, dental bone repair, and tendon repair.  Current efforts in support of Chrysalin are focused on identifying and exploring partnering or development collaboration opportunities.

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.

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On August 5, 2004, we purchased substantially all of the assets and intellectual property of Chrysalis Biotechnology, Inc. (“CBI”), including exclusive worldwide rights to Chrysalin.  We became a development stage entity commensurate with the acquisition.  Subsequently, our efforts were focused on research and development of Chrysalin with the goal of commercializing our product candidates.

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

Our development activities for Chrysalin 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 June 30, 2010, we have incurred $132 million in net losses as a development stage company.

OrthoLogic Corp. commenced doing business as Capstone Therapeutics on October 1, 2008, and we formally changed our name to Capstone Therapeutics Corp. on May 21, 2010.

In this document, references to “we”, “our”, the “Company”, “Capstone Therapeutics”, “Capstone” and “OrthoLogic Corp.”, refer to Capstone Therapeutics 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, and all adjustments were of a normal recurring nature except for the adjustment related to the grant of shareholders’ put rights as described in Note D to the June 30, 2010 Condensed Financial Statements included herewith.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the complete fiscal year.

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 we believe 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 our Annual Report on Form 10-K for the year ended December 31, 2009.  Information presented as of December 31, 2009 is derived from audited financial statements.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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 us in the future, actual results may differ from these estimates and assumptions.

8

Accrued Clinical

Accrued clinical represents the liability recorded on a per patient basis of the costs incurred for our human clinical trials.  Total patient costs are based on the specified clinical trial protocol, recognized over the period of time service is provided to the patient. Our Phase 1a and Phase 1b clinical trials for AZX100 in dermal scarring were both commenced and completed during 2008.      In the first quarter of 2009, we commenced Phase 2 clinical trials for AZX100 in keloid scar revision and dermal scarring following shoulder surgery.  At June 30, 2010 and December 31, 2009, accounts payable and accrued clinical and other accrued liabilities include $896,000 and $1,078,000, respectively, related to the Phase 2 clinical trials.

Loss per Common Share

In determining loss per common share for a period, we use weighted average shares outstanding during the period for primary shares and we utilize the treasury stock method to calculate the weighted average shares outstanding during the period for diluted shares.  Utilizing the treasury stock method for the three month periods ended June 30, 2010 and March 31, 2010, 189,911 and 221,360 shares, respectively, were determined to be outstanding during the period but were excluded from the calculations of diluted loss per share as they were anti-dilutive.  At June 30, 2010, options and warrants to purchase 3,759,802 shares of our common stock, at exercise prices ranging from $0.42 to $7.83 per share, were outstanding.

A.   Investments and Fair Value Disclosures

At June 30, 2010 and December 31, 2009, investments were classified as held-to-maturity securities, as we do not intend to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity.  Such classification requires these securities to be reported at amortized cost unless they are deemed to be other than temporarily or permanently impaired in value.

A summary of the fair value and unrealized gains and losses on these securities is as follows (in thousands):

June 30, 2010			Gross unrealized		Gross unrealized
Short-term investments	Amortized cost		Gain		Loss			Fair value
Government-Sponsored
Enterprise Securities	$	3,000	$	1	$	-		$	3,001
Corporate Debt Securities	$	17,873	$	-	$	(94	)	$	17,779
Total short-term investments	$	20,873	$	1	$	(94	)	$	20,780
December 31, 2009			Gross unrealized		Gross unrealized
Short-term investments	Amortized cost		Gain		Loss			Fair value
US Government Securities	$	2,220	$	10	$	-		$	2,230
Government-Sponsored
Enterprise Securities		1,104		-		(23	)		1,081
Corporate Debt Securities		18,944		2		(230	)		18,716
Total short-term investments	$	22,268	$	12	$	(253	)	$	22,027

9

For our cash and cash equivalent investments, the carrying amount is assumed to approximate the fair value because of the liquidity of these instruments.

B.   Stock Based Compensation

2010 Stock Options

On January 1, 2010, the Company granted each director a fully vested option to purchase 10,000 shares of the Company’s common stock with the exercise price determined by the closing market price on the date of grant ($0.72).  The options have a ten-year term.

On February 4, 2010, the Company granted options to employees to purchase 324,000 shares of the Company’s common stock with the exercise price determined by the closing market price on the date of grant ($0.82).  The options have a ten-year term and vest monthly over a two-year period.

On May 21, 2010, the Company granted two directors fully vested options to purchase shares (Dr. Spiegel 50,000 shares and Dr. Wardell 15,000 shares) of the Company’s common stock with the exercise price determined by the closing market price on the date of grant ($0.82).  These options have a ten-year term.

We used the Black-Scholes model with the following assumptions to determine the total fair value of $168,000 for options to purchase 374,000 shares of our common stock issued during the three months ended March 31, 2010 and the fair value of $27,000 for options to purchase 65,000 shares of our common stock issued during the three months ended June 30, 2010:

	Three months ended			Three months ended
	March 31, 2010			June 30, 2010
Risk free interest rate		2.3% - 2.7	%		2.0	%
Volatility		66	%		66	%
Expected term from vesting	3.9 Years			3.9 Years
Dividend yield		0	%		0	%

Stock Option Summary

Non-cash stock compensation cost for the six months ended June 30, 2010 totaled $156,000.  In the Condensed Statements of Operations for the six months ended June 30, 2010, non-cash stock compensation expense of $129,000 was recorded as a general and administrative expense and $27,000 was recorded as a research and development expense.

Non-cash stock compensation cost for the six months ended June 30, 2009, totaled $178,000.  In the Condensed Statements of Operations for the six months ended June 30, 2009, non-cash stock compensation expense of $132,000 was recorded as a general and administrative expense and $46,000 was recorded as a research and development expense.

No options were exercised in the six month periods ended June 30, 2010 and 2009.

