**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON, D.C.
      20549**





**Form
      10-QSB**





**x
      QUARTERLY REPORT UNDER
      SECTION 13 OR 15(D) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended March 31, 2006





**o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(d) OF THE**


**EXCHANGE
      ACT**





For
      the
      transition period from __________________ to ____________________








**Commission
      file number:** **333-120253**




**VIRTUALSCOPICS,
      INC.**


(Name
      of
      Small Business Issuer in its charter)





**DELAWARE**
            
            **04-
                3007151**(State
                or other jurisdiction of incorporation or
                organization)
            
            (I.R.S.
                Employer Identification
                No.)**350
                Linden Oaks, Rochester, New
                York**
            
            **14625**(Address
                of principal executive
                offices)
            
            (Zip
                Code)




**(585)
      249-6231**


( Issuer's
      Telephone Number, Including Area Code )





**SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE
      ACT:**


**None.**


**SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE
      ACT:**


**TITLE
      OF EACH CLASS: Common Stock, $0.001 par value**








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





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





Indicate
      by a check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Securities Exchange Act of 1934). Yes **o**  No **x**.





As
      of
      April 30, 2006, there were 21,889,075 shares of the issuer’s common stock,
      $0.001 par value, outstanding.





Transitional
      Small Business disclosure format. Yes **o**  No **x**











TABLE
      OF
      CONTENTS











PART
                I
            
            FINANCIAL
                INFORMATION
            
            Page
                NumbersITEM
                1: Financial Statements (unaudited)Condensed
                Consolidated Balance Sheet as of March 31, 2006
                (unaudited)
            
            2Condensed
                Consolidated Statements of Operations for the three months
              ended
                March 31, 2006 and 2005 (unaudited)
            
            3Condensed
                Consolidated Statements of Cash Flows for the three months
              ended
                March 31, 2006 and 2005 (unaudited)
            
            4Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            5-7ITEM
                2: Management's Discussion and Analysis of
              Financial
                Condition and Results of Operations
            
            8-12ITEM
                3: Controls and Procedures
            
            12PART
                II
            
            OTHER
                INFORMATIONITEM
                1: Legal Proceedings
            
            13ITEM
                2: Unregistered Sales of Equity Securities and Use of Proceeds
            
            13ITEM
                3: Defaults Upon Senior Securities
            
            13ITEM
                4: Submission of Matters to a Vote of Security Holders
            
            13ITEM
                5: Other Information
            
            13ITEM
                6: Exhibits
            
            14









**PART
      1: FINANCIAL INFORMATION**





**ITEM
      1. Financial Statements (unaudited)**













**VirtualScopics,
        Inc. and Subsidiary**
 **Condensed
        Consolidated Balance Sheet**
 ***(unaudited)***
 
 **March
        31, 2006**




**Assets**Current
                assetsCash
                and cash equivalents
            
            
            
            
            $
            5,382,309Accounts
                receivable
            
            
            
            
            
            719,343Prepaid
                expenses and other assets
            
            
            
            
            
            383,672Total
                current assets
            
            
            
            
            
            6,485,324Patents,
                net
            
            1,853,056Property
                and equipment, net
            
            355,920Other
                assets
            
            508,965Total
                assets
            
            
            
            
            $
            9,203,265**Liabilities
                and Stockholders' Equity**Current
                liabilitiesNotes
                payable, current portion
            
            
            
            
            $
            72,000Accounts
                payable and accrued expenses
            
            
            
            
            
            421,459Accrued
                payroll
            
            
            
            
            
            293,112Unearned
                revenue
            
            
            
            
            
            372,601Total
                current liabilities
            
            
            
            
            
            1,159,172Notes
                payable, net of current portion
            
            65,838Total
                liabilities
            
            
            
            
            
            1,225,010Commitments
                and ContingenciesStockholders'
                EquityPreferred
                stock, $0.001 par value; 15,000,000 shares authorized;8,400
                shares designated Series A; 7,000 issued and outstanding;liquidation
                preference $1,000 per share
            
            
            
            
            
            7Common
                stock, $0.001 par value; 85,000,000 shares authorized;
                21,889,075
            
            21,889shares
                issued and outstandingAdditional
                paid-in capital
            
            9,510,250Accumulated
                deficit
            
            (1,553,891
            )Total
                stockholders' equity
            
            
            
            
            
            7,978,255Total
                liabilities and stockholders' equity
            
            
            
            
            $
            9,203,265







See
      notes
      to condensed consolidated financial statements.




