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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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Amendment No. 1

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OrthoLogic Corp.

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Delaware		3841		86-0585310
(State or other Jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

OrthoLogic Corp.

Thomas R. Trotter

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Copies to: Steven P. Emerick Quarles & Brady Streich Lang LLP Two North Central Avenue Phoenix, Arizona 85004 (602) 229-5200		Copies to: Jeffrey R. Harder Winstead Sechrest & Minick P.C. 600 Town Center One 1450 Lake Robbins Drive The Woodlands, Texas 77380 (281) 681-5900

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     Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective and the completion of the transactions described herein.

     If any of the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    o

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o 

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     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o 

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CALCULATION OF REGISTRATION FEE

				Proposed		Proposed
Title of Each Class of		Amount to be		Maximum Offering		Maximum Aggregate		Amount of
Securities to be Registered		Registered		Price Per Share		Offering Price		Registration Fee
Common Stock, par value $.0005 per share		3,708,649(1)		$8.10(2)		$30,040,049		$3,806.08
Common Stock, par value $.0005 per share		—		—		$ 7,000,000(3)		$ 886.90

(1)	Maximum number of shares to be issued at the time of the closing of the transaction described in this registration statement.
(2)	Calculated solely for the purpose of computing the registration fee under Rule 457(c) on the basis of the average of the high and low sale prices of OrthoLogic common stock as reported on the NASDAQ National Market on May 28, 2004.
(3)	Represents the maximum aggregate offering price of such shares to be issued in the future based on the then market price of such shares, in accordance with Rule 457(o).

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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[Chrysalis Letterhead]

Dear Stockholder of Chrysalis Biotechnology, Inc.:

      On behalf of the Board of Directors of Chrysalis, I am pleased to inform you that the Board of Directors has approved the sale of substantially all of Chrysalis’ assets (except cash, but including all intellectual property) to OrthoLogic Corp., Chrysalis’ long-time strategic partner, pursuant to the Asset Purchase Agreement and Plan of Reorganization by and between Chrysalis and OrthoLogic dated April 28, 2004 as amended (the “Asset Purchase Agreement”) and attached as Annex A. Through this consent solicitation/prospectus, Chrysalis is seeking your written consent as a Chrysalis stockholder to (i) the Asset Purchase Agreement and the transfer of Chrysalis’ assets in connection with the Asset Purchase Agreement, and (ii) its plan of complete liquidation and dissolution, which is attached as Annex B. Chrysalis is required to obtain written consents from holders of at least a majority of the outstanding shares of Chrysalis’ common stock, on an as-converted basis, to approve both of the proposals described above. Chrysalis intends to consummate the asset sale on or about 10 business days following the date of this consent solicitation/prospectus, assuming Chrysalis receives written consents from holders of the requisite number of shares of its voting stock. Chrysalis, however, reserves the right to close the asset sale as soon as it receives a sufficient number of consents.

      This consent solicitation/prospectus and the registration statement on Form S-4 in which it is contained is also intended to register under the Securities Act of 1933, as amended, the shares of OrthoLogic’s common stock to be issued pursuant to the Asset Purchase Agreement.

      Pursuant to the Asset Purchase Agreement, at closing Chrysalis will receive cash of $2.5 million and a number of shares of OrthoLogic common stock that is equal to $25.0 million as of closing based on the 10-day average closing price of OrthoLogic common stock ending immediately prior to closing (the “Closing Date Stock Price”) if the Closing Date Stock Price is no greater than $8.239 and no less than $6.741 per share. In the event that the Closing Date Stock Price is greater than $8.239, Chrysalis will receive 3,034,349 shares of OrthoLogic common stock and in the event that the Closing Date Stock Price is less than $6.741, Chrysalis will receive 3,708,649 shares of OrthoLogic common stock. This means that Chrysalis could receive a number of shares of OrthoLogic common stock worth more or less than $25.0 million at closing. For example, the closing price of OrthoLogic common stock as of July 1, 2004 was $8.25. Assuming this is the Closing Date Stock Price, Chrysalis would receive $25,033,379 worth of OrthoLogic common stock (based on multiplying $8.25 per share and 3,034,349 shares).

      Pursuant to the Asset Purchase Agreement and an escrow agreement among Chrysalis, OrthoLogic and the escrow agent, attached as Annex C, 15% of the shares that Chrysalis receives at the closing of the Asset Purchase Agreement (the “General Escrow Shares”) will be placed in escrow for 18 months from the closing date to cover indemnification of OrthoLogic by Chrysalis for the representations and warranties made by Chrysalis in the Asset Purchase Agreement. Because of my role as Chrysalis’ founder, I have agreed to the placement of an additional number of shares (equal to approximately 3% of the shares Chrysalis receives at the closing) allocable to me individually in escrow to be available for indemnification after and in the event the General Escrow Shares are fully used. As a result, the escrow account will contain approximately 18% of the stock portion of the purchase price. Holders of 5% or more of Chrysalis common stock on an as-converted basis will be subject to a 60-day lockup agreement.

      In addition, Chrysalis may receive an additional number of shares of OrthoLogic common stock valued at $7.0 million (but not in excess of the number of shares issued at closing) upon the occurrence of certain trigger events, which include the sale or other disposition of OrthoLogic or the acceptance by the U.S. Food and Drug Administration of a new drug application for a product based on Chrysalin, if either such trigger event occurs within five years of closing. A portion of the $7.0 million payment may be paid in cash under certain limited circumstances.

      Chrysalis intends to distribute the shares of OrthoLogic common stock received at closing to its stockholders pursuant to its plan of complete liquidation and dissolution as soon as practicable following the closing of the Asset Purchase Agreement. Chrysalis also intends to distribute any of the $2.5 million in cash consideration remaining after the payment of or retention for expenses associated with this transaction, winding down and dissolution, including the payment of a finder’s fee incurred in connection with this

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      Chrysalis urges you to read the consent solicitation/prospectus in its entirety and all of the Annexes as well. Chrysalis asks that you consent to both the Asset Purchase Agreement and related asset sale and the plan of complete liquidation and dissolution by signing the written consent of stockholders attached as Annex E and returning it in the enclosed self-addressed envelope as soon as possible. As I stated earlier, the parties intend to close on the asset sale on or before the 10th business day following the date of this consent solicitation/prospectus assuming Chrysalis has received written consents representing a sufficient number of votes to approve the transaction. Please feel free to call me or Dennis McWilliams, Chrysalis’ Chief Operating Officer, at (409) 750-9251 if you have any questions.

	Very truly yours,
	Darrell H. Carney, Ph.D.
	President and Chief Executive Officer

Galveston, Texas

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This consent solicitation/prospectus and the information contained herein is subject to completion or amendment. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the consent solicitation/prospectus. Any representation to the contrary is a criminal offense. This consent solicitation/prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

SUBJECT TO COMPLETION

CONSENT SOLICITATION/ PROSPECTUS

[Chrysalis Logo/ Ortho Logo]

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             This consent solicitation/prospectus relates to the issuance of shares of OrthoLogic Corp. (“OrthoLogic”) common stock to Chrysalis Biotechnology, Inc. (“Chrysalis”) in connection with the purchase of substantially all of Chrysalis’ assets. On April 28, 2004, OrthoLogic and Chrysalis signed an Asset Purchase Agreement and Plan of Reorganization, as later amended, (the “Asset Purchase Agreement”) pursuant to which OrthoLogic agreed to purchase substantially all the assets of Chrysalis in exchange for the payment described below:

	•	$2.5 million in cash, payable at the closing:
	•	$25.0 million in OrthoLogic common stock, payable at the closing. Chrysalis will receive that number of shares of OrthoLogic common stock with a value of $25.0 million as of closing, based on the 10-day average closing price of OrthoLogic common stock ending immediately prior to closing (the “Closing Date Stock Price”) if the Closing Date Stock Price is no greater than $8.239 and no less than $6.741 per share. In the event that the Closing Date Stock Price is greater than $8.239, Chrysalis will receive 3,034,349 shares of OrthoLogic common stock and in the event that the Closing Date Stock Price is less than $6.741, Chrysalis will receive 3,708,649 shares of OrthoLogic common stock. This means that Chrysalis could receive a number of shares of OrthoLogic common stock worth more or less than $25.0 million at closing. For example, the closing price of OrthoLogic common stock as of July 1, 2004 was $8.25. Assuming this is the Closing Date Stock Price, Chrysalis would receive $25,033,379 worth of OrthoLogic common stock (based on multiplying $8.25 per share and 3,034,349 shares).
	•	$7.0 million in OrthoLogic common stock, payable if either of the following trigger events occurs before the fifth anniversary of the closing: (1) a sale of substantially all OrthoLogic’s assets, or a merger, consolidation, recapitalization, or other transaction, in each case after which OrthoLogic’s stockholders immediately before such transaction do not own a majority of the voting power of the resulting entity immediately after such transaction; or (2) OrthoLogic’s receipt of written notice from the United States Food and Drug Administration that a new drug application for a product based on Chrysalin has been accepted for filing. The number of shares of OrthoLogic common stock issued will be calculated by using a per share price equal to the average closing price for the 10 trading days preceding the triggering event; in no event shall such number of shares exceed the number issued at closing. In the event that the aggregate number of shares issuable at closing and upon the successful accomplishment of the trigger event equals or exceeds 20% of OrthoLogic’s outstanding capital stock at closing, the number of shares issuable upon the trigger event shall be reduced so the amount is less than 20% of its outstanding shares, with the difference paid in cash based on the same OrthoLogic average closing price for the 10 trading days preceding the triggering event.

      In connection with the transaction, OrthoLogic is registering for sale all the shares of its common stock that may be issued to Chrysalis and distributed to the Chrysalis stockholders upon Chrysalis’ liquidation. OrthoLogic’s common stock is currently traded on the Nasdaq National Market under the symbol “OLGC.”

      This consent solicitation/prospectus is dated                     , 2004 and is first being mailed to Chrysalis stockholders on or about                     , 2004. Chrysalis’ offices are located at 2200 Market, Suite 600, Galveston, Texas 77550. Chrysalis’ website address is www.chrysalisbio.com. Chrysalis can be reached by telephone at 409-750-9251. You should carefully read the discussion in the section entitled “Risk Factors” beginning on page 13.

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TABLE OF CONTENTS

Questions and Answers			ii
Summary			1
OrthoLogic Corp. Selected Historical Consolidated Financial Data			7
Chrysalis Biotechnology, Inc. Selected Historical Consolidated Financial Data			10
OrthoLogic Corp. Selected Unaudited Pro Forma Consolidated Financial Information			11
Risk Factors			13
Forward Looking Statements			23
The Companies			24
The Asset Purchase Agreement and Plan of Reorganization			27
Reasons for Engaging in the Asset Sale			31
Background, Past Contacts, and Negotiations			34
Stockholder Approval			36
Dissenter’s or Appraisal Rights			36
Interests of Certain Chrysalis Related Persons in the Asset Sale			36
Material Federal Income Tax Consequences to Chrysalis Stockholders			38
Management’s Discussion and Analysis of Financial Condition and Results of Operations			42
Quantitative and Qualitative Disclosures About Market Risk			43
Per Share Data			44
Market Price and Dividend Data			45
Certain Relationships and Related Transactions			45
Security Ownership of Certain Beneficial Owners and Management			45
Description of the Plan of Complete Liquidation and Dissolution			47
Comparative Rights of Chrysalis Stockholders and OrthoLogic Stockholders			50
Legal Matters			57
Experts			57
Chrysalis Audited Financial Statements			F-1
Unaudited Pro Forma Consolidated Financial Statements			F-16
Asset Purchase Agreement and Plan of Reorganization, and Amendment No. 1 Thereto			Annex  A
Plan of Complete Liquidation and Dissolution			Annex  B
Escrow Agreement			Annex  C
Transition Services Agreement			Annex  D
Written Consent of Stockholders			Annex  E
OrthoLogic Form 10-K for the Fiscal Year Ended December 31, 2003, as Amended			Annex  F
OrthoLogic Form 10-Q for the Quarter Ended March 31, 2004			Annex  G
OrthoLogic Proxy Statement Dated April 29, 2004			Annex  H
OrthoLogic Form 8-K Filed January 28, 2004			Annex I
OrthoLogic Form 8-K Filed April 29, 2004			Annex J
EX-8.1
EX-10.1
EX-10.2
EX-23.2
EX-23.3

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QUESTIONS AND ANSWERS

What am I being asked to do as a stockholder of Chrysalis?

      You are being asked to provide your written consent to approve (i) the sale of substantially all of the Chrysalis assets (except cash) to OrthoLogic pursuant to the Asset Purchase Agreement and Plan of Reorganization and the related transactions described in that agreement, and (ii) the plan of complete liquidation and dissolution pursuant to which Chrysalis will wind down its operations and dissolve. To consummate such proposals, Chrysalis is soliciting written consent from holders of at least a majority of its outstanding common stock on an as-converted basis.

      On an as-converted basis as of July 1, 2004, Chrysalis had 2,048,310 shares of Chrysalis common stock eligible to vote on the asset sale and on the plan of liquidation and dissolution. As of such date, Chrysalis had 1,201,940 shares of common stock outstanding, 89,850 Series A preferred shares convertible into 205,371 shares of common stock, Series B preferred shares convertible into 346,467 shares of common stock, Series C preferred shares convertible into 190,476 shares of common stock and convertible notes, which, upon the closing of this transaction, convert into 104,056 shares of Series D preferred stock, which are convertible into 104,056 shares of common stock (assuming a July 1, 2004 conversion date). Because the convertible notes continue to accrue interest until their conversion and the principal and interest on the notes are convertible into Series D preferred stock, which are convertible into a like number of shares of common stock, the convertible notes will convert into 104,723 shares of common stock assuming a July 31, 2004 conversion date.

      Chrysalis is asking you to execute and return the written consent attached as Annex E to this consent solicitation to Chrysalis’ Secretary as soon as possible by returning the executed written consent in the enclosed self-addressed stamped envelope. If you do not respond and Chrysalis receives the requisite number of consents voting in favor of the asset purchase, you will receive a written notice from the Chrysalis Board of Directors of the approval of the consent promptly thereafter.

If I change my mind after I have submitted an executed consent, can I revoke my consent?

      If you submit your written consent to us and subsequently wish to revoke your consent, please call Dennis McWilliams at (409) 750-9251 and notify him of your decision, and Chrysalis will disregard your signed consent provided that Chrysalis has not already received and accepted consents from shareholders representing a majority of the Chrysalis shares eligible to be voted to approve the asset sale and plan of liquidation.

Why has Chrysalis Board of Directors decided to sell Chrysalis’ assets?

      Chrysalis’ Board of Directors considered a number of factors in determining that the asset sale is in the best interests of Chrysalis and its stockholders, including but not limited to the following:

	•	The expected increased value from having all Chrysalin patent license rights owned by a single entity rather than having multiple owners of rights for different indications;
	•	Chrysalis’ Board’s assessment of OrthoLogic’s commitment to the future growth and commercialization of the Chrysalin technology, and OrthoLogic management’s ability to achieve these goals; and
	•	OrthoLogic’s cash position and ability to fund the future development of Chrysalin drug products compared to Chrysalis’ current ability.

      The Board also considered a number of factors that might have a negative impact on Chrysalis and its stockholders. Please see “Reasons for Engaging in Asset Sale” on page 31 for a complete list of the positive and negative factors that were considered by the Board.

What was the process by which Chrysalis chose to sell its assets to OrthoLogic?

      Since inception, Chrysalis has sought ways to increase stockholder value through a variety of financing and corporate partnering activity. More recently, since the termination of the Abbott license agreement,

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What will the Chrysalis stockholders receive if the asset sale closes?

      Chrysalis’ stockholders will not immediately receive anything upon the consummation of the sale. However, assuming all of the $2.5 million cash portion of the purchase price is used to pay expenses related to the asset sale and Chrysalis’ liquidation; assuming Chrysalis receives $25.0 million of OrthoLogic stock when the asset sale closes; assuming there are no claims made against the stock in the escrow account; assuming the convertible notes convert as of July 31, 2004 and all the option holders exercise their options, but the warrant holders do not; then Chrysalis expects each of Chrysalis’ common stockholders to receive approximately $7.84 in OrthoLogic common stock for every share of Chrysalis common stock owned after all preferred preferences are paid. The ratio of OrthoLogic common stock Chrysalis shareholders will receive for each share of Chrysalis common stock will vary depending on the market price of OrthoLogic common stock on the distribution date. Using the high and low ranges of the Closing Date Stock Price collar (of $6.741 and $8.239) as the range of market prices on the date of distribution and the $7.84 distribution amount per Chrysalis common share derived above, Chrysalis common stockholders would receive between 0.95 and 1.16 shares of OrthoLogic common stock per share of Chrysalis common stock as of July 31, 2004.

      The Chrysalis Board of Directors plans to pay all Chrysalis’ creditors (including those to whom Chrysalis owes payment for services related to the sale of the assets), fulfill its post-sale obligations under the transition services agreement and then liquidate as soon as practicable and, in doing so, distribute the remaining cash and shares of OrthoLogic common stock to Chrysalis stockholders. Chrysalis expects to use all or nearly all of the $2.5 million cash portion of the purchase price to pay expenses related to the sale and its liquidation. Chrysalis will pay all preferred stock liquidation preferences in the liquidation. Chrysalis currently has common stock and three series of preferred stock outstanding, Series A, B and C. Additionally, Chrysalis expects to have a Series D preferred stock outstanding (through the conversion of notes) by the closing. Chrysalis preferred stockholders have certain liquidation preferences as well as participation rights in the distributions. The holders of the Chrysalis preferred stock are entitled to liquidation preferences totaling approximately $5.9 million in the aggregate, divided among the series of preferred stockholders approximately as follows:

Series A		$	899,000;
Series B		$	1,905,000;
Series C		$	2,000,000;			and
Series D		$	1,050,000			(not including accrued interest in connection with the convertible notes).

      Assuming Chrysalis holds $25.0 million worth of OrthoLogic common stock at the time of the distribution, Chrysalis will have approximately $19.1 million of OrthoLogic common stock after Chrysalis pays the preferred stock liquidation preferences. In addition, all such series of preferred stock participate with

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      A 15% portion of each stockholder’s distributions (and a larger percentage of Darrell Carney’s distributions) will be placed into an escrow account for an 18 month period following the closing which will be used to fund indemnification claims made by OrthoLogic.

Do I have to retain the OrthoLogic stock distributed to me to be eligible to receive my per share portion of the $7.0 million contingent payment?

      No. Each holder of Chrysalis stock at the time of Chrysalis’ liquidation will receive his pro rata portion of the $7.0 million contingent portion of the purchase price, if it is earned, regardless of whether the Chrysalis stockholder has retained or sold his OrthoLogic common stock. Assuming that Chrysalis has already paid all of its preferred shares’ liquidation preferences, the $7.0 million contingent portion of the purchase price will be paid to holders of Chrysalis’ capital stock on a pro rata basis with holders of preferred stock participating on an as converted to common stock basis.

What will the Chrysalis option holders and warrant holders receive if the asset sale closes?

      If the option holders exercise their options, which are currently exercisable at prices ranging from $0.55 to $1.05 per share, they will receive the same distribution per share as the holders of common stock. Such options must be exercised as of the closing to be valid. There are currently outstanding options exercisable for a total of 391,900 shares.

      The warrant holders must exercise their warrants prior to or within 30 days after the closing of the asset sale. They would also receive the same distribution per share as the holders of common stock. Because the exercise price of Chrysalis’ outstanding warrants is $10.50 per share and the expected value of the OrthoLogic common stock distributable to Chrysalis’ common stockholders is less than $10.50 per share, Chrysalis believes it is unlikely that any of the warrants will be exercised.

What will happen to Chrysalis after the sale is consummated?

      The Chrysalis Board of Directors plans to liquidate Chrysalis, distributing all Chrysalis’ then remaining assets, after all creditors have been paid, to Chrysalis stockholders, and dissolve Chrysalis as soon as practicable after the closing. Chrysalis has agreed to continue employing all of Chrysalis’ employees who are not hired by OrthoLogic and to make them available to OrthoLogic for up to 90 days following the closing pursuant to a transition services agreement. Consequently, Chrysalis will not commence formal liquidation of the company until after the end of the transition services agreement.

When will I be able to sell my shares of OrthoLogic?

      You will be able to sell shares in the public market as soon the shares of OrthoLogic common stock are distributed to you, unless you are entering into a lockup agreement with OrthoLogic. In addition, you may be subject to volume, time, manner of sale and other restrictions of Rule 145 under the Securities Act of 1933, as amended if you are considered an affiliate of Chrysalis or OrthoLogic. See “The Asset Purchase Agreement and Plan of Reorganization — Other Related Material Contracts” for more information about the lockup agreements.

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What are the federal tax consequences of the asset sale and liquidation to Chrysalis and its Stockholders?

      Chrysalis has obtained the opinion of Winstead Sechrest & Minick P.C., counsel to Chrysalis, which is included as an Exhibit to the Registration Statement of which this consent solicitation/prospectus is a part (the “Tax Opinion”), that the asset sale and liquidation will constitute a “Reorganization” within the meaning of section 368(a)(1)(C) of the Internal Revenue Code of 1986. The Tax Opinion is subject to certain assumptions and qualifications, including but not limited to the accuracy of certain representations made by Chrysalis. The Tax Opinion is not binding on the Internal Revenue Service (the “IRS”) and does not preclude the IRS from adopting a contrary position. If this transaction qualifies as a tax-free reorganization, Chrysalis will not recognize gain or loss as a result of the asset sale and Chrysalis’ stockholders will not recognize gain or loss on the shares of OrthoLogic common stock received or deemed received by them except to the extent of (a) OrthoLogic common stock issuable as the contingent portion of the purchase price that are recharacterized as interest income under the imputed interest rules of federal income tax law; (b) cash received in lieu of fractional shares of OrthoLogic common stock; (c) cash or other non-stock property received or deemed received in exchange for Chrysalis capital stock; and (d) cash issuable as the contingent portion of the purchase price. Certain option holders may also recognize income upon the exercise of their options to acquire Chrysalis capital stock in anticipation of the asset sale and liquidation. The federal income tax consequences described may not apply to all stockholders of Chrysalis. Your tax consequences will depend on your own situation. You are urged to consult your tax advisor so as to fully understand the tax consequences of the sale and liquidation to you. See “Material Federal Income Tax Consequences to Chrysalis Stockholders” on page 38 for more information.

Are there any conditions to the closing of the sale?

      Chrysalis and OrthoLogic are not obligated to consummate the asset sale until specific conditions are satisfied or waived. Some of the conditions are as follows:

	•	The president of Chrysalis must enter into an employment agreement with OrthoLogic;
	•	No statute, rule, regulation, executive order, decree, injunction or other order has been enacted, entered, promulgated or enforced by any court or governmental authority that is in effect and has the effect of preventing the consummation of the sale and plan of reorganization;
	•	Opinions of legal counsel of OrthoLogic, Chrysalis and the University of Texas, as licensor of Chrysalin, must have been obtained;
	•	All representations and warranties must be complete, true and correct; and
	•	All approvals and consents necessary or desirable, if any, in connection with the transfer to OrthoLogic of Chrysalis’ assets must have been obtained.

Am I entitled to appraisal or dissenter’s rights?

      No. Chrysalis’ stockholders are not entitled to any dissenter’s or appraisal rights with respect to the sale of Chrysalis’ assets under Delaware law or Chrysalis’ Certificate of Incorporation.

Can Chrysalis decide not to proceed with the sale to OrthoLogic?

      Chrysalis’ Board of Directors may terminate the asset sale to OrthoLogic under certain circumstances. However, the termination may make Chrysalis responsible to pay OrthoLogic certain breakup fees or reimburse OrthoLogic for its out-of-pocket expenses incurred in pursuing the Chrysalis sale of assets. See “The Asset Purchase Agreement and Plan of Reorganization — Termination and Breakup Fees.”

What are the interests of Chrysalis’ directors, officers and affiliates in the asset sale?

      In connection with the closing of the asset sale, Chrysalis’ management team and directors will receive consideration in the form of stockholder distributions upon Chrysalis’ liquidation and, in some cases, severance

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	•	Philip Hunke, a Chrysalis director, will receive a $50,000 preference distribution on his 5,000 shares of Series A Preferred Stock.
	•	Chrysalis’ director and president, Darrell Carney will receive a consulting contract with OrthoLogic.
	•	Chrysalis’ Chief Operating Officer Dennis McWilliams will receive a severance payment.
	•	All of Chrysalis management and directors, along with all other option holders, will be eligible to have the payment of their exercise prices waived by Chrysalis.

      Please see “Interests of Certain Chrysalis Related Persons in the Asset Sale” for a more complete description of the Chrysalis managements’ and directors’ interests in the asset sale.

      In addition, two of Chrysalis’ affiliates are holders of Chrysalis preferred stock and will receive a preference distribution. OrthoLogic will receive approximately $750,000 in a preference distribution on its 136,364 shares of Series B preferred stock and Abbott Corporation will receive approximately $2.0 million in a preference payment on its 190,476 shares of Series C preferred stock.

Who is paying the expenses related to the asset sale?

      Both Chrysalis and OrthoLogic have agreed to each pay their own out-of-pocket expenses incurred in pursuing the asset sale. However, if Chrysalis’ stockholders do not approve the asset sale, Chrysalis will need to pay OrthoLogic a sum equal to OrthoLogic’s out-of-pocket expenses incurred in pursuing this asset sale if OrthoLogic terminates this sale.

How is this transaction expected to be treated for accounting purposes?

      The asset sale is expected to be treated as an acquisition of net assets by OrthoLogic for financial accounting purposes.

Where can I find more information about OrthoLogic?

      Information about OrthoLogic can be obtained in reading the Annexes F-J included herein. Additionally, you can get more information about OrthoLogic by inspecting its annual, quarterly and other reports, which it files with the U.S. Securities and Exchange Commission, by copying them at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549, or by calling the SEC at 1-800-SEC-0330 (the “SEC”). You can obtain these reports from the SEC website at www.sec.gov through the EDGAR system or by contacting OrthoLogic directly at the address and telephone number below.

OrthoLogic Corp.

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SUMMARY

      This summary highlights information more fully described elsewhere in this consent solicitation/prospectus and may not contain all of the information that may be important to you. You should read the entire consent solicitation/prospectus, including the consolidated financial statements and related notes and other financial data included in this consent solicitation/prospectus and its Annexes. This summary is qualified in its entirety by the more detailed information appearing elsewhere in this document. This summary includes page references in parentheses to direct you to a more complete description of the topics presented in this summary. You should also carefully consider the information set forth under “Risk Factors” beginning on page 13.

      OrthoLogic has supplied all information contained in this consent solicitation/prospectus relating to OrthoLogic and Chrysalis has supplied all information contained in this consent solicitation/prospectus relating to Chrysalis.

      Unless the context suggests otherwise, references to “Chrysalis” refer to Chrysalis Biotechnology, Inc. and references to “OrthoLogic” refer to OrthoLogic Corp. and its subsidiaries.

The Companies

•	OrthoLogic Corp.

      OrthoLogic Corp. is a Nasdaq listed public company which has been a minority stockholder of Chrysalis since 1997. It is a Delaware corporation involved in the research and development of biopharmaceutical solutions for hard and soft tissue repair. Its research program is focused exclusively on the development of Chrysalin, a patented peptide licensed to it by Chrysalis. Its primary offices are located at 1275 West Washington, Tempe, Arizona 85281 and its telephone number is (602) 286-5520. OrthoLogic’s website is www.orthologic.com.

•	Chrysalis Biotechnology, Inc.

      Chrysalis is a privately held biopharmaceutical company developing synthetic peptide compounds targeted at tissue repair and regeneration. Chrysalis has operated as a development stage company since its inception. Its primary offices are located at 2200 Market, Suite 600, Galveston, Texas 77550 and its telephone number is (409) 750-9251. Chrysalis’ website is www.chrysalisbio.com.

      Please see Annexes F-J for more information about OrthoLogic’s business and page 24, for more information about Chrysalis’ business.

The Asset Purchase Agreement and Plan of Reorganization (p. 27)

      OrthoLogic has agreed to purchase and Chrysalis has agreed to sell substantially all of Chrysalis’ assets (except cash), including Chrysalis’ tangible assets, license rights to Chrysalin and all other intellectual property, in exchange for approximately $27.5 million in cash and shares of OrthoLogic common stock and an additional $7.0 million in OrthoLogic common stock if certain triggers are met. OrthoLogic owns approximately 7.0% of the outstanding capital stock of Chrysalis and as a result, OrthoLogic will receive a portion of the purchase price as a stockholder. The purchase price will be paid to Chrysalis, or, following Chrysalis’ liquidation, to Chrysalis stockholders as follows:

	•	$2.5 million in cash, payable at the closing;
	•	$25.0 million in OrthoLogic common stock, payable at the closing. At closing, Chrysalis will receive that number of shares of OrthoLogic common stock with a value of $25.0 million as of closing, based on the 10-day average closing price of OrthoLogic common stock ending immediately prior to closing (the “Closing Date Stock Price”) if the Closing Date Stock Price is no greater than $8.239 and no less than $6.741 per share. In the event that the Closing Date Stock Price is greater than $8.239, Chrysalis will receive 3,034,349 shares of OrthoLogic common stock and in the event that the Closing Date Stock Price is less than $6.741, Chrysalis will receive 3,708,649 shares of OrthoLogic common stock. This means that Chrysalis could receive a number of shares of OrthoLogic common stock worth more

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		or less than $25.0 million at closing. For example, the closing price of OrthoLogic common stock as of July 1, 2004 was $8.25. Assuming this is the Closing Date Stock Price, Chrysalis would receive $25,033,379 worth of OrthoLogic common stock (based on multiplying $8.25 per share and 3,034,349 shares); and
	•	$7.0 million in OrthoLogic common stock, payable if either of the following trigger events occurs before the fifth year anniversary of the closing: (1) a sale of substantially all OrthoLogic’s assets, or a merger, consolidation, recapitalization, or other transaction, in each case after which OrthoLogic’s stockholders immediately before such transaction do not own a majority of the voting power of the resulting entity immediately after such transaction; or (2) OrthoLogic’s receipt of written notice from the United States Food and Drug Administration that a new drug application for a product based on Chrysalin has been accepted for filing. The number of shares of OrthoLogic common stock issued will be calculated by using a per share price equal to the average closing price for the 10 trading days preceding the triggering event; in no event shall such number of shares exceed the number issued at closing. In the event that the aggregate number of shares issuable at closing and upon the successful accomplishment of the trigger event equals or exceeds 20% of OrthoLogic’s outstanding capital stock at closing, the number of shares issuable upon the trigger event shall be reduced so the amount is less than 20% of its outstanding shares, with the difference paid in cash based on the same OrthoLogic average closing price for the 10 trading days preceding the triggering event.