It is our 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, we may issue stock options outside of shareholder approved plans.  Options granted to employees 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 closing market price 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 our common stock at June 30, 2010 of $0.68, stock options exercisable or expected to vest at June 30, 2010, have an intrinsic value of $99,000.  At June 30, 2010, 47 4,052 shares remain available to grant under our existing stock plans.

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C.  Authorized Preferred Stock

We have 2,000,000 shares of authorized but unissued preferred stock, the terms of which may be fixed by our Board of Directors.

On June 19, 2007, we entered into a new Rights Agreement (the “New Rights Agreement”) with the Bank of New York.  In connection with the New Rights Agreement, we declared a dividend distribution of one Right for each outstanding share of our common stock to stockholders of record as of July 2, 2007 and designated 1,000,000 shares of preferred stock as Series A Preferred Stock.  The Right, exercisable upon a Triggering Event as defined in the New Rights Agreement, allows the holder of each share of our common stock to purchase 1/100 of a share of Series A Preferred Stock for $6.00. (Each 1/100 of a share of Series A Preferred Stock is convertible into $12 of our common stock).  The new rights replace similar rights that we issued under our previous Rights Agreement.  The New Rights Agree ment and the exercise of rights to purchase Series A Preferred Stock pursuant to the terms thereof may delay, defer or prevent a change in control because the terms of any issued Series A Preferred Stock would potentially prohibit our consummation of certain extraordinary corporate transactions without the approval of the Board of Directors.  In addition to the anti-takeover effects of the rights granted under the New Rights Agreement, the issuance of preferred stock, generally, could have a dilutive effect on our stockholders.

On May 21, 2010, our Board of Directors approved the First Amendment to the Rights Agreement to extend the expiration date of the Rights Agreement from June 19, 2010 to June 19, 2011.

D.    Put Rights

At our Annual Meeting of Stockholders on May 21, 2010, our stockholders approved an amendment to our Restated Certificate of Incorporation, which is reflected in Article 5A of the Certificate of Amendment of Restated Certificate of Incorporation filed as Exhibit 3.1 to the Form 8-K filed with the Securities and Exchange Commission on May 25, 2010, to provide each record holder of our common stock as of June 30, 2011 with the right to require us, under certain circumstances, to purchase for cash all or a portion of the shares of common stock held by such holder at a formula-based price on or about July 31, 2011 (the “put right”). Unless terminated earlier, the put rights will become exercisable by holders of our common stock as of June 30, 2011.  We expect to facilitate the exercise of the put rights through the use of a tender offer, informing stockholders of the amount of cash that would be paid for each properly exercised put right and the process by which to exercise such put rights. The cash price to be paid to stockholders for each properly exercised put right will be based on a formula calculated by us as of June 30, 2011, which price is intended to approximate the per-share equivalent of 90% of our available cash (as that term is defined in our Certificate of Incorporation attached as Exhibit 3.1 to this current report on Form 10-Q) as of June 30, 2011.  For further information about the put rights, see the description under “Proposal 2: Amendment to our Restated Certificate of Incorporation to provide a Put Right to each holder of our Common Stock as of June 30, 2011” in our Proxy Statement filed with the Securities and Exchange Commission on April 12, 2010.

The Put Rights will expire upon the occurrence of certain events, including the entry into a partnering, commercial, investment, or capital raising agreement or any other transaction that our Board of Directors, determines, in its sole and absolute discretion, to be material to the Company, a change in control of the Company, or the approval by the Board of a plan of liquidation or dissolution.  Our obligation to purchase shares pursuant to the Put Rights is be subject to certain conditions, including compliance with all applicable state and federal laws, the availability of sufficient cash to consummate the purchase and the absence of any court or administrative order or proceeding prohibiting or seeking to prohibit consummation of the purchase.

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The put rights are a unique addition to the rights of the holders of our common stock and the relevant accounting literature is very complex. The put rights are considered a bifurcated, embedded equity derivative instrument. To record the effect of the put rights requires difficult estimates and is very subjective. We do not believe the fair value of the put rights at June 30, 2010 is material. The fair value of the put right will be revalued at each reporting period with the change in valuation, if material,  reflected in our operating results for that reporting period.

Because the put rights create a potential redemption obligation on June 30, 2011, the estimated amount of that redemption obligation, calculated as of June 30, 2010, has been reclassified from accumulated deficit to a put right redemption reserve to reflect the potential redemption obligation.  The estimate of the redemption reserve also requires difficult estimates and is very subjective.  There is substantial uncertainty as to if or to what extent, the put rights will be exercised at June 30, 2011. The creation of the redemption reserve does not currently affect or restrict the funds available for our operations. The put right redemption reserve will be adjusted in future periods for changes in the estimated redemption obligation. Such adjustments will be recorded through accumulated deficit. Because all shareholder s participate equally in the put rights, there is no impact on the calculation of earnings per share.

Other than the put right redemption reserve, the impact of the put rights on other items in the financial statements was determined to be immaterial to the financial position and results of operations of the Company as of and for the three month period ended June 30, 2010.

E.   Company Buy-Back of Common Stock

            On March 5, 2008, we announced that our Board of Directors approved a stock repurchase program for up to five percent of our then outstanding common shares.  The shares could be repurchased from time to time in open market transactions or privately negotiated transactions at our discretion, subject to market conditions and other factors.  There were approximately 41.8 million shares of common stock outstanding on March 5, 2008.  On May 21, 2010, our Board of Directors canceled the stock repurchase program.

We did not purchase any shares in 2010 prior to cancellation of the program, and we did not purchase any shares in 2009.During the year ended December 31, 2008, we repurchased and retired 1,131,622 shares of our common stock at a total cost of $1,041,000.