2


**VirtualScopics,
          Inc. and Subsidiary**
 **Condensed
          Consolidated Statements of Operations**
 ***(unaudited)***




For
                the Three Months Ended March 31,2006
            
            2005Revenues
            
            $
            1,024,353
            
            $
            699,063Cost
                of services
            
            
            640,747
            
            
            530,603Gross
                profit
            
            
            383,606
            
            
            168,460Operating
                expensesResearch
                and development
            
            
            239,299
            
            
            231,603Sales
                and marketing
            
            
            186,582
            
            
            177,460General
                and administrative (includingstock
                  option compensation expense of $424,884 in 2006)
            
            
            876,756
            
            
            328,499Depreciation
                and amortization
            
            
            104,497
            
            
            97,184Total
                operating expenses
            
            
            1,407,134
            
            
            834,746Operating
                loss
            
            
            (1,023,528
            )
            
            (666,286
            )Other
                income (expense)Interest
                income
            
            
            36,572
            
            
            7,774Other
                expense
            
            
            (7,177
            )
            
            (9,203
            )Total
                other income (expense)
            
            
            29,395
            
            
            (1,429
            )Net
                loss
            
            $
            (994,133
            )
            $
            (667,715
            )Basic
                and diluted net loss per common share
            
            $
            (0.05
            )
            $
            (0.04
            )Weighted
                average number of common shares outstanding
            
            
            21,889,075
            
            
            17,326,571





See
      notes
      to condensed consolidated financial statements.





3


**VirtualScopics,
          Inc. and Subsidiary**
 **Condensed
          Consolidated Statements of Cash Flows**
 ***(unaudited)***




For
                the Three Months Ended March 31,2006
            
            2005**Cash
                flows from operating activities**Net
                loss
            
            $
            (994,133
            )
            $
            (667,715
            )Adjustments
                to reconcile net lossto
                net cash used in operating activities:Depreciation
                and amortization
            
            
            104,497
            
            
            97,184Stock
                option compensation expense
            
            
            424,884
            
            
            -Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (221,570
            )
            
            70,940Prepaid
                expenses and other assets
            
            
            24,878
            
            
            2Accounts
                payable and accrued expenses
            
            
            (56,216
            )
            
            100,180Accrued
                payroll
            
            
            (16,027
            )
            
            (38,831
            )Unearned
                revenue
            
            
            (194,667
            )
            
            (618,166
            )Total
                adjustments
            
            
            65,779
            
            
            (388,691
            )Net
                cash used in operating activities
            
            
            (928,354
            )
            
            (1,056,406
            )**Cash
                flows from investing activities**Purchase
                of equipment
            
            
            (67,261
            )
            
            (50,443
            )Acquisition
                of patents
            
            
            (11,096
            )
            
            (4,346
            )Cash
                used in investing activities
            
            
            (78,357
            )
            
            (54,789
            )**Cash
                flows from financing activities**Repayments
                of notes payable - related parties
            
            
            (18,590
            )
            
            (16,648
            )Net
                decrease in cash and cash equivalents
            
            
            (1,025,301
            )
            
            (1,127,843
            )**Cash
                and cash equivalents**Beginning
                of period
            
            
            6,407,610
            
            
            3,538,446End
                of period
            
            $
            5,382,309
            
            $
            2,410,603**Supplemental
                disclosure of cash flow information**Cash
                paid during the periods for:Interest
            
            $
            2,249
            
            $
            4,294




See
      notes
      to condensed consolidated financial statements.