      Chrysalis has agreed to place approximately 18% of the shares issued at closing (15% allocable to all stockholders and approximately 3% additionally allocable to Darrell Carney) of OrthoLogic common stock into an escrow account to pay for indemnification claims made by OrthoLogic within the 18 months following the closing. Except for shares for which OrthoLogic has made an unresolved claim within the 18 months following the closing, all remaining shares in the escrow account will be released to Chrysalis or its stockholders 18 months following the closing.

      Chrysalis has agreed to continue to employ all its current employees not immediately hired by OrthoLogic for a period of up to 90 days following the closing. Pursuant to a transition services agreement, Chrysalis has agreed to make these employees available to OrthoLogic for a fee during the 90-day transition period.

      Chrysalis has agreed not to engage in discussions regarding a business combination or other similar transaction with another party while the asset sale with OrthoLogic is pending and to notify OrthoLogic of any inquiries or proposals it receives. The Chrysalis Board of Directors will provide the identity of the other party and a summary of the material terms of the competing offer to OrthoLogic and provide OrthoLogic the opportunity to amend the Asset Purchase Agreement and Plan of Reorganization so that the competing proposal is no longer more favorable to Chrysalis. If Chrysalis’ Board of Directors still believes in good faith that it is in the best interests of Chrysalis to terminate the asset sale to OrthoLogic, it may do so with the payment of certain termination fees described below.

      Chrysalis may terminate the Asset Purchase Agreement and Plan of Reorganization in some circumstances without a penalty. However, Chrysalis is required to pay OrthoLogic termination fees if Chrysalis terminates the asset sale under the following circumstances. If Chrysalis terminates this agreement because Chrysalis’ Board of Directors has concluded in good faith that the Board of Directors believes it must terminate the asset sale in order to fulfill its fiduciary duties to Chrysalis and its stockholders, Chrysalis must pay OrthoLogic a termination fee of $1.5 million in cash. OrthoLogic may terminate the sale and receive the $1.5 million termination fee from Chrysalis if the Chrysalis Board of Directors changes its recommendation that the Chrysalis stockholders approve the sale. Finally, if the stockholders of Chrysalis do not approve the sale, Chrysalis will be obligated to pay OrthoLogic a sum equal to all of OrthoLogic’s out-of-pocket expenses related to the proposed asset sale.

      Chrysalis’ plan of liquidation provides for the liquidation, winding up and dissolution of Chrysalis. Following closing of the asset sale and fulfillment of its post closing obligations, including the transition services agreement, Chrysalis will wind up its business, pay any remaining creditors and distribute its remaining assets to its stockholders. The actual amounts of, timing of, and record dates for, any distributions

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      OrthoLogic has registered the issuance of its stock to Chrysalis with the U.S. Securities and Exchange Commission (“SEC”) on a Form S-4. Thus, upon Chrysalis’ distribution of the OrthoLogic common stock to the Chrysalis stockholders, Chrysalis’ non-affiliate stockholders who are not subject to a lockup agreement will have freely tradeable OrthoLogic common stock. Chrysalis will require all stockholders who own 5 percent or more of the outstanding stock of Chrysalis to agree to a 60-day lockup agreement that prohibits them for a period of 60 days from the closing from selling, on any single day during such 60-day period, more than 5 percent of their portion of the OrthoLogic common stock distributed to them. OrthoLogic common stock is listed on the Nasdaq National Market under the symbol “OLGC.” You are encouraged to obtain current market quotations of OrthoLogic common stock.

      There is attached to and provided as part of this consent solicitation/prospectus as Annex A a copy of the Asset Purchase Agreement and Plan of Reorganization and as Annex B a copy of the Plan of Complete Liquidation and Dissolution. Please read the Asset Purchase Agreement and Plan of Reorganization, the Plan of Complete Liquidation and Dissolution and also the related Escrow Agreement attached as Annex C and the Transition Services Agreement attached as Annex D because these are the legal documents that govern the asset sale and the subsequent liquidation and dissolution.

      Attached as Annex E is the written consent of stockholders, which Chrysalis is requesting that you sign and return to Chrysalis’ Secretary as soon as possible by sending it back in the enclosed self-addressed stamped envelope. Under Delaware law, Chrysalis is required to obtain stockholder approval to consummate the asset sale and to liquidate and dissolve. Chrysalis does not intend to hold a stockholder meeting to approve this transaction; you are encouraged to contact Chrysalis’ management if you have any questions or comments.

Reasons for the Purchase and Sale of Chrysalis’ Assets (p. 31)

	OrthoLogic’s Reasons

      OrthoLogic’s Board of Directors believed the acquisition of exclusive rights to Chrysalin for all indications would be a key strategic acquisition for OrthoLogic as it continued its research into orthopedic indications for Chrysalin. The Board of Directors weighed the benefits of the acquisition against the costs of the acquisition and ultimately decided it was in the best interests of OrthoLogic to obtain the full licensed rights to Chrysalin which would broadened the scope of OrthoLogic’s potential Chrysalin Product Platform significantly.

	Chrysalis’ Reasons

      Chrysalis’ Board of Directors considered a number of factors in determining that the asset sale is in the best interests of Chrysalis and its stockholders, including but not limited to the following three primary factors:

	•	The favorable contractual terms of the asset purchase and related transaction documents, including the favorable valuation of Chrysalis in this transaction as compared to other offers considered in the past by Chrysalis’ Board.
	•	The opportunity presented by the asset sale to achieve liquidity for Chrysalis’ existing stockholders, who currently do not have a public market for their shares; and
	•	The fact that OrthoLogic is in a much better cash position than Chrysalis, and as a result, OrthoLogic’s ability to fund development of Chrysalin drug products is much stronger than Chrysalis’ current ability.

      The Board also considered a number of factors that might have a negative impact on Chrysalis and its stockholders. Please see “Reasons for Engaging in Asset Sale” on page 31 for a description of the positive and negative factors that were considered by the Chrysalis Board.

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Conditions to Consummation of the Sale (p. 28)

      Chrysalis and OrthoLogic are not obligated to consummate the sale until specific conditions are satisfied or waived. Some of the conditions are as follows:

	•	The president of Chrysalis must enter into an employment agreement with OrthoLogic;
	•	No statute, rule, regulation, executive order, decree, injunction or other order has been enacted, entered, promulgated or enforced by any court or governmental authority that is in effect and has the effect of preventing the consummation of the sale and plan of reorganization;
	•	Opinions of legal counsel of OrthoLogic, Chrysalis and the University of Texas, as licensor of Chrysalin, must have been obtained;
	•	All representations and warranties must be complete, true and correct; and
	•	All approvals and consents necessary or desirable, if any, in connection with the transfer of Chrysalis’ assets to OrthoLogic must have been obtained.

Chrysalis’ Stockholders Approval (p. 36)

      To consummate the asset sale and liquidate, Chrysalis is required to obtain the approval of the holders of at least a majority of the outstanding shares entitled to vote on the transaction and the plan of liquidation. Chrysalis does not intend to hold a stockholder meeting to obtain such approval but is soliciting such approval by written consent as permitted by its certificate of incorporation. While a closing could be held as soon as enough consents are received from Chrysalis’ stockholders, Chrysalis anticipates that a closing will be held on or before 10 business days following the date of this consent solicitation/prospectus.

No Regulatory Approval Required (p. 31)

      No regulatory approval is required in order to consummate the transaction.

Tax Treatment of the Asset Sale and Liquidation (p. 38)

      Chrysalis has obtained the Tax Opinion of Winstead Sechrest & Minick P.C., counsel to Chrysalis, which is included as an exhibit to the registration statement of which this consent solicitation/prospectus is a part, that the asset sale and liquidation will constitute a “Reorganization” within the meaning of section 368(a)(1)(C) of the Internal Revenue Code of 1986. The Tax Opinion is subject to certain assumptions and qualifications, including but not limited to the accuracy of certain representations made by Chrysalis. The Tax Opinion is not binding on the IRS and does not preclude the IRS from adopting a contrary position. If this asset sale and liquidation qualifies as a tax-free reorganization, Chrysalis will not recognize gain or loss as a result of the asset sale and Chrysalis’ stockholders will not recognize gain or loss upon their receipt or deemed receipt (including as a consequence of receiving a beneficial interest in the liquidating trust or the escrowed shares) of OrthoLogic common stock in exchange for Chrysalis capital stock upon the liquidation except to the extent of (i) OrthoLogic common stock issuable as the contingent portion of the purchase price that are recharacterized as interest income under the imputed interest rules of federal tax law; (ii) cash received in lieu of fractional shares of OrthoLogic common stock; (iii) cash or other non-stock property received in exchange for Chrysalis capital stock; and (iv) cash issuable as the contingent portion of the purchase price. In addition, the fair market value of shares of Chrysalis capital stock received upon the exercise of certain options held by holders of non-qualified stock options in excess of the option exercise price, which will be taxable upon exercise thereof. In general, the tax basis of the OrthoLogic common stock received by Chrysalis’ stockholders in the asset sale and liquidation, other than the Deferred Interest Shares (as defined under “Material Federal Income Tax Consequences to Chrysalis Stockholders”), including OrthoLogic common stock that is deemed to be received by Chrysalis stockholders as a result of receiving a beneficial interest in the liquidating trust or the escrowed shares, should be the same as the aggregate tax basis of the Chrysalis capital stock surrendered in exchange, increased by any gain recognized in the exchange and decreased by the amount of cash (or any other property) other than OrthoLogic common stock received

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Accounting Treatment of the Sale (p. 31)

      The asset sale is expected to be treated as an acquisition of net assets by OrthoLogic for financial accounting purposes.

Appraisal Rights (p. 36)

      Chrysalis stockholders are not entitled to any dissenter’s or appraisal rights with respect to the sale of Chrysalis’ assets under Delaware law or Chrysalis’ Certificate of Incorporation.

Expenses Incurred in the Sale (p. 29)

      Both Chrysalis and OrthoLogic have agreed to each pay their own out-of-pocket expenses incurred in pursuing the asset sale. However, if OrthoLogic or Chrysalis elects to terminate the sale because the Chrysalis stockholders do not approve the asset sale, Chrysalis must reimburse OrthoLogic for its out-of-pocket expenses incurred in connection with the proposed transaction. Assuming the asset sale closes, it is anticipated that most or all of the $2.5 million cash portion of the purchase price will be allocated toward transaction and liquidation related expenses incurred by Chrysalis. The estimated expenses, which total $2,425,000, are as follows:

	•	$1,375,000 for the finder’s fee payable in cash to HC Technologies, Inc.;
	•	$400,000 for legal and accounting expenses;
	•	$400,000 for employee related expenses, including deferred compensation, severance and bonus payments; and
	•	$250,000 for a reserve for residual operations.

Interests of Certain Chrysalis Related Persons in the Asset Sale (p. 36)

      In connection with the closing of the Asset Purchase Agreement, Chrysalis’ management team and directors will receive severance payments, bonuses or employment contracts, which may make their interests different from those of Chrysalis’ stockholders. Please see “Interests of Certain Chrysalis Related Persons in the Asset Sale” on page 36 for a complete description of such interests.

Interest of Chrysalis in OrthoLogic after the Asset Sale

      On the closing of the asset sale and subject to the escrow, Chrysalis will receive between 3,034,349 and 3,708,649 shares of OrthoLogic common stock, based on the Closing Date Stock Price. This is equal to approximately 8.1% to 9.7% of the outstanding stock of OrthoLogic as of June 30, 2004. However, as a preferred stockholder in Chrysalis, OrthoLogic will receive a portion of the shares back as shareholder distributions. OrthoLogic conservatively estimates it will receive about $1.5 million of consideration back in shareholder distributions, or between approximately 180,000 to 223,000 shares of OrthoLogic common stock (subject to the requirement that 15% of such amount be held in escrow for indemnification claims). Assuming the number of shares of OrthoLogic common stock is equal to the number of shares outstanding as of June 30, 2004, assuming Chrysalis makes the distribution to shareholders immediately after the closing and assuming OrthoLogic cancels the shares received by it, then Chrysalis stockholders will own between 7.6% and 9.2% of OrthoLogic’s outstanding common stock. The following chart shows the percentage of OrthoLogic shares

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		Percentage of				Percentage of
		Outstanding OrthoLogic				Outstanding OrthoLogic
		Common Stock Owned				Common Stock Owned
		If 3,034,349 Shares				If 3,708,649 Shares
		Are Issued to Chrysalis				Are Issued to Chrysalis
By affiliates of Chrysalis			3.9%				4.7%
By non-affiliates of Chrysalis			3.7%				4.5%

Trading Market (p. 45)

      OrthoLogic’s common stock trades on the Nasdaq National Market under the symbol “OLGC.” See “Market Data” on page 45 for more information. Chrysalis is not listed on any trading market and there is no market for its shares.

Risk Factors (p. 13)

      You should consider carefully all of the information set forth in or attached to this consent solicitation/prospectus and, in particular, should evaluate the specific factors set forth in the section entitled “Risk Factors” on page 13 for an explanation of certain risks of any investment decision.

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ORTHOLOGIC CORP.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

      The selected historical consolidated financial data should be read together with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein in Annex F and G to this consent solicitation/prospectus. The selected historical consolidated financial data presented below for each of the years in the three year period ended December 31, 2003 and the December 31 balance sheet data for 2003 and 2002 is derived from OrthoLogic Corp.’s audited financial statements included elsewhere herein in Annex F to this consent solicitation/prospectus. The statements of operations data for 2000 and 1999 and the 2001, 2000 and 1999 balance sheet data is derived from audited financial statements not included in this filing. The selected historical consolidated financial data for the three month periods ended March 31, 2004 and 2003 is derived from OrthoLogic Corp.’s unaudited financial statements included elsewhere herein in Annex G to this consent solicitation/prospectus and, in OrthoLogic’s management’s opinion, reflect all adjustments that are necessary to present fairly the financial results for such periods.

ORTHOLOGIC CORP.

STATEMENTS OF OPERATIONS DATA

			Three Months
			Ended March 31,								Years Ended December 31,
			2004				2003				2003(1)				2002(2)				2001(3)				2000(4)				1999
			(In thousands, except per share amounts)
Total net revenues			$	—			$	—			$	—			$	2,230			$	31,879			$	69,570			$	71,159
Total cost of revenues				—				—				—				—				5,811				14,103				15,947
Gross profit				—				—				—				—				26,068				55,467				55,212
Operating expenses
	Selling, general and administrative			555				1,289				4,331				4,576				29,274				55,872				48,973
	Research and development			3,371				1,390				9,008				3,488				3,460				4,112				2,191
	Restructuring and other charges			—								—				—				—				—				(216	)
	Legal settlement			—								—				—				—				4,499				—
	Write-off of goodwill			—								—				—				—				23,348				—
	Net gain from discontinuation of co- promotion agreement			—								—				—				—				(844	)			—
	CPM divestiture and related gains			(111	)							(743	)			(1,047	)			14,327				—				—
	Total operating expenses			3,815				2,679				12,596				7,017				47,061				86,987				50,948
Operating (loss) income				(3,815	)			(2,679	)			(12,596	)			(4,787	)			(20,993	)			(31,520	)			4,264
Other income				306				132				568				706				682				451				225
(Loss) income from continuing operations before taxes				(3,509	)			(2,547	)			(12,028	)			(4,081	)			(20,311	)			(31,069	)			4,489
Income taxes (benefit)				(294	)			(981	)			(4,414	)			(1,571	)			(2,778	)			42				1,614
Net (loss) income from continuing operations				(3,215	)			(1,566	)			(7,614	)			(2,510	)			(17,533	)			(31,111	)			2,875
Net gain on the sale of the Bone Device Business, net of taxes $5,205				—								72,692				—				—				—				—
Income (loss) from the operations of the Bone Device Business net of taxes $0, $994, $4,414, $1,577, $2,790, ($54), ($1,672) respectively				—				1,708				7,358				8,119				4,438				(79	)			(2,637	)
	Net income (loss) from discontinued operations			—				1,708				80,050				8,119				4,438				(79	)			(2,637	)
	Accretion of non-cash preferred stock dividend			—								—				—				—				—				(824	)
	Net income (loss) applicable to common stockholders		$	(3,215	)		$	142			$	72,436			$	5,609			$	(13,095	)		$	(31,190	)		$	(586	)

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				Three Months
				Ended March 31,								Years Ended December 31,
				2004				2003				2003(1)				2002(2)				2001(3)				2000(4)				1999
				(In thousands, except per share amounts)
	Net (loss) income from continuing operations
		Basic		$	(0.09	)		$	(0.05	)		$	(0.23	)		$	(0.08	)		$	(0.56	)		$	(1.04	)		$	0.11
		Diluted		$	(0.09	)		$	(0.05	)		$	(0.23	)		$	(0.08	)		$	(0.56	)		$	(1.04	)		$	0.11
	Net income (loss) from discontinued operations
		Basic		$	(0.00	)		$	0.05			$	2.43			$	0.25			$	0.14			$	(0.00	)		$	(0.10	)
		Diluted		$	(0.00	)		$	0.05			$	2.38			$	0.24			$	0.14			$	(0.00	)		$	(0.10	)
	Net income (loss)
		Basic		$	(0.09	)		$	(0.00	)		$	2.20			$	0.17			$	(0.42	)		$	(1.04	)		$	(0.02	)
		Diluted		$	(0.09	)		$	(0.00	)		$	2.16			$	0.17			$	(0.42	)		$	(1.04	)		$	(0.02	)
Basic shares outstanding					34,310				32,809				32,970				32,642				31,464				29,855				26,078
Equivalent shares					—				219				613				731				—				—				—
Diluted shares outstanding					34,310				33,028				33,583				33,373				31,464				29,855				26,078

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(1)

On November 26, 2003, OrthoLogic completed the sale of all the assets and related liabilities of its bone growth stimulation device business (which OrthoLogic also calls its “Bone Device Business”). The Bone Device Business comprised all OrthoLogic’s revenue generating operations. OrthoLogic’s consolidated financial statements for the year ended December 31, 2003 include the results of operations prior to the divestiture and the related gain on the sale as discontinued operations.

Total operating expenses in 2003 were reduced by $743,000 as a result of settlement payments received against the contingent payment due from the buyer of the continuous passive motion (“CPM”) business and additional collections of the accounts receivable balances which are fully reserved.

(2)	Total operating expenses in 2002 were reduced by $1.0 million as a result of better than anticipated collection of CPM accounts receivable than had been originally estimated when the CPM business was sold in July 2001. Also, during 2002, OrthoLogic paid a $500,000 milestone payment to Chrysalis that was recorded as a research and development expense.
(3)	The net loss in 2001 includes $14.3 million of CPM divestiture and related charges, and a $1.0 million payment to Chrysalis recorded as research and development expense for a license extension for Chrysalin.
(4)	The net loss in 2000 includes charges of $4.5 million for the class action legal settlement and other legal settlements; $27.8 million of additional expenses related to the CPM business composed of the write-off of impaired goodwill, adjustments to accounts receivable, and other legal settlements; and $2.0 million of research and development expense paid to Chrysalis to obtain additional Chrysalin rights. Also, during 2000, OrthoLogic recorded an $844,000 net gain from the discontinuation of the Co-Promotion Agreement for Hyalgan.

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ORTHOLOGIC CORP.

BALANCE SHEET DATA

		March 31,				December 31,
		2004				2003				2002				2001				2000				1999
		(In thousands)
Working capital		$	112,701			$	112,679			$	39,585			$	40,039			$	43,056			$	40,865
Total assets			128,906				130,106				53,420				49,442				65,035				92,203
Long term liabilities, less current maturities			190				280				352				287				88				209
Stockholders’ equity		$	124,502			$	123,975			$	48,233			$	41,896			$	51,910			$	73,054

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CHRYSALIS BIOTECHNOLOGY, INC.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

      The selected historical consolidated financial data should be read together with the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this consent solicitation/prospectus. The selected historical consolidated financial data presented below as of and for each of the years in the two year period ended December 31, 2003 and the December 31, 2002 balance sheet data is derived from Chrysalis Biotechnology, Inc. audited consolidated financial statements included elsewhere in this consent solicitation/prospectus. The selected historical consolidated financial data for the three month periods ended March 31, 2004 and 2003 is derived from Chrysalis Biotechnology’s unaudited consolidated financial statements included elsewhere in this consent solicitation/prospectus. The selected historical consolidated financial data for the years ended December 31, 2001, 2000 and 1999 are derived from Chrysalis Biotechnology’s unaudited consolidated financial statements not included in this filing. In Chrysalis Biotechnology’s management’s opinion, the unaudited financial statements reflect all adjustments that are necessary to present fairly the financial results for such periods.

CHRYSALIS BIOTECHNOLOGY, INC.

STATEMENTS OF OPERATIONS DATA

		Three Months
		Ended March 31,								Year Ended December 31,
		2004				2003				2003				2002				2001				2000				1999
		(In thousands)
Revenues		$	530			$	457			$	2,574			$	1,581			$	1,851			$	1,472			$	1,039
Research and development			795				468				2,215				2,274				2,203				1,192				1,190
General and administrative			381				314				1,357				1,082				1,749				1,234				469
Total expenses			1,176				782				3,572				3,356				3,952				2,426				1,659
Minority interest			—				—				—				(72	)			(14	)			—				—
Net loss		$	(646	)		$	(325	)		$	(998	)		$	(1,703	)		$	(2,087	)		$	(954	)		$	(620	)
Net loss per share		$	(0.54	)		$	(0.27	)		$	(0.83	)		$	(1.43	)		$	(1.75	)		$	(0.80	)		$	(0.52	)
Basic and diluted shares outstanding			1,202				1,194				1,196				1,194				1,194				1,194				1,194

CHRYSALIS BIOTECHNOLOGY, INC

BALANCE SHEET DATA

						December 31,
		March 31,
		2004				2003				2002				2001				2000				1999
		(In thousands)
Working capital		$	(135	)		$	230			$	639			$	2,668			$	4,682			$	868
Total assets			1,047				1,462				1,280				3,221				5,419				1,314
Long term liabilities, less current maturities			3,900				3,636				3,119				3,430				3,801				710
Stockholders’ equity (deficit)		$	(3,903	)		$	(3,257	)		$	(2,268	)		$	(565	)		$	1,522			$	476

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ORTHOLOGIC CORP.

SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

      The selected unaudited proforma consolidated financial data presented below is derived from unaudited proforma consolidated financial statements included elsewhere herein in the “F” pages to this consent solicitation/ prospectus. The summary selected unaudited proforma consolidated financial data are based on the historical consolidated financial statements of OrthoLogic Corp. and subsidiaries included elsewhere herein, adjusted to give effect to the acquisition of substantially all of Chrysalis’ net assets excluding non-recurring expenses pursuant to the Asset Purchase Agreement by and between Chrysalis and OrthoLogic dated April 28, 2004.

      The unaudited pro forma consolidated balance sheet data gives effect to the proposed transaction as if it occurred on the date of the balance sheet. The unaudited pro forma consolidated statements of operations data for the three months ended March 31, 2004 and the year ended December 31, 2003 give effect to the transaction as if it had occurred as of January 1, 2003.

      The pro forma consolidated financial information is presented for illustrative purposes only, and is not necessarily indicative of the operating results or financial position that would have occurred if all of the events as described above had occurred on the first day of the respective periods presented, nor is it necessarily indicative of our future operating results or financial position. The selected unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements for OrthoLogic and the audited financial statements of Chrysalis included elsewhere in this filing.

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ORTHOLOGIC CORP.

SELECTED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA

					Three Months
					Ended				Year Ended
					March 31,				December 31,
					2004				2003
					(In thousands)
					(Unaudited)
REVENUES
	Grant Revenue				$	—			$	131
	Sponsored research					—				—
	Licensing fees					—				—
			Total revenues			—				131
OPERATING EXPENSES
	General and administrative				$	963			$	5,868
	Research and development					3,501				8,590
	CPM divestiture and related gains					(111	)			(743	)
			Total operating expenses			4,353				13,715
	OPERATING LOSS					(4,353	)			(13,584	)
OTHER INCOME
	Interest income, net					287				564
	Loss from continuing operations before taxes					(4,066	)			(13,020	)
	Income tax benefit					(294	)			(4,796	)
	Net loss from continuing operations				$	(3,772	)		$	(8,224	)
	Net loss from continuing operations
		Basic and diluted			$	(0.10	)		$	(0.22	)
	Basic and diluted shares outstanding					37,795				36,678

PRO FORMA BALANCE SHEET DATA

		March 31,
		2004
		(In thousands)
		(Unaudited)
Working capital		$	108,413
Total assets			126,652
Long term liabilities, less current maturities			190
Stockholders’ equity		$	121,783

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RISK FACTORS

Risks of OrthoLogic’s Business

	OrthoLogic is a biopharmaceutical company with no revenue generating operations and high investment costs. OrthoLogic expects to incur losses for a number of years as it expands its research and development projects. There is no assurance that OrthoLogic’s current level of funds will be sufficient to support all research expenses to achieve commercialization.

      With the November 2003 sale of its bone growth stimulation business, OrthoLogic currently has no revenue generating operations. With the acquisition of Chrysalis, OrthoLogic will be a pure research and development company. OrthoLogic estimates that its 2004 net cash expenditures, including the cash associated with the CBI acquisition, will be approximately $20.0 million. OrthoLogic anticipates evaluating both its and CBI’s research projects after the closing of the asset purchase transaction to determine future cash flow requirements. However, based on current research and development plans, OrthoLogic expects its 2005 cash expenditures to be approximately $25.0-$30.0 million. OrthoLogic cautions that its future cash expenditure levels are difficult to estimate because the estimates include a number of assumptions about the number of research projects OrthoLogic pursues, the pace at which it pursues them, the quality of the data collected and the requests of the FDA to expand, narrow or conduct again clinical trials and analyze data. Changes in any of these assumptions can change significantly OrthoLogic’s estimated cash expenditure levels.

	OrthoLogic’s product candidates are in various stages of development and may not be successfully developed or commercialized. If it fails to commercialize its product candidates, it will not be able to generate revenue:

      OrthoLogic currently does not sell any products. OrthoLogic’s product candidates are at the following stages of development:

	•	Acceleration of Fracture Repair — Phase 3 human clinical trials
	•	Spine Fusion — Phase 1/2 human clinical trials
	•	Cartilage Defect Repair — Late stage pre-clinical trials
	•	Tendon and Ligament Repair — Early stage pre-clinical trials

      Consequently, OrthoLogic is subject to the risk that:

	•	the FDA finds some or all of OrthoLogic’s product candidates ineffective or unsafe;
	•	OrthoLogic does not receive necessary regulatory approvals;
	•	OrthoLogic is unable to get some or all of its product candidates to market in a timely manner;
	•	OrthoLogic is not able to produce its product candidates in commercial quantities at reasonable costs;
	•	OrthoLogic’s products undergo post-market evaluations resulting in marketing restrictions or withdrawal of OrthoLogic’s products; or
	•	the patient and physician community does not accept OrthoLogic’s products.

      In addition, OrthoLogic’s product development programs may be curtailed, redirected or eliminated at any time for many reasons, including:

	•	adverse or ambiguous results;
	•	undesirable side effects which delay or extend the clinical trials;
	•	inability to locate, recruit, qualify and retain a sufficient number of patients for clinical trials;
	•	regulatory delays or other regulatory actions;

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	•	difficulties in obtaining sufficient quantities of the particular product candidate or any other components needed for OrthoLogic’s preclinical testing or clinical trials;
	•	change in the focus of OrthoLogic’s development efforts; and
	•	re-evaluation of OrthoLogic’s clinical development strategy.

      OrthoLogic cannot predict whether it will successfully develop and commercialize any of its product candidates. If it fails to do so, it will not be able to generate revenue.

	OrthoLogic’s product candidates are all based on the same chemical peptide, Chrysalin. If one of OrthoLogic’s product candidates reveals safety or fundamental inefficacy issues in clinical trials, it could impact the development path for all OrthoLogic’s other current product candidates.

      The development of each of OrthoLogic’s product candidates in the Chrysalin product platform is based on OrthoLogic’s knowledge and understanding of how the human thrombin molecule contributes to the repair of soft tissue and bone. While there are important differences in each of the product candidates in terms of their purpose (fracture repair, spine fusion, cartilage repair, etc.), each product candidate is focused on accelerating the repair of soft tissue and bone and is based on the ability of Chrysalin to mimic specific attributes of the human thrombin molecule to stimulate the body’s natural healing processes.

      Since OrthoLogic is developing the product candidates in the Chrysalin product platform in parallel, OrthoLogic expects to learn from the results of each trial and apply some of OrthoLogic’s findings to the development of the other product candidates in the platform. If one of the product candidates has negative clinical trial results or is shown to be ineffective, it could impact the development path or future development of the other product candidates in the platform. If OrthoLogic finds that one of the biopharmaceutical product candidates is unsafe, it could impact the development of OrthoLogic’s other product candidates in clinical trials.

	OrthoLogic’s rights to Chrysalin are licensed from the University of Texas and if the license is invalid or unenforceable, OrthoLogic may lose its rights to use the Chrysalin technology, which would ultimately prevent OrthoLogic from commercializing and selling any Chrysalin-based products.

      OrthoLogic’s rights to the development, use and marketing of all of its therapeutic products within the Chrysalin product platform are currently governed by a series of sub-licensing agreements from Chrysalis. Upon the consummation of the asset sale, the license agreements with Chrysalis will be replaced by a direct license agreement with the University of Texas, which OrthoLogic and Chrysalis negotiated in conjunction with the asset sale. Under this direct license, OrthoLogic will expand its current license for Chrysalin from a license for only orthopedic “soft tissue” indications to a license for any and all indications. In return, OrthoLogic must pay the University of Texas continuing royalties, sublicense fees and various other fees in connection with filing and maintaining patents. The license agreement will expire upon the expiration of all licensed patents, and is not subject to termination by the University of Texas, except for fraud by OrthoLogic or a payment default following assignment of the license by OrthoLogic. If OrthoLogic loses its rights to Chrysalin under the license agreement, OrthoLogic would be unable to continue its product development programs and its business and prospects would be materially harmed.

	If OrthoLogic cannot protect the Chrysalin patent or its intellectual property generally, OrthoLogic’s ability to develop and commercialize its products will be severely limited.