F.   Contingency – Legal Proceedings

On or about April 20, 2009, we became aware of a qui tam complaint that was filed under seal by Jeffrey J. Bierman on March 28, 2005 in the United States District Court for the District of Massachusetts against us and other companies that are identified as having manufactured bone growth stimulation devices, including Orthofix International N.V., Orthofix, Inc., DJO Incorporated, Reable Therapeutics, Inc., the Blackstone Group, L.P., Biomet, Inc., EBI, L.P., EBI Holdings, Inc., EBI Medical Systems, Inc., Bioelectron, Inc., LBV Acquisition, Inc., and Smith & Nephew, Inc.  By order entered on March 24, 2009, the court unsealed the amended complaint.  The amended complaint alleges various causes of action under the federal False Claims Act and state and city false claim s acts premised on the contention that the defendants improperly promoted the sale, as opposed to the rental, of bone growth stimulation devices.  The amended complaint also includes claims against the defendants for, among other things, allegedly misleading physicians and purportedly causing them to file false claims and for allegedly violating the Anti-kickback Act by providing free products to physicians, waiving patients’ insurance co-payments, and providing inducements to independent sales agents to generate business.  Mr. Bierman is seeking civil penalties under various state and federal laws, as well as treble damages.

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The United States Government declined to intervene or participate in the case.  On September 4, 2009, Jeffrey J. Bierman, the Relator/Plaintiff, served the amended complaint on the Company.  We sold our bone growth stimulation business in November 2003 and have had no further activity in the bone growth stimulation business since that date.  We intend to defend this matter vigorously and believe that at all times our billing practices in our bone growthstimulation business complied with applicable laws.  On December 4, 2009, the Company moved to dismiss the amended complaint with prejudice.  That motion is currently pending.  Based upon the currently available information, we believe that the ultimate resolution of th is matter will not have a material adverse effect on our financial position, liquidity or results of operations.

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 June 30, 2010 and factors that affected our 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, 2009, our “Risk Factors” contained therein and Item 1A. Risk Factors included in Part II of this quarterly report.

Overview of the Business

Capstone Therapeutics Corp. (formerly OrthoLogic Corp.), is a biotechnology company focused on the development and commercialization of the novel synthetic peptides AZX100 and Chrysalin (TP508).

In 2010 and 2009, our activities included:

· Evaluating AZX100 for medically and commercially significant applications, such as prevention or reduction of hypertrophic and keloid scarring, treatment of pulmonary fibrosis and vascular intimal hyperplasia.  We are executing a development plan for this peptide, which included filing an IND for dermal scarring in 2007 and commencement of Phase 1 safety studies in this indication in the first quarter of 2008.  Our Phase 1a study was completed in May 2008.  We initiated a second safety study in dermal scarring (Phase 1b), which was completed in the fourth quarter of 2008.  The Studies’ Safety Committee reviewing all safety-related aspects of the clinical trials was satisfied with the profile of AZX100.  We commenced in the first quarter of 2009 AZX100 Phase 2 human clinical trials in keloid sca r revision and dermal scarring following shoulder surgery.  These Phase 2 studies completed enrollment in 2009 and are targeted to be substantially completed in 2010.  We also continued to perform pre-clinical studies supporting multiple indications for AZX100.

·   Pre-clinical experiments investigating the potential of Chrysalin to modulate the health of endothelial tissue in blood vessels and other mechanism-of-action studies to support our strategy to partner our vascular product candidates.  We did not perform additional pre-clinical or clinical studies in fracture repair, wound healing, spine fusion, cartilage defect repair, dental bone repair or tendon repair.  In 2010, we are continuing our vascular partnering/development collaboration efforts.

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Critical Accounting Policies

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 on Form 10-K, filed with the Securities and Exchange Commission on March 12, 2010, for the year ended December 31, 2009 and the accounting policies and related risks of the Put Rights as described in Note D to the Condensed Financial Statements as of and for the three and six months ended June 30, 2010 included in this current report of Form 10-Q, are those that depend most heavily on these judgments and estimates.  As of June 30, 2010, there have been no material changes to any of the critical accounting policies contained in our Annual Report for the year ended December 31, 2009, except for the accounting policies for the Put Rights.

Results of Operations Comparing Three-Month Period Ended June 30, 2010 to the Corresponding Period in 2009.

General and Administrative (“G&A”) Expenses:  G&A expenses related to our ongoing development operations were $789,000 in the second quarter of 2010 compared to $761,000 in the second quarter of 2009.  Our administrative expenses during the second quarter of 2010 reflect a comparable level of administrative activity to the same period of 2009.

Research and Development Expenses:  Research and development expenses were $2,160,000 for the second quarter of 2010 compared to $2,579,000 for the second quarter of 2009.  Our research and development expenses decreased $419,000 in the second quarter of 2010 compared to the same period in 2009 primarily due to the completion in 2009 of our planned partnering or development collaboration research support activities for Chrysalin.

Interest and Other Income, Net:  Interest and other income, net decreased from $224,000 in the second quarter of 2009 to $26,000 in the second quarter of 2010 due to the decrease in interest rates earned on investments between the two periods and reduction in the amount available for investment.

Net Loss:  We incurred a net loss in the second quarter of 2010 of $2.9 million compared to a net loss of $3.1 million in the second quarter of 2009.  The $0.2 million decrease in the net loss for the second quarter of 2010 compared to the same period in 2009 resulted primarily from the completion in 2009 of our planned partnering or development collaboration research support activities for Chrysalin.  These cost decreases were partially offset by reduced interest income, due to the decrease in interest rates earned on investments between the two periods and reduction in the amount available for investment.

Results of Operations Comparing Six-Month Period Ended June 30, 2010 to the Corresponding Period in 2009.

General and Administrative (“G&A”) Expenses:  G&A expenses related to our ongoing development operations were $1,762,000 in the six months ended June 30, 2010 compared to $1,568,000 in the same period in 2009.  Our administrative expenses during the six months ended June 30, 2010 reflect a comparable level of administrative activity to the same period of 2009 with the increase related to increased business development and legal expenses in 2010.

Research and Development Expenses:  Research and development expenses were $4,183,000 for the six months ended June 30, 2010, compared to $6,187,000 for the same period in 2009.  Our research and development expenses decreased $2,004,000 in the six months ended June 30, 2010 compared to the same period in 2009 primarily due to a $600,000 purchase in 2009 of peptide for pre-clinical studies and completion in 2009 of our planned partnering or development collaboration research support activities for Chrysalin.  Given the overlapping nature of our research efforts it is not possible to clearly separate research expenditures between AZX100 and Chrysalin; however, the majority of our research and development expenses in 2010 and 2009 were directed toward AZ X100 development efforts.