4


**VirtualScopics,
          Inc. and Subsidiary**
 **Notes
          to Condensed Consolidated Financial Statements**
 ***(unaudited)***




NOTE
      1 - Organization
      and Basis of Presentation





Organization


On
      November 4, 2005, VirtualScopics, LLC (“VS”), a New York limited liability
      company, entered into a merger agreement with ConsultAmerica, Inc. (“CA”), a
      Delaware corporation. CA issued 17,326,571 of its unregistered shares of common
      stock for 100% of the outstanding membership units of VS. As a result of the
      exchange, the members of VS became the controlling stockholders of CA. CA did
      not have any meaningful operations prior to the merger. The transaction was
      treated as a recapitalization of VS, and accounted for on a historical cost
      basis for all periods presented. Moreover, the financial statements set forth
      in
      this report for all periods, prior to the recapitalization, are the financial
      statements of VS and the members' equity of VS has been retroactively
      restated to give the effect to the exchange for CA common stock. Immediately
      following the merger, CA changed its name to VirtualScopics, Inc. (the “Company”
or “New VS”) and its fiscal year end from August 31 to December 31. The Company
      also changed its trading symbol from “CSAA.OB” to “VSCP.OB.”





Nature
      of Business


The
      Company’s headquarters are located in Rochester, New York. The Company’s
      business evolved from research first carried out at the University of Rochester,
      a related party. As a result of this research, the Company has created a suite
      of image analysis software tools and applications which are used in detecting
      and analyzing specific structures in medical images. The Company’s developed
      software provides measurement and visualization capabilities designed to improve
      clinical research and development.





Basis
      of Presentation


The
      accompanying unaudited condensed consolidated financial statements of Company
      have been condensed in certain respects and should, therefore, be read in
      conjunction with the audited consolidated financial statements and notes related
      thereto contained in the Company’s Annual Report on Form 10-KSB as of and for
      the year ended December 31, 2005. In the opinion of the management, these
      financial statements contain all adjustments necessary for a fair presentation
      for the interim period, all of which were normal recurring adjustments. The
      results of operations for the three months ended March 31, 2006 are not
      necessarily indicative of the results to be expected for the full year ending
      December 31, 2006.





NOTE
      2 - Summary
      of Certain Significant Accounting Policies





Principles
      of Consolidation


The
      accompanying unaudited condensed consolidated financial statements include
      the
      accounts of New VS and its wholly-owned subsidiary, VS. All significant
      intercompany balances and transactions have been eliminated in
      consolidation.





Concentration
      of Credit Risk


The
      Company derived 53% and 89% of its revenue from its largest customer for the
      quarters ended March 31, 2006 and 2005, respectively.





Revenue
      Recognition


The
      Company provides advanced medical image analysis which is charged to its
      customers on a per image basis in addition to various consulting and
      project/data management services. Revenue is recognized after the services
      are
      rendered or when the image analysis is delivered.





The
      Company also offers software development to its customers. Software development
      revenue includes software integration, customization and development fees.
      Software development revenue is billed on a fixed price basis.





5


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***


Research
      and Development


Research
      and development expense relates to the development of new products and processes
      including significant improvements to existing products. These costs are
      expensed as incurred.





NOTE
      3 - Notes
      Payable





Notes
      payable to related parties as of March 31, 2006 amounted to
      $137,838.





During
      2002, the Company entered into note agreements with two of the Company’s
      founders, along with two additional employees, for total cash proceeds of
      $360,000. The notes are payable in quarterly installments of principal and
      interest. The notes bear interest at the rate of 5.75% per annum and are due
      on
      March 31, 2008.





Interest
      expense amounted to $2,249 and $4,294 for the quarters ended March 31, 2006
      and
      2005, respectively.





NOTE
      4 - Employee
      Stock Options





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based
      Payment,” using the modified prospective method. Consequently, for the three
      months ended March 31, 2006, the Company’s results of operations reflected
      compensation expense for new stock options granted and vested under its stock
      incentive plans during the first three months of fiscal year 2006 and the
      unvested portion of previous stock option grants which vested during the first
      three months of fiscal year 2006. The amount recognized in the financial
      statements related to stock-based compensation was $424,884 for the three months
      ended March 31, 2006.