      OrthoLogic’s success will depend in part on the University of Texas’ and OrthoLogic’s ability to maintain and enforce patent protection for Chrysalin and each product resulting from Chrysalin. Without patent protection, other companies could offer substantially identical products for sale without incurring the sizable discovery, development and licensing costs that OrthoLogic has incurred. OrthoLogic’s ability to recover these expenditures and realize profits upon the sale of products would then be diminished.

      Chrysalin is patented and there have been no successful challenges to the Chrysalin patent. However, if there were to be a challenge to the patent or any of the patents for product candidates, a court may determine

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      As is commonplace in the biotechnology and pharmaceutical industry, OrthoLogic employs individuals who were previously employed at other biotechnology or pharmaceutical companies, including OrthoLogic’s competitors or potential competitors. To the extent OrthoLogic’s employees are involved in research areas which are similar to those areas in which they were involved at their former employers, OrthoLogic may be subject to claims that such employees and/or OrthoLogic have inadvertently or otherwise used or disclosed the alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to defend against such claims, which could result in substantial costs and be a distraction to management and which may have a material adverse effect on OrthoLogic, even if it is successful in defending such claims.

      OrthoLogic also relies on its business on trade secrets, know-how and other proprietary information. OrthoLogic seeks to protect this information, in part, through the use of confidentiality agreements with employees, consultants, advisors and others. Nonetheless, OrthoLogic cannot assure you that those agreements will provide adequate protection for its trade secrets, know-how or other proprietary information and prevent their unauthorized use or disclosure. To the extent that consultants, key employees or other third parties apply technical information independently developed by them or by others to OrthoLogic’s proposed products, disputes may arise as to the proprietary rights to such information, which may not be resolved in OrthoLogic’s favor. The breach by other parties of confidentiality agreements with OrthoLogic, or OrthoLogic’s trade secrets becoming known or independently discovered by competitors, could adversely affect OrthoLogic by enabling its competitors, who may have greater experience and financial resources, to copy or use its trade secrets and other proprietary information in the advancement of their products, methods or technologies.

	Some of OrthoLogic’s product candidates are in early stages of development and may never be commercialized.

      Research, development and pre-clinical testing are long, expensive and uncertain processes. Other than indications for fracture repair and spine fusions, none of OrthoLogic’s other Chrysalin product candidates have reached clinical trial testing. OrthoLogic’s development of Chrysalin for the repair of cartilage defects, ligaments and tendons is currently in pre-clinical testing or the research stage. OrthoLogic’s future success depends, in part, on its ability to complete pre-clinical development of these and other product candidates and advance them through the clinical trial process.

      If OrthoLogic is unsuccessful in advancing its early stage product candidates into and through clinical testing for any reason, its business prospects will be harmed.

	The loss of OrthoLogic’s key scientific personnel may hinder its ability to execute its business plan.

      As a small company with 34 employees, OrthoLogic’s success depends on the continuing contributions of OrthoLogic’s scientific personnel, and maintaining relationships with the network of medical and academic centers in the United States that conduct its clinical trials. OrthoLogic is most highly dependent on the services of Dr. James Ryaby, its Senior Vice-President and Chief Technology Officer, whom OrthoLogic considers its key scientific employee. A long time employee of OrthoLogic, Dr. Ryaby oversees all of OrthoLogic’s clinical trials, is a well respected orthopedic scientist and is OrthoLogic’s primary contact with the medical community. Like all companies in its field, OrthoLogic faces intense competition in its hiring efforts with other pharmaceutical and biotechnology companies, as well as universities and nonprofit research organizations, and it may have to pay higher salaries to attract and retain qualified personnel. The loss of one or more members of OrthoLogic’s current management team or any of its scientific personnel, could delay OrthoLogic’s business plan. The loss of Dr. Ryaby, depending on what stage of development OrthoLogic’s research is at upon Dr. Ryaby’s departure, could cause a substantial delay in implementing OrthoLogic’s

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	OrthoLogic faces an inherent risk of liability in the event that the use or misuse of its products results in personal injury or death.

      The use of OrthoLogic’s product candidates in clinical trials, and the sale of any approved products, may expose OrthoLogic to product liability claims, which could result in financial losses. OrthoLogic’s clinical liability insurance coverage may not be sufficient to cover claims that may be made against it. In addition, OrthoLogic may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts or scope to protect it against losses. Any claims against OrthoLogic, regardless of their merit, could severely harm OrthoLogic’s financial condition, strain its management and other resources and adversely impact or eliminate the prospects for commercialization of the product which is the subject of any such claim.

	OrthoLogic’s stock price is volatile and fluctuates due to a variety of factors.

      OrthoLogic’s stock price has varied significantly in the past (from a low of $3.22 to a high of $8.96 since January 1, 2002) and may vary in the future due to a number of factors, including:

	•	fluctuations in OrthoLogic’s operating results;
	•	developments in litigation to which OrthoLogic or a competitor is subject;
	•	announcements and timing of potential acquisitions, divestitures, and conversions of preferred stock;
	•	announcements of technological innovations or new products by OrthoLogic or its competitors;
	•	FDA and international regulatory actions;
	•	actions with respect to reimbursement matters;
	•	developments with respect to OrthoLogic or its competitors’ patents or proprietary rights;
	•	public concern as to the safety of products developed by OrthoLogic or others;
	•	changes in health care policy in the United States;
	•	changes in stock market analyst recommendations regarding OrthoLogic, other drug development companies or the pharmaceutical industry generally; and
	•	general market conditions.

      In addition, the stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of OrthoLogic’s stock.

Risks of OrthoLogic’s Industry

	OrthoLogic is in a highly regulated field with high investment costs and high risks.

      OrthoLogic’s Chrysalin product platform is currently in the human testing phase for two potential products and earlier preclinical testing phases for two other potential products. The U.S. Food and Drug Administration (“FDA”) and comparable agencies in many foreign countries impose substantial limitations on the introduction of new pharmaceuticals through costly and time-consuming laboratory and clinical testing and other procedures. The process of obtaining FDA and other required regulatory approvals is lengthy, expensive and uncertain. Chrysalin, as a new drug, is subject to the most stringent level of FDA review.

      There can be no guarantee that the FDA will grant approval of Chrysalin for the indicated uses or that it will do so in a timely manner.

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      If OrthoLogic successfully brings one or more products to market, there is no assurance that it will be able to successfully manufacture or market the products or that potential customers will buy them if, for example, a competitive product has greater efficacy or is deemed more cost effective. In addition, the market in which OrthoLogic will sell any such products is dominated by a number of large corporations that have vastly greater resources than OrthoLogic has, which may impact OrthoLogic’s ability to successfully market its products or maintain any technological advantage OrthoLogic might develop. OrthoLogic also would be subject to changes in regulations governing the manufacture and marketing of its products, which could increase its costs, reduce any competitive advantage it may have and/or adversely affect its marketing effectiveness.

	The results of OrthoLogic’s late stage clinical trials may be insufficient to obtain FDA approval which could result in a substantial delay in OrthoLogic’s ability to generate revenue.

      Positive results from preclinical studies and early clinical trials do not ensure positive results in more advanced clinical trials. If OrthoLogic is unable to demonstrate that a product candidate will be safe and effective in advanced clinical trials involving larger numbers of patients, OrthoLogic will be unable to submit the new drug application necessary to receive approval from the FDA to commercialize that product.

      OrthoLogic is currently conducting a Phase 3 human clinical trial on Chrysalin for fracture repair indications. OrthoLogic expects to have enrollment for the trial completed by the end of 2004. If it fails to achieve the clinical benefits sought in this Phase 3 clinical trial or the results are ambiguous, OrthoLogic will have to determine whether to redesign its Chrysalin fracture repair product candidate and its protocols and continue with additional testing, or cease activities in this area. Redesigning the product could be extremely costly and time-consuming. A substantial delay in obtaining FDA approval or termination of the Chrysalin fracture repair product candidate could result in a delay in OrthoLogic’s ability to generate revenue.

	Patients may discontinue their participation in OrthoLogic’s clinical studies, which may negatively impact the results of these studies and extend the timeline for completion of OrthoLogic’s development programs.

      As with all clinical trials, OrthoLogic is subject to the risk that patients enrolled in its clinical studies may discontinue their participation at any time during the study as a result of a number of factors, including, withdrawing their consent or experiencing adverse clinical events, which may or may not be judged related to its product candidates under evaluation. OrthoLogic is subject to the risk that if a large number of patients in any one of its studies discontinue their participation in the study, the results from that study may not be positive or may not support an NDA for regulatory approval of OrthoLogic’s product candidates.

      In addition, the time required to complete clinical trials is dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including:

	•	the size of the patient population;
	•	the nature of the clinical protocol requirements;
	•	the diversion of patients to other trials or marketed therapies;
	•	OrthoLogic’s ability to recruit and manage clinical centers and associated trials;
	•	the proximity of patients to clinical sites; and
	•	the patient eligibility criteria for the study.

	Even if OrthoLogic obtains marketing approval, its products will be subject to ongoing regulatory oversight, which may affect OrthoLogic’s ability to successfully commercialize any products it may develop.

      Even if OrthoLogic receives regulatory approval of a product candidate, the approval may be subject to limitations on the indicated uses for which the product is marketed or require costly post-marketing follow-up

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      If OrthoLogic fails to comply with applicable regulatory requirements, it may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

	OrthoLogic’s product candidates may not gain market acceptance among physicians, patients and the medical community. If OrthoLogic’s product candidates fail to achieve market acceptance, its ability to generate revenue will be limited.

      Even if OrthoLogic obtains regulatory approval for its products, market acceptance will depend on its ability to demonstrate to physicians and patients the benefits of its products in terms of safety, efficacy, convenience, ease of administration and cost effectiveness. In addition, OrthoLogic believes market acceptance depends on the effectiveness of its marketing strategy, the pricing of its products and the reimbursement policies of government and third-party payors. Physicians may not prescribe OrthoLogic’s products, and patients may determine, for any reason, that OrthoLogic’s product is not useful to them. If OrthoLogic’s product candidates fail to achieve market acceptance, its ability to generate revenue will be limited.

	OrthoLogic’s success also depends on its ability to operate and commercialize products without infringing on the patents or proprietary rights of others.

      Third parties may claim that OrthoLogic or its licensors or suppliers are infringing their patents or are misappropriating their proprietary information. In the event of a successful claim against OrthoLogic or its licensors or suppliers for infringement of the patents or proprietary rights of others, OrthoLogic may be required to, among other things:

	•	pay substantial damages;
	•	stop using certain OrthoLogic technologies;
	•	stop certain research and development efforts;
	•	develop non-infringing products or methods; and
	•	obtain one or more licenses from third parties.

      A license required under any such patents or proprietary rights may not be available to us, or may not be available on acceptable terms. If OrthoLogic or its licensors or suppliers are sued for infringement, OrthoLogic could encounter substantial delays in, or be prohibited from, developing, manufacturing and commercializing OrthoLogic’s product candidates.

	The pharmaceutical industry is subject to stringent regulation, and failure to obtain regulatory approval from the United States Food and Drug Administration will prevent commercialization of OrthoLogic’s products.

      OrthoLogic’s research, development, preclinical and clinical trial activities and the manufacture and marketing of any products that it may successfully develop are subject to an extensive regulatory approval process by the FDA. The process of obtaining required regulatory approvals for drugs is lengthy, expensive and uncertain, and any such regulatory approvals may entail limitations on the indicated usage of a drug, which may reduce the drug’s market potential.

      In order to obtain FDA approval to commercialize any product candidate, an NDA must be submitted to the FDA demonstrating, among other things, that the product candidate is safe and effective for use in

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	•	negative or ambiguous preclinical or clinical trial results;
	•	changes in regulations or the adoption of new regulations;
	•	unexpected technological developments; and
	•	developments by OrthoLogic’s competitors that are more effective than OrthoLogic’s product candidates.

      Consequently, OrthoLogic cannot assure you that it will make its submissions to the FDA in the timeframe that OrthoLogic has planned, or at all, or that its submissions will be approved by the FDA. Even if regulatory clearance is obtained, post-market evaluation of OrthoLogic’s products, if required, could result in restrictions on a product’s marketing or withdrawal of a product from the market as well as possible civil and criminal sanctions.

      Clinical trials are subject to oversight by institutional review boards and the FDA to ensure compliance with the FDA’s good clinical practice regulations, as well as other requirements for good clinical practices. OrthoLogic depends, in part, on third-party laboratories and medical institutions to conduct preclinical studies and clinical trials for its products and other third-party organizations, usually universities, to perform data collection and analysis, all of which must maintain both good laboratory and good clinical practices. If any such standards are not complied with in OrthoLogic’s clinical trials, the FDA may suspend or terminate such trials, which would severely delay OrthoLogic’s development of, and possibly end the development of, a product candidate.

      OrthoLogic also currently depends and in the future will depend upon third party manufacturers of its products, which are and will be required to comply with the applicable FDA Good Manufacturing Practices regulations. OrthoLogic cannot be certain that its present or future manufacturers and suppliers will comply with these regulations. The failure to comply with these regulations may result in restrictions on the sale of, or withdrawal of the products from the market. Compliance by third parties with these standards and practices are outside of OrthoLogic’s direct control.

	If OrthoLogic’s competitors develop and market products that are more effective than OrthoLogic’s, or obtain marketing approval before OrthoLogic does, OrthoLogic’s commercial opportunities will be reduced or eliminated.

      Competition in the pharmaceutical and biotechnology industries is intense and is expected to increase. Several biotechnology and pharmaceutical companies, as well as academic laboratories, universities and other research institutions, are involved in research and/or product development for various treatments for or involving fracture repair, spine fusion surgery, cartilage defect repair and ligament and tendon repair. Many of OrthoLogic’s competitors have significantly greater research and development capabilities, experience in obtaining regulatory approvals and manufacturing, marketing, financial and managerial resources than OrthoLogic has. OrthoLogic is currently aware of the following development efforts by its competitors:

	•	Acceleration of Fracture Repair: While there is currently no product approved by the FDA for acceleration of fracture repair, at least one large pharmaceutical company, Pfizer, Inc., appears to have received FDA clearance to begin human clinical trials in the United States for this indication.
	•	Spine Fusion: Although there are already many products approved by the FDA for use in spinal fusion, only one, InFuse from Medtronic, a bone morphogenic protein (“BMP”), includes a bioactive component. OrthoLogic believes others are in the development stage, but none are yet in human clinical trials in the United States.
	•	Cartilage Defect Repair: Several products with bioactive components are in the development stage for this indication, including BMPs. However, OrthoLogic believes no company has yet received FDA authorization to begin human clinical trials in the United States for this indication.

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      OrthoLogic’s competitors may succeed in developing products that are more effective than the ones OrthoLogic has under development or that render OrthoLogic’s proposed products or technologies noncompetitive or obsolete. In addition, certain of such competitors may achieve product commercialization before OrthoLogic does. If any of OrthoLogic’s competitors develops a product that is more effective than one OrthoLogic is developing or plans to develop, or is able to obtain FDA approval for commercialization before OrthoLogic does, OrthoLogic may not be able to achieve significant market acceptance for certain of its products, which would have a material adverse effect on OrthoLogic’s business.

	Healthcare reform and restrictions on reimbursements may limit OrthoLogic’s financial returns.

      OrthoLogic’s ability to successfully commercialize its products may depend in part on the extent to which government health administration authorities, private health insurers and other third party payors will reimburse consumers for the cost of these products. Third party payors are increasingly challenging both the need for, and the price of, novel therapeutic drugs and uncertainty exists as to the reimbursement status of newly approved therapeutics. Adequate third party reimbursement may not be available for OrthoLogic’s drug products to enable OrthoLogic to maintain price levels sufficient to realize an appropriate return on OrthoLogic’s investments in research and product development, which could restrict OrthoLogic’s ability to commercialize a particular drug candidate.

Risks Related to the Asset Sale

	Even if Chrysalis obtains stockholder approval, the asset sale may not close. In that case, Chrysalis will need to raise additional bridge financing while it pursues other strategic options.

      There are a number of conditions the parties must meet or waive before the asset sale can close. Obtaining Chrysalis’ stockholder approval is just one of the closing conditions. Some of the conditions require the co-operation of third parties and current Chrysalis employees. If the parties do not meet all the closing conditions and those closing conditions that the parties do not achieve are not waived, the asset sale will not be consummated. In the event that the asset sale does not close, Chrysalis will be required to raise additional bridge financing to cover corporate operations while the company pursues other strategic options for the company. These strategic options would include a potential financing by venture capital, and/or licensing the rights to Chrysalin for wound healing, dental/bone, or cardiovascular applications, for which the company has already received some interest. The funds from these additional partnerships or venture financings would be used to pursue product applications of Chrysalin retained by Chrysalis. Currently, Chrysalis is not in negotiations with any venture capital groups or other strategic corporate collaborators and is prevented by the terms of the Asset Purchase Agreement from soliciting any other potential bidders or buyers. There is no assurance that such resources will become available on a timely basis or on terms Chrysalis finds favorable.

	If the asset sale is terminated under certain circumstances, Chrysalis would be required to pay OrthoLogic a termination fee of $1.5 million or reimburse OrthoLogic for its out-of-pocket fees incurred in pursuing the asset sale which would require funds it currently does not have.

      If the asset sale is terminated because Chrysalis’ Board of Directors changes its recommendation from an approval of the asset sale to a recommendation against the proposed asset sale, or because Chrysalis’ Board of Directors believes in good faith that its fiduciary responsibilities to Chrysalis require it to terminate the Asset Purchase Agreement and Plan of Reorganization, Chrysalis will be required to pay OrthoLogic a termination fee of $1.5 million in cash. If the asset sale is terminated because the Chrysalis stockholders do not approve of the transaction, Chrysalis will be required to pay OrthoLogic a sum equal to OrthoLogic’s out of pocket expenses incurred in pursuing the asset sale. While Chrysalis does not have enough cash to pay these fees, it is anticipated that if the fees arise because of the appearance of a superior competing offer by another company, the acquiring company in such transaction would pay these fees. There is no assurance that Chrysalis will receive a superior competing offer. Chrysalis is prevented from entering into such discussions at this time pursuant to the Asset Purchase Agreement and Plan of Reorganization.

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	If the asset sale and reorganization do not qualify as a tax-free reorganization, Chrysalis will recognize income on the sale of the assets and stockholders will recognize income from the distribution of the sale proceeds to them as ordinary income.

      Chrysalis and OrthoLogic believe the asset sale will qualify as a tax-free reorganization. However, certain pre-closing and post-closing conditions must be met to qualify as a tax-free reorganization. Some of those conditions include (1) OrthoLogic must intend to continue at least one significant historic business line of Chrysalis’ or use a significant portion of Chrysalis’ assets in OrthoLogic’s ongoing business; (2) Chrysalis cannot be an investment company as defined under the Internal Revenue Code; and (3) the portion of the purchase price that is paid in OrthoLogic common stock must equal at least 80 percent of the Total Consideration, as that term is defined in the Asset Purchase Agreement and Plan of Reorganization. If the asset sale does not qualify as a tax-free reorganization, Chrysalis will recognize a significant gain on the sale of its assets and will owe income tax on such gain. Further, in the liquidation, the Chrysalis stockholders will recognize the distribution of the remainder of the purchase price as ordinary income.

	Chrysalis may never receive the $7.0 million contingent portion of the purchase price.

      Even if the asset sale closes, payment of $7.0 million of the purchase price is contingent upon the occurrence of certain trigger events within five years of the closing. Those trigger events are: (1) a sale of substantially all of OrthoLogic’s assets, or a merger, consolidation, recapitalization, or other transaction, in each case after which OrthoLogic stockholders immediately before such transaction do not own a majority of the voting power of the resulting entity immediately after such transaction; or (2) OrthoLogic’s receipt of written notice from the United States Food and Drug Administration that a new drug application for a product based on Chrysalin has been accepted for filing. Both trigger events are beyond the control of Chrysalis and its stockholders and may not occur within the five-year deadline or ever. If the trigger events do not occur within the five-year deadline, Chrysalis (or, if Chrysalis no longer exists, its shareholders) will not receive the $7.0 million contingent portion of the purchase price.

Risks Related to the Liquidation of Chrysalis

	Chrysalis cannot determine at this time the amount of distributions to its stockholders because there are a variety of factors that will affect that amount.

      Chrysalis cannot determine at this time the amount of its distributions to its stockholders upon a liquidation and distribution of the company because that determination depends on a variety of factors, including but not limited to the following:

	•	Value of OrthoLogic shares received by Chrysalis at the closing. As a result of the ceiling and floor on the number of shares of OrthoLogic’s common stock being issued upon closing, the value of the shares that Chrysalis may receive at closing could be higher or lower than $25.0 million and is unknown at this time.
	•	Transaction costs and expenses. Although Chrysalis expects substantially all of the $2.5 million cash portion of the purchase price will likely be used to cover the costs related to the asset sale and liquidation expenses, Chrysalis is unable to determine at this time the actual amount of such expenses and thus cannot determine how much of the cash, if any, will be distributed to Chrysalis stockholders. As of the date of this filing, Chrysalis estimates that its transaction related expenses will equal approximately $2,425,000.
	•	Escrow shares. Approximately 18% of the shares issued at closing are to be placed in escrow to cover indemnification claims made by OrthoLogic against Chrysalis. It is impossible to ascertain at this time whether any or all of these shares will be available as part of the distribution to Chrysalis stockholders or will be paid to OrthoLogic on its claims for indemnification. In addition, shares not paid to OrthoLogic will not be distributed until the end of the 18-month term of the escrow. The market value of the OrthoLogic shares released to Chrysalis stockholders at the end of the escrow period is unknown.

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	•	Contingent payment. There is the potential of additional shares being issued as a result of the $7.0 million contingent portion of the purchase price. These shares are to be issued only upon the happening of certain trigger events that may or may not occur after the closing. Because of the uncertainty relating to the occurrence of any trigger event, it is impossible to ascertain at this time whether any or all of these shares will be available for issuance to Chrysalis’ stockholders in the future.

	The timing of the dissolution of Chrysalis is not known and therefore Chrysalis cannot determine the timing of any distributions to its stockholders.

      Several factors affect the timing of Chrysalis’ ability to dissolve, including the timing of the completion of the asset sale and Chrysalis’ ability to determine the amount of its known and unknown debts and liabilities. The Asset Purchase Agreement and Plan of Reorganization provides the parties with termination rights if the closing does not occur before September 26, 2004; however, Chrysalis cannot guarantee that the closing of the asset sale will occur by that date, or at all. Any delay in the dissolution of Chrysalis will result in a delay in making distributions and a decline in the value of OrthoLogic common stock during such delay would negatively affect the value of OrthoLogic common stock ultimately received by Chrysalis stockholders.

      The foregoing list of important factors is not exhaustive and will not be updated.

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FORWARD LOOKING STATEMENTS

      OrthoLogic and Chrysalis may from time to time make written or oral forward-looking statements. 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 consent solicitation/prospectus and its related Annexes contain forward-looking statements made pursuant to that safe harbor. These forward-looking statements relate to future events or to future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause 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 the control of OrthoLogic and Chrysalis and which could materially affect actual results, levels of activity, performance or achievements. Factors that may cause actual results to differ materially from current expectations, which are described in more detail in the section titled “Risks Factors,” include, but are not limited to:

	•	unfavorable results of product candidate development efforts;
	•	unfavorable results of preclinical or clinical testing;
	•	delays in obtaining, or failure to obtain FDA approvals;
	•	increased 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 products;
	•	the impact of present and future collaborative agreements; and
	•	failure to successfully implement OrthoLogic’s or Chrysalis’ drug development strategy, or plans for obtaining further financing.

      If one or more of these or other risks or uncertainties materialize, or if the underlying assumptions prove to be incorrect, actual results may vary significantly from what was projected. Any forward-looking statement you read in this consent solicitation/prospectus reflects OrthoLogic’s and/or Chrysalis’ current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to each companies’ operations, results of operations, business strategy and liquidity. Neither OrthoLogic nor Chrysalis assumes any 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.

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THE COMPANIES

OrthoLogic Corp.

      OrthoLogic is a drug-development company focused on the healing of musculoskeletal tissue through biopharmaceutical approaches. OrthoLogic’s research is focused exclusively on the potential commercialization of its Chrysalin® Product Platform. Chrysalin, or TP508, is a 23-amino acid synthetic peptide representing a receptor-binding domain of the human thrombin molecule, a naturally occurring molecule in the body responsible for both blood clotting and initiating many of the cellular events responsible for tissue repair in bone and cartilage. OrthoLogic licenses Chrysalin for orthopedic uses from Chrysalis Biotechnology, Inc. OrthoLogic is currently enrolling patients in a Phase 3 Chrysalin product human clinical trial for fracture indications, has completed the enrollment of patients in a Phase 1/2 Chrysalin product clinical trial for spine fusion indications, has a potential Chrysalin product in late-stage pre-clinical development for cartilage defect repair, and is planning the development for two additional areas of research.

      Please see Annexes F-J for more information about OrthoLogic its business, management and financial condition.

Strategic Activities

      OrthoLogic, as part of its ongoing analysis of the most effective way to maximize the value to stockholders of its Chrysalin product platform in light of the inherent uncertainties associated with the development of drug candidates, is actively considering appropriate strategic alternatives for its business. These alternatives include joint ventures, sublicensing, partnerships and other similar arrangements that mitigate risk and provide value for OrthoLogic’s stockholders, sale of the company and continuation of the current approach of independent development of Chrysalin. In connection with this, OrthoLogic is considering the long-term funding that might be required to fully develop independently the orthopedic and other indications of the Chrysalin product platform. This funding may include new debt, equity or other arrangements. OrthoLogic has not entered into any definitive agreements in regard to any of the foregoing, and there is no assurance that these strategic alternatives or additional funding arrangements would be available on terms acceptable to OrthoLogic or at all. If OrthoLogic does not enter into arrangements for sharing the development cost of the Chrysalin product platform or for additional debt or equity funding, OrthoLogic may need to reduce the rate at which it is developing drug candidates or the number of candidates being supported during the next few years in order to conserve funds for use in pursuing its initial NDA filing and until such arrangements or funds are available on acceptable terms or a drug candidate is successfully commercialized.

Chrysalis Biotechnology, Inc.

      Chrysalis is a privately held biopharmaceutical company founded in 1995 to commercialize the Chrysalin peptide technology invented by Dr. Darrell Carney at the University of Texas Medical Branch — Galveston (“UTMB”). Since inception, Chrysalis has operated as a development stage company and has focused its efforts on developing synthetic peptide compounds targeted at tissue repair and regeneration. Chrysalis is currently in Phase 2 testing for chronic diabetic ulcers and has completed a Phase 1/2 60-patient study for this indication. Through its collaboration with OrthoLogic, Chrysalis’ lead compound, Chrysalin®, is currently in Phase 3 clinical testing for bone fracture healing and Phase 1/2 testing for spine fusion.

      Chrysalis is initially targeting the following market applications for its technology: dermal wound healing, orthopedic (through its license agreement with OrthoLogic), dental bone repair and cardiovascular.

      Dermal Wound Healing Applications. Chrysalin has shown significant effects on dermal wound healing. Preclinical animal studies in normal and impaired healing models showed that the peptide could increase the rate of healing by 40-100% compared with controls.

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      In 2001, Chrysalis completed a multi-center Phase 1/2 randomized, double-blinded, placebo controlled, three-armed human trial in chronic diabetic ulcers that involved 60 patients. The results of the study showed the following:

	•	No drug related adverse events or patient sensitivity to the drug.
	•	In the per-protocol population (patients meeting all inclusion/exclusion criteria), 57% of patients treated at the 10 microgram treatment level experienced full wound closure versus 45% in the 1 microgram treatment group and 33% in the saline control group.
	•	Subgroup analysis of neuropathic foot ulcers, post unblinding, showed significant effects with complete closure occurring in 70% of Chrysalin-treated ulcers relative to 33% in placebo controls.

      Orthopedic Applications. Chrysalis has licensed all orthopedic applications of Chrysalin to OrthoLogic, which is in preclinical and human clinical trials for varying uses.

      Dental Bone Repair Applications. Chrysalin has an active preclinical program in dental bone repair focused on improving dental implants and repairing jaw or maxillo-facial defects following surgical removal of bone. This project is based on positive preclinical results seen in bone gap filling and fracture healing experiments conducted by both Chrysalis and OrthoLogic. Preclinical research at Louisiana State University has shown that addition of Chrysalin to a commercially accepted bone graft substitute resulted in a four-fold increase in new bone formation between graft segments by two weeks post implant and a three-fold increase over that seen with bone graft material alone at five weeks.

      Cardiovascular Applications. The angiogenic and tissue regenerative properties of Chrysalin may also be directly applicable to treatment of myocardial and vascular disease, and is the focus of additional preclinical research by Chrysalis.

	•	Preclinical research in chronic ischemia conducted at Texas A&M University shows that Chrysalin injection into porcine ischemic heart tissue stimulates revascularization, improving perfusion and heart function.
	•	Preclinical data collected as part of a National Institute of Health sponsored grant to Chrysalis showed that Chrysalin injection into rabbit ischemic heart tissue increases the formation of new blood capillaries.
	•	Additional preclinical studies are planned to evaluate dosing regimens and modes of therapeutic delivery.

      Additional Technologies. In addition to Chrysalin, Chrysalis has proprietary rights to two new classes of peptide compounds that are in the early stage of development:

	•	Neutrophil Targeting Peptide, or NTP. NTP recruits neutrophils which are important infection fighting cells naturally occurring in the human body, to the site of damaged tissue. Chrysalis envisions that this peptide may be used in a topical drug formulation for infected wounds to enhance the body’s natural infection fighting capabilities as an adjunct or primary therapy for drug-resistant bacterial infections.
	•	Antagonists for Non-Proteolytically Activated thrombin Receptors, or aNPAR peptides. These peptides block the binding of molecules to certain thrombin receptors, may have the potential to inhibit surgical adhesions and may block specific cellular events that contribute to cancer metastasis.

      Chrysalis Patents. Chrysalis maintains an intellectual property portfolio that covers the Chrysalin technology and related formulations. Patents for Chrysalin are issued in North America, the major European PCT countries, and Japan. Patents are filed and pending for additional uses and formulations of Chrysalin, as well as for the NTP and aNPAR peptides.

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      Chrysalis’ product portfolio is protected by several United States and international patents, which include the following:

THROMBIN DERIVED POLYPEPTIDES:

COMPOSITIONS AND METHODS FOR USE

06/925,201 10/31/86

U.S.

Darrell H. Carney, et al.