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Interest and Other Income, Net:  Interest and other income, net decreased from $491,000 in the six months ended June 30, 2009 to $71,000 in the same period in 2010 due to the decrease in interest rates earned on investments between the two periods and reduction in the amount available for investment.

Net Loss:  We incurred a net loss in the six months ended June 30, 2010 of $5.9 million compared to a net loss of $7.3 million in the same period in 2009.  The $1.4 million decrease in the net loss for the six months ended June 30, 2010 compared to the same period in 2009 resulted primarily from the purchase in 2009 of peptide for pre-clinical studies and completion in 2009 of our planned partnering or development collaboration research support activities for Chrysalin.  These cost decreases were partially offset by reduced interest income, due to the decrease in interest rates earned on investments between the two periods and reduction in the amount available for investment.

Liquidity and Capital Resources

We have 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.  Since the sale of our Bone Device Business, we have relied on our cash and investments to finance all our operations, the focus of which was research and development of our Chrysalin and AZX100 product candidates.  On February 27, 2006, we entered into an agreement with Quintiles (see Note 15 to our A nnual Report on Form 10-K filed with the Securities Exchange Commission on March 5, 2008), which provided an investment by Quintiles in our 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 and in January 2010 we received a tax refund of $1,009,000 for the tax year 2003, related to federal tax legislation enacted in the fourth quarter of 2009.  At June 30, 2010, we had cash and cash equivalents of $9.1 million and short-term investments of $20.9 million.

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 for Chrysalin-based product candidates.  We currently intend to pursue development partnering, collaboration 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.  We will continue research and development expenditures for further pre-clinical studies supporting multiple indications for AZX100 and plan to continue our Phase 2 human clinical trials for dermal scarring following shoulder surgery and keloid scar revision.

Our future research and development expenses may vary significantly from prior periods depending on our decisions on future AZX100 and Chrysalin development plans.  Our future interest and other income may vary significantly from prior periods based on changes in interest rates and amounts available for investment.

We anticipate that our cash and short-term investments at June 30, 2010 will be sufficient to meet our presently projected cash and working capital requirements for the next year.  However, to complete the clinical trials and supporting research and production efforts necessary to obtain FDA approval for either AZX100 or Chrysalin product candidates would require us to seek other sources of capital.  New sources of funds, including raising capital through the sales of our debt or equity securities, joint venture or other forms of joint development arrangements, sales of developments rights, or licensing agreements, may not be available or may only be available on terms that would have a material adverse impact on our existing stockholders’ interests.

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To the extent, if at all, the Put Rights are exercised at June 30, 2011, the cash purchase price for the shares tendered may affect our ability to meet our presently projected cash and working capital requirements and our ability to continue operations.  To continue operations after the Put Rights are exercised could require us to seek other sources of capital.  New sources of funds, including raising capital through the sales of our debt or equity securities, joint venture or other forms of joint development arrangements, sales of developments rights, or licensing agreements, may not be available or may only be available on terms that would have a material adverse impact on our remaining stockholders’ interests.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial and accounting officer, has reviewed and evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form 10-Q. Based on that evaluation, our management, including our principal executive officer and principal financial and accounting officer, has concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q in ensuring that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms a nd is accumulated and communicated to management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There were no 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.

Part II – Other Information

Item 1.   Legal Proceedings

Reference is made to Item 3. Legal Proceedings in our Form 10-K filed with the Securities and Exchange Commission on March 12, 2010.

Item 1A.  Risk Factors

Except for the potential effects of our common stock Put Rights, there are no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.  In May 2010, our shareholders approved an amendment to our Restated Certificate of  Incorporation which gives shareholders of record on June 30, 2011 a right under certain circumstances to put their shares to us for purchase on or about July 31, 2011.  These Put Rights, and their possible exercise, entail certain risks that shareholders should consider.  These risks are discussed under "Proposal 2: Amendment to our Restated Certificate of Incorporation to Provide a 'Put Right' to Each Holder of our Common Stock as of June 30, 2011 - Risks and Uncertainties Related to the Put Rights" in our
60;Proxy Statement filed with the SEC on April 12, 2010.

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The Put Rights are a unique addition to the rights of the holders of our common stock and the relevant accounting literature is very complex.  We do not currently believe the non-cash effect of the Put Rights would be material to our financial position or results of operations at June 30, 2010, but the actual amount would depend on the valuation of the Put Rights, which are inherently difficult to value.  Additionally, Derivative Accounting for the Put Rights would also affect the accounting for other items in our financial statements and those non-cash effects are not believed to be material to our financial position or results of operations at June 30, 2010; but these effects are inherently difficult to determine, require difficult estimates and are very subjective.

Item 6.  Exhibits

See the Exhibit Index 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.

CAPSTONE THERAPEUTICS CORP.
(Registrant)
Signature	Title	Date
/s/ John M. Holliman, III	Executive Chairman	August 9, 2010
John M. Holliman, III	(Principal Executive Officer)
/s/ Les M. Taeger	Senior Vice President and ChiefFinancial Officer	August 9, 2010
Les M. Taeger	(Principal Financial and Accounting Officer)

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Capstone Therapeutics Corp.

(formerly OrthoLogic Corp.)

(the “Company”)

Exhibit Index to Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2010

Exhibit  No.	Description	Incorporated by Reference To:	Filed Herewith
3.1	Certificate of Incorporation, as amended through May 21, 2010		X
10.1	First Amendment to Lease dated April 28, 2010 by and between OrthoLogic Corp. and Phoenix Investors #20, L.L.C.		X
31.1	Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as amended		X
31.2	Certification of Principal Financial and Accounting Officer Pursuant to Securities Exchange Act Rule 13a-14(a), as amended		X
32	Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350*

* Furnished herewith

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EX-3.1

Exhibit 3.1

CERTIFICATE OF INCORPORATION

OF

CAPSTONE THERAPEUTICS CORP.