Stock
      options issued under the Company’s Long-term Incentive Plans are granted with an
      exercise price equal to the market price of the Company’s stock at the date of
      grant and expire ten years from the date of grant. These options generally
      vest
      over a three- or four-year period.





Prior
      to
      the first quarter of fiscal year 2006, the Company accounted for its stock-based
      employee compensation arrangements in accordance with the provisions and related
      interpretations of Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees.” Had compensation cost for stock-based compensation
      been determined consistent with SFAS No. 123R, the net loss and net loss per
      share for the three months ended March 31, 2005 would have been adjusted to
      the
      following pro forma amounts:





Net
                loss, as reported
            
            $
            (667,715
            )Deduct:
                Total stock-based employee compensation
              expense
                determined under the fair value method
            
            
            (296,677
            )Net
                loss, pro forma
            
            $
            (964,392
            )Basic
                and diluted net loss per common share:As
                reported
            
            $
            (0.04
            )Pro
                forma
            
            $
            (0.06
            )





The
      fair
      value of each option granted is estimated on the date of grant using the
      Black-Scholes option-pricing method. The Company uses historical data to
      estimate the expected price volatility, the expected option life and the
      expected forfeiture rate. The risk-free rate is based on the U.S. Treasury
      yield
      curve in effect at the time of grant for the estimated life of the option.
      The
      Company has not made any dividend payments nor does it have plans to pay
      dividends in the foreseeable future. The following assumptions were used to
      estimate the fair value of options granted during the three months ended March
      31, 2006 and 2005 using the Black-Scholes option-pricing model:




6


**VirtualScopics,
      Inc. and Subsidiary** **Notes
        to Condensed Consolidated Financial Statements**
 ***(unaudited)***




March
                31,2006
            
            2005Risk
                free interest rate
            
            
            4.72
            %
            
            4.15
            %Expected
                term (years)
            
            
            8.8
            
            
            8.6Expected
                volatility
            
            
            80.6
            %
            
            80.6
            %Expected
                dividend yield
            
            
            —
            
            
            —





A
      summary
      of the option activity for the three months ended March 31, 2006 is as
      follows:





Number
                of Shares
            
            Weighted
                Average Exercise PriceOptions
                outstanding at January 1, 2006
            
            
            2,892,166
            
            $
            1.89Granted
            
            
            22,250
            
            
            6.70Options
                outstanding at March 31, 2006
            
            
            2,914,416
            
            $
            1.93Options
                exercisable at March 31, 2006
            
            
            1,198,351
            
            $
            1.23





NOTE
      5 - Net
      Loss Per Share





Basic
      net
      loss per share is computed by dividing the net loss applicable to common shares
      by the weighted average number of common shares outstanding during the period.
      The weighted average number of shares has been given retroactive effect to
      the
      recapitalization. Diluted net loss attributable to common shares adjusts basic
      net loss per share for the effects of convertible securities, warrants, stock
      options, and other potentially dilutive financial instruments, only in the
      periods in which such effect is dilutive. The shares issuable upon the
      conversion of preferred stock, the exercise of stock options and warrants are
      excluded from the calculation of net loss per share as their effect would be
      antidilutive.





Securities
      that could potentially dilute earnings per share in the future that were not
      included in the computation of diluted loss per share consist of the
      following:




March
                31,2006
            
            2005Series
                A convertible preferred stock
            
            
            2,800,000
            
            
            —Warrants
                to purchase common stock
            
            
            2,212,490
            
            
            532,490Options
                to purchase common stock
            
            
            3,050,762
            
            
            2,261,185Total
            
            
            8,063,252
            
            
            2,793,675





NOTE
      6 - Severance
      Payment Demand





In
      the
      summer of 2005, the former President and Chief Executive Officer of VS made
      a
      demand for severance payments alleged by him to be due in connection with his
      termination in the approximate amount of $230,000 and certain options. No legal
      proceeding has been initiated to date with respect to this demand. VS believes
      the demand is without merit and intends to vigorously defend against the demand.
      As of March 31, 2006, the Company did not accrue any liability related to the
      demand.