5,352,664 10/04/94

Issued

THROMBIN DERIVED POLYPEPTIDES:

COMPOSITIONS AND METHODS FOR USE

08/007,173 01/21/93

U.S.

Darrell H. Carney, et al.

5,500,412 03/19/96

Issued

SYNTHETIC PEPTIDE   NEUTROPHIL CELL CHEMOTACTIC AGENTS

08/330,594 10/28/94

U.S.

Darrell H. Carney, et al.

6,184,342 02/06/01

Granted

      All TP508 patents, the basis of Chrysalin, are licensed to Chrysalis from the University of Texas pursuant to that certain Exclusive License Agreement dated November 10, 1995, which agreement has been amended and restated in its entirety in connection with this transaction. (See “Amended and Restated Patent License Agreement” starting on page 30 for a full description of such amended and restated license.) Chrysalis has received registered domestic trademark status for the Chrysalin mark, which is being planned for use as the product name of its lead compound. Chrysalis has an application pending for the Chrysalis company name trademark, which is currently in publication at the U.S. Patent and Trademark Office.

      Chrysalis’ Partnership with OrthoLogic. In December 1997, Chrysalis signed a licensing agreement with OrthoLogic for the orthopedic applications of Chrysalin, including bone and cartilage regeneration. The OrthoLogic partnership began with a $750,000 equity investment in Chrysalis in 1997, and has been maintained by continued milestone and option payments over the past five years totaling over $5.0 million. In 2001, OrthoLogic completed a Phase 2 pilot clinical study of Chrysalin in the treatment of bone fractures. Data from this trial were positive and OrthoLogic began a Phase 3 study in the fourth quarter of 2002. In addition, OrthoLogic subcontracts research and development work back to Chrysalis in the areas of formulation, toxicology, bioassay development, and some preclinical work.

      Chrysalis Intellectual Property Relationship with The University of Texas. Chrysalis has a worldwide, exclusive licensing agreement with The University of Texas System (the “University”) relating to the intellectual property surrounding Chrysalin. As part of this agreement, Chrysalis reimburses the University for all Chrysalin-related patent expenses and is required to make royalty payments based on net sales and milestone/license payments. As part of this agreement, any inventions related to thrombin peptides and tissue repair made by Dr. Carney are automatically added to the licensing agreement. The initial agreement was built around two patents covering the composition and use of TP508. Additional patents have been added to the agreement for new uses of the peptide in cardiovascular, orthopedics, and chronic wounds. This licensing agreement has been amended subject to consummation of the asset purchase agreement. The terms of the amended license agreement are described under “Amended and Restated Patent License Agreement” starting on page 30.

      Chrysalis Facilities. Chrysalis’ corporate offices are located at 2200 Market, Suite 600, Galveston Texas with approximately 2,000 sq. ft. for offices, equipment and a conference room. Chrysalis occupies approximately 4,000 square feet of laboratory space in the same building, and has analytical chemistry equipment, refrigerated monitored storage, and capacity for tissue culture, microbiology, and bioactivity assay development.

      Dr. Darrell Carney and other UTMB staff conduct research for Chrysalis utilizing laboratory facilities at the UTMB Human Biological Chemistry and Genetics Department and Dr. Carney’s Thrombin Receptor Research Lab. This space includes laboratories assigned to Dr. Carney and others for biochemistry, peptide synthesis and purification, tissue culture, molecular biology, and microscopy and shared UTMB resource core laboratories, and facilities for animal surgery and housing, computation analysis, and histology analysis.

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      Chrysalis Employees. Chrysalis currently employs 13 employees. All of Chrysalis’ employees are expected to remain as Chrysalis employees during the 90-day transition services period. Darrell Carney is expected to enter into a two year consulting agreement with OrthoLogic prior to closing. In the event OrthoLogic does not hire Chrysalis’ employees following the transition services period, Chrysalis will pay them severance equal to three months’ salary unless any such employee is entitled to receive a greater amount payable pursuant to a written consent.

      Chrysalis Legal Proceedings. Chrysalis is not a party to any material legal proceedings.

THE ASSET PURCHASE AGREEMENT AND PLAN OF REORGANIZATION

Description of the Asset Sale

      On April 28, 2004, Chrysalis and OrthoLogic announced that they had entered into an Asset Purchase Agreement and Plan of Reorganization to sell substantially all of Chrysalis’ assets (except cash but including intellectual property) to OrthoLogic.

      Consideration to be Received in the Asset Sale. In exchange for Chrysalis’ assets, OrthoLogic will pay Chrysalis:

	•	$2.5 million in cash, payable at the closing:
	•	$25.0 million in OrthoLogic common stock, payable at the closing. Chrysalis will receive that number of shares of OrthoLogic common stock with a value of $25.0 million as of closing, based on the 10-day average closing price of OrthoLogic common stock ending immediately prior to closing (the “Closing Date Stock Price”) if the Closing Date Stock Price is no greater than $8.239 and no less than $6.741 per share. In the event that the Closing Date Stock Price is greater than $8.239, Chrysalis will receive 3,034,349 shares of OrthoLogic common stock and in the event that the Closing Date Stock Price is less than $6.741, Chrysalis will receive 3,708,649 shares of OrthoLogic common stock. This means that Chrysalis could receive a number of shares of OrthoLogic common stock worth more or less than $25.0 million at closing. For example, the closing price of OrthoLogic common stock as of July 1, 2004 was $8.25. Assuming this is the Closing Date Stock Price, Chrysalis would receive $25,033,379 worth of OrthoLogic common stock (based on multiplying $8.25 per share and 3,034,349 shares).
	•	$7.0 million in OrthoLogic common stock, payable if either of the following trigger events occurs before the fifth anniversary of the closing: (1) a sale of substantially all OrthoLogic’s assets, or a merger, consolidation, recapitalization, or other transaction, in each case after which OrthoLogic’s stockholders immediately before such transaction do not own a majority of the voting power of the resulting entity immediately after such transaction; or (2) OrthoLogic’s receipt of written notice from the United States Food and Drug Administration that a new drug application for a product based on Chrysalin has been accepted for filing. The number of shares of OrthoLogic common stock issued will be calculated by using a per share price equal to the average closing price for the 10 trading days preceding the triggering event; in no event shall such number of shares exceed the number issued at closing. In the event that the aggregate number of shares issuable at closing and upon the successful accomplishment of the trigger event equals or exceeds 20% of OrthoLogic’s outstanding capital stock at closing, the number of shares issuable upon the trigger event shall be reduced so the amount is less than 20% of its outstanding shares, with the difference paid in cash based on the same OrthoLogic average closing price for the 10 trading days preceding the triggering event.

      Chrysalis has agreed to place approximately 18% of the shares issued at closing (15% allocable to all stockholders and an approximately 3% additionally allocable to Darrell Carney) of OrthoLogic common stock into an escrow account to pay for indemnification claims made by OrthoLogic within the 18 months following the closing. Except for shares for which OrthoLogic has made a claim within the 18 months following the closing and which claims have not yet been resolved, all remaining shares in the escrow account will be released to Chrysalis or its assigns 18 months following the closing.

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      Assets Transferred and Liabilities Assumed. Chrysalis is selling and transferring substantially all of the assets of its business (other than cash), which includes substantially all of its equipment, licenses and rights to intellectual property, inventory and certain contracts. OrthoLogic will assume Chrysalis’ obligations under the category of contracts called “assumed contracts,” which includes the University of Texas patent license, the real property lease on the Galveston building (other than an $18,000 termination fee for which Chrysalis will remain liable), lab equipment and office equipment leases and certain service provider leases. However, any obligation not expressly assumed by OrthoLogic pursuant to the Asset Purchase Agreement and Plan of Reorganization will remain Chrysalis’ responsibility, which will include obligations related to any employee salary deferrals, severance payments, change-in-control severance payments, bonus payments, worker’s compensation claims, stock options, taxes, liabilities related to excluded assets and undisclosed or contingent liabilities, if any.

Other Material Terms of the Asset Purchase Agreement

      Representations and Warranties. The Asset Purchase Agreement and Plan of Reorganization contains customary representations and warranties from Chrysalis to OrthoLogic relating to, among other things:

	•	due organization and good standing;
	•	corporate authority to enter into the Asset Purchase Agreement and Plan of Reorganization;
	•	the accuracy of financial statements;
	•	ownership of Chrysalis’ assets;
	•	absence of certain liabilities;
	•	compliance with laws, including environmental and safety laws;
	•	absence of material changes or events;
	•	tax matters;
	•	absence of liabilities related to employee benefit plans;
	•	absence of litigation;
	•	matters related to intellectual property and other intangible assets; and
	•	matters related to contracts and commitments.

      OrthoLogic has made representations and warranties to Chrysalis regarding OrthoLogic’s legal capacity and authority to enter into and perform its obligations under the Asset Purchase Agreement and Plan of Reorganization, the accuracy of its filings with the Securities and Exchange Commission and the lack of required consents or approvals.

      All of Chrysalis’ representations and warranties terminate 18 months after the closing.

      Conditions to the Closing. The closing of the sale will be held promptly after approval by Chrysalis’ stockholders and the satisfaction of all other conditions to closing. The obligation of OrthoLogic to purchase Chrysalis’ assets is subject to various conditions, which must be satisfied prior to September 25, 2004, including the following:

	•	Chrysalis’ representations and warranties must be true and correct on the closing date;
	•	Chrysalis’ business shall not have suffered a material adverse change (as defined in the Asset Purchase Agreement and Plan of Reorganization), such as an event that is reasonably likely to adversely affect the likelihood of successful commercialization of one or more Chrysalin-based products due to efficacy or safety or other factors outside the control of Chrysalis or OrthoLogic.

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	•	the parties shall have entered into a transition services agreement, attached as Annex D, governing the provision of certain transition services and an escrow agreement governing the escrow of approximately percent of the shares issued at closing;
	•	receipt of all necessary government approvals and the consent of all parties necessary to transfer and assign the assumed contracts;
	•	certain employees and consultants shall have entered into new contracts with OrthoLogic; and
	•	approval by Chrysalis stockholders of the sale of the Chrysalis assets.

      Indemnification and Escrow Arrangements. Chrysalis has agreed to indemnify OrthoLogic for any losses and claims against it arising from:

	•	Chrysalis’ breach of any covenants or any representations or warranties in the Asset Purchase Agreement and Plan of Reorganization;
	•	any liabilities Chrysalis has agreed to retain;
	•	claims arising out of conduct that occurred prior to the closing, including Chrysalis’ past clinical trials; and
	•	taxes.

      Of the $25.0 million purchase price being paid at the closing in OrthoLogic common stock, approximately 18% of the shares issued at closing will be deposited in an escrow fund to pay for such eligible indemnity claims, if any, that are brought within 18 months of the closing. The eligible indemnity claims are, in the aggregate, monetarily capped at the value of the stock in the escrow account as of the closing. The stock in the escrow account will be held in two separate accounts, one equal to 15% of the shares of stock issued at the closing (the “General Escrow Shares”) and the other equal to approximately 3% of the shares of stock issued at closing (the “Carney Escrow Shares”). Claims made against the escrow account will be paid out first from the General Escrow Shares and, when that account is depleted, then from the Carney Escrow Shares. Disbursements of the Carney Escrow Shares to OrthoLogic represent a reduction on a share-for-share basis from the number of shares that will be allocated to Chrysalis’ president, Darrell Carney, in the liquidation of Chrysalis. Please refer to Annex C for the complete text of the Escrow Agreement relating to these escrow shares.

      OrthoLogic has agreed to indemnify Chrysalis for any of Chrysalis’ losses resulting from any inaccuracy in or breach or nonperformance of any of OrthoLogic’s representations, warranties, covenants or agreements, its conduct and operation of the purchased assets after the closing and its failure to pay, perform or otherwise discharge the liabilities it agreed to assume as part of its purchase of the Chrysalis assets.

      Termination and Breakup Fees. Chrysalis must pay a termination fee to OrthoLogic if the Asset Purchase Agreement and Plan of Reorganization is terminated under specified circumstances as follows:

	•	Chrysalis must reimburse OrthoLogic for all its out-of-pocket expenses incurred in pursuit of the asset sale if the Chrysalis stockholders do not approve the Asset Purchase Agreement and Plan of Reorganization;
	•	Chrysalis must pay OrthoLogic $1.5 million if Chrysalis’ Board of Directors decides in good faith that its fiduciary responsibilities to Chrysalis require it to terminate the Asset Purchase Agreement and Plan of Reorganization; and
	•	Chrysalis must pay OrthoLogic $1.5 million if OrthoLogic terminates the Asset Purchase Agreement and Plan of Reorganization following the Chrysalis’ Board of Directors’ change in its recommendation to the Chrysalis stockholders such that it does not unanimously recommend that stockholders approve the proposed asset sale.

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Other Related Material Contracts

      Transition Services Agreement. At the closing, Chrysalis and OrthoLogic will enter into a transition services agreement pursuant to which Chrysalis will retain all of its employees not already hired by OrthoLogic for a period of up to 90 days following the closing. Chrysalis will make each employee available to work on OrthoLogic designated projects during the 90-day period for a fee that is approximately equal to Chrysalis’ cost of retaining each such employee. Chrysalis will be responsible for any severance or other bonuses related to each employee’s termination, except that OrthoLogic will reimburse Chrysalis for up to $125,000 of severance paid to Chrysalis’ chief operating officer upon termination.

      Lockup Agreement. As a condition of closing, Chrysalis must cause all of its stockholders who are beneficial owners of 5% or more of the outstanding common stock of Chrysalis on a fully diluted basis as of April 28, 2004 to enter into a lockup agreement with OrthoLogic by which the stockholder agrees not to dispose of more than 5% of its allocation of the shares of OrthoLogic received by it as part of the purchase price on any given day in the first 60 days following the closing, unless the transaction is a permitted transfer. Permitted transfers are limited to transfers by gift, intestacy, to a family trust or an immediate family member.

Amended and Restated Patent License Agreement

      Prior to this transaction, Chrysalis held an exclusive worldwide license from the University of Texas in the patents underlying Chrysalin and OrthoLogic held an exclusive sublicense from Chrysalis in respect of such patents for all orthopedic indications worldwide. Under this sublicense, OrthoLogic was required to pay various milestone payments and future royalties to Chrysalis. In connection with the proposed asset sale, Chrysalis and the University of Texas entered into an amended and restated Patent License Agreement (the “Patent License Agreement”) which will become effective and be assumed by OrthoLogic upon consummation of the asset sale. Some of the licensed patents are co-owned by the University of Texas and Monsanto Company. As to these patents, the University of Texas holds a worldwide, exclusive license to make, use and sell products covered by the patents and to sublicense its rights.

      The Patent License Agreement includes the following key provisions:

	•	Grant of License. The Patent License Agreement grants to OrthoLogic an exclusive, worldwide, royalty-bearing license to the patents underlying Chrysalin and related inventions and discoveries conceived or reduced to practice by the University of Texas during the two year period following the effective date of the Patent License Agreement, subject to the retention by the University of Texas of the right to use the licensed technology for various educational and other non-commercial purposes. OrthoLogic has the right to grant sublicenses under the Patent License Agreement.
	•	Royalty Rates. The Patent License Agreement provides for the payment of royalties to the University of Texas on all sales of products by OrthoLogic or any sublicensee which are covered by the licensed patents. The royalty rate will be between 2.5% and 3.3%. In addition, OrthoLogic will be required to pay sublicensing fees to the University of Texas in connection with any sublicensing.
	•	Milestone Payments. The Patent License Agreement eliminates the existing requirement to pay milestone payments upon the occurrence of product development events.
	•	Assignment Incentive. The Patent License Agreement includes incentives for the University of Texas to assign its ownership rights in the underlying patents and to cause the co-owner of such rights also to assign its rights in the underlying patents to OrthoLogic. These incentives include special bonus payments and an increase in the running royalty rates. If both co-owners assign their rights, the running royalty rates will increase to 3.3%.
	•	Enforcement. Under the Patent License Agreement, OrthoLogic has the right to enforce for its own account the licensed patent rights against infringement.
	•	Expiration. The Patent License Agreement will terminate upon the last to expire of the licensed patents or, if earlier, when the last of the patents is found to be invalid or unenforceable.

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Finder’s Fee

      Pursuant to the consulting agreement between Chrysalis and HC Technologies, Inc. dated May 15, 2003, Chrysalis is required upon closing to pay a finder’s fee equal to 5% of the total consideration paid for Chrysalis’ assets in the asset sale. This finder’s fee is for strategic business development assistance and advisory services performed pursuant to a 1997 consulting contract between Chrysalis and HC Technologies, Inc. Prior to this asset sale, Dallas Anderson, on behalf of HC Technologies, Inc., provided consulting services to Chrysalis, which included assisting Chrysalis in identifying potential strategic partners to license the orthopedic indications of Chrysalin. Mr. Anderson initially contacted OrthoLogic, and played a key role in the negotiations of the original licensing agreement between the companies. In addition, Mr. Anderson assisted Chrysalis’ management team in the licensing expansions and amendments that were negotiated from 1997 to 2003. HC Technologies, Inc. has not been materially involved in the negotiation of the asset sale.

      Pursuant to the consulting agreement, Chrysalis is also required to use best efforts to pay such finder’s fee in cash. As a result, at closing HC Technologies, Inc. is entitled to a payment of $1,375,000 based on a total value at closing of $27.5 million. HC Technologies, Inc. and Chrysalis have agreed that HC Technologies, Inc. will receive 85% of this amount in cash, or $1,168,750, and the remainder in shares of OrthoLogic common stock. All of the shares HC Technologies, Inc. receives at closing will be placed in escrow pursuant to the escrow agreement previously described so that HC Technologies, Inc. will have the same percentage of its payment subject to the escrow agreement as Chrysalis’ stockholders. HC Technologies, Inc. will not be paid any fee on the contingent $7.0 million payment unless the related trigger event occurs and OrthoLogic issues the shares. If OrthoLogic issues such shares upon a trigger event, HC Technologies, Inc. will receive the 5% it is owed in such OrthoLogic common stock; in the event that any portion of the $7.0 million is paid in cash, HC Technologies, Inc. will receive 5% of such amount in cash and a reduced number of shares equal to the amount it received in cash.

Governmental Approvals

      No regulatory approval is required in order to consummate the transaction.

Accounting Treatment

      The transaction will be accounted for as an acquisition of net assets for financial accounting purposes. The purchase price will be allocated based upon the fair value of the assets acquired and liabilities assumed.

REASONS FOR ENGAGING IN THE ASSET SALE

OrthoLogic Corp.

      OrthoLogic’s Board of Directors believed the acquisition of exclusive rights to Chrysalin for all indications would be a key strategic acquisition for OrthoLogic as it continued its research into orthopedic indications for Chrysalin. The Board of Directors weighed the benefits of the acquisition against the costs of the acquisition and ultimately decided it was in the best interests of OrthoLogic to obtain the full licensed rights to Chrysalin which would broaden the scope of OrthoLogic’s potential Chrysalin Product Platform significantly.

      Arranged by order of significance to the OrthoLogic Board, the positive considerations the Board of Directors discussed were:

	•	The purchase of the license grants OrthoLogic exclusive control of all potential sub-licensing and potential corporate partnership agreements related to Chrysalin. Having this control provides OrthoLogic with numerous options to expand or accelerate individual programs and potentially provides additional financial resources to OrthoLogic.

This was deemed by the OrthoLogic Board to be the most critical consideration, one which could provide major long term positive benefits to OrthoLogic, both financial and strategic.

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	•	The purchase of the license gives OrthoLogic control of the manufacturing process and would provide OrthoLogic all of the potential product margin. This could amount to significant cost savings over the potential lifetime of the various Chrsyalin based products.
	•	The royalty rate OrthoLogic would be obligated to pay to Chrysalis for Chrysalin products (and which it would pay to the University of Texas if the asset sale is consummated) would be reduced.
	•	The purchase of the license would eliminate potential future milestone payments that would be required to be made to Chrysalis on orthopedic indications OrthoLogic has under investigation. These potential future milestone payments included:

	•	$1.2 million in total payments if Investigational New Drug (“IND”) applications were authorized by the FDA for cartilage defect repair, tendon repair and ligament repair.
	•	$2.5 million in total payments if New Drug Applications (“NDAs”) were accepted for filing on the five orthopedic indications currently in development.
	•	$7.0 million in additional payments for NDA approvals for fracture repair and spinal fusion.
	•	$6.0 million in additional payments for NDA approvals for the other three orthopedic indications (cartilage, ligament and tendon).
	•	$6.0 million in additional payments for approvals to sell orthopedic products outside the United States.

	•	OrthoLogic would gain important scientific, research, chemistry, manufacturing and product-development expertise, including Dr. Darrell Carney, founder of Chrysalis and Professor at University of Texas Medical Branch in Galveston, and several members of Chrysalis’s technical development team if the asset sale is consummated.

      The negative considerations the Board of Directors discussed were the following:

	•	The dilutive impact the purchase would have on the current shareholders. OrthoLogic currently has approximately 34.5 million shares outstanding. The Chrysalis asset purchase calls for an additional minimum of 3.0 million shares to a maximum of 3.7 million shares (depending upon the average of OrthoLogic’s closing stock price for the 10 trading days prior to the close of the transaction) to be issued to Chrysalis shareholders at closing. This amounts to approximately 7.6% to 9.2% dilution for OrthoLogic’s shareholders after OrthoLogic cancels the shares received by it as a preferred stockholder of Chrysalis. An additional contingent payment of $7.0 million worth of OrthoLogic stock would also be required depending upon the occurrence of certain future events.
	•	Whether the purchase is the best use of funds in light of OrthoLogic’s lack of revenue generating operations and the ongoing need to fund research and development. Because the transaction was structured using OrthoLogic stock as the primary consideration OrthoLogic’s Board estimated the actual cash cost of the transaction is less than $3.5 million, $2.5 million of which will be paid as part of the purchase price and approximately $1.0 million in expenses related to the transaction. The Board believed the $3.5 million cash expenditure does not represent a significant drain on the OrthoLogic cash reserves.

Chrysalis Biotechnology, Inc.

      Chrysalis’ Board of Directors considered a number of factors in reaching its decision to approve the asset sale, including other strategic alternatives to increase stockholder value. These considerations included the following, listed by order of significance to the Chrysalis Board:

	•	The most significant factor to the Chrysalis Board was the favorable contractual terms of the asset purchase and related transaction documents, including the favorable valuation of Chrysalis in this transaction as compared to other offers considered in the past by Chrysalis’ Board;

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	•	The opportunity presented by the asset sale to achieve liquidity for Chrysalis’ existing stockholders, who currently do not have a public market for their shares;
	•	OrthoLogic is in a much better cash position than Chrysalis, and as a result, OrthoLogic’s ability to fund development of Chrysalin drug products is much stronger than Chrysalis’ current ability;
	•	The synergies achieved through the combination of the two companies by allowing the reduction of the amount of administrative officers and employees employed by the combined company as compared to each individual company, permitting the combination of both companies’ product development programs and eliminating the need for as much overhead;
	•	The intent for the acquisition to qualify as a tax-free reorganization to Chrysalis’ stockholders who receive shares of OrthoLogic common stock in exchange for their Chrysalis stock pursuant to the acquisition, except to the extent they receive any cash distribution;
	•	The expected increased value derived from the efficiency of having all Chrysalin patent license rights owned by a single entity rather than having multiple owners of rights for different indications;
	•	Chrysalis’ Board’s assessment of OrthoLogic’s commitment of the future growth and commercialization of the Chrysalin technology, and OrthoLogic’s management’s ability to achieve these goals;
	•	More capital and a better infrastructure give OrthoLogic an improved ability to achieve its strategic goals related to additional fundraising and corporate partnering as compared with Chrysalis, which has far less resources than OrthoLogic does currently;
	•	The ability to negotiate a better license with the University of Texas for the Chrysalin technology in the context of the proposed asset sale as a result of the incentive given to the University of Texas to see the combination occur so that the development of Chrysalin has access to more resources;
	•	The dilutive effect of a potential venture capital financing and whether such venture funding is available to Chrysalis; and
	•	The impact that future licensing of Chrysalin rights would have on a potential liquidity event for Chrysalis’ stockholders.

      In addition, Chrysalis’ Board also identified and considered the following potentially negative factors that could result from the acquisition:

	•	The risk that OrthoLogic may have to raise additional cash in the future and the potential negative impact this could have on the OrthoLogic common stock price;
	•	The risk that OrthoLogic, in its business interest, may not choose to pursue other potential indications of Chrysalin;
	•	The risks that the integration of the businesses and personnel of the two companies will not be successfully implemented and may require a significant amount of management time and resources;
	•	The risk that the asset sale may not be completed;
	•	The negative effect of the public announcement of the acquisition on the retention of Chrysalis’ employees; and
	•	The costs associated in seeking to complete the acquisition.

      Chrysalis’ Board took into account all of these factors, including the potential benefit to members of Chrysalis’ management, in approving the Asset Purchase Agreement. Chrysalis also considered other strategic alternatives. First, Chrysalis’ Board considered the possibility of conducting an additional debt or equity financing. Chrysalis had just completed an offering for debt, which included warrant coverage, for just over $1.0 million. In addition, Chrysalis’ Board considered the potential of a corporate partnering or licensing transaction. The Board felt that its cash position put it in a position of weakness in negotiations. Also, such transactions typically take a substantial amount of time longer than a financing, and as a result, Chrysalis may

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BACKGROUND, PAST CONTACTS, AND NEGOTIATIONS

      OrthoLogic and Chrysalis have a long historical business relationship. Since 1997, OrthoLogic has held a minority stockholder interest in Chrysalis and holds the license to Chrysalis for orthopedic indications. The license agreement with Chrysalis requires OrthoLogic to pay certain other milestone payments and royalties, based upon OrthoLogic’s development of Chrysalin and achievement of commercial success. Most recently in 2003, OrthoLogic made a milestone pre-payment of $250,000 required for a potential IND using Chrysalin for a cartilage defect repair indication. Chrysalis and OrthoLogic’s management began discussing a potential asset sale in the fall of 2003.

      October 19, 2003 — OrthoLogic’s Chairman of the Board of Directors and Chief Executive Officer met Chrysalis’ President for dinner in Boston, Massachusetts to review the status of various research and development projects. The parties discussed briefly a potential acquisition of Chrysalis by OrthoLogic, but tabled the topic with an agreement to revisit the issue some time in the future.

      December 5, 2003 — At an OrthoLogic Board of Directors’ conference call, the Chairman of the Board John Holliman, III, and Board members Stuart Altman, Fredric Feldman, Augustus White, III and Elwood Howse, Jr. discussed, among other things, the idea of exploring the feasibility and business reasons for pursuing a transaction with Chrysalis.

      December 6-18, 2003 — OrthoLogic’s Chief Executive Officer and Chrysalis’ President had several telephone calls to discuss the idea of a potential acquisition of Chrysalis by OrthoLogic. The parties agreed that OrthoLogic should prepare a written expression of its interest by the end of the year for Chrysalis’ Board of Directors to consider.

      December 19, 2003 — OrthoLogic’s Board of Directors (with John Holliman, III, Stuart Altman, Augustus White, III, Elwood Howse, Jr. and Thomas Trotter attending) and its counsel held a meeting to review and discuss a draft nonbinding expression of interest (an “EIP”) for the acquisition of Chrysalis. The OrthoLogic Board of Directors unanimously approved a finalized EIP and authorized the OrthoLogic Chief Executive Officer to deliver it to Chrysalis. The EIP was delivered to Chrysalis’ President that same day.

      January 6, 2004 — Chrysalis held a Board meeting by teleconference (at which all Board members, Chrysalis’ Chief Operating Officer Dennis McWilliams and Chrysalis’ legal counsel Jeffrey Harder were present) at which it was decided that while the combination of the companies made strategic sense, the valuation of Chrysalis as proposed by OrthoLogic, in the Board’s belief, was too low, and instructed Chrysalis’ President to provide a written response to OrthoLogic relaying this.

      January 7, 2004 — Chrysalis sent OrthoLogic a written response to the EIP. While conceptually agreeing that a combination of the two companies made good strategic sense, there was considerable disagreement regarding the valuation of Chrysalis and other deal terms such as the standstill agreement, the liquidity of securities to be received as consideration and employment of existing Chrysalis employees.

      January 8, 2004 — OrthoLogic sent a written response back to Chrysalis explaining its view of the transaction terms.

      January 13, 2004 — Chrysalis’ President emailed OrthoLogic’s Chief Executive Officer a response to the January 8, 2004 letter from OrthoLogic, which acknowledged a difference of opinion, but agreed that additional discussion was warranted.

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      January 14, 2004 — OrthoLogic’s Chief Executive Officer and Chrysalis’ President attended a technology conference in San Francisco. Over the course of the three day conference, the parties met several times to discuss the differences in the parties’ view of the potential transaction.

      January 24, 2004 — At the regularly scheduled OrthoLogic Board of Directors’ meeting at which all members were present, the Board approved modified terms for the potential transaction and authorized the Chairman of the Board and the Chief Executive Officer to reopen negotiations with Chrysalis.

      February 2, 2004 — OrthoLogic sent a revised EIP to Chrysalis that proposed a valuation of up to $34.5 million and other terms.

      February 3-8, 2004 — OrthoLogic’s Chief Executive Officer and Chrysalis’ President had a number of telephone conversations over several days to negotiate terms of the EIP.

      February 9, 2004 — Chrysalis held a Board meeting (at which all Board members, Chrysalis’ Chief Operating Officer Dennis McWilliams and Chrysalis’ legal counsel Jeffrey Harder were present) to review the EIP proposed by OrthoLogic, and approved the terms of the EIP. OrthoLogic and Chrysalis signed a non-binding EIP that described the basic terms of a proposed asset transaction as well as conditions necessary to effectuate the negotiation and signing of a definitive agreement. An initial 30-day due diligence period began on February 10, 2004. OrthoLogic paid $100,000 in connection with the signing of the EIP as payment for exclusivity with Chrysalis for a 30-day period.

      February 10-17, 2004 — OrthoLogic sent several representatives to Chrysalis’ facilities in Galveston, Texas to begin conducting due diligence on Chrysalis. During due diligence, OrthoLogic concluded that the current license which Chrysalis held from the University of Texas for Chrysalin was too restrictive and would need to be modified in order for the transaction to move forward. OrthoLogic was concerned about the following provisions under the license, all of which were eliminated in the new license agreement negotiated in connection with the terms of the transaction:

	•	licensor’s right to terminate the license in respect of any jurisdiction as to which licensee could not demonstrate that it was actively attempting to commercialize a licensed invention;
	•	licensor’s demand and piggyback registration rights for its shares of licensee’s stock;
	•	licensor’s right to terminate the license upon an uncured default and licensee’s insolvency;
	•	licensee’s obligation to enforce the licensed patents against all infringement;
	•	licensee’s inability to assign the license;
	•	lack of indemnification of licensee by licensor;
	•	licensor’s right of consent with respect to any proposed patent filing; and
	•	licensor’s right to representation on licensee’s board of directors or to have a representative attend all of licensee’s board meetings as an observer.