As amended through May 21, 2010

1.           Name.  The name of the corporation is:

Capstone Therapeutics Corp. (the “Corporation”)

2.           Registered Agent.  The name and address of the initial registered office and registered agent of the Corporation is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.

3.           Purpose.  The purpose for which this Corporation is organized is the transaction of any or all lawful activity for which corporations may be organized under the General Corporation Law of Delaware, as it may be amended from time to time.

4.           Election of Directors.  Elections of directors at an annual or special meeting of stockholders shall be by written ballot unless the Bylaws of the Corporation shall otherwise provide.  Advance notice of stockholder nominations for the election of directors shall be given in the manner provided in the Bylaws of the Corporation.

5.           Authorized Capital.  The total number of shares of stock which the Corporation shall have authority to issue is 102,000,000 shares, consisting of 100,000,000 shares of common stock having a par value of $.0005 per share (the “Common Stock”) and 2,000,000 shares of preferred stock having a par value of $.0005 per share (the “Preferred Stock”).

The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of Article 5, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof.

The authority of the Board with respect to each series shall include, but not be limited to, determination of the following:

(a)           The number of shares constituting that series and the distinctive designation of that series;

(b)           The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;

(c)           Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights;

(d)           Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine;

(e)           Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

(f)           Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;

(g)           The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and

(h)           Any other relative rights, preferences and limitations of that series.

5A.           Common Stock Put Right.

(a)     Definitions.  For purposes of this Article 5A, the following terms shall have the following meanings:

(1)   “Available Cash” means Net Liquid Assets less Commitments and Contingencies, each calculated as of the Record Date.

(2)   “Change of Control Transaction” 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 Corporation representing 50% or more of the total voting power of all outstanding voting securities of the Corporation;

(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 Corporation; or

(c)  any merger, consolidation, share exchange, business combination or similar transaction in which the Corporation is not the surviving entity or in which the holders of the outstanding shares of stock of the Corporation immediately prior to such transaction hold, immediately after such transaction, less than 51% of the total voting power of the outstanding securities of the surviving or resulting entity in such transaction.

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(3)   “Commencement Date” means the date specified by the Corporation as the first date on which the Put Rights may be exercised, as set forth in the Put Notice.

(4)   “Commitments and Contingencies” means the amount of funds necessary to satisfy all obligations and liabilities of the Corporation, including contingent obligations and liabilities, which are then outstanding or would arise if the Corporation was liquidated, as determined by the Board of Directors in its sole and absolute discretion.

(5)   “Depositary” means the bank or trust company having combined capital, surplus and undivided profits of at least $500,000,000 which is appointed by the Corporation to serve as agent for the purpose of receiving certificates representing shares of Common Stock upon exercise of the Put Right, and distributing the Put Price therefor.

(6)   “Letter of Transmittal” means the notice delivered to each holder of record as of the Record Date, containing instructions as to how to exercise the Put Right, including a form of written notice for exercising the Put Right.

(7)   “Material Transaction” means a partnering, development or any other transaction, whether commercial, investment or otherwise, that the Board of Directors in its sole and absolute discretion determines is material to the Corporation.

(8)   “Net Liquid Assets” means the sum of the Corporation’s cash and cash equivalents and the liquidation value of the Corporation’s other disposable assets, as determined by the Board of Directors in its sole and absolute discretion.

(9)   “Put Notice” means the written notice from the Corporation to each holder of record of Common Stock on the Record Date, notifying such holder of the Put Right, the Commencement Date, the Closing Date, and the Put Price, and providing a Letter of Transmittal.

(10)   “Put Period” means the period beginning on the Commencement Date and ending on the Closing Date.

(11)   “Put Price” means an amount equal to 90% of Available Cash divided by the number of Puttable Shares.

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(12)   “Put Right” means the right to require the Corporation to redeem all or any portion of such holder’s Puttable Shares at a cash price equal to the Put Price in accordance with and subject to the terms and conditions of this Article 5A.

(13)   “Puttable Shares” means all shares of Common Stock outstanding as of the Record Date.

(14)   “Record Date” means June 30, 2011.

(15)   “Closing Date” means July 31, 2011, or such later date as may be designated by the Board of Directors.

(b)   Each holder of record of Common Stock on the Record Date shall have a Put Right beginning on the Commencement Date and ending on the Closing Date.

(c)   With respect to each Puttable Share as to which the Put Right has been properly exercised, the Corporation shall pay the holder an amount equal to 90% of Available Cash divided by the number of shares of Common Stock outstanding as of the Record Date.

(d)   If, after the Record Date, the Corporation shall effect a subdivision or combination of the Common Stock into a greater or lesser number of shares of Common Stock, or declare a dividend on the Common Stock payable in shares of Common Stock, then in each such case the Put Price shall be adjusted by multiplying the Put Price in effect immediately prior to such event by the ratio of the number of shares of Common Stock outstanding immediately prior to such event to the number of shares of Common Stock outstanding immediately after such event.  If the Corporation shall at any time declare or pay any dividend on Common Stock in cash, securities or other property other than Common Stock, the Put Price shall be reduced by the per share value of such dividend.   The Board of Directors shall determine in its sole and absolute discret ion the value of any non-cash dividend for purposes of calculating any adjustment to the Put Price.

(e)   As soon as practicable following the Record Date, the Corporation shall mail the Put Notice to each holder of record of Puttable Shares to such holder’s address as it appears on the stock register of the Corporation.  A holder of Puttable Shares may exercise his, her or its Put Right by delivering to the Depositary a duly and properly completed Letter of Transmittal during the Put Period, specifying, among other things, the number of Puttable Shares as to which the Put Right is being exercised and accompanied by a certificate or certificates representing such shares, with all necessary endorsements and stock powers.