7





**ITEM
      2: Management's Discussion and Analysis of Financial Condition and Result of
      Operations**





**Overview**





We
      are a
      provider of image-based biomarker solutions to the pharmaceutical, biotechnology
      and medical device industries. We focus on applying our imaging technology
      in
      two areas:





·
            improving
                the efficiency and effectiveness of the pharmaceutical and medical
                device
                research and development processes;
                and





·
            providing
                unique products to improve treatment planning and diagnosis of patients
                in
                a clinical setting.





We
      were
      originally formed in 1988 under the name ConsultAmerica, Inc. On November 4,
      2005, we acquired all of the outstanding membership units of VirtualScopics,
      LLC
      (“VS”), in exchange for 17,326,571 shares of our common stock, and changed our
      name to VirtualScopics, Inc. These newly issued shares constitute approximately
      70% of our outstanding shares of common stock and shares of common stock
      initially issuable upon the conversion of our outstanding series A convertible
      preferred stock. Prior to the exchange transaction, we provided strategic
      business planning to small companies. As a result of the exchange transaction,
      we have succeeded to the business of VS and plan to continue this business.





VS
      was
      formed in July 2000 after being spun out of the University of Rochester. In
      June
      2002, VS purchased the underlying technology and patents created by the founders
      of VS from the University of Rochester. VS owns all rights to the patents
      underlying its technology. Since its inception, VS’s principal activities
      consisted of:





·
            research
                and development;





·
            hiring
                technical, sales and other personnel;





·
            business
                development of customer and strategic relationships; and





·
            raising
                capital.





During
      the first three years, we have expanded our customer base. In 2003, we performed
      our services for eight customers. Since that time, we have added 21 new
      customers, for a total of 29 as of the date of this report. Revenue over this
      time has been derived primarily from image processing services in connection
      with pharmaceutical drug trials and contract research studies. For these
      services, we have been concentrating in the areas of oncology and
      osteoarthritis. We have also derived a portion of revenue from software
      development and consulting services, as well as research studies in the
      neurology and sexual dysfunction areas. We expect that the concentration of
      our
      revenue will continue in these services and in those areas throughout 2006.
      Revenues are recognized as the images that we process are quantified and
      delivered to our customers.





We
      have
      found that our customers value the ability to better understand the efficacy
      profile of their compounds. To date, nearly all of our customers have expressed
      interest in expanding their service agreements with us. We have also submitted
      proposals and bids for a number of other contracts. However, there can be no
      assurance that we will secure contracts from these efforts or that any such
      contracts or any of its existing contracts will not be cancelled on 30 days’
advance notice by a customer.





Additionally,
      once we enter into a new contract for participation in a drug trial, there
      are
      several factors that can affect whether we will realize the full benefits under
      the contract, and the time over which we will realize revenue. Customers may
      not
      accept our services due to performance reasons. Furthermore, the contracts
      may
      contemplate performance over multiple years. Therefore, revenue may not be
      realized in the fiscal year in which the contract is signed. Recognition of
      revenue under the contract may also be affected by the timing of patient
      recruitment or image site identification and training.





8


***Results
      of Operations***




***Results
      of Operations for the Three Months Ended March 31, 2006 Compared to the Three
      Months Ended March 31, 2005***





*Revenues*





Our
      sales
      for the three months ended March 31, 2006 were $1,024,000, an increase of
      $325,000 or 46% over the first quarter of 2005. The strong sales were a direct
      reflection of the increase in our customer base which included beginning the
      work on an Agreement in Principle (“Agreement”) with GlaxoSmithKline
      Corporation. In 2006, 53% of the revenues for the first quarter were generated
      from Pfizer, as compared to 89% in the same period of 2005. We anticipate
      that our revenues from Pfizer will continue to grow; however, we expect the
      relative percentage of the Pfizer business to decline in 2006 as we continue
      to
      broaden our customer base .
      We
      performed services for a total of 42 projects in the first quarter of 2006,
      as
      compared to 19 in the first quarter of 2005. During the first quarter of 2006,
      we derived 60% of our revenues from musculoskeletal projects, 26% from oncology
      projects, and 14% from consulting and other smaller projects. The majority
      of
      the pharmaceutical trial projects for which we have performed work to date
      are
      in pre-clinical, Phase I or Phase II studies.