      February 17-March 10, 2004 — The balance of the initial 30-day due diligence period was spent in negotiations between Chrysalis, OrthoLogic and the University of Texas, attempting to come to agreement on a new license for Chrysalin which would be acceptable to all parties.

      March 10-12, 2004 — OrthoLogic’s Chief Executive Officer met several times with Chrysalis’ President at a conference in San Francisco to discuss the on-going negotiations with the University of Texas. The parties agreed to continue due diligence for another 30 days and continue to negotiate with the University of Texas.

      March 16-April 26, 2004 — OrthoLogic and Chrysalis, through their counsel, engaged in extensive negotiations with the University of Texas on the new license for Chrysalin that would take effect upon a closing of a deal with Chrysalis.

      April 27, 2004 — Chrysalis and the University of Texas entered into a new license, effective upon the closing of the asset sale to OrthoLogic.

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      April 28, 2004 — OrthoLogic and Chrysalis entered into a definitive Asset Purchase Agreement and Plan of Reorganization.

      June 1, 2004 — OrthoLogic and Chrysalis executed the First Amendment to the Asset Purchase Agreement and Plan of Reorganization, relating to the maximum number of shares issuable to avoid issuing 20% or more of the number of OrthoLogic shares outstanding at closing.

STOCKHOLDER APPROVAL

      Chrysalis is seeking written consents to approve (i) the sale of substantially all of the Chrysalis assets (except cash) to OrthoLogic pursuant to the Asset Purchase Agreement and Plan of Reorganization and the related transactions described in that agreement, and (ii) the plan of complete liquidation and dissolution pursuant to which Chrysalis will wind down its operations and dissolve. To consummate such proposed actions, Chrysalis is required to obtain written consent from holders of at least a majority of its outstanding common stock on an as-converted basis.

      Chrysalis is asking stockholders to execute and return the written consent attached as Annex E to this consent solicitation to Chrysalis’ Secretary as soon as possible by returning the executed written consent in the enclosed self-addressed stamped envelope. If a stockholder does not respond and Chrysalis receives the requisite number of consents voting in favor of the asset purchase, such stockholder will receive a written notice from the Chrysalis Board of Directors of the approval of the consent promptly thereafter. If a stockholder does respond and subsequently wishes to revoke their consent, such stockholder may call Dennis McWilliams at (409) 750-9251, and Chrysalis will disregard such stockholder’s signed consent, provided that Chrysalis has not yet received and accepted consents from shareholders representing a majority of the Chrysalis shares eligible to be voted to approve the asset sale and plan of liquidation.

DISSENTER’S OR APPRAISAL RIGHTS

      Chrysalis’ stockholders are not entitled to any dissenter’s or appraisal rights with respect to the sale of the Chrysalis assets under Delaware law or Chrysalis’ Certificate of Incorporation.

INTERESTS OF CERTAIN CHRYSALIS RELATED PERSONS IN THE ASSET SALE

      Certain of the members of Chrysalis’ Board and its management team have interests in the asset sale, which could be adverse to those of Chrysalis’ stockholders. The interests described in detail below may have been factored into the decision of members of the Board of Directors to approve the asset purchase agreement with OrthoLogic.

•	Darrell H. Carney, Chrysalis’ President and Chief Executive Officer

      Dr. Carney will receive shares of registered OrthoLogic common stock (in the same form and manner as Chrysalis’ other holders of common stock), in return for the 548,446 shares of Chrysalis common stock beneficially owned by Dr. Carney and his wife and family partnerships (excluding shares held by certain of Dr. Carney’s relatives of which he disclaims beneficial ownership). However, pursuant to the Asset Purchase Agreement and Plan of Reorganization, Dr. Carney is required to place an additional number of shares in escrow equal to ten percent of the amount he is entitled to receive. Dr. Carney currently owns non-qualified stock options exercisable for 50,000 shares of Chrysalis common stock. Additional non-qualified stock options to purchase 20,000 shares of Chrysalis common stock will immediately vest upon consummation of the asset sale. Dr. Carney is entitled to have the payment of his exercise price waived if he exercises his options in connection with the asset sale. In addition, Dr. Carney will receive a consulting agreement with OrthoLogic which will pay him an annual consulting fee of $200,000 for at least two years. He is also entitled to receive $37,733 in deferred compensation (accrued through June 30, 2004) from Chrysalis. Dr. Carney waived his rights to receive a change of control payment pursuant to his employment agreement, in the amount of one and a half year’s salary (approximately $300,000), in exchange for a “completion” bonus payable upon final distribution of any remaining Chrysalis assets under the plan of liquidation. Chrysalis’ Board of Directors has

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•	Dennis L. McWilliams, Chrysalis’ Executive Vice President and Chief Operating Officer

      Mr. McWilliams will receive shares of registered OrthoLogic common stock (in the same form and manner as Chrysalis’ other holders of common stock), in return for the 14,000 shares of Chrysalis common stock beneficially owned by Mr. McWilliams. Mr. McWilliams currently owns incentive stock options exercisable for 48,000 shares of Chrysalis common stock. Additional incentive stock options to purchase 33,000 shares of Chrysalis common stock will immediately vest upon consummation of the asset sale. Mr. McWilliams is entitled to have the payment of his exercise price waived if he exercises his options in connection with the asset sale. In addition, Mr. McWilliams will receive a severance payment of approximately $165,000, equal to his annual base salary and health benefits for twelve months (of which $125,000 shall be paid by OrthoLogic). Mr. McWilliams will also be entitled to receive $68,500 in deferred compensation (accrued through June 30, 2004) from Chrysalis. Further, Chrysalis’ Board of Directors has approved the payment of a “completion” bonus to Mr. McWilliams to incentivize him to assist the liquidating trustee following the liquidation of Chrysalis. Mr. McWilliams will be paid $75,000 cash on or before the final liquidating distribution to Chrysalis’ stockholders.

•	David Hobson, Vice President, Research and Development

      Dr. Hobson currently owns incentive stock options exercisable for 19,000 shares of Chrysalis common stock. Additional incentive stock options to purchase 23,000 shares of Chrysalis common stock will immediately vest upon consummation of the asset sale. Dr. Hobson is entitled to have the payment of his exercise price waived if he exercises his options in connection with the asset sale. In addition, he shall be entitled to receive one year of his Chrysalis salary of $145,000 as severance. Dr. Hobson is also be entitled to receive $25,000 in deferred compensation (accrued through June 30, 2004) from Chrysalis.

•	Edwin Lamm, Director

      Mr. Lamm will receive registered shares of OrthoLogic common stock (in the same form and manner as Chrysalis’ other holders of common stock), in return for his 34,286 shares of Chrysalis common stock and for any exercised stock options out of the 22,500 he was granted as part of his service on Chrysalis’ Board. Mr. Lamm is entitled to have the payment of his exercise price waived if he exercises his options in connection with the asset sale. All of Mr. Lamm’s options are vested.

•	Philip Hunke, Director

      Dr. Hunke will receive registered shares of OrthoLogic common stock (in the same form and manner as Chrysalis’ other holders of common stock), in return for his 8,915 shares of Chrysalis common stock and for any exercised stock options out of the 22,500 he was granted as part of his service on Chrysalis’ Board. Dr. Hunke is entitled to have the payment of his exercise price waived if he exercises his options in connection with the asset sale. All of Dr. Hunke’s options are vested. In addition, Dr. Hunke will receive registered shares of OrthoLogic common stock in return for the 5,000 shares of Chrysalis Series A preferred stock he owns in the same form, relative amount, and manner as Chrysalis’ other Series A stockholders.

•	All Option Holders

      Chrysalis’ Board of Directors has approved the payment of a cash bonus to all holders of options to purchase shares of Chrysalis’ common stock in order to help facilitate the exercise of all outstanding options. However, Chrysalis will not pay any cash out-of-pocket to pay for such bonuses. Instead, optionees will be able to exercise any options that they currently own and Chrysalis will waive the requirement to pay the exercise price if such optionees exercise their respective options in connection with the asset sale. The value of the exercise price waiver, calculated by aggregating the exercise price for all outstanding options, is $380,100, with $230,850 of such value applicable to the 237,000 shares held by Chrysalis affiliates and $149,250 applicable to

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	•	The value of the waiver with respect to Darrell H. Carney’s 70,000 option shares is $73,500;
	•	The value of the waiver with respect to Dennis L. McWilliams’s 81,000 option shares is $78,050;
	•	The value of the waiver with respect to David Hobson’s 42,000 option shares is $44,100;
	•	The value of the waiver with respect to Philip Hunke’s 22,000 option shares is $17,600; and
	•	The value of the waiver with respect to Edwin Lamm’s 22,000 option shares is $17,600.

Optionees who avail themselves of this bonus will recognize income as a result of such bonus. Chrysalis urges any optionee who utilizes this bonus payment to consult with their own tax advisers to determine the tax consequences of such bonus payment.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES TO CHRYSALIS STOCKHOLDERS

      The following discussion summarizes the material federal income tax considerations of the asset sale and liquidation relevant to holders of shares of Chrysalis capital stock who are holders of record on the closing date and receive shares of OrthoLogic common stock pursuant to the plan of liquidation. This discussion is based on currently existing provisions of the Internal Revenue Code of 1986, as amended, (the “Code”), existing and proposed Treasury Department regulations thereunder and current administrative rulings and court decisions, each as in effect as of the date of this consent solicitation/prospectus and all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences to Chrysalis or the Chrysalis stockholders.

      Chrysalis stockholders should be aware that this discussion does not deal with all federal income tax considerations that may be relevant to certain stockholders of Chrysalis in light of their particular circumstances, such as stockholders who are preferred stockholders, who are financial institutions, insurance companies, tax-exempt organizations, dealers in securities, or foreign persons, who do not hold their shares of Chrysalis capital stock as capital assets, or who acquired their shares in connection with stock option plans or otherwise as compensation. In addition, the following discussion does not address the tax consequences of the asset sale and the liquidation under foreign, state or local tax laws or the tax consequences of transactions effectuated prior or subsequent to or concurrently with the asset sale and the liquidation (whether or not such transactions are in connection with such transactions), including, without limitation, transactions in which Chrysalis capital stock is acquired or OrthoLogic common stock is disposed of. ACCORDINGLY, CHRYSALIS STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS DESCRIBED IN THIS CONSENT SOLICITATION STATEMENT/ PROSPECTUS, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SUCH TRANSACTIONS IN THEIR PARTICULAR CIRCUMSTANCES.

      Chrysalis has not requested a ruling from the IRS with regard to any of the federal income tax consequences of the asset sale and the liquidation. Chrysalis has obtained the Tax Opinion of Winstead Sechrest & Minick P.C., counsel to Chrysalis, which is included as an Exhibit to the Registration Statement of which this consent solicitation/prospectus is a part, that the asset sale and liquidation will constitute a “Reorganization” within the meaning of section 368(a)(1)(C) of the Code. The Tax Opinion is subject to certain assumptions and qualifications, including but not limited to the accuracy of certain representations made by Chrysalis. The Tax Opinion is not binding on the IRS and does not preclude the IRS from adopting a contrary position.

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      Subject to the limitations and qualifications referred to herein, in the event the asset sale and liquidation does receive the intended treatment under tax laws, the material federal income tax consequences are as follows:

	(i) Holders of Chrysalis capital stock will not recognize gain or loss upon their receipt or deemed receipt (including as a consequence of receiving a beneficial interest in the Liquidating Trust or the escrowed shares) of OrthoLogic common stock in exchange for Chrysalis capital stock in the asset sale and the liquidation except to the extent of (a) OrthoLogic common stock issuable as the contingent portion of the purchase price (the “Deferred Shares”) that are recharacterized as interest income under the imputed interest rules of the Code (we refer to the Deferred Shares that are recharacterized as interest income as the Deferred Interest Shares); (b) cash received in lieu of fractional shares of OrthoLogic common stock; (c) cash or other non-stock property received in exchange for Chrysalis capital stock; and (d) cash issuable as the contingent portion of the purchase price.
	(ii) Chrysalis stockholders receiving cash or other non-stock property in addition to OrthoLogic common stock in the liquidation will recognize gain equal to the lesser of the amount of cash received or the gain realized as a result of the liquidation (i.e., the fair market value of the OrthoLogic common stock and all other property received by the stockholder less the stockholder’s tax basis in the Chrysalis capital stock surrendered). The gain recognized is treated as capital gain or dividend income depending on whether the non-stock consideration has the effect of a dividend distribution and whether Chrysalis has adequate earnings and profits; provided, however, under the imputed interest rules of the Code, if cash is paid more than one year following the asset sale and liquidation as part of the contingent purchase price, a portion of such gain will be recharacterized for federal income tax purposes as interest income.
	(iii) In general, the tax basis of the OrthoLogic common stock received by Chrysalis stockholders in the asset sale and liquidation (other than the Deferred Interest Shares), including OrthoLogic common stock that is deemed to be received by Chrysalis stockholders as a result of receiving a beneficial interest in the liquidating trust or the escrow shares, should be the same as the aggregate tax basis of the Chrysalis capital stock surrendered in exchange increased by any gain recognized in the exchange and decreased by the amount of cash (or any other property) other than OrthoLogic common stock received, or deemed received as a result of the receipt of a beneficial interest in the liquidating trust or the escrow shares. Prior to the final determination of the amount and timing of all Deferred Shares and escrow shares to be issued to Chrysalis stockholders, the interim basis of the shares of OrthoLogic common stock received or deemed received by Chrysalis stockholders will be determined as though the escrow shares and the maximum number of Deferred Shares (not including Deferred Interest Shares) were actually received by Chrysalis stockholders. After final determination of the amount and timing of all Deferred Shares and escrow shares to be issued to Chrysalis stockholders, the final basis of the shares of OrthoLogic common stock received by Chrysalis stockholders will be recalculated to take into account the actual number of shares received.
	(iv) The holding period of the OrthoLogic common stock received by the Chrysalis stockholders in the liquidation will include the holding period of the Chrysalis capital stock surrendered in the exchange.
	(v) Chrysalis stockholders receiving cash in lieu of a fractional interest in shares of OrthoLogic common stock will be treated as if such holder actually received such fractional share interest which was subsequently redeemed by OrthoLogic, resulting in the cash such holder receives in lieu of such fractional share interest being treated as having been received as full payment in exchange for common stock redeemed as provided in section 302(a) of the Code. Such holder should generally recognize capital gain or loss for federal income tax purposes measured by the difference between the amount of cash received and the portion of the tax basis of the shares of Chrysalis capital stock allocable to such fractional share interest.

      For federal income tax purposes, holders of Chrysalis capital stock should be treated as having received the General Escrow Shares upon the consummation of the asset sale and liquidation. Because the number of escrow shares to be returned to OrthoLogic or any other beneficiary is based upon the value of the OrthoLogic common stock at the time of the asset sale, Chrysalis stockholders should not recognize gain or loss upon the

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      Under the imputed interest rules of the Code, because Chrysalis common stockholders could receive Deferred Shares more than one year following the asset sale and liquidation, a portion of those contingent shares (i.e., the Deferred Interest Shares) will be recharacterized for federal income tax purposes as interest income and will be taxable to Chrysalis stockholders as ordinary interest income when received. In general, the portion of any Deferred Shares constituting Deferred Interest Shares will be equal to the excess of the fair market value of the Deferred Shares when received over the present value of that fair market value as of the date of the asset sale (determined using a discount rate equal to the appropriate “applicable federal rate” for the month of the asset sale). A Chrysalis stockholder’s tax basis for Deferred Interest Shares will equal their fair market value when received and the holding period for Deferred Interest Shares will commence the day following their receipt.

      Although Chrysalis stockholders who acquired their Chrysalis capital stock upon exercise of employee stock options or otherwise as compensation will generally recognize no gain or loss upon receipt of OrthoLogic common stock (other than Deferred Interest Shares) in the asset sale and liquidation, special rules may also apply. For example, if a Chrysalis stockholder acquired Chrysalis capital stock upon exercise of a non-qualified stock option in anticipation of the asset sale and liquidation, the fair market value of shares of Chrysalis capital stock received in excess of the option exercise price would be treated as ordinary, compensation income subject to withholding. In addition, if a Chrysalis stockholder acquired Chrysalis capital stock upon exercise of an “incentive stock option” less than one year prior to the asset sale, cash received in the asset sale and liquidation would be treated as ordinary, compensation income rather than capital gain because the deemed redemption of the fractional interest in OrthoLogic common shares would constitute a “disqualifying disposition.” The application of additional special rules may depend upon whether the Chrysalis capital stock acquired upon exercise of an employee stock option was subject to a “substantial risk of forfeiture” when acquired and, if so, whether the Chrysalis stockholder made a valid and timely election under Section 83(b) of the Code. CHRYSALIS STOCKHOLDERS WHO ACQUIRED THEIR CHRYSALIS CAPITAL STOCK UPON EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.

      For the asset sale and liquidation of Chrysalis to qualify as a “Reorganization,” the “continuity of interest” requirement must be satisfied. To satisfy the continuity of interest requirement, the Chrysalis stockholders must receive a meaningful ownership interest in OrthoLogic as a result of the asset sale and liquidation. In general, this requirement will be considered satisfied if the fair market value of the OrthoLogic stock to be received by Chrysalis stockholders in the asset sale and liquidation constitutes a substantial part of the total consideration received by the Chrysalis stockholders in the asset sale and liquidation. For advance ruling purposes, the IRS has provided that the continuity of interest requirement will be satisfied if the Chrysalis stockholders exchange their Chrysalis stock for OrthoLogic stock that has a fair market value, as of the closing date, that equals or exceeds 50% of the total consideration received by such Chrysalis stockholders. This safe harbor merely indicates the level of continuity required by the IRS for the issuance of an advance ruling and does not necessarily represent the degree of continuity that is required to qualify as a “Reorganization.” Courts have held the continuity of interest requirement to be satisfied where the stockholders of the acquired corporation receive a lower percentage (e.g., 40%) of acquiring corporation stock. No assurance can be given that the “continuity of interest” requirement will be satisfied. If such requirement is not satisfied, the asset sale and the liquidation would not be treated as a “Reorganization” under the Code.

      In addition, (1) OrthoLogic must continue at least one significant historic business line of Chrysalis or use a significant portion of Chrysalis’ assets in OrthoLogic’s ongoing business; (2) Chrysalis must not be an investment company as that term is defined under the Code; and (3) the portion of the purchase price paid in

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      In accordance with the Chrysalis plan of liquidation, Chrysalis will be liquidated. Some amount of cash held by Chrysalis and some amount of OrthoLogic common stock received by Chrysalis upon sale of its assets may be placed into a liquidating trust upon liquidation of Chrysalis. The beneficial interests in the liquidating trust will be distributed to the stockholders of Chrysalis pursuant to the plan of liquidation. For U.S. federal income tax purposes, a share of the assets of the liquidating trust (both common stock and cash) should be deemed to have been distributed to each Chrysalis stockholder in proportion to their interests in the liquidating trust and thereafter contributed by such stockholder to the liquidating trust. Accordingly, a distribution of cash to the liquidating trust by Chrysalis would be taxable as if transferred directly to the stockholders as more fully discussed above.

      In general, a liquidating trust is not itself subject to U.S. federal income tax rather, each holder of a beneficial interest in the liquidating trust will be treated as owning a pro rata share of the assets of the liquidating trust and is required to take into account his proportionate share of each of the liquidating trust’s items of income or deduction. Because the completion of the asset sale and liquidation should constitute a Reorganization within the meaning of section 368(a)(1)(C) of the Code, as described above, Chrysalis stockholders should not recognize any gain or loss that they would not otherwise recognize if the liquidating trust were not utilized.

      If the liquidating trust disposes of any of its OrthoLogic common stock, other than in a distribution to Chrysalis stockholders, each Chrysalis stockholder will recognize gain or loss equal to the difference between the stockholder’s pro rata share of the amount realized by the liquidating trust on the disposition of such shares, and the stockholder’s tax basis in such shares. If the liquidating trust makes any payments in satisfaction of liabilities of Chrysalis that were contingent as of the inception of the liquidating trust, a holder of a beneficial interest in the liquidating trust will generally be entitled to increase the stockholder’s basis (or claim a capital loss) in the OrthoLogic common stock acquired in the liquidation (including such holder’s pro rata share of any OrthoLogic common stock held in the liquidating trust) by an amount equal to such holder’s pro rata share of such payment. Moreover, if the liquidating trust earns any income, such as interest or dividends, such income will be taxable to a holder of a beneficial interest in the liquidating trust in accordance with the holder’s method of accounting in the year in which received by the trust without regard to whether any distribution was made.

      A successful IRS challenge to the “Reorganization” status of the asset sale and liquidation (as a result of the failure of the “continuity of interest” requirement or otherwise) would result in several significant adverse tax consequences. First, a Chrysalis stockholder would recognize additional gain or loss with respect to each share of Chrysalis capital stock surrendered in the liquidation equal to the difference between the stockholder’s basis in such share and the fair market values of the OrthoLogic common stock received in the liquidation and the contingent right to receive escrow shares and Deferred Shares in the future. In such event, a stockholder’s aggregate basis in the OrthoLogic common stock so received would equal its fair market value and the stockholder’s tax holding period for such stock would begin the day after the date of the liquidation. Second, the transfer of Chrysalis’ assets to OrthoLogic would be treated as a taxable sale of such assets. The corporate level gain Chrysalis would recognize upon such a taxable sale of assets would be equal to the difference between Chrysalis’s adjusted tax basis in such assets and the fair market value of all of the consideration received from OrthoLogic in the asset sale (including, but not limited to, all of the OrthoLogic common stock issued by OrthoLogic, cash and all of the liabilities assumed by OrthoLogic). Chrysalis’ tax liability associated with any such recognized gain, after taking into account the effect of any relevant and available Chrysalis tax attributes (e.g., current and carryover net operating losses and tax credits), is a liability that is not assumed by OrthoLogic in accordance with the Asset Purchase Agreement. It is anticipated that any such tax liability would be material and would reduce the amounts of cash and OrthoLogic common stock otherwise distributable in the liquidation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

OrthoLogic.

      Please see the OrthoLogic “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Annexes F and G.

Chrysalis.

Overview

      Chrysalis has operated as a development stage company since its inception and is a research and development organization focused on products based on the synthetic peptide Chrysalin. Chrysalin, or “TP-508,” is a 23-amino acid synthetic peptide representing a receptor-binding domain of the human thrombin molecule, a naturally occurring molecule in the body responsible for both blood clotting and initiating many of the cellular events responsible for tissue repair in bone and cartilage. Chrysalis’ lead drug is currently in Phase 3 clinical trials for bone fractures and Phase 1/2 testing for spine fusion through its collaboration with OrthoLogic, and is in Phase 2 clinical testing for diabetic ulcers. Chrysalis also has active preclinical programs in dental bone repair and cardiovascular applications.

      Chyrsalis principally focuses its corporate resources on the development of products based on the Chrysalin platform. Chrysalis currently has four active research categories focusing on Chrysalin: orthopedic tissue repair, dermal wound healing, dental bone repair, and cardiovascular research. The orthopedic program has been funded since 1998 through partnership with OrthoLogic, while the other programs are funded directly by Chrysalis through a combination of corporate, equity-based, and grant funding. In April 2004, OrthoLogic and Chrysalis agreed that OrthoLogic would acquire all the assets of Chrysalis.

Results of Operations Comparing Quarters Ended March 31, 2004 to 2003

	Revenues, Cost of Revenues, and Gross Profits

      During the first quarter of 2004 compared with the same period in 2003, Chrysalis saw an increase in revenue of approximately $73,000 as a result of increased sponsored research activity offset by a reduction in grant revenue. Sponsored projects from OrthoLogic increased from approximately $350,000 in 2003 to approximately $475,000 in 2004 related to greater manufacturing activity.

	Research and Development Expense

      Research and development expenses in the first quarter of 2004 increased by approximately $327,000 to approximately $795,000 compared with the same quarter in 2003. This was primarily caused by the increased chemistry activity for OrthoLogic.

	General and Administrative (G&A) Expenses

      G&A costs increased by approximately $67,000 in the first quarter of 2004 compared with the same quarter of 2003, primarily due to an increase of approximately $100,000 in patenting expenses in the first quarter of 2004. Other legal expenses also increased approximately $25,000 in the first quarter of 2004 as compared to 2003 due to activities relating to the acquisition agreement negotiations with OrthoLogic. These were offset primarily by a $50,000 decrease in professional services.

Results of Operations Comparing Years Ended December 31, 2003 to 2002

	Overview

      During 2003, Chrysalis began to realize an increase in sponsored research projects from OrthoLogic in support of OrthoLogic’s Phase 3 clinical program for Chrysalin in bone fractures. In addition, Chrysalis was engaged in discussions for additional strategic partnerships and venture investments to fund Chyrsalin programs not licensed to OrthoLogic.

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	Revenues, Cost of Revenues, and Gross Profits

      Total revenues in 2003 increased by approximately $1.0 million due to a significant increase in OrthoLogic sponsored research projects. Grant revenues decreased approximately $205,000 due to the completion of Chrysalis’ grant in 2002 for cartilage repair.

	Research and Development (“R&D”) Expense

      Research and development expenses in 2003 remained at approximately $2.2 million, which was consistent with R&D expenditures in 2002. R&D salary costs decreased by $130,000 in 2003 compared with 2002 due to a reduction in staff in 2003 to reduce costs in non-sponsored research areas. The salary cost decrease was offset by an increase in third party subcontract expenses related primarily to manufacturing for OrthoLogic.

	General and Administrative Expenses

      General and administrative costs increased by approximately $275,000 to $1.4 million in 2003 compared with 2002, due to normal increases in salaries of approximately $100,000 and consulting fees of approximately $50,000 paid in 2003, as well as an increase in professional services of $45,000 due primarily to higher legal fees related to Chrysalis’ efforts to raise financing in 2003. Insurance costs also increased in 2003 by approximately $20,000 due to higher director’s insurance costs.

Liquidity and Capital Resources

      Chrysalis has historically financed its operations through receipt of payments from third parties primarily for licensing and strategic partnering services and through the issuance of $4.8 million of preferred stock. In 2003, cash increased by approximately $217,000 due to the influx of $750,000 received from the sale of convertible bridge notes. These notes, supplemented by an additional $300,000 raised in January of 2004, are promissory notes earning an interest rate of 8% per annum, and are convertible into equity securities upon the completion of a financing for a minimum of $4.0 million, or upon the sale or merger of Chrysalis. Cash decreased to approximately $630,000 at March 31, 2004 due to continued research in the first quarter.

      In April 2004, Chrysalis entered into a definitive agreement with OrthoLogic for the acquisition of substantially all of the assets of Chrysalis. In the event that Chrysalis does not complete the sale with OrthoLogic, Chrysalis will need to raise additional cash prior to the end of the year to finance ongoing operations, and to offset the expenses incurred to date related to the Asset Purchase Agreement. There can be no assurance Chrysalis will be successful in its efforts to generate capital.

      The following table sets forth all known commitments as of March 31, 2004 and the year in which these commitments become due or are expected to be settled (in thousands):

		Convertible				Operating				Capital				Accounts Payable and
Year		Notes Payable				Leases				Leases				Accrued Liabilities				Total
2004		$	—			$	76			$	12			$	707			$	795
2005		$	—				76				—				—			$	76
2006		$	—				—				—				—			$	—
2007		$	—				—				—				—			$	—
2008		$	1,073			$	—				—				—			$	1,073
Total		$	1,073			$	152			$	12			$	707			$	1,944

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      OrthoLogic. Please see OrthoLogic’s disclosure on “Quantitative and Qualitative Disclosures About Market Risk” in Annexes F and G.

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      Chrysalis. Chrysalis does not have significant exposure to market risk due to the fixed nature of the interest rates on the notes payable.

PER SHARE DATA

      The information below reflects the historical net income and the book value per share of OrthoLogic’s and Chrysalis’ common stock, and equivalent pro forma and book value per share of Chrysalis’ common stock, as well as the unaudited OrthoLogic pro forma combined net income per share and the OrthoLogic pro forma combined book value per share after giving effect to the acquisition. You should read the following tables in conjunction with the unaudited pro forma condensed consolidated financial statements of OrthoLogic, the historical consolidated financial statements and related notes of OrthoLogic included elsewhere herein and the historical consolidated financial statements of Chrysalis and related notes which are included in the “F” pages in this document.

OrthoLogic Corp. Share Data

			Year Ended				Three Months Ended
			December 31, 2003				March 31, 2004
Historical per common share data:
	Net loss from continuing operations per share — basic and diluted		$	(0.23	)		$	(0.09	)
	Book value per share(1)		$	3.70			$	3.61

Unaudited OrthoLogic Corp. Pro Forma Combined Per Share Data

			Year Ended				Three Months Ended
			December 31, 2003				March 31, 2004
Pro forma combined per share data:
	Net loss from continuing operations per share — basic and diluted		$	(0.22	)		$	(0.10	)
	Pro forma combined book value per share(2)						$	3.55

Chrysalis Biotechnology, Inc. Share Data

			Year Ended				Three Months Ended
			December 31, 2003				March 31, 2004
Historical per common share data:
	Net loss from continuing operations per share — basic and diluted		$	(0.83	)		$	(0.54	)
	Book value per share(1)		$	(2.71	)		$	(3.25	)
Pro forma equivalent per common share data:
	Net loss from continuing operations per share — basic and diluted		$	(0.34	)		$	(0.15	)
	Book value per share(1)(3)						$	5.47

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(1)	The historical book value per share is computed by dividing stockholders’ equity (deficit) by the number of common shares outstanding at the end of each period presented.
(2)	The pro forma combined book value per share is computed by dividing pro forma stockholders’ equity by the pro forma number of shares outstanding at the end of the period.
(3)	The equivalent pro forma per share information is computed assuming the issuance of 3,708,649 shares of OrthoLogic common stock, which equates to an exchange ratio of 1.54 shares of OrthoLogic stock per common share of Chrysalis.