(f)   As soon as practicable following the Closing Date, the Corporation shall deposit with the Depositary funds in an amount sufficient to pay the Put Price for all Puttable Shares as to which Put Rights have been properly exercised.  Each holder of Puttable Shares who has properly exercised the Put Right shall be paid the Put Price for each such share as soon as practicable following the Closing Date.  In the event that a holder of Puttable Shares exercises his, her or its Put Right with respect to less than all of the Puttable Shares held by such holder, a new certificate representing the shares of Common Stock as to which the Put Right was not exercised will be issued to the holder of such shares as soon as practicable after the Closing Date.

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(g)   Notwithstanding any other provision of this Article 5A, the Corporation’s obligation to pay the Put Price in respect of Puttable Shares as to which Put Rights have been properly exercised shall be subject to the satisfaction of each of the following conditions:

(1)  compliance with all applicable federal and state securities laws, including without limitation the filing with the U.S. Securities and Exchange Commission of an issuer tender offer statement on Schedule TO and Schedule 13E-3, to the extent required;

(2)  compliance with all other applicable laws, including Delaware General Corporation Law §160 relating to repurchases of shares;

(3)  availability of sufficient cash to pay the Put Price in respect of all Puttable Shares as to which Put Rights have been properly exercised;

(4)  absence of any court or administrative order or proceeding prohibiting or seeking the prohibition of the consummation of the redemption of Puttable Shares hereunder; and

(5)  less than 100% of the Puttable Shares having been put pursuant to the Put Rights.

 If any of the above conditions are not satisfied, the Corporation shall not be obligated to pay the Put Price in respect of Puttable Shares as to which Put Rights have been properly exercised.

(h)  Notwithstanding any other provision of this Article 5A, the Put Rights will terminate immediately upon the occurrence of any of the following:

(1)  the Corporation enters into a Material Transaction;

(2)  the Corporation consummates a Change of Control Transaction;

(3)  the Board of Directors approves a plan of dissolution or liquidation at any time prior to the redemption of Puttable Shares hereunder, whether before or after the Commencement Date; or

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(4)  the Put Rights are exercised with respect to 100% of the Puttable Shares, in which case the Board of Directors shall promptly thereafter propose a plan of dissolution or liquidation to stockholders in accordance with the Delaware General Corporation Law.

(i)   Provided that all conditions to the payment of the Put Price have been satisfied and the Put Rights have not otherwise terminated in accordance with this Article 5A, the Corporation shall pay the Put Price in respect of all, and not less than all, Puttable Shares as to which Put Rights have been properly exercised.

5B.           Series A Preferred Stock.  The first series of Preferred Stock, par value $.0005 per share, of the Corporation shall be, and hereby is, designated “Series A Preferred Stock” (the “Series A Shares”), and the number of shares constituting such series shall be One Million (1,000,000).  The relative rights and preferences of the Series A Shares shall be as follows:

Section A.             Dividends and Distributions.

(1)           Subject to the prior and superior rights of the holders of any shares of any series of stock prior and superior to the Series A Shares with respect to dividends, the holders of Series A Shares, in preference to the holders of Common Stock, par value $.0005 per share, of the Corporation (the “Common Stock”) and of any other junior stock, shall be entitled to receive, when and as declared by the Board of Directors, out of any funds lawfully available therefor, cash dividends thereon, payable quarterly, from the date of issuance thereof, upon the tenth days of January, April, July and October in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a Series A Share, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) subject to the provisions for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend or distribution payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any Series A Share.  In the event the Corporation shall at any time after July 2, 2007 (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amounts to which holders of Series A Shares were entitled immediately prior to such event under clause (a) and clause (b) of the preceding sentence shall be adjusted by multiplying each such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

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(2)           The Corporation shall declare a dividend or distribution on the Series A Shares as provided in paragraph (1) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend or distribution payable in shares of Common Stock); provided, however, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Series A Shares shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date; a nd provided further, that nothing contained in this paragraph (2) shall be construed so as to conflict with any provision relating to the declaration of dividends contained in the Charter.

(3)           Dividends shall begin to accrue and be cumulative on outstanding Series A Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such Series A Shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date.  Ac crued but unpaid dividends shall not bear interest.  Dividends paid on the Series A Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding.  The Board of Directors may fix a record date for the determination of holders of Series A Shares entitled to receive payment of a dividend or distribution declared thereon.

Section B.              Redemption. The Series A Shares are not redeemable.

Section C.              Liquidation, Dissolution or Winding Up.  In the event of the voluntary or involuntary liquidation of the Corporation the “preferential amount” that the holders of the Series A Shares shall be entitled to receive out of the assets of the Corporation shall be $100.00 per share plus all accrued and unpaid dividends thereon.

(1)           Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (upon liquidation, dissolution or winding up) to the Series A Shares unless, prior thereto, the holders of Series A Shares shall have received $100.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the “Series A Liquidation Preference”).  Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of Series A Shares unless, prior thereto, the holders of shares o f common stock shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in paragraph (3) of this Section C to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the “Adjustment Number”).  Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding Series A Shares and Common Stock, respectively, holders of Series A Shares and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one with respect to the Series A Shares and Common Stock , on a per share basis, respectively.

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(2)           In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, that rank on a parity with the Series A Shares, then all such available assets shall be distributed ratably to the holders of the Series A Shares and the holders of such parity shares in proportion to their respective liquidation preferences.  In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then any such remaining assets shall be distributed ratably to the holders of Common Stock.

(3)           In the event the Corporation shall at any time after July 2, 2007 (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section D.              Sinking Fund. The Preferred Shares shall not be entitled to the benefit of any sinking fund for the redemption or purchase of such shares.

Section E.               Conversion.

(1)           Subject to paragraph (2) of this Section E, the Preferred Shares shall not be convertible.

(2)           In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the Series A Shares shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged.  In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a su bdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series A Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

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Section F.               Voting Rights.

(1)           The holders of Series A Shares shall have no voting rights except as provided by Delaware statutes or by paragraph (2) of this Section F.