*Gross
      Profit*





We
      had a
      gross profit of $384,000 for the three months ended March 31, 2006 compared
      to
      $168,000 for the comparable period in 2005. Our gross profit margin also
      increased from 24% in the first quarter 2005 to 37% in the first quarter 2006.
      This improvement in gross margin is largely attributed to the increase in sales
      as well as the product mix of the services that were delivered on during the
      quarter.





*Research
      and Development*





Research
      and development costs were consistent in the three months ended March 31, 2006
      as compared to the same period in 2005. Total research and development
      expenditures were $239,000 in the first quarter of 2006 compared to $232,000
      for
      the comparable period in 2005. These costs were composed mostly of salaries
      for
      our technical, scientific and software development staff. All costs associated
      with the development of a new product or enhancement of an existing product
      or
      software platform are expensed as incurred.





*Sales
      and Marketing*





Sales
      and
      marketing costs for the three months ended March 31, 2006 slightly increased
      to
      $187,000, an increase of $10,000 or 6% over the first quarter of 2005. The
      increase is attributable to the hiring of a new business development person
      at
      the end of 2005. All costs associated with our selling efforts, including trade
      shows, seminars, customer presentations and proposal related travel are included
      in sales and marketing.





*General
      and Administrative*





General
      and administrative for the three months ended March 31, 2006 costs were
      $452,000, an increase of $124,000 or 38%, over the first quarter of 2005. The
      increase is mainly due to the additional costs of being a public company which
      was a result of the exchange transaction between ConsultAmerica and
      VirtualScopics, LLC on November 4, 2005. These additional costs included legal
      fees, filing fees, as well as audit and tax-related services. The increase
      was
      also a result of the hiring of administrative functions, including IT, human
      resources and finance in order to support the Company’s growth. We expect that
      our general and administrative costs will increase in 2006 as a result of being
      a publicly traded company.




9




*Stock
      Option Compensation Expense*





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123R, “Share-Based Payment,” using the modified prospective method.
      Consequently, for the three months ended March 31, 2006, the Company’s results
      of operations reflected compensation expense for new stock options granted
      and
      vested under its stock incentive plans during the first three months of fiscal
      year 2006 and the unvested portion of previous stock option grants which vested
      during the first three months of fiscal year 2006. The amount recognized in
      the
      financial statements related to stock-based compensation was $424,884 for the
      three months ended March 31, 2006. SFAS No. 123R does not require retroactive
      adjustments; therefore, there was no comparable amount in the March 31, 2005
      statement of operations. Prior to January 1, 2006, the effects of stock options
      are disclosed in the notes to the unaudited condensed consolidated financial
      statements.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges increased in the three months ended March 31, 2006
      by
      $7,000 or 8%, to $104,000, when compared to the same period in 2005. This
      increase is attributed mostly to the rise in depreciation charges for the period
      resulting from the purchase of new hardware and software to support the
      Company’s delivery of services to its customers. We intend to continue to invest
      in our IT infrastructure in order to meet the demands of our
      customers.





*Interest
      Income (Expense)*





Interest
      income for the three months ended March 31, 2006 was $37,000 and composed of
      interest derived on the Company’s operating and savings accounts, compared to
      interest income of $8,000 in the same period in 2005. The increase in interest
      income was a reflection of the higher cash balances on hand during the fiscal
      year 2006 as well as higher average rates of return on our savings accounts
      in
      2006 compared to 2005. Interest expense for the quarter ended March 31, 2006
      and
      2005 were $7,000 and $9,000, respectively representing interest due to loans
      from certain stockholders of the Company.





*Net
      Loss*





Our
      net
      loss for the three months ended March 31, 2006 was $994,000 compared to a net
      loss of $668,000 for the same period in 2005. The increase in our net loss
      over
      the prior period was primarily related to the effects of implementing SFAS
      No.
      123R in 2006. Offsetting the non-cash expense related to stock options was
      the
      higher revenues in the first quarter 2006 as compared to 2005 which was in
      turn
      offset by higher operating costs.