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MARKET PRICE AND DIVIDEND DATA

      OrthoLogic’s common stock is listed on the Nasdaq National Market under the symbol “OLGC.” The following table sets forth the range of high and low per-share closing sales prices for OrthoLogic common stock as reported on the Nasdaq National Market for the periods indicated.

		2004								2003								2002
		High				Low				High				Low				High				Low
First Quarter		$	8.70			$	6.65			$	4.05			$	3.28			$	5.74			$	4.47
Second Quarter		$	8.96			$	7.24			$	4.53			$	3.30			$	5.95			$	4.51
Third Quarter			—				—			$	6.07			$	4.63			$	5.50			$	3.69
Fourth Quarter			—				—			$	7.85			$	5.45			$	4.25			$	3.22

      As of July 1, 2004, 34,527,152 shares of OrthoLogic’s common stock were outstanding and held by approximately 1,086 stockholders of record. As of April 27, 2004, the date preceding the public announcement of the asset sale, OrthoLogic’s common stock’s closing price was $7.70.

      Dividends. OrthoLogic has never paid a cash dividend on its common stock. Its Board of Directors currently anticipates that all of its earnings, if any, will be retained for use in its business and does not intend to pay any cash dividends on its common stock in the foreseeable future.

      Chrysalis Biotechnology, Inc.’s equity is not traded on any public market. It has never paid a cash dividend on any of its stock. It intends to make distributions to stockholders pursuant to its plan of liquidation. There are, as of July 1, 2004, 143 Chrysalis common stockholders of record.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      OrthoLogic has entered into indemnity agreements with all of its directors and officers for the indemnification of and advancing of expenses to such persons to the full extent permitted by law.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      OrthoLogic. Please see Annex H for beneficial ownership information for OrthoLogic.

      Chrysalis. On an as-converted-to-common stock basis (including the conversion of the notes) as of July 1, 2004, 2,048,310 shares of Chrysalis common stock were eligible to vote on the asset sale and on the plan of liquidation and dissolution. As of such date, Chrysalis had 1,201,940 shares of common stock outstanding, 89,850 shares of Series A preferred shares convertible into 205,371 shares of common stock, Series B preferred shares convertible into 346,467 shares of common stock, Series C preferred shares convertible into 190,476 shares of common stock and Series D preferred shares convertible into 104,056 shares of common stock outstanding, (assuming a July 1, 2004 conversion date). The following table sets forth information regarding the beneficial ownership of Chrysalis’ equity on an as-converted-to-common stock basis as the date of this consent solicitation as though the convertible notes had been converted into 104,056 shares of Chrysalis common stock with respect to (i) each person known to Chrysalis to own beneficially more than

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		Chrysalis Shares Beneficially Owned on an
		As-Converted to Common Stock Basis
						Percentage of
Beneficial Owners		Number of Shares				Total Shares(1)
5% Stockholders
University of Texas Board of Regents			200,000				9.8	%
Abbott Corporation			190,476	(2)			9.3	%
OrthoLogic Corp.			136,364	(3)			6.7	%
Directors and Executive Officers
Darrell Carney			618,446	(4)			29.2	%
David Hobson			42,000	(5)			2.0	%
Dennis McWilliams			95,000	(6)			4.5	%
Phil Hunke			42,843	(7)			2.1	%
Edwin Lamm			56,786	(8)			2.8	%
Directors and executive officers as a group (5 persons)			855,075	(4)-(8)			37.4	%

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	*	Less than one percent.

(1)	The percentages above were calculated based on the assumption that the Series D Preferred Stock will be issued and all option holders will exercise their options on closing. For purposes of this table, it is assumed the closing occurred on July 1, 2004 and it has been estimated that there were 104,056 shares of Series D Preferred Stock issued upon conversion of Chrysalis’ convertible notes, which shares would be convertible into a like number of shares of Chrysalis’ common stock.
(2)	Includes 190,476 shares of Chrysalis’ Series C Preferred Stock, which are convertible into a like number of shares of Chrysalis’ common stock.
(3)	Includes 136,364 shares of Chrysalis’ Series B Preferred Stock, which are convertible into a like number of shares of Chrysalis’ common stock.
(4)	Includes 548,446 shares of Chrysalis’ common stock and non-qualified options exercisable for 70,000 shares of Chrysalis’ common stock, including non-qualified options to purchase 20,000 shares of Chrysalis’ common stock which accelerate upon closing of the asset sale.
(5)	Includes incentive stock options exercisable for 42,000 shares of Chrysalis’ common stock, including incentive stock options to purchase 23,000 shares of Chrysalis’ common stock which accelerate upon closing of the asset sale.
(6)	Includes incentive stock options exercisable for 81,000 shares of Chrysalis’ common stock, including incentive stock options to purchase 33,000 shares of Chrysalis’ common stock which accelerate upon closing of the asset sale.
(7)	Includes 8,915 shares of Chrysalis’ common stock, non-qualified options exercisable for 22,500 shares of Chrysalis’ common stock and 5,000 shares of Chrysalis’ Series A Preferred Stock, which are convertible into 11,428 shares of Chrysalis’ common stock.
(8)	Includes 34,286 shares of Chrysalis’ common stock and non-qualified options exercisable for 22,500 shares of Chrysalis’ common stock.

      Please also see Annex H for information about OrthoLogic’s directors and officers and executive compensation.

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DESCRIPTION OF THE PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION

Dissolution under Delaware Law

      Section 275 of the Delaware General Corporation Law provides that a corporation may dissolve upon either (a) a majority vote of the Board of Directors of the corporation followed by a majority vote of its stockholders (which may be effected either through a vote at a special meeting of stockholders or by written consent of such stockholders who hold an amount of shares sufficient to approve the proposal at a special meeting); or (b) a unanimous stockholder consent. Following such approval, the dissolution is effected by filing a certificate of dissolution with the Secretary of State of the State of Delaware. Once a corporation is dissolved, its existence is automatically continued for a term of three years, but solely for the purpose of winding up its business. The process of winding up includes:

	•	the prosecution and defense of lawsuits, if any;
	•	the settling and closing of any business;
	•	the disposition and conveyance of any property;
	•	the discharge of any liabilities; and
	•	the distribution of any remaining assets to the stockholders of the corporation.

      If any action, suit or proceeding is commenced by or against the corporation before or within the winding up period, the corporation will, solely for the purpose of such action, suit or proceeding, automatically continue to exist beyond the three-year period until any judgments, orders or decrees are fully executed.

The Plan of Liquidation

      The following is a brief summary of the plan of liquidation. It is qualified in its entirety by reference to the full text of the plan of liquidation attached as Annex B and incorporated herein by reference. You should read the plan of liquidation carefully.

      Effective Date. The plan of liquidation will become effective only if (1) the asset sale and plan of liquidation are approved by written consent by holders of a majority of Chrysalis’ capital stock, voting as a single class, with holders of Chrysalis’ preferred stock voting on an as-converted to common stock basis, and (2) the asset sale to OrthoLogic is consummated. Following the consummation of the asset sale, the Board of Directors will, in its discretion, determine a date on which the plan of liquidation will become effective and the most efficient means to liquidate. However, it is intended that the shares of OrthoLogic common stock that Chrysalis receives upon closing of the asset sale will be distributed to the stockholders as soon as practical after closing. It is anticipated that Chrysalis will retain all of the $2.5 million in cash it receives at closing for a period of at least 90 days during the transition services period under the transition services agreement. Following such period, Chrysalis intends to distribute its remaining cash, less any accrued expenses and any amount Chrysalis believes should be retained to cover any remaining contingent liabilities that may arise in the three-year period following dissolution. It should be noted that such amount of cash will have been depleted during the 90-day period to pay all transaction related expenses as well as any portion of the finder’s fee required to be paid in cash.

      Cessation of Business. If the asset sale and plan of liquidation are approved, Chrysalis will continue to operate its business until the asset sale is consummated. Following the consummation of the asset sale, Chrysalis will cease its business and will not engage in any business activities except for the purposes of collecting and distributing its assets, paying, satisfying and discharging any existing debts and obligations (or making provisions for payment thereof), and doing all other acts required to liquidate and wind up its business and affairs, except that Chrysalis will continue certain of its operations for at least 90 days pursuant to the transition services agreement.

      Certificate of Dissolution. After the plan of liquidation becomes effective, Chrysalis’ officers shall, at such time as the Board of Directors determines, obtain any certificates required by the Delaware tax

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      Liquidation of other Assets. As soon as reasonably practical after the effective date of the plan of liquidation, all of Chrysalis’ assets, other than those sold to OrthoLogic and those not already converted to cash or cash equivalents, will, to the extent possible, be sold and converted to cash or cash equivalents. Sales of Chrysalis’ assets will be made on such terms as are approved by the Board of Directors and may be conducted by either competitive bidding, public sales or privately negotiated sales. Authorization and approval of the plan of liquidation will constitute approval of any such sales, and as such Chrysalis does not anticipate that any further stockholder votes will be solicited with respect to the approval of the specific terms of any particular sales of assets approved by Chrysalis’ Board of Directors. The plan of liquidation permits Chrysalis to utilize a liquidating trustee, which Chrysalis anticipates engaging for the liquidation and distribution of Chrysalis’ assets, including the distribution of the escrow shares and the $7.0 million of contingent shares (and cash, if applicable), if earned.

      Payment of Liabilities and Obligations. Chrysalis will pay or make reasonable provision to pay all claims and obligations of the company, including all contingent, conditional or unmatured contractual claims known to Chrysalis, and all claims which are known to Chrysalis but for which the identity of the claimant is unknown. Chrysalis will pay all such claims and obligations in full and make any such provisions for payment if there are sufficient assets and funds available. If there are insufficient assets and funds available, Chrysalis will pay such claims and obligations according to their priority.

      Final Record Date and Restrictions on Transfer. Chrysalis will close its stock transfer books and discontinue recording transfers of shares of common stock and preferred stock on the earliest to occur of:

	•	the close of business on the record date fixed by Chrysalis’ Board of Directors for the final liquidating distribution,
	•	the close of business on the date on which Chrysalis’ remaining assets are transferred to a liquidating trust, or
	•	the date fixed by Chrysalis’ Board of Directors for filing the certificate of dissolution,

and, thereafter, certificates representing shares of common stock and preferred stock will not be assignable or transferable on Chrysalis’ books except by will, intestate succession or operation of law. After the final record date, Chrysalis will not issue any new stock certificates, other than replacement certificates. Any person holding options, warrants or other rights to purchase common stock or preferred stock must exercise such instruments or rights prior to the final record date.

      Contingent Liabilities, Contingency Reserve and Liquidating Trust. Under Delaware law, Chrysalis is required, in connection with its dissolution, to pay or provide for payment of all of its liabilities and obligations. Following the authorization and approval of the plan of liquidation by Chrysalis’ stockholders, Chrysalis will pay all expenses and fixed and other known liabilities to the extent of its available funds and assets.

      It is anticipated that the cash proceeds from the asset sale to OrthoLogic will be sufficient to fully pay all known liabilities and obligations. As a result, Chrysalis does not expect that there will be any remaining funds or assets available for distribution to its stockholders.

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      The plan of liquidation authorizes Chrysalis’ Board of Directors to appoint one or more individuals or entities to act as trustee or trustees of the liquidating trust or trusts and to cause Chrysalis to enter into a liquidating trust agreement or agreements with such trustee or trustees on such terms and conditions as may be approved by its Board of Directors. Approval of the plan of liquidation by the stockholders will also constitute the approval by the stockholders of any such appointment and any liquidating trust agreement or agreements.

      The liquidating trust would be evidenced by a trust agreement between Chrysalis and the trustee(s). The purpose of the trust would be to serve as a temporary repository for the trust property prior to its disposition or distribution to Chrysalis’ stockholders. The transfer to the trust and distribution of interests therein to Chrysalis’ stockholders would enable Chrysalis to divest the trust property and permit its stockholders to enjoy the economic benefits of ownership thereof. Pursuant to the trust agreement, the trust property would be transferred to the trustee or trustees immediately following creation of the trust, to be held in trust for the benefit of the stockholder beneficiaries subject to the terms of the trust agreement. It is anticipated that the interests would be evidenced only by the records of the trust and there would be no certificates or other tangible evidence of such interests and that no holder of capital stock would be required to pay any cash or other consideration for the interests to be received in the distribution or to surrender or exchange shares of capital stock in order to receive the interests. It is further anticipated that pursuant to such trust agreement (i) approval of a majority of the trustees, if more than one, would be required to take any action; and (ii) the trust would be irrevocable and would terminate after the earliest of (x) the trust property having been fully distributed, or (y) a majority in interest of the beneficiaries of the trust, or a majority of the trustees, having approved of such termination, or (z) a specified number of years having elapsed after the creation of the trust.

      Under Delaware law, in the event Chrysalis fails to create an adequate contingency reserve for payment of its expenses and liabilities, or should such contingency reserve and the assets held by the liquidating trust or trusts be exceeded by the amount ultimately found payable in respect of expenses and liabilities, each stockholder could be held liable for the payment to creditors of such stockholder’s pro rata share of such excess, limited to amounts which are received by such stockholder from Chrysalis or from the liquidating trust or trusts.

      If Chrysalis was held by a court to have failed to make adequate provision for its expenses and liabilities or if the amount ultimately required to be paid in respect of such liabilities exceeded the amount available from the contingency reserve and the assets, if any, to Chrysalis’ stockholders of the liquidating trust or trusts, a creditor of Chrysalis’ could seek an injunction against the making of distributions under the plan of liquidation on the ground that the amounts to be distributed were needed to provide for the payment of Chrysalis’ expenses and liabilities.

      Distributions to Stockholders. Chrysalis anticipates that the cash proceeds received at closing will be sufficient to cover all of its liquidation expenses, including the payment of a finder’s fee in cash to HC Technologies, Inc. in the amount of 5% of the value of the transaction, in connection with the company’s assistance and advisory services provided to Chrysalis prior to this transaction. See “Finder’s Fee” on page 31 for a more complete description of this payment. Consequently, Chrysalis will distribute all of the shares of OrthoLogic common stock it receives at closing to its stockholders under the plan of liquidation (subject to the requirement to put approximately 18% of the shares in escrow. The holders of the Chrysalis preferred stock are entitled to liquidation preferences totaling approximately $5.9 million in the aggregate, divided among the series of preferred stockholders approximately as follows:

Series A		$ 899,000
Series B		$1,905,000
Series C		$2,000,000
Series D or Notes		$1,050,000 (not including accrued interest in connection with the convertible notes)

      In addition, all such series of preferred stock participate with the common stockholders on an as converted to common stock basis in the distribution of the remaining assets. Assuming all of Chrysalis’

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      Expenses of Liquidation and Dissolution. Chrysalis will bear all of its expenses incurred in carrying out the plan of liquidation, including, but not limited to, legal, accounting and administrative expenses, transaction costs and tax obligations.

Indemnification of Chrysalis’ Officers, Directors, Employees and Agents

      Following the adoption and approval of the plan of liquidation by Chrysalis’ stockholders, Chrysalis will continue to indemnify its officers, directors, employees and agents in accordance with its certificate of incorporation and bylaws, including for actions taken in connection with the plan of liquidation and the winding up of Chrysalis’ affairs.

Abandonment, Amendment

      Under the plan of liquidation, Chrysalis’ Board of Directors may modify, amend or abandon the plan of liquidation, notwithstanding stockholder authorization and approval, to the extent permitted by Delaware law. Chrysalis will not amend or modify the plan of liquidation under circumstances that would require additional stockholder approval under Delaware law without complying with Delaware law.

COMPARATIVE RIGHTS OF CHRYSALIS STOCKHOLDERS AND

      OrthoLogic is a Delaware corporation governed by the Delaware General Corporation Law. Chrysalis is also a Delaware corporation governed by the Delaware General Corporation Law. The rights of OrthoLogic stockholders are governed by its Amended and Restated Certificate of Incorporation, Certificate of Designation of Series A Preferred Stock, Rights Agreement and Bylaws and the rights of Chrysalis stockholders are governed by Chrysalis’ Certificate of Incorporation, Certificate of Designations of Series A, B, and C, Certificate of Designations of Series D and Bylaws. The following is a summary of some of the rights of OrthoLogic and Chrysalis stockholders and certain charter and bylaw provisions of the companies. This summary is provided in light of the potential distribution to Chrysalis stockholders of shares of OrthoLogic common stock in connection with the liquidation and dissolution of Chrysalis. This summary does not purport to be a complete discussion of, and is qualified in its entirety by reference to, Delaware law, as well as to OrthoLogic’s Amended and Restated Certificate of Incorporation, Certificate of Designation of Series A Preferred Stock, Rights Agreement and Bylaws and Chrysalis’ Certificate of Incorporation, Certificates of Designation and Bylaws.

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The Capital Stock of OrthoLogic and Chrysalis

•	Authorized Capital Stock

      OrthoLogic. The authorized capital stock of OrthoLogic consists of 50,000,000 shares of common stock, par value $.0005 per share, and 2,000,000 shares of preferred stock, par value $.0005 per share, of which 500,000 shares are designated Series A Preferred Stock.

      Chrysalis. The authorized capital stock of Chrysalis consists of 20,000,000 shares of common stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share, of which 89,850 shares are designated Series A Preferred Stock, 346,467 shares are designated Series B Preferred Stock, 190,476 shares are designated Series C Preferred Stock and 106,725 shares are designated Series D Preferred Stock. In connection with the sale of Chrysalis to OrthoLogic, the notes payable will convert to approximately 104,723 shares of Series D preferred stock (assuming a July 31, 2004 closing date).

•	Description of Common Stock

      OrthoLogic. Holders of OrthoLogic’s common stock are entitled to one vote per share for the election of directors and other corporate matters, but are not entitled to cumulative voting rights. The holders are entitled to dividends in such amounts and at such times as may be declared by OrthoLogic’s Board of Directors out of funds legally available therefor. Upon liquidation or dissolution, holders of OrthoLogic common stock are entitled to share ratably in all net assets available for distribution to stockholders after payment of any debts or obligations owed to OrthoLogic’s creditors. The shares of OrthoLogic common stock carry no preemptive rights.

      Chrysalis. Holders of Chrysalis’ common stock are entitled to one vote per share for the election of directors and other corporate matters, but are not entitled to cumulative voting rights. The holders are entitled to dividends in such amounts and at such times as may be declared by Chrysalis’ Board of Directors out of funds legally available therefor. Upon liquidation or dissolution, holders of common stock, together with holders of preferred stock entitled to share pro rata with the holders of common stock, are entitled to share ratably in all net assets available for distribution to stockholders after payment of any liquidation preferences to holders of preferred stock. The Chrysalis common stock carries no preemptive rights.

•	Description of Preferred Stock

      OrthoLogic. OrthoLogic currently has one designated series of preferred stock, the Series A Preferred Stock. No shares of OrthoLogic’s Series A Preferred Stock are outstanding at this time. For a discussion of the Rights Agreement pursuant to which such shares are issuable, see the item below labeled “Stockholder Rights Plan”.

      Chrysalis. Chrysalis currently has four designated series of preferred stock authorized: Series A, Series B, Series C and Series D. The following descriptions are equally applicable to all four series.

	•	Dividends. Holders of Chrysalis preferred stock are not guaranteed any type of dividends; however, holders must be paid dividends in an amount equal to the amount paid to any junior stock if Chrysalis declares or pays a dividend on shares of common stock or any class of preferred stock subordinate to the applicable preferred stock with respect to dividend rights.
	•	Liquidation Preference. In the event of a dissolution, liquidation, or winding up of Chrysalis, after payment or provision for payment of its debts, the holders of Chrysalis preferred stock are entitled to a liquidation preference in the amount of $10.00 per share of Series A Preferred Stock, $5.50 per share of Series B Preferred Stock, $10.50 per share of Series C Preferred Stock and $10.50 per share of Series D Preferred Stock. If the assets of Chrysalis are insufficient to permit payment in full of such liquidation preferences, the assets shall be distributed pro rata among the holders of the preferred stock. In the event of payment in full of such liquidation preference, the entire remaining assets of Chrysalis shall be distributed pro rata among stockholders of Chrysalis on an as-converted to common stock basis.

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	•	Conversion Rights. Holders of Chrysalis preferred stock have the option to convert such securities into shares of common stock at any time. Shares of preferred stock are automatically converted into shares of common stock upon: 1) the consummation of an underwritten public offering with an initial public offering price per share of at least $10.00 and resulting in net proceeds to Chrysalis of at least $10,000,000; or 2) the election of the holders of a majority of the issued and outstanding shares of preferred stock, voting together as a single class.
	•	Voting. Except as otherwise required by law, holders of Chrysalis preferred stock are entitled to that number of votes per share on all matters equal to the number of shares of common stock into which such holder’s preferred stock could be converted. Except as otherwise required by law or in the case of certain instances referenced in Chrysalis’ Certificate of Designations, holders of Chrysalis preferred stock do not have a separate class or series vote; rather they vote together with the holders of Chrysalis common stock.

•	Stockholder Rights Plan

      OrthoLogic. OrthoLogic has adopted a stockholder rights plan that, among other things, discourages some types of transactions that may involve an actual or threatened change of control of OrthoLogic. Under the plan, holders of shares of OrthoLogic common stock issued and outstanding are entitled to purchase one one-hundredth of a share of Series A Preferred Stock. The purchase right is exercisable upon the earlier of: 1) 10 business days following a public announcement relating to the acquisition of beneficial ownership of 15% or more of OrthoLogic’s common stock; or 2) 15 business days following the commencement of a tender offer or exchange offer if, upon consummation thereof, beneficial ownership of 20% or more of OrthoLogic’s common stock would be obtained.

      Chrysalis. Chrysalis does not currently have a stockholder rights plan.

The Board of Directors of OrthoLogic and Chrysalis

•	Number of Directors

      OrthoLogic. OrthoLogic’s Amended and Restated Certificate of Incorporation and Bylaws state that although the authorized number of directors shall be determined from time to time by the Board of Directors, the number of directors shall not be less than three nor more than nine. OrthoLogic’s Board of Directors currently consists of seven members.

      Chrysalis. Chrysalis’ Certificate of Incorporation and Bylaws state that although the authorized number of directors shall be determined from time to time by the Board of Directors, the number of directors shall not be less than one. Chrysalis’ Board of Directors currently consists of three members.

•	Qualifications of Directors

      OrthoLogic. OrthoLogic’s Bylaws state that directors need not be stockholders.

      Chrysalis. Chrysalis’ Bylaws have no specific qualifications for directors.

•	Classes of Directors

      OrthoLogic. Pursuant to OrthoLogic’s Amended and Restated Certificate of Incorporation, OrthoLogic’s Board of Directors is classified into three classes, with each class holding office for a three-year period. 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.

      Chrysalis. Chrysalis has no classes of directors.

•	Board Quorum and Vote Requirements

      OrthoLogic. Pursuant to OrthoLogic’s Bylaws and except as otherwise provided by law, a majority of the directors constitutes a quorum for the transaction of business at any meeting of OrthoLogic’s Board of

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      Chrysalis. Pursuant to Chrysalis’ Bylaws and except as otherwise provided by law, a majority of the directors constitutes a quorum for the transaction of business at any meeting of Chrysalis’ Board and the act of a majority of the directors present at any meeting at which there is a quorum is deemed an act of the Board.

•	Action by Written Consent of Directors

      OrthoLogic. OrthoLogic’s Bylaws provide that any action required or permitted to be taken by OrthoLogic’s Board of Directors may be taken without a meeting if all members of the Board consent in writing.

      Chrysalis. Chrysalis’ Bylaws provide that any action required or permitted to be taken by Chrysalis’ Board of Directors may be taken without a meeting if all members of the Board consent in writing.

•	Election of Directors

      OrthoLogic. Because all members of the OrthoLogic Board of Directors serve on a staggered board that is divided into three classes, with each class serving a three-year term, only a portion of the Board is elected each year. Assuming a quorum is present, directors are elected at OrthoLogic’s Annual Meeting by the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote thereon.

      Chrysalis. Assuming a quorum is present, directors are elected at Chrysalis’ Annual Meeting by the affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote thereon.

•	Vacancies on the Board of Directors

      OrthoLogic. OrthoLogic’s Amended and Restated Certificate of Incorporation provides that 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 with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. In addition, any vacancy on OrthoLogic’s Board of Directors, however 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.

      Chrysalis. Chrysalis’ Certificate of Incorporation provides that any additional directors elected to fill a vacancy resulting from an increase in the number of directors shall hold office for a term that shall coincide with the remaining term of that directorship, but in no case will a decrease in the number of directors shorten the term of any incumbent director. In addition, any vacancy on Chrysalis’ Board of Directors, however 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 remainder of the term to which such director shall have been elected.

•	Removal of Directors

      OrthoLogic. OrthoLogic’s Amended and Restated Certificate of Incorporation provides that, subject to the rights, if any, of the holders of shares of preferred stock, any or all directors may be removed at any time, but only for cause and only by the affirmative vote of a majority of outstanding shares entitled to vote generally in the election of directors, with such shares being treated as one class.

      Chrysalis. Chrysalis’ Bylaws provide that, subject to the rights, if any, of the holders of shares of preferred stock, any or all directors may be removed at any time, but only for cause and only by the affirmative vote of a majority of outstanding shares entitled to vote generally in the election of directors, with such shares being treated as one class.

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Special Matters Relating to OrthoLogic and Chrysalis Stockholders

•	Notice Requirement for Stockholder Meetings

      OrthoLogic. Pursuant to OrthoLogic’s Bylaws and except as otherwise provided by law, notice of any annual or special meeting of stockholders must be served upon or mailed to each stockholder entitled to vote at the meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.

      Chrysalis. Pursuant to Chrysalis’ Bylaws and except as otherwise provided by law, notice of any annual or special meeting of stockholders must be served upon or mailed to each stockholder entitled to vote at the meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.

•	Special Meeting of Stockholders

      OrthoLogic. OrthoLogic’s Amended and Restated Certificate of Incorporation and Bylaws provide that special meetings of the stockholders may be called at any time for any purpose or purposes only by the president or the Board of Directors pursuant to a resolution approved by a majority of the whole board, or at the request in writing of stockholders owning at least 35% of the capital stock issued, outstanding and entitled to vote.

      Chrysalis. Chrysalis’ Certificate of Incorporation and Bylaws provide that special meetings of the stockholders may be called at any time for any purpose or purposes only by the Board of Directors.

•	Stockholder Meeting Quorum Requirements

      OrthoLogic. OrthoLogic’s Bylaws provide that the holders of a majority of the shares entitled to vote, represented in person or by proxy, will constitute a quorum at all meetings of the stockholders for the transaction of business. The affirmative vote of the majority of such quorum shall be deemed the act of the stockholders. If the quorum requirement is not satisfied at a meeting of the stockholders, the presiding officer of that meeting may adjourn the meeting to another place, date or time, without notice other than announcement at that meeting, until a quorum is present or represented.

      Chrysalis. Chrysalis’ Bylaws provide that the holders of a majority of the shares entitled to vote, represented in person or by proxy, will constitute a quorum at all meetings of the stockholders for the transaction of business. The affirmative vote of the majority of such quorum shall be deemed the act of the stockholders. If the quorum requirement is not satisfied at a meeting of the stockholders, the holders of a majority of the shares of stock represented at such meeting may adjourn the meeting to another place, date or time, without notice other than announcement at that meeting, until a quorum is present or represented.

•	Action by Written Consent of Stockholders

      OrthoLogic. OrthoLogic’s Amended and Restated Certificate of Incorporation and Bylaws provide that any action required or permitted to be taken by stockholders must be effected at a duly called annual or special meeting of such stockholders and may not be effected by written consent.

      Chrysalis. Chrysalis’ Bylaws provide that any action required or permitted to be taken by stockholders may be effected by written consent signed by holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

•	Special Voting Requirements

      OrthoLogic. OrthoLogic’s Amended and Restated Certificate of Incorporation provides that the affirmative vote of the holders of two-thirds of OrthoLogic’s outstanding stock entitled to vote is required for the approval of any significant corporate transaction involving OrthoLogic, e.g., a merger, substantial asset purchase or sale, or any other transaction requiring stockholder approval under the Delaware General Corporation Law, where an “Interested Person” is a party. An “Interested Person” is any person, entity or group thereof having beneficial ownership, directly or indirectly, of 5% or more of any class of OrthoLogic’s voting securities. The two-thirds approval requirement described above is not applicable to any transaction approved by resolution of OrthoLogic’s Board of Directors, so long as a majority of the directors voting for the

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      Chrysalis. Chrysalis’ Certificate of Incorporation and Bylaws provide no special voting rights. Pursuant to Delaware General Corporation Law, holders of each of Chrysalis’ series of preferred stock have a right to vote as a separate class for a proposed amendment to Chrysalis’ Certificate of Incorporation if such amendment would: (1) increase or decrease the aggregate number of authorized shares of such class, (2) increase or decrease the per value of the shares of such class, or (3) alter or change the powers, preferences or special rights of such class so as to affect them adversely.

•	Stockholder Proposals

      OrthoLogic. OrthoLogic’s Bylaws provide that a stockholder who wishes to present to the Chairman of the Board or the President an item for consideration as an agenda item for a meeting of stockholders may do so if such stockholder complies with the procedures and deadlines set forth in the Bylaws.

      Chrysalis. Chrysalis’ Bylaws do not provide a mechanism for stockholder proposals.

•	Stockholder Nominations

      OrthoLogic. OrthoLogic’s Bylaws provide that nominations of persons for election to the Board of Directors at any meeting at which elections are held may be made by any stockholder who is a stockholder of record, who is entitled to vote at such meeting and who complies with the procedures and deadlines set forth in the Bylaws. OrthoLogic’s Bylaws also provide that nominations may be made by the Board of Directors or a committee appointed by the Board.

      Chrysalis. Chrysalis’ Bylaws do not provide a mechanism for nominations of persons for election to the Board of Directors.

Amendments to the Organizational Documents of OrthoLogic and Chrysalis

•	Amendments to the Certificate of Incorporation

      OrthoLogic. Subject to applicable law and the restrictions described in OrthoLogic’s Amended and Restated Certificate of Incorporation, OrthoLogic reserves the right to amend, alter, change or repeal any provision contained in such Certificate. OrthoLogic’s Amended and Restated Certificate of Incorporation provides that the approval of the holders of at least two-thirds of the voting power of the outstanding stock entitled to vote is required in order to alter, amend or adopt any provision inconsistent with, or repeal the provisions in the Amended and Restated Certificate of Incorporation relating to: 1) the procedure for a) electing directors, and b) nominating candidates for the Board of Directors; 2) the number and term, classification scheme, removal, vacancies and rights of preferred stockholders with respect to, directors; 3) action by consent of stockholders; 4) supermajority voting requirements; 5) the restrictions on calling special meetings of stockholders; 6) amendments to the Bylaws; and 7) amendments to the Amended and Restated Certificate of Incorporation. Notwithstanding the foregoing two-thirds voting requirement, only a majority approval is required for amending the above provisions if the Continuing Directors (meaning those directors not affiliated with persons holding 5% or more of OrthoLogic’s voting securities) shall, by a majority vote, adopt a resolution approving the amendment or repeal proposal and determine to recommend it for approval by the holders of stock entitled to vote thereon.