(2)           So long as any Series A Shares shall be outstanding, and in addition to any other approvals or consents required by law, without the consent of the holders of 66- 2/3% of the Series A Shares outstanding as of a record date fixed by the Board of Directors, given either by their affirmative vote at a special meeting called for that purpose, or, if permitted by law, in writing without a meeting:

(i)           The Corporation shall not sell, transfer or lease all or substantially all the properties and assets of the Corporation; provided, however, that nothing herein shall require the consent of the holders of Series A Shares for or in respect of the creation of any mortgage, pledge, or other lien upon all or any part of the assets of the Corporation.

(ii)           The Corporation shall not effect a merger or consolidation with any other corporation or corporations unless as a result of such merger or consolidation and after giving effect thereto holders of Series A Shares are entitled to receive a per share amount and type of consideration equal to 100 times the per share amount and type of consideration received by holders of shares of Common Stock, or (1) either (A) the Corporation shall be the surviving corporation or (B) if the Corporation is not the surviving corporation, the successor corporation shall be a corporation duly organized and existing under the laws of any state of the United States of America or the District of Columbia, and all obligations of the Corporation with respect to the Series A Shares shall be assu med by such successor corporation, (2) the Series A Shares then outstanding shall continue to be outstanding and (3) there shall be no alteration or change in the designation or the preferences, relative rights or limitations applicable to outstanding Series A Shares prejudicial to the holders thereof.

(iii) The Corporation shall not amend, alter or repeal any of the provisions of its Certificate of Incorporation in any manner that adversely affects the relative rights, preferences or limitations of the Series A Shares or the holders thereof.

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Section G.              Certain Restrictions.

(1)           Whenever quarterly dividends or other dividends or distributions payable on the Series A Shares as provided in Section A are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series A Shares outstanding shall have been paid in full, the Corporation shall not:

(i)           declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (as to dividends) to the Series A Shares;

(ii)           declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (as to dividends) with the Series A Shares, except dividends paid ratably on the Series A Shares and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii)           redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (as to dividends) to the Series A Shares; provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation, ranking junior (as to dividends) to the Series A Shares; and

(iv)           purchase or otherwise acquire for consideration any Series A Shares, or any shares of stock ranking on a parity (as to dividends) with the Series A Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(2)           The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (1) of this Section G, purchase or otherwise acquire such shares at such time and in such manner.

Section H.              Fractional Shares.  The Corporation may issue fractions and certificates representing fractions of Series A Shares in integral multiples of 1/100th of a Series A Share, or in lieu thereof, at the election of the Board of Directors of the Corporation at the time of the first issue of any Series A Shares, evidence such fractions by depositary receipts, pursuant to an appropriate agreement between the Corporation and a depositary selected by it, provided that such agreement shall provide that the holders of such depositary receipts shall have all rights, privileges and preferences to which they would be entitled as beneficial owners of Series A Shares.  In the even t that fractional Series A Shares are issued, the holders thereof shall have all the rights provided herein for holders of full Series A Shares in the proportion that such fraction bears to a full share.

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6.           Classification and Terms of Directors.  The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors consisting of not less than three directors nor more than nine directors, the exact number of directors to be determined from time to time by resolution adopted by the Board of Directors.  The directors shall be divided into three classes, designated Class I, Class II and Class III.  Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors.  The terms of the initial Class I directors shall terminate on the date of the first annual meeting of stockholders held after the effective date of this Article 6; the term of the initial Class II directors shall terminate on the date of the second annual meeting of stockholders held after the effective date of this Article 6; and the term of the initial Class III directors shall terminate on the date of the third annual meeting of stockholders held after the effective date of this Article 6.  At each annual meeting of stockholders beginning with the first annual meeting held after the effective date of this Article 6, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term.  If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide w ith the remaining terms of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.  A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.  Any vacancy on the Board of Directors, howsoever resulting (including without limitation newly created directorships), may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director.  Any director elected to fill a vacancy shall hold office for a term that shall coincide with the term of the class to which such director shall have been elected.

Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation or the resolution or resolutions adopted by the Board of Directors pursuant to Article Five applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article Six unless expressly provided by such terms.

7.           Removal of Directors.  Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the outstanding shares of the Corporation then entitled to vote generally in the election of directors, considered for purposes of this Article 7 as one class.

8.           Director Liability.  No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director.  Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit.  No amendment to or r epeal of this Section 8 shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.

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9.           Action by Consent of Stockholders.  Any action required or permitted to be taken by the stockholders must be effected at a duly called and noticed annual or special meeting of such stockholders and may not be effected by any consent in writing by such stockholders.

10.           Compromise of Debts.  Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Co de, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court direct.  If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation.

11.           Special Voting Requirements.

(a)           Except as set forth in Section (b) of this Article 11, the affirmative vote of the holders of two-thirds of the outstanding stock of the Corporation entitled to vote shall be required for:

(1)           any merger or consolidation to which the Corporation, or any of its subsidiaries, and an Interested Person (as hereinafter defined) are parties;

(2)           any sale or other disposition by the Corporation, or any of its subsidiaries, of all or substantially all of its assets to an Interested Person;

(3)           any purchase or other acquisition by the Corporation, or any of its subsidiaries, of all or substantially all of the assets or stock of an Interested Person; and

(4)           any other transaction with an Interested Person which requires the approval of the stockholders of the Corporation under the GCL, as in effect from time to time.

(b)           The provisions of Section (a) of this Article 11 shall not be applicable to any transaction described therein if such transaction is approved by resolution of the Corporation’s Board of Directors, provided that a majority of the members of the Board of Directors voting for the approval of such transaction are Continuing Directors.  The term “Continuing Director” shall mean any member of the Board of Directors of the Corporation who is not the Interested Person, and not an affiliate, associate, representative or nominee of the Interested Person or of such an affiliate or associate that is involved in the relevant transaction, and (A) was a member of the Board of Directors prior to the date that the person, firm or corporation, or any group the reof, with whom such transaction is proposed, became an Interested Person or (B) whose initial election as a director of the Corporation succeeds a Continuing Director or is a newly created directorship, and in either case was recommended by a majority vote of the Continuing Directors then in office.

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(c)           As used in this Article 11, the term “Interested Person” shall mean any person, firm or corporation, or any group thereof, acting or intending to act in concert, including any person directly or indirectly controlling or controlled by or under direct or indirect common control with such person, firm or corporation or group, which owns of record or beneficially, directly or indirectly, five percent (5%) or more of any class of voting securities of the Corporation.

12.           Special Meetings.  Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time only by the President, or the Board of Directors pursuant to a resolution approved by a majority of the whole Board of Directors, or at the request in writing of shareholders owning at least 35% of the capital stock issued and outstanding and entitled to vote.  Special meetings of the stockholders may not be called by any other person or persons.  Business transacted at any special meeting of the stockholders shall be limited to the purposes stated in the notice of such meeting.

13.           Bylaws.  In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized by majority vote of the whole Board of Directors to adopt, repeal, alter, amend or rescind the Bylaws of the Corporation.  In addition, the Bylaws of the Corporation may be adopted, repealed, altered, amended, or rescinded by the affirmative vote of two-thirds of the outstanding stock of the Corporation entitled to vote thereon; provided, if the Continuing Directors, as defined in Article 11 shall by a majority vote of such Continuing Directors have adopted a resolution approving the amendment or repeal proposal and have determined to recommend it for approval by the holders of stock entitled to vote thereon, then the vote required shall be the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon.

14.           Certificate.  The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute and the Certificate of Incorporation, and all rights conferred on stockholders herein are granted subject to the reservations in Article 14.  Provided, however, the affirmative vote of the holders of at least two-thirds of the voting power of the outstanding stock of the Corporation entitled to vote thereon, shall be required to alter, amend, or adopt any provision inconsistent with or repeal Articles 4, 6, 7, 9, 11, 12 and 13 and this Article 14; provided, if the Continuing Directors, as defi ned in Article 11 shall by a majority vote of such Continuing Directors have adopted a resolution approving the amendment or repeal proposal and have determined to recommend it for approval by the holders of stock entitled to vote thereon, then the vote required shall be the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon.

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EX-10.1

EXHIBIT 10.1

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (this "First Amendment") is made and entered into to be effective this 28th  day of April, 2010 by and between Phoenix Investors #20, L.L.C., an Arizona limited liability company (“Landlord”) and OrthoLogic Corp., a Delaware corporation (“Tenant”) and is as follows.

RECITALS

A.           Landlord, as successor-in-title to Phoenix Investors #13, L.L.C, and Tenant are currently the Lessor and Lessee under that LEASE made as of July 19, 2007 between Phoenix Investors #13, L.L.C., an Arizona limited liability company, and OrthoLogic Corp with respect to Suites 101-A and 101-B of the Building  located at 1275 West Washington Street, Tempe, Arizona .

B.           This First Amendment is being entered into to change the Early Termination Date from February 28, 2011 to July 31, 2011 and Termination Option Exercise Date from 9 months prior to the Early Termination Date to 6 months prior to the Early Termination Date, as those terms are defined in the LEASE.

AGREEMENTS

In consideration of good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the parties agree that Section 31 of the LEASE, TENANT’S TERMINATION RIGHT is removed and replaced in its entirety by the following:

TENANT’S TERMINATION RIGHT

.  Tenant shall have an option to cancel the remainder of the initial Lease Term effective as of July 31, 2011 (the "Early Termination Date").  To exercise this option, Tenant must (a) deliver written notice of the exercise thereof to Landlord at least six (6) months prior to the Early Termination Date (the "Termination Option Exercise Date"), and (b) concurrently with the giving of such notice, pay to Landlord a termination fee equal to the sum of (i) six (6) months of Base Rent ( $131,626.00), plus (ii) all unamortized, as of February 28, 2011, leasing commissions paid to Tenant's broker in connection with this Lease ( $26,325.00).  Tenant must also not be in default beyond any applicable notice and cure period under this Lease at the time Tenant de livers such notice.  If Tenant fails to deliver such items on or before the Termination Option Exercise Date, the option to terminate shall be deemed waived for all purposes and shall no longer be available to Tenant.  Upon Tenant’s delivery of the notice and termination fee described above, the Lease Term shall be deemed adjusted in accordance with the provisions of this Section 31.  If Tenant timely gives notice of its exercise of this option, then the parties shall promptly execute an amendment to this Lease or a lease termination agreement prepared by Landlord to confirm the change of the Lease Term, which amendment or agreement shall be reasonably acceptable to each of Landlord and Tenant.

Except as specifically modified in this First Amendment, all terms and provisions in the LEASE are ratified and affirmed and remain in full force and effect.

IN WITNESS WHEREOF, the parties have executed this Agreement to be effective on the date set forth above.

LANDLORD: PHOENIX INVESTORS #20, L.L.C. an Arizona limited liability company
By	Greenwood and McKenzie, a California general partnership
Its	Manager
	By /s/ Jim McKenzie
	Jim McKenzie Its General Partner
TENANT: ORTHOLOGIC CORP., a Delaware corporation
By:	/s/ Les M. Taeger
Print Title:	SVP Chief Financial Officer

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 Capstone Therapeutics 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(s) 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(s) 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:  August 9, 2010

By:  /s/ John M. Holliman, III  

John M. Holliman, III

Executive Chairman

(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 Capstone Therapeutics 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(s) 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(s) 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:  August 9, 2010

By:  /s/ Les M. Taeger                                                                                                     

Les M. Taeger

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting 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 Capstone Therapeutics Corp. (the “Company”) on Form 10-Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of John M. Holliman, III, Executive Chairman and Principal Executive Officer of the Company, and Les M. Taeger, Senior Vice President and Chief Financial Officer, and Principal Financial and Accounting 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: August 9, 2010

/s/ John M. Holliman, III

John M. Holliman, III

Executive Chairman

(Principal Executive Officer)

/s/ Les M. Taeger

Les M. Taeger

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting 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 Capstone Therapeutics  Corp. and will be retained by Capstone Therapeutics Corp. and furnished to the Securities and Exchange Commission or its staff upon request.