      Chrysalis. Pursuant to the Delaware General Corporation Law, holders of a majority of the outstanding shares of capital stock entitled to vote thereon may amend the Certificate of Incorporation. See the description of “Special Voting Rights” above for a description of the voting rights of holders of preferred stock to amend the Certificate of Incorporation under Delaware General Corporation law.

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•	Amendments to the Bylaws

      OrthoLogic. The Delaware General Corporation Law states that stockholders entitled to vote have the power to adopt, amend or repeal the bylaws of a corporation. A corporation, in its certificate of incorporation, may also confer this power on the Board of Directors in addition to the stockholders. OrthoLogic’s Amended and Restated Certificate of Incorporation authorizes its Board of Directors, by majority vote thereof, to adopt, repeal, alter, amend or rescind its Bylaws. OrthoLogic’s Amended and Restated Certificate of Incorporation also provides that its Bylaws may be adopted, repealed, altered, amended, or rescinded by the affirmative vote of two-thirds of the outstanding stock entitled to vote thereon; except that only a majority approval is required if the Continuing Directors (meaning those directors not affiliated with persons holding 5% or more of OrthoLogic’s voting securities) shall, by a majority vote, adopt a resolution approving the amendment or repeal proposal and determine to recommend it for approval by the holders of stock entitled to vote thereon.

      Chrysalis. The Delaware General Corporation Law states that stockholders entitled to vote have the power to adopt, amend or repeal the bylaws of a corporation. A corporation, in its certificate of incorporation, may also confer this power on the Board of Directors in addition to the stockholders. Chrysalis’ Certificate of Incorporation authorizes its Board of Directors, by majority vote thereof, to adopt, repeal, alter, amend or rescind its Bylaws. Chrysalis’ Bylaws also provide that they may be adopted, repealed, altered, amended, or rescinded by the affirmative vote of a majority of the outstanding stock entitled to vote thereon.

Limitation of Liability, Indemnification and Insurance by or for OrthoLogic and Chrysalis

•	Limitation of Liability

      OrthoLogic. OrthoLogic’s Amended and Restated Certificate of Incorporation provides that no director shall be personally liable 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: 1) for breach of the duty of loyalty; 2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; 3) pursuant to Section 174 of the Delaware General Corporation Law (relating to the liability of directors for unlawful payment of dividends or unlawful stock purchase or redemption); or 4) for any transaction from which the director derived an improper personal benefit.

      Chrysalis. Chrysalis’ Certificate of Incorporation provides that no director shall be personally liable 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: 1) for breach of the duty of loyalty; 2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; 3) pursuant to Section 174 of the Delaware General Corporation Law (relating to the liability of directors for unlawful payment of dividends or unlawful stock purchase or redemption); or 4) for any transaction from which the director derived an improper personal benefit.

•	Indemnification and Insurance

      OrthoLogic. OrthoLogic’s Bylaws provides that, subject to certain specific limitations, OrthoLogic will indemnify, to the fullest extent permitted by applicable law, each person who is or was a director or officer, and may indemnify each employee and agent of OrthoLogic, against all expense, liability and loss arising out of or in any way related to their status as such or their acts, omissions or services rendered in such capacities. In addition, OrthoLogic’s Bylaws provides that OrthoLogic may maintain insurance, at its expense, to protect against any expense, liability or loss, whether or not the power to indemnify is available under the specific circumstance.

      Chrysalis. Chrysalis’ Bylaws provide that, subject to certain specific limitations, Chrysalis will indemnify, to the fullest extent permitted by applicable law, each person who is or was a director or officer, and may indemnify each employee and agent of Chrysalis, against all expense, liability and loss arising out of or in any way related to their status as such or their acts, omissions or services rendered in such capacities. In addition, Chrysalis’ Bylaws provide that Chrysalis may maintain insurance, at its expense, to protect against any expense, liability or loss, whether or not the power to indemnify is available under the specific circumstance.

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LEGAL MATTERS

      Certain legal matters in connection with the OrthoLogic common stock offered hereby have been passed upon for OrthoLogic Corp. by Quarles & Brady Streich Lang, LLP of Phoenix, Arizona.

      Winstead Sechrest & Minick P.C., Houston, Texas, has passed upon the tax treatment of the asset purchase agreement for Chrysalis.

EXPERTS

      The consolidated financial statements of OrthoLogic Corp. and subsidiaries as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, included in this prospectus have been audited by Deloitte & Touche LLP, independent registered public accounting firm, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the sale of the bone device business), and has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

      The consolidated financial statements of Chrysalis Biotechnology, Inc. (a development stage company) as of December 31, 2003 and 2002, and for the years then ended included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes explanatory paragraphs relating to Chrysalis Biotechnology, Inc.’s ability to continue as a going concern and the proposed acquisition of Chrysalis Biotechnology, Inc. by OrthoLogic Corp.), and has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20.	Indemnification of Directors and Officers

      Section 145 of the General Corporation Law of the State of Delaware, or DGCL, empowers a Delaware corporation to indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was an officer or director of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful.

      A Delaware corporation may indemnify past or present officers and directors of such corporation or of another corporation or other enterprise at the former corporation’s request, in an action by or in the right of the corporation to procure a judgment in its favor under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in defense of any action referred to above, or in defense of any claim, issue or matter therein, the corporation must indemnify such person against the expenses (including attorneys’ fees) which such person actually and reasonably incurred in connection therewith. Section 145 further provides that any indemnification shall be made by the corporation only as authorized in each specific case upon a determination that indemnification of such person is proper because he has met the applicable standard of conduct (i) by the stockholders, (ii) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, (iii) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (iv) by independent legal counsel in a written opinion, if there are no such disinterested directors, or if such disinterested directors so direct. Section 145 further provides that indemnification pursuant to its provisions is not exclusive of other rights of indemnification to which a person may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

      OrthoLogic has directors’ and officers’ insurance which provides for indemnification of officers and directors of the Company and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions. OrthoLogic has also entered into separate indemnification agreements with each of its directors and certain officers that may require the Company, among other things, to indemnify such directors against certain liabilities that may arise by reason of their status or service as directors or officers to the maximum extent permitted under Delaware law.

      OrthoLogic’s amended and restated certificate of incorporation provides that indemnification shall be to the fullest extent permitted by the DGCL for all current or former directors or officers. Reference is made to Item 22 for OrthoLogic’s undertakings with respect to indemnification for liabilities arising under the Securities Act.

Item 21.	Exhibits and Financial Statement Schedules

      (a) Exhibits

      See the exhibit index for a list of exhibits filed as part of this registration statement.

      (b) Financial Statement Schedules. See the “F” pages included as part of this registration statement.

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Item 22.	Undertakings

      The undersigned Registrant hereby undertakes:

	(2) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

	(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended;
	(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
	(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Securities and Exchange Commission by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934, as amended, that are incorporated by reference in the registration statement;

	(3) That, for the purpose of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
	(4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;
	(5) That, for purposes of determining any liability under the Securities Act of 1933, as amended, each filing of the Registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
	(6) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request;
	(7) That, prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form;

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	(8) That every prospectus (i) that is filed pursuant to paragraph (6) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Securities Act of 1933, as amended, and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and
	(9) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired therein, that was not the subject of and included in the registration statement when it became effective.

      Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.

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SIGNATURES

      Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tempe, State of Arizona, on July 12, 2004.

	ORTHOLOGIC CORP.

	By	/s/ THOMAS R. TROTTER

	Thomas R. Trotter
	President and Chief Executive Officer

Date: July 12, 2004

      Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

Signature				Title		Date
/s/ THOMAS R. TROTTER Thomas R. Trotter				President, Chief Executive Officer and Director (Principal Executive Officer)		July 12, 2004
* John M. Holliman III				Chairman of the Board of Directors and Director		July 12, 2004
* Fredric J. Feldman				Director		July 12, 2004
* Elwood D. Howse, Jr.				Director		July 12, 2004
* Stuart H. Altman, Ph.D.				Director		July 12, 2004
* Augustus A. White III, M.D.				Director		July 12, 2004
* Michael D. Casey				Director		July 12, 2004
/s/ SHERRY A. STURMAN Sherry A. Sturman				Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)		July 12, 2004
*By:		/s/ THOMAS R. TROTTER Thomas R. Trotter Attorney-in-Fact

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FINANCIAL STATEMENTS

CHRYSALIS BIOTECHNOLOGY AUDITED FINANCIAL STATEMENTS

ORTHOLOGIC CORP. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

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CHRYSALIS BIOTECHNOLOGY, INC.

Consolidated Financial Statements for the Three Months Ended March 31, 2004 and 2003 and for the

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CHRYSALIS BIOTECHNOLOGY, INC.

TABLE OF CONTENTS

			Page
INDEPENDENT AUDITORS’ REPORT				F-3
CONSOLIDATED FINANCIAL STATEMENTS:
	Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and as of December 31, 2003 and 2002			F-4
	Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (Unaudited) and for the years ended December 31, 2003 and 2002 and from inception (March 25, 1995) to March 31, 2004 (Unaudited)			F-5
	Consolidated Statements of Stockholders’ Equity (Deficit) for quarter ended March 31, 2004 (Unaudited) and for the years ended December 31, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996 and 1995			F-6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (Unaudited) and for the years ended December 31, 2003 and 2002 and from inception (March 25, 1995) to March 31, 2004 (Unaudited)			F-7
	Notes to Consolidated Financial Statements			F-8-15

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INDEPENDENT AUDITORS’ REPORT

Board of Directors
Chrysalis Biotechnology, Inc.
Galveston, Texas

      We have audited the accompanying consolidated balance sheets of Chrysalis Biotechnology, Inc. (a development stage company) as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2003 and 2002, and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.

      The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations in the development stage and ability to fund its future operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

      As described in Note 1 to the financial statements, on April 28, 2004 the Company entered into a definitive agreement with OrthoLogic Corp. for the acquisition of substantially all of the intellectual property of the Company.

/s/ Deloitte & Touche LLP

Phoenix, Arizona

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CHRYSALIS BIOTECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

								December 31,
				March 31,
				2004				2003				2002
				(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	630,449			$	1,165,815			$	948,168
	Receivables				240,509				123,423				45,883
	Prepaid expenses and other current assets				44,182				23,387				73,196
		Total current assets			915,140				1,312,625				1,067,247
EQUIPMENT AND FURNITURE — Net					132,124				149,097				212,639
TOTAL				$	1,047,264			$	1,461,722			$	1,279,886
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
	Accounts payable			$	565,321			$	363,511			$	257,853
	Accrued expenses				141,874				161,290				39,505
	Deferred revenue — current portion				331,000				541,000				103,000
	Capital lease payable — current portion				11,757				16,599				27,870
		Total current liabilities			1,049,952				1,082,400				428,228
	Deferred revenue				2,827,074				2,882,235				3,102,882
	Convertible notes payable including interest of $23,307, $4,044 and 0				1,073,307				754,044
	Capital lease payable												16,599
		Total liabilities			4,950,333				4,718,679				3,547,709
COMMITMENTS AND CONTINGENCIES (Notes 1, 3, 4 and 7)
STOCKHOLDERS’ DEFICIT:
	Convertible Series A, B and C preferred stock, $.001 par value — 5,000,000 shares authorized, 626,793 shares issued and outstanding, reported at liquidation value				4,803,013				4,803,013				4,803,013
	Common stock, $.001 par value — 20,000,000 shares authorized, 1,201,940, 1,201,940 and 1,193,840 shares issued and outstanding, respectively				1,202				1,202				1,194
	Additional paid-in capital				21,679				21,679				13,182
	Deficit accumulated during the development stage				(8,728,963	)			(8,082,851	)			(7,085,212	)
		Total stockholders’ deficit			(3,903,069	)			(3,256,957	)			(2,267,823	)
TOTAL				$	1,047,264			$	1,461,722			$	1,279,886

See notes to consolidated financial statements.

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CHRYSALIS BIOTECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

					Three Months Ended																From Inception
					March 31,								Years Ended December 31,								(March 25, 1995)
																					Through
					2004				2003				2003				2002				March 31, 2004
																					(Unaudited)
					(Unaudited)
REVENUES:
	Research and development grants				$	—			$	51,898			$	130,658			$	335,377			$	2,897,039
	Sponsored research					474,979				350,000				2,222,992				1,025,000				6,516,210
	Licensing fees					55,162				55,162				220,647				220,647				761,926
			Total revenues			530,141				457,060				2,574,297				1,581,024				10,175,175
EXPENSES:
	Research and development:
		General				45,875				96,018				303,280				626,949				7,099,258
		Clinical				26,462				9,356				77,448				57,980				161,890
		Preclinical				54,349				53,482				322,066				444,389				821,288
		Chemistry				497,709				109,180				743,172				389,392				1,938,396
		Biology				170,269				199,687				769,095				755,148				1,695,541
			Total research and development			794,664				467,723				2,215,061				2,273,858				11,716,373
	General and administrative					381,589				314,440				1,356,875				1,081,593				7,283,406
			Total expenses			1,176,253				782,163				3,571,936				3,355,451				18,999,779
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY																		(71,593	)			(95,641	)
NET LOSS					$	(646,112	)		$	(325,103	)		$	(997,639	)		$	(1,702,834	)		$	(8,728,963	)

See notes to consolidated financial statements.

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CHRYSALIS BIOTECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

			Preferred Stock								Common Stock												Deficit				Total
			Issued								Issued								Additional				During the				Stockholders’
																			Paid-In				Development				Equity
			Shares				Amount				Shares				Amount				Capital				Stage				(Deficit)
Issuance of Common Stock at Inception (March 25, 1995)				—			$	—				411,000			$	411			$	11,194			$	—			$	11,605
	Issuance of common stock											200,000				200				1,800								2,000
	Net loss																							(25,019	)			(25,019	)
BALANCE — December 31, 1995												611,000				611				12,994				(25,019	)			(11,414	)
	Issuance of common stock											36,490				37				734								771
	Issuance of Series A preferred stock			90,050				900,500																				900,500
	Net loss																							(514,100	)			(514,100	)
BALANCE — December 31, 1996				90,050				900,500				647,490				648				13,728				(539,119	)			375,757
	Stock split 2.28571:1											546,350				546				(546	)
	Issuance of Series B preferred stock			222,378				1,222,554																				1,222,554
	Net loss																							(704,415	)			(704,415	)
BALANCE — December 31, 1997				312,428				2,123,054				1,193,840				1,194				13,182				(1,243,534	)			893,896
	Issuance of Series B preferred stock			124,089				682,477																				682,477
	Repurchase Series A preferred stock			(200	)			(2,518	)																			(2,518	)
	Net loss																							(477,847	)			(477,847	)
BALANCE — December 31, 1998				436,317				2,803,013				1,193,840				1,194				13,182				(1,721,381	)			1,096,008
	Net loss																							(620,252	)			(620,252	)
BALANCE — December 31, 1999				436,317				2,803,013				1,193,840				1,194				13,182				(2,341,633	)			475,756
	Issuance of Series C preferred stock			190,476				2,000,000																				2,000,000
	Net loss																							(953,681	)			(953,681	)
BALANCE — December 31, 2000				626,793				4,803,013				1,193,840				1,194				13,182				(3,295,314	)			1,522,075
	Net loss																							(2,087,064	)			(2,087,064	)
BALANCE — December 31, 2001				626,793				4,803,013				1,193,840				1,194				13,182				(5,382,378	)			(564,989	)
	Net loss																							(1,702,834	)			(1,702,834	)
BALANCE — December 31, 2002				626,793				4,803,013				1,193,840				1,194				13,182				(7,085,212	)			(2,267,823	)
	Options exercised											8,100				8				8,497								8,505
	Net loss																							(997,639	)			(997,639	)
BALANCE — December 31, 2003				626,793				4,803,013				1,201,940				1,202				21,679				(8,082,851	)			(3,256,957	)
	Net loss (Unaudited)																							(646,112	)			(646,112	)
BALANCE — March 31, 2004 (Unaudited)				626,793			$	4,803,013				1,201,940			$	1,202			$	21,679			$	(8,728,963	)		$	(3,903,069	)

See notes to consolidated financial statements.

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CHRYSALIS BIOTECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

						Three Months Ended								Years Ended								From Inception
						March 31,								December 31,								(March 25, 1995)
																						through
						2004				2003				2003				2002				March 31, 2004
																						(Unaudited)
						(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss					$	(646,112	)		$	(325,103	)		$	(997,639	)		$	(1,702,834	)		$	(8,728,963	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Minority interest in net loss																	(71,593	)			(95,641	)
		Depreciation and amortization					16,973				16,835				63,663				72,203				367,376
		Changes in operating assets and liabilities:
			Accounts receivable				(117,086	)			15,128				(77,540	)			(13,847	)			(240,509	)
			Prepaid expenses and other current assets				(20,795	)			21,053				49,809				2,476				(44,182	)
			Accounts payable and accrued expenses				182,394				(48,064	)			227,443				119,829				707,195
			Interest payable				19,263								4,044								23,307
			Deferred revenue				(265,161	)			(55,162	)			217,353				(220,647	)			3,158,074
				Net cash used in operating activities			(830,524	)			(375,313	)			(512,867	)			(1,814,413	)			(4,853,343	)
CASH FLOWS FROM INVESTING ACTIVITIES —
	Purchase of property and equipment										(905	)			(121	)			(50,306	)			(312,819	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Principal payments on capital lease obligations						(4,842	)			(10,178	)			(27,870	)			(36,124	)			(174,925	)
	Contribution (distribution) from (to) minority interest																		(29,359	)			95,641
	Proceeds from exercise of stock options										1,113				8,505								8,505
	Proceeds from issuance of common stock																						14,377
	Proceeds from issuance of preferred stock																						4,803,013
	Proceeds from issuance of notes payable						300,000								750,000								1,050,000
				Net cash provided by (used in) financing activities			295,158				(9,065	)			730,635				(65,483	)			5,796,611
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS							(535,366	)			(385,283	)			217,647				(1,930,202	)			630,449
CASH AND CASH EQUIVALENTS — Beginning of period							1,165,815				948,168				948,168				2,878,370
CASH AND CASH EQUIVALENTS — End of period						$	630,449			$	562,885			$	1,165,815			$	948,168			$	630,449
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
	Purchase of property and equipment by capital lease																					$	186,681

See notes to consolidated financial statements.

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CHRYSALIS BIOTECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Organization and Summary of Significant Accounting Policies

      Organization and Development Stage — Chrysalis Biotechnology, Inc. (the “Company”) was founded on March 25, 1995 as a biopharmaceutical company developing a new class of synthetic drugs for accelerating tissue repair. The Company’s core technology, Chrysalin®, is a synthetic peptide that accelerates the repair of a variety of tissue types. The Company’s first product is a topical drug for the treatment of chronic diabetic ulcers and is currently in clinical trials. The Company is also developing an injectable form of Chrysalin®, which is being clinically tested in accelerating fracture healing. Additional internal and collaborative efforts are focusing on new therapies to increase the strength of surgical incisions, fight infection, and repair damaged vasculature.

      A limited liability company was formed and development agreement with Medici Technologies was signed in 1999. This agreement covered the creation of a joint venture called Chrysalis Vascular Technologies I, L.L.C. (“CVT”). CVT was focused on the development of Chrysalin® based products for vascular/cardiovascular applications. The Company maintained control of the company and therefore, the joint venture has been consolidated into these financial statements. The joint venture was dissolved in August 2002.

      The Company has operated as a development stage company since its inception by devoting substantially all of its efforts to financial planning, raising capital, research and development and commercializing its products.

      Going Concern Considerations — The Company has experienced recurring losses and accumulated deficits since its inception. The Company has funded these losses through the issuance of preferred stock and the receipt of payments from third parties primarily for research grants, sponsored research and licensing fees. Additionally, in December 2003, the Company issued secured convertible promissory notes (the “Promissory Notes”) totaling $750,000 to individual investors. The Company issued an additional $300,000 in Promissory Notes in January 2004. Without additional funding, the Company may not be able to fund its future obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continued existence is dependent upon the Company’s ability to obtain additional funding through equity infusions, issuance of debt or increased revenue sources or the consummation of the acquisition of the Company as described below.

      On April 28, 2004, the Company entered into a definitive agreement with OrthoLogic Corp. (“OrthoLogic”) for the acquisition of intellectual property of the Company. Under the terms of the agreement, OrthoLogic will pay the Company $2.5 million in cash and $25 million in OrthoLogic common stock at closing, and an additional $7.0 million in common stock upon the occurrence of one of the following trigger events before the five year anniversary of the closing: (1) a sale of substantially all of OrthoLogic’s assets, or a merger, consolidation, recapitalization, or other transaction, in each case after which OrthoLogic’s stockholders immediately before such transaction do not own a majority of the voting power of the resulting entity immediately after such transaction; or (2) OrthoLogic’s receipt of written notice from the United States Food and Drug Administration that a new drug application for a product based on Chrysalin® has been accepted for filing. The number of shares of OrthoLogic common stock issued will be calculated by using a per share price equal to the average closing price for the 10 trading days preceding the triggering event; in no event shall such number of shares exceed the number issued at closing. In the event that the aggregate number of shares issuable at closing and upon the successful accomplishment of the trigger event exceeds 20% of OrthoLogic’s outstanding capital stock at closing, the number of shares issuable upon the trigger event shall be reduced to an amount that does not exceed 20% of its outstanding shares, with the difference paid in cash based on the same OrthoLogic average closing price for the 10 trading days preceding the triggering event. OrthoLogic

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

currently owns approximately 7.0% of the Company’s outstanding common stock through a prior equity investment in convertible preferred stock. The transaction is subject to approval of the Company’s stockholders, effectiveness of the registration statement to be filed by OrthoLogic with the Securities and Exchange Commission and other customary closing conditions. Closing is expected during the third quarter of 2004.

      Three Months Ended March 31, 2004 and 2003 — The unaudited financial statements for the three months ended March 31, 2004 and 2003 reflect all adjustments which management believes are necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. These adjustments are of a normal, recurring nature. Such interim financial information should be read in conjunction with the 2003 and 2002 financial statements and accompanying notes herein.

      Significant Accounting Policies — The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. All intercompany transactions have been properly eliminated. A summary of significant accounting policies is as follows:

      a. Cash and cash equivalents include all highly liquid investments purchased with a maturity date of three months or less.

      b. Property and equipment are recorded at cost. Depreciation of property and equipment is provided using the straight-line method over the estimated useful lives of the depreciable assets of five years. Additions or improvements that increase the value or extend the life of an asset are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. Disposals are removed from the accounts at cost less accumulated depreciation, and any gain or loss from disposition is reflected in operations.

      c. Revenue Recognition

	Research and Development Grants — The Company applies for research and development grants from the federal government in the form of Small Business Innovative Research (“SBIR”) grants, typically from the National Institutes of Health. When the Company is awarded one of these grants, it is obligated to spend grant dollars on research activities based on a budget submitted with the grant application. The Company bills the federal government on a monthly basis as the costs are incurred. Revenues consist of reimbursement for direct budgeted expenses, indirect costs, and a “fixed fee” which is a pre-approved profit for the grant.
	Sponsored Research Revenue is revenue received in return for tasks performed by the Company for partners. Sponsored research revenues are invoiced to the partners with the invoices based on actual expenses incurred (subcontract costs, direct personnel costs, etc.) and an indirect cost rate. A formal written contract does not exist. Specific research is identified on a project by project basis which is performed monthly. This revenue is recognized as the work is performed. Costs incurred under the sponsored research were approximately $475,000, $847,000, $2.0 million, $0, and $2.5 million for the three months ended March 31, 2004 and 2003 (unaudited), for the years ended December 31, 2003 and 2002 and the period from inception (March 25, 1995) through March 31, 2004 (unaudited), respectively.
	Licensing Fees are related to the payment of fees to the Company in return for certain rights related to intellectual property owned by the Company. For licensing payments, at the time of the agreement relating to the license, the Company establishes its best estimate of the life of the agreement. Typically these agreements have a term equal to the expiration date of the last patent to expire that relates to the technology. As of March 31, 2004 (unaudited), the Company had deferred revenue in the amount of $3.2 million that will be recognized on a straight-line basis over the remaining performance period of this agreement, which is estimated to be the period ending June 30, 2017.
	One customer, OrthoLogic, accounts for the majority of the sponsored research revenue and licensing fees. Total revenues from OrthoLogic were approximately $530,000, $405,000, $2,444,000,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	$1,246,000 and $5,558,000 for the three months ended March 31, 2004 and 2003 (unaudited), for the years ended December 31, 2003 and 2002 and the period from inception (March 25, 1995) through March 31, 2004 (unaudited), respectively.
	Deferred Revenue represents licensing fees that are being amortized over the patent life of the technology licensed and advance payments related to sponsored research revenue. All deferred revenue amounts relate to payments received from OrthoLogic.

      d. Research and Development Costs — Costs of research and development for government and Company-sponsored projects are expensed as incurred. These costs consist of direct costs associated with specific projects.

      e. Stock Based Compensation — The Company applies Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for the 1997 and 2003 Plans (the “Plans”). Accordingly, no compensation expense has been recognized for its stock-based compensation plan. Had compensation cost for the Plans been determined based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 123, as amended by SFAS No. 148, the Company’s net loss for the three months ended March 31, 2004 and 2003 (unaudited) and the years ended December 31, 2003 and 2002 and for the period from inception (March 25, 1995) to March 31, 2004 (unaudited) would have increased by approximately $8,000, $9,000, $30,000, $3,000 and $62,000, respectively. The fair value of the options granted during the three months ended March 31, 2004 and 2003 (unaudited) and the years ended December 31, 2003 and 2002 is estimated as $9,000, $33,000, $66,000, $2,000, respectively, on the date of grant using an option pricing model with the following assumptions in fiscal years 2003 and 2002: dividend yield of 0% and volatility of 3.35%, average risk-free interest rate of approximately 2.3%, an assumed forfeiture rate of 0% and an average expected life of approximately 3.5 years for grants in 2003 and 3.8 years in 2002. The weighted average fair value of options granted during the three months ended March 31, 2004 and 2003 (unaudited) and the years ended December 31, 2003 and 2002 was $0.25, $0.28, $0.29 and $0.28, respectively.

      f. Recent Accounting Pronouncements — In October 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The primary objectives of SFAS No. 144 are to develop one accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The Company’s adoption of SFAS No. 144 on January 1, 2002 had no material impact on our financial position and results of operations.

      In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligation it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for the financial statements of interim or annual periods ending after December 15, 2002. The Company’s adoption of FIN No. 45 on January 1, 2003 had no material impact on our financial position, results of operations and cash flows.

      In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

      In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires that unconsolidated variable interest entities be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity’s expected losses or residual benefits. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows:

	(i) Special-purpose entities (“SPEs”) created prior to February 1, 2003. The company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003.
	(ii) Non-SPEs created prior to February 1, 2003. The company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004.
	(iii) All entities regardless of whether an SPE, that were created subsequent to January 31, 2003.

      The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The adoption of the provisions applicable to SPEs and all other variable interests obtained after January 31, 2003 is not expected to have a material impact on the company’s financial position, results of operations, or cash flows.

      In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires certain financial instruments that embody obligations of the issuer, and which have characteristics of both liabilities and equity, to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The Company’s adoption of SFAS No. 150 did not have a material impact on its financial position, results of operations or cash flows.

      g. Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2.     Property and Equipment

      Property and equipment consist of the following as of December 31:

						December 31,
		March 31,
		2004				2003				2002
		(Unaudited)
Laboratory equipment		$	373,254			$	373,254			$	377,940
Furniture and equipment			126,246				126,246				121,439
Total			499,500				499,500				499,379
Less accumulated depreciation and amortization			(367,376	)			(350,403	)			(286,740	)
Property and equipment — net		$	132,124			$	149,097			$	212,639

      Depreciation expense totaled $16,973 and $16,835 for the three months ended March 31, 2004 and 2003 (unaudited) and $63,663 and $72,203 for the years ended December 31, 2003 and 2002, respectively, and $367,376 for the period from inception (March 25, 1995) through March 31, 2004 (unaudited).

3.     Long-Term Debt

      In December 2003, the Company issued $750,000 in Promissory Notes at an annual interest rate of 8% with principal and interest due on June 30, 2008. The Company issued an additional $300,000 in Promissory Notes at an annual interest rate of 8% in January 2004. The Promissory Notes and any accrued interest are automatically converted into equity securities upon an equity infusion in an aggregate amount of at least $4,000,000 occurring on or before June 30, 2004 at a price per share paid by the investors in the equity infusion.

      In the event of (1) a merger, consolidation or similar transaction in which the Company’s stockholders immediately prior to such transaction own less than 50% of the outstanding shares after such transaction; (2) a transaction in which more than 50% of the Company’s outstanding voting power is transferred; or (3) a sale, lease or other disposition of all or substantially all of the Company’s assets, if conversion of the Promissory Notes has not already occurred, then the Promissory Notes will automatically convert into shares of a newly created series of preferred stock (the “New Preferred Stock”) of the Company with rights and privileges pari pasu to the Company’s Series C Preferred Stock at a purchase price of $10.50 per share. Based on the terms of the definitive agreement with OrthoLogic discussed in Note 1, the notes would convert upon closing to approximately 104,000 shares of newly created Series D preferred stock (assuming a June 30, 2004 closing date).

      In the event of an underwritten initial public offering with aggregate proceeds of $10 million or more and which results in the Company’s common stock being listed on a national stock exchange or the Nasdaq Stock Market, if conversion of the Promissory Notes has not already occurred, then the Promissory Notes will automatically convert into New Preferred Stock at a purchase price of $10.50 per share.

      If the equity infusion is not completed on or before June 30, 2004, each holder can elect to convert all or part of the principal amount owing on such holder’s Promissory Note (and accrued interest) into shares of the Company’s Series C Preferred Stock or New Preferred Stock, the type of stock to be determined in the sole discretion of the Company, at a purchase price of $10.50 per share, until June 30, 2004.

      If an equity infusion is completed any time after June 30, 2004 but prior to the due date of the Promissory Notes, then holders who did not already convert their Promissory Notes may elect to convert all of the principal amount owing on such holder’s Promissory Note (and accrued interest) into shares of equity securities sold by the Company in such equity infusion, at the same purchase price per share paid by the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

investors in the equity infusion. In the event that holders representing 51% or more of the principal amount of all outstanding Promissory Notes elect to convert, then all holders of outstanding Promissory Notes shall be required to convert their respective Promissory Notes.

      Each lender received warrants to purchase shares of Common Stock of the Company with a term of five years from the date of issuance. Each warrant shall be exercisable for that number of shares as is determined by multiplying .30 times the number of shares which would be acquired upon conversion of the Promissory Notes at the price paid per share in the equity infusion, or if the equity infusion does not occur on or prior to June 30, 2004, $10.50. The exercise price shall be either the price paid per share for the shares of capital stock sold in the equity infusion, or if the equity infusion does not occur on or prior to June 30, 2004, $10.50 per share. Management has determined that the fair value of the warrants was zero at the date of issuance.

4.     Leases

      The Company leases laboratory equipment under capital leases. The present value of the remaining lease payments as of March 31, 2004 (unaudited) is $11,757 through October 2004.

      The Company leases its facility in Galveston, Texas. The lease term is through December 2005. Future minimum lease payments under noncancelable operating leases having an initial term in excess of one year as of December 31, 2003, were as follows:

2004		$	76,438
2005			76,438
Total		$	152,876

      Lease expense totaled approximately $19,109 in the three months ended March 31, 2004 and 2003 (unaudited) and $76,438 in the years ended December 31, 2003 and 2002.

5.     Accrued Expenses

      Accrued Expenses consist of the following:

						December 31,
		March 31,
		2003				2003				2002
		(Unaudited)
Deferred officer compensation		$	116,083			$	137,933				—
Vacation			23,250				23,250			$	25,824
Other			2,541				107				13,681
Total		$	141,874			$	161,290			$	39,505

      The Company has employment agreements with its officers that contain change of control provisions. The definitive agreement with OrthoLogic (Note 1) will trigger the change of control provisions in the employment agreements upon closing.

6.     Federal Income Taxes

      As of March 31, 2004 and December 31, 2003, the Company has generated net operating loss (“NOL”) carryforwards of approximately $5.3 million and $4.6 million, respectively, which are available to reduce future income taxes. If not utilized, these carryforwards begin to expire in 2011. A change in ownership, as defined by federal income tax regulations, could significantly limit the Company’s ability to utilize its carryforwards. The transaction with OrthoLogic (Note 1) will likely represent such a change in ownership.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Additionally, because U.S. tax laws limit the time during which these carryforwards may be applied against future taxes, the Company may not be able to take full advantage of these losses for federal income tax purposes. The benefit for income taxes computed at the federal statutory rate for each reported period differs from the income tax benefit of zero reported as all such deferred tax benefits have been fully reserved.

      Under SFAS No. 109, Accounting for Income Taxes, an NOL results in the recognition of a deferred tax asset. Due to the uncertainty of future taxable income, a full valuation allowance has been provided on the Company’s deferred tax assets in the accompanying financial statements. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:

							December 31,
			March 31,
			2004				2003				2002
			(Unaudited)
Deferred tax assets:
	NOL carryforwards		$	1,786,253			$	1,566,575			$	1,751,775
	Nondeductible accruals			34,742				34,742				8,780
	Deferred revenues			1,254,055				1,163,900				1,054,980
	Other			144,273				144,273				156,285
Total				3,219,323				2,909,490				2,971,820
Valuation allowance				(3,219,323	)			(2,909,490	)			(2,971,820	)
Net			$	—			$	—			$	—

7.     Capital Stock

      Series A Preferred Stock — During 1996, the Company issued 89,850 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) for gross proceeds of approximately $900,500 in a private placement. Each share of Series A Preferred Stock is convertible at any time at the option of the holder into 2.28571 shares of common stock (205,371 shares of common stock at December 31, 2003). As of December 31, 2003, no shares of Series A Preferred Stock had been converted into shares of common stock. The Series A Preferred Stock is recorded at its liquidation preference of $10.00 per share, or approximately $899,000.

      In 1998, the Company repurchased 200 shares of Series A Preferred Stock at fair value at that date due to potential conflicts of interest.

      Series B Preferred Stock — During 1997 and 1998, the Company issued 346,467 shares of Series B Preferred Stock for gross proceeds of approximately $1.9 million in private placements. Each share of Series B Preferred Stock is initially convertible at any time at the option of the holder into 1 share of Common Stock (346,467 shares of Common Stock at December 31, 2003). As of December 31, 2003, no shares of Series B Preferred Stock had been converted into shares of Common Stock. The Series B Preferred Stock is recorded at its liquidation preference of $5.50 per share, or approximately $1.9 million.

      Series C Preferred Stock — In 2000, the Company issued 190,476 shares of Series C Preferred Stock for gross proceeds of approximately $2.0 million in a private placement. Each share of Series C Preferred stock is convertible at any time at the option of the holder into 1 share of Common Stock (190,476 shares of Common Stock at December 31, 2003). As of December 31, 2003 no shares of Series C Preferred Stock had been converted in shares of Common Stock. The Series C Preferred Stock is recorded at its liquidation preference of $10.50 per share, or approximately $2.0 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Additional Rights — Series A, B and C Preferred Stock may bear dividends at rates determined by the board of directors. No such dividends have been determined by the board of directors. On all matters for which the Company’s stockholders are entitled to vote, each share of Series A, B and C Preferred Stock will entitle the holder to one vote for each share of Common Stock into which the share of Series A, B and C Preferred Stock is then convertible. Additionally, the holders of Series A, B and C Preferred Stock have the right to elect one director to the Board of Directors of the Company.

      Shares of preferred stock are automatically converted into shares of common stock upon: 1) the consummation of an underwritten public offering with an initial public offering price per share of at least $10.00 and resulting in net proceeds to Chrysalis of at least $10,000,000; or 2) the election of the holders of a majority of the issued and outstanding shares of preferred stock, voting together as a single class.

8.     Stock Options

      During 1997, the Company adopted the 1997 Stock Option Plan, (the “Plan”), that provides for the grant of options to purchase up to 140,000 shares of Common Stock. The 1997 Plan was subsequently amended in May 2000 and provides for an additional 100,000 options. Additionally, in January 2003, the Company adopted the 2003 Stock Option Plan, (the “2003 Plan”), that provides for the grant of options to purchase up to 160,000 shares of Common Stock. Granted options generally become exercisable over various periods. To the extent not exercised, options generally expire on the tenth anniversary of the date of grant. All options granted under the plan have exercise prices equal to the fair market value at the dates of grant.

      The following is a summary of the Company’s option activity:

						Weighted Average
		Options				Exercise Price
Outstanding, January 1, 2002			152,450			$	0.85
Granted			62,400				1.05
Forfeited			(7,600	)			1.05
Exercised			(600	)			1.05
Outstanding, December 31, 2002			206,650				0.90
Granted			150,300				1.05
Forfeited			(10,800	)			1.05
Exercised			(8,100	)			1.05
Outstanding, December 31, 2003			338,050				0.98
Granted			34,800				1.05
Forfeited			(800	)			1.05
Exercised			0				1.05
Outstanding, March 31, 2004 (Unaudited)			372,050			$	0.99

      Since its inception, the Plans have granted stock options to purchase 400,350 shares of its common stock at a weighted average price of $.97. As of March 31, 2004 (unaudited) 212,342 options were exercisable. The weighted average remaining life is approximately eight years. At March 31, 2004 (unaudited), there were 27,950 options available for grant under the Plan.

      The definitive agreement signed with OrthoLogic Corp. on April 28, 2004 (Note 1) will trigger the acceleration of vesting of the options.

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

      The following unaudited pro forma condensed consolidated financial statements are based on the historical consolidated financial statements of OrthoLogic Corp. and subsidiaries included elsewhere herein, adjusted to give effect to the acquisition of substantially all of the net assets of Chrysalis Biotechnology, Inc (“Chrysalis”) (excluding cash, but including intellectual property), pursuant to the Asset Purchase Agreement and Plan of Reorganization by and between Chrysalis and OrthoLogic dated April 28, 2004 (the “Asset Purchase Agreement”).

      The unaudited pro forma consolidated balance sheet gives effect to the proposed transaction as if it occurred on the date of the balance sheet. The unaudited pro forma consolidated statements of operations for the three months ended March 31, 2004 and the year ended December 31, 2003 give effect to the transaction as if it had occurred on January 1, 2003.

      The pro forma consolidated financial information is presented for illustrative purposes only, and is not necessarily indicative of the operating results or financial position that would have occurred if all of the events as described above had occurred on the first day of the respective periods presented, nor is it necessarily indicative of future operating results or financial position. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements for OrthoLogic included elsewhere herein and the financial statements of Chrysalis included elsewhere herein this filing.

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ORTHOLOGIC CORP.

PRO FORMA CONSOLIDATED BALANCE SHEET

											Chrysalis
											Assets/ Liabilities
											not Acquired or
			Historical				Historical				Eliminating				Allocation of				Pro Forma
			OrthoLogic				Chrysalis				Interco Items				Purchase Price				OrthoLogic
ASSETS
Cash and cash equivalents			$	67,114			$	630			$	(630	)(1)		$	(2,500	)(3)		$	63,289
				—				—				—				(1,200	)(3)			—
																(125	)(3)
Short-term investments				48,364				—				—				—				48,364
Accounts receivable				348				241				(241	)(1)			—				348
Inventory				—				—				—				—				—
Prepaids and other current assets				1,089				44				(42	)(1)			—				1,091
Deferred income taxes				—				—				—				—				—
	Total current assets			116,915				915				(913	)			(3,825	)			113,092
Furniture and equipment, net				528				132				—				17	(3)			677
Long-term investments				4,609				—				—				—				4,609
Escrow receivable, net				5,138				—				—				—				5,138
Deferred income taxes, non-current				770				—				—				—				770
Deposits and other assets				196				—				—				—				196
Intangible — Trademarks				—				—				—				2,170	(3)			2,170
				—				—				—								—
Investment in Chrysalis BioTechnology				750				—				—				(750	)(3)			—
	Total Assets		$	128,906			$	1,047			$	(913	)		$	(2,388	)		$	126,652
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Accounts payable			$	665			$	565			$	(115	)(1)		$	—			$	1,115
Accrued compensation				200				142				(139	)(1)			—				203
Accrued taxes				1,146				—				—				—				1,146
Excess space reserve				209				—				—				—				209
Other accrued liabilities				1,994				—				—				—				1,994
Deferred revenue — current portion				—				331				(196	)(1)			—				—
												(135	)(2)
Capital lease — current portion				—				12				—				—				12
Accrued severance and other divestiture costs				—				—				—				—				—
	Total current liabilities			4,214				1,050				(585	)			—				4,679
Notes Payable				—				1,073				(1,073	)(1)			—				—
Deferred revenue				—				2,827				(2,827	)(1)			—				—
Deferred rent and capital lease obligation				190				—				—				—				190
	Total liabilities			4,404				4,950				(4,485	)			—				4,869
Stockholders’ Equity
Preferred stock				—				4,803				(4,803	)(1)			—				—
Common stock				17				1				(1	)(1)			4				21
Additional paid-in capital				145,933				22				(22	)(1)			24,996	(3)			170,929
Accumulated deficit				(21,448	)			(8,729	)			8,398	(1)			(25,888	)(3)			(47,667	)
Treasury stock				—				—				—				(1,500	)(3)			(1,500	)
	Total stockholders’ equity			124,502				(3,903	)			3,572				(2,388	)			121,783
	Total Liabilities and Stockholders’ Equity		$	128,906			$	1,047			$	(913	)		$	(2,388	)		$	126,652

See notes to consolidated pro forma financial statements.

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ORTHOLOGIC CORP.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

												Eliminating
				Historical				Historical				Interco Items				Pro Forma				Pro Forma
				OrthoLogic				Chrysalis				with OrthoLogic				Adjustments				OrthoLogic
REVENUES
	Grant Revenue
	Sponsored research							$	475			$	(475	)(2)
	Licensing fees								55				(55	)(2)
		Total revenues							530				(530	)
OPERATING EXPENSES
	General and administrative			$	555				362								46	(4)		$	963
	Research and development				3,371				795				(665	)(2)			—				3,501
	CPM divestiture and related gains				(111	)			—				—				—				(111	)
		Total operating expenses			3,815				1,157				(665	)			46				4,353
	OPERATING LOSS				(3,815	)			(627	)			135				(46	)			(4,353	)
OTHER INCOME
	Interest income, net				306				(19	)			—				—				287
	Loss from continuing operations before taxes				(3,509	)			(646	)			135				(46	)			(4,066	)
	Income tax benefit				(294	)			—				—				—				(294	)
	Net loss from continuing operations			$	(3,215	)		$	(646	)		$	135	(2)		$	(46	)		$	(3,772	)
	Net loss per share from continuing operations
		Basic and diluted		$	(0.09	)														$	(0.10	)
	Basic and diluted shares outstanding				34,310												3,485				37,795

See notes to consolidated pro forma financial statements.

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ORTHOLOGIC CORP.

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

													Eliminating
													InterCo
					Historical				Historical				items with				Pro Forma				Pro Forma
					OrthoLogic				Chrysalis				OrthoLogic				Adjustments				OrthoLogic
REVENUES
	Grant Revenue								$	131											$	131
	Sponsored research									2,223			$	(2,223	)(2)							—
	Licensing fees									220				(220	)(2)							—
			Total revenues							2,574				(2,443	)							131
OPERATING EXPENSES
	General and administrative				$	4,331				1,353				—			$	184	(4)			5,868
	Research and development					9,008				2,215				(2,633	)(2)			—				8,590
	CPM divestiture and related gains					(743	)			—				—				—				(743	)
			Total operating expenses			12,596				3,568				(2,633	)			184				13,715
	OPERATING LOSS					(12,596	)			(994	)			190				(184	)			13,584
OTHER INCOME
	Interest income, net					568				(4	)			—				—				564
	Loss from continuing operations before taxes					(12,028	)			(998	)			190				(184	)			(13,020	)
	Income tax benefit					(4,414	)			0				—				(382	)(5)			(4,796	)
	Net loss from continuing operations					(7,614	)			(998	)			190				198				(8,224	)
	Net loss per share from continuing operations
		Basic and diluted			$	(0.23	)														$	(0.22	)
	Basic and diluted shares outstanding					32,970												3,485				36,678

See notes to consolidated pro forma financial statements.

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NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION

      The following explanations describe the assumptions used in preparing the pro forma consolidated financial statements of OrthoLogic as of March 31, 2004 and for the year ended December 31, 2003 and the three months ended March 31, 2004.

Acquisition

      On April 28, 2004, OrthoLogic and Chrysalis signed an Asset Purchase Agreement and Plan of Reorganization pursuant to which OrthoLogic agreed to purchase substantially all the assets and intellectual property of Chrysalis in exchange for the payment described below:

	•	$2.5 million in cash, payable at the closing;
	•	$25.0 million in OrthoLogic common stock, payable at the closing. Chrysalis will receive the number of shares of OrthoLogic common stock, that is equal to $25.0 million as of closing if the 10-day average closing price of OrthoLogic common stock ending immediately prior to closing (the “Closing Date Stock Price”) is no greater than $8.239 and no less than $6.741 per share. In the event that the Closing Date Stock Price is greater than $8.239, Chrysalis will receive 3,034,349 shares of OrthoLogic common stock and in the event that the Closing Date Stock Price is less than $6.741, Chrysalis will receive 3,708,649 shares of OrthoLogic common stock. This means that Chrysalis could receive a number of shares of OrthoLogic common stock worth more or less than $25.0 million at closing. For purposes of the pro forma consolidated financial statements, the maximum number of shares that may possibly be issued, or 3,485,000 shares (3,708,000 shares less 223,000 reflecting the number of shares allocable to OrthoLogic as a shareholder of Chrysalis) have been reflected. If the Closing Date Stock Price exceeds $8.239, the pro forma fully diluted earnings per share would be ($0.10) and ($0.22) for the three months ended March 31, 2004 and the year ended December 31,2003, respectively.
	•	$7.0 million in OrthoLogic common stock, payable if either of the following trigger events occurs before the fifth anniversary of the closing: (1) a sale of substantially all OrthoLogic’s assets, or a merger, consolidation, recapitalization, or other transaction, in each case after which OrthoLogic’s stockholders immediately before such transaction do not own a majority of the voting power of the resulting entity immediately after such transaction; or (2) OrthoLogic’s receipt of written notice from the United States Food and Drug Administration that a new drug application for a product based on Chrysalin has been accepted for filing. The number of shares of OrthoLogic common stock issued as the $7.0 million will be calculated by using a per share price equal to the average closing price for the 10 trading days preceding the triggering event. These consolidated pro forma financial statements do not reflect this potential payment, as the triggering events have not been met. If the trigger is met, the additional $7.0 million will be added to the purchase price as goodwill.

      (1) To give effect to the acquisition of Chrysalis. Pursuant to the Asset Purchase Agreement, OrthoLogic will acquire only certain assets, principally intellectual property, and assume certain liabilities. It should be noted, OrthoLogic will not assume the Chrysalis position on grants of revenue previously recorded at $131,000 in fiscal year 2003. The contract is not transferable to OrthoLogic. The adjustment removes the related historical assets and liabilities that will not be acquired or assumed by OrthoLogic. As a result, the following represents what is to be acquired by OrthoLogic:

Prepaids and current assets			2
Furniture and equipment, net			132
Accounts payable and accrued compensation			(453	)
Capital lease			(12	)
Net liabilities acquired			(331	)

      (2) To give effect for transactions between OrthoLogic and Chrysalis which on a consolidated basis require elimination. These transactions relate primarily to license fees and sponsored research.

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      (3) To give effect for the allocation of the purchase price as follows (in thousands):

Cash to be paid				$	2,500
Common stock to be issued					25,000
Direct acquisition costs (related primarily to professional services)					1,200
Liabilities acquired					465
Severance					125
Original investment in Chrysalis					750
Less treasury stock OrthoLogic will receive due to the original investment in Chrysalis					(1,500	)
Total purchase price					28,540
Fair value of assets acquired
	Trademarks and patents (Note 4)				1,928
	In process R&D (“IPR&D”) (Note 7)				23,295
	Furniture and equipment, net (Note 2)				132
		Fair value			25,355
Purchase price paid in excess of fair value				$	3,185

      Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles (“SFAS 142”) requires that the cost of a group of assets acquired in a transaction other than a business combination be allocated to the individual assets acquired based on their relative fair values. Therefore, the excess purchase price was allocated primarily to trademarks, patents and in process research and development resulting in adjusted fair values of $2,170,000 and $26,221,000, respectively.

      The allocation is expected to change based upon the fair value of OrthoLogic stock on the closing date. On July 1, 2004, the closing price for OrthoLogic stock was $8.25 which is outside of the high end of the range established in the purchase agreement of $8.239. Therefore, as an example, if the average of the Company’s stock price is $8.50 at the date of close, 3,034,349 shares will be issued, however, the value of the stock will be $25.8 million which would result in the purchase price exceeding the fair value by an additional $800,000 which would then be allocated based upon fair values.

      (4) To record depreciation on furniture and equipment and amortization of the trademark and patents over the estimated useful lives of 5 and 12 years, respectively.

      (5) Income tax effect on the net loss of Chrysalis and the purchase accounting adjustment for the year ended December 31, 2003, at a statutory federal income tax rate of 34% and a state statutory income tax rate of 4.5%, after federal benefit, has been used in tax effecting the net loss of Chrysalis. No tax provision was provided for the three months ended March 31, 2004 due to the net loss and assumed deferred tax valuation allowance.

      (6) OrthoLogic will expense in process Research and Development of $26,221,000 as a result of the acquisition. This item has not been reflected in the pro forma financial statements as it is non-recurring in nature.

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      Non-recurring charges:

      (7) In-process R&D

      For valuation purposes, in-process research and development (“IRP&D”) projects were categorized as follows:

      Ortho Indications — These projects include developing applications of the Chrysalin peptide compound to accelerate the repair of damaged tissue for bone fracture healing, spine fusion, and cartilage repair. Bone fracture healing is currently in Phase 3 clinical trials (est. 75% complete). Spine fusion is currently in Phase 2 clinical trials (est. 50% complete), while cartilage repair is in the Pre-IND stage (est. 20% complete). The valuable elements of these acquired projects include the beneficial data that has already been collected from the preclinical work and clinical trials, as well as the time and expense already incurred in moving these indications through the regulatory approval process, bringing these projects nearer to NDA approval and commercialization. Additional direct R&D costs of approximately $1.8 million are estimated to complete these projects. Several material risks of timely completion and commercialization of these projects exist, including risk of unfavorable clinical trial results, potential delays in FDA regulatory approvals, potential lack of capital funding, and risks related to market acceptance and competing products. The fair value of these Ortho Indications projects was determined to be $17,072,442.

      Soft Tissue Indications — These projects include developing applications of the Chrysalin peptide compound to accelerate the repair of damaged tissue for chronic wounds and diabetic ulcers, which is currently in Phase 2 clinical trials (est. 50% complete). The valuable elements of these acquired projects include the beneficial data that has already been collected from the preclinical work and clinical trials, as well as the time and expense already incurred in moving these indications through the regulatory approval process, bringing these projects nearer to NDA approval and commercialization. Assuming timely NDA approval, material net cash inflows were forecast to begin in late 2007. Additional direct R&D costs of approximately $6.3 million are estimated to complete these projects. Several material risks of timely completion and commercialization of these projects exist, including risk of unfavorable clinical trial results, potential delays in FDA regulatory approvals, potential lack of capital funding, and risks related to market acceptance and competing products. The fair value of these Soft Tissue Indications projects was determined to be $4,968,172.

      Other Indications — These projects include developing applications of the Chrysalin peptide compound to accelerate the repair of damaged tissue for dental bone replacement and myocardial revascularization and repair, as well as the development of novel peptides. Dental bone replacement is currently in the Pre-IND stage (est. 20% complete), while the other indications are in the Preclinical stage (est. 10% complete). The valuable elements of these acquired projects include the beneficial data that has already been collected from the preclinical work, as well as the time and expense already incurred in moving these indications through the regulatory approval process, bringing these projects nearer to NDA approval and commercialization. Material net cash inflows from these indications are not expected to begin until 2009 or 2010 at the earliest. Additional R&D costs to complete these Other Indications projects are undetermined. Several material risks of timely completion and commercialization of these projects exist, including risk of unfavorable pre-clinical and clinical trial results, potential delays in FDA regulatory approvals, potential lack of capital funding, and risks related to market acceptance and competing products. The fair value of these Other Indications projects was determined to be $1,255,148.

      A discounted cash flow method was used to determine the fair value of the Ortho and Soft Tissue Indications projects based, in part, on (i) expected NDA approval dates, (ii) market size and market share assumptions, (iii) expected R&D, royalty, general and administrative expenses, and (iv) a risk adjusted discount rate of 30%. The cost approach was used to determine the fair value of the Other Indications projects with applications beyond the forecast horizon.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):   January 27, 2004

ORTHOLOGIC CORP.

Delaware

Registrant’s telephone number, including area code:      (602) 286-5520

Not Applicable

 

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Item 7. Exhibits

     (c) Exhibits

Item 9. Regulation FD Disclosure

     OrthoLogic Corp. announced on January 27, 2004 that the Board of Directors has appointed Michael D. Casey to fill a newly-created vacancy on the OrthoLogic Corp. Board of Directors. Mr. Casey has over 30 years of experience in the pharmaceutical industry. With the addition of Mr. Casey, whose term runs until the next Annual Meeting of Stockholders, the total number of OrthoLogic Corp. directors is now seven.

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 hereunto duly authorized.

 

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INDEX TO EXHIBITS

 

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THE BERLIN GROUP, INC.
INVESTOR RELATIONS COUNSEL

     FOR FURTHER INFORMATION:

ORTHOLOGIC ANNOUNCES APPOINTMENT OF
MICHAEL D. CASEY TO BOARD OF DIRECTORS

Pharmaceutical Industry Veteran Further Strengthens Company’s Board

TEMPE, Ariz., Tuesday, January 27, 2004—OrthoLogic Corp. (Nasdaq: OLGC) announced today that Michael D. Casey has been appointed to fill a newly-created vacancy on the company’s Board of Directors. With the addition of Mr. Casey, whose term runs until the next Annual Meeting of Stockholders, the total number of OrthoLogic directors is now seven.

Mr. Casey, who has over 30 years of experience in the pharmaceutical industry, spent most of his career at Johnson & Johnson, where he served as vice president of sales and marketing of Ortho Pharmaceutical Corp. and president of McNeil Pharmaceuticals. Mr. Casey was most recently president, chief executive officer and chairman of Matrix Pharmaceutical Inc. Prior to joining Matrix, he served as president of two divisions of Schein Pharmaceutical Inc. and president of Genetic Therapy Inc. Casey is a director of Celgene Corp., Bone Care International Inc., and Cholestech Corp.

“We are delighted to welcome Michael Casey to our Board,” said John M. Holliman III, chairman of the Board of Directors of OrthoLogic. “Michael’s extensive experience in the pharmaceutical and biotechnology fields will be a decided asset as OrthoLogic further develops its Chrysalin® Product Platform.”

Mr. Casey stated: “OrthoLogic is a very interesting company with a unique strategy in the rapidly developing orthobiologics sector. I believe that its synthetic peptide, Chrysalin, is a strong candidate in the race to use the body’s own healing processes to bring more cost-effective, less invasive technologies to orthopedic medicine. I look forward to working with the company’s

 

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Board and executive management team as Chrysalin moves through the FDA regulatory process.”

“Michael Casey is an accomplished pharmaceutical and biotechnology executive,” said Thomas R. Trotter, president and chief executive officer of OrthoLogic. “His experience will be invaluable as we continue to develop the Chrysalin Product Platform and evaluate new strategic opportunities for the company’s future growth.”

About OrthoLogic Corp.

OrthoLogic is an orthobiologics drug-development company focused on commercializing several potential therapeutics comprising the Chrysalin® Product Platform, a series of potential drug products aimed at treating traumatic and chronic orthopedic indications in both bone and soft tissue. All of these potential products are based on the Chrysalin synthetic peptide, also known as TP508, invented by and licensed from Galveston, Texas-based Chrysalis BioTechnology Inc.

OrthoLogic owns options on all worldwide orthopedic rights to the peptide, and is actively pursuing five orthopedic indications for Chrysalin. These are fracture repair and spine fusion, which are in human clinical trials and cartilage defect repair, which is in late-stage preclinical trials. Ligament and tendon repair, respectively, are in the preclinical planning stage, with studies planned to initiate early in 2004.

The company’s vision is to become a worldwide leader in fracture healing, spinal repair and orthopedic soft tissue repair.

For more information, visit the company’s Web site: www.orthologic.com.

Statements in this press release or otherwise attributable to OrthoLogic regarding our business that are not historical facts are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which include the timing and acceptability of FDA filings and the efficacy and marketability of potential products, involve risks and uncertainties that could cause actual results to differ materially from predicted results. These risks include: unfavorable outcomes in our pre-clinical and clinical testing; the development by others of competing technologies and therapeutics that may have greater efficacy or lower cost; delays in obtaining or inability to obtain FDA or other necessary regulatory approval of our products; our inability to successfully and cost effectively develop or outsource manufacturing and marketing of any products we are able to bring to market; changes in FDA or other regulations that affect our ability to obtain regulatory approval of our products, increase our manufacturing costs or limit our ability to market our products; our possible need for additional capital in the future to fund the continued development of our Chrysalin Product Platform; and other factors discussed in the proxy statement for our special stockholders meeting held November 26, 2003 and in our Form 10-K for the fiscal year ended December 31, 2002 and other documents we file with the Securities and Exchange Commission.

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EXHIBIT INDEX

								Filed
Exhibit No.				Description		Incorporated by Reference to:		Herewith
	2	.1		Asset Purchase Agreement and Plan of Reorganization by and between OrthoLogic Corp. and Chrysalis Biotechnology, dated April 28, 2004*		Exhibit 2.1 to OrthoLogic’s Registration Statement on Form S-4 filed with the SEC on June 3, 2004 (“June 2004 S-4”)
	2	.2		Amendment No. 1 to Asset Purchase Agreement and Plan of Reorganization by and between OrthoLogic Corp. and Chrysalis Biotechnology, dated June 1, 2004		Exhibit 2.2 to OrthoLogic’s June 2004 S-4
	4	.1		Rights Agreement dated as of March 4, 1997, between OrthoLogic and Bank of New York, and Exhibits A, B and C thereto		Exhibit 4.1 to OrthoLogic’s Registration Statement on Form 8-A filed with the SEC on March 6, 1997
	4	.2		1987 Stock Option Plan of OrthoLogic, as amended and approved by stockholders(1)		Exhibit 4.4 to OrthoLogic’s Form 10-Q for the quarter ended June 30, 1997 (“June 1997 10-Q”)
	4	.3		1997 Stock Option Plan of OrthoLogic(1)		Exhibit 4.5 to OrthoLogic’s June 1997 10-Q
	5	.1		Opinion of Quarles & Brady Streich Lang LLP		Exhibit 5.1 to OrthoLogic’s June 2004 S-4
	8	.1		Opinion of Winstead Sechrest & Minick P.C. regarding certain U.S. federal income tax consequences of the asset purchase					X
	10	.1		Patent License Agreement between the Board of Regents of The University of Texas System through its component institution The University of Texas Medical Branch at Galveston and Chrysalis Biotechnology, Inc., dated April 27, 2004 and exhibits thereto(2)					X
	10	.2		Form of Consulting Agreement with Darrell H. Carney, Ph.D.					X
	23	.1		Consent of Quarles & Brady Streich Lang LLP		Exhibit 5.1 to OrthoLogic’s June 2004 S-4
	23	.2		Consent of Deloitte & Touche LLP					X
	23	.3		Consent of Deloitte & Touche LLP					X
	24	.1		Power of Attorney		Signature page to OrthoLogic’s June 2004 S-4

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(1)	Management contract or compensatory plan or arrangement.
(2)	Portions of this agreement and exhibits thereto have been redacted and filed under confidential treatment request with the Securities and Exchange Commission.

	*	OrthoLogic Corp. agrees to furnish supplementally a copy of any disclosure schedule section or exhibit to the Asset Purchase Agreement and Plan of Reorganization dated April 28, 2004 omitted from this filing to the Securities and Exchange Commission upon its request.