**Liquidity
      and Capital Resources**





Our
      working capital as of March 31, 2006 was $5,326,000 compared to our working
      capital of $1,144,000 as of March 31, 2005. The increase was a direct result
      of
      our recently completed private placement in the fourth quarter of 2005, as
      described below.





On
      November 4, 2005 and in two subsequent closings on November 23, 2005 and
      December 2, 2005, we closed on our private placement for the sale of 7,000
      shares of our newly issued series A convertible preferred stock. We received
      net
      cash proceeds of approximately $5.7 million from the private placement. The
      net
      proceeds from our 2005 private placement have been invested in money market
      funds that invest primarily in short-term, highly-rated investments, including
      U.S. Government securities, commercial paper and certificates of deposit
      guaranteed by banks. Under our current policies, we do not use interest rate
      derivative instruments to manage our exposure to interest rate changes. Because
      of the short-term maturities of our investments, we do not believe that a
      decrease in market rates would have a significant negative impact on the value
      of our investment portfolio. As of April 30, 2006, we had approximately $5.1
      million in cash and cash equivalents.





10


We
      plan
      to utilize the net proceeds from the private placement to support the proposed
      expansion of our business to serve larger scale clinical trials, further
      research and development of existing and new targeted therapeutic areas, and
      develop and market diagnostic and treatment planning products. We also plan
      to
      continue our sales and marketing strategy with presentations to pharmaceutical
      companies and participation in medical conferences.





Net
      cash
      used in operating activities totaled $928,000 in the first quarter of 2006
      compared to $1,056,000 for the comparable quarter in 2005. This decrease in
      usage was primarily the result of the timing of collection of receivables as
      well as the earning of advance payments from customers.





We
      invested a total of $78,000 in the purchase of equipment and the acquisition
      of
      patents in the first quarter of 2006, compared to $55,000 in the same quarter
      of
      2005. We anticipate further spending within our IT infrastructure to support
      the
      Company’s operations.





Net
      cash
      used in our financing activities for the quarter ended March 31, 2006 was
      $19,000, compared to $17,000 for the quarter ended March 31, 2005. The amounts
      included in cash used in financing activities represent amounts paid on loans
      from certain stockholders of the Company.





We
      currently expect that existing cash and cash equivalents will be sufficient
      to
      fund operations for at least the next 12 months. If in the next 12 months our
      plans or assumptions change or prove to be inaccurate, we may be required to
      seek additional capital through public or private debt or equity financings.
      If
      we need to raise additional funds, we may not be able to do so on terms
      favorable to us, or at all. If we cannot raise sufficient funds on acceptable
      terms, we may have to curtail our level of expenditures and our rate of
      expansion.





**Off
      Balance Sheet Arrangements**





We
      have
      no off-balance sheet arrangements, other than the consulting agreements and
      operating leases that have or are reasonably likely to have a current or future
      effect that is material to investors on our financial condition, revenues or
      expenses, results of operations, liquidity, capital resources or capital
      expenditures.





**Forward
      Looking Statements**





Certain
      statements made in this discussion are “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995. These
      forward-looking statements include statements that address activities, events
      or
      developments that we expect, believe or anticipate may occur in the future,
      including:





·
            adverse
                economic conditions;





·
            inability
                to raise sufficient additional capital to operate our business;





·
            unexpected
                costs, lower than expected sales and revenues, and operating defects;





·
            adverse
                results of any legal proceedings;





·
            the
                volatility of our operating results and financial condition;





·
            inability
                to attract or retain qualified senior management personnel, including
                sales and marketing, and scientific personnel; and





·
            other
                specific risks that may be referred to in this report.






11





All
      statements, other than statements of historical facts, included in this report
      regarding our strategy, future operations, financial position, estimated revenue
      or losses, projected costs, prospects and plans and objectives of management
      are
      forward-looking statements. When used in this report, the words “may,”
“believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan,”
“could,” “would” and similar expressions are intended to identify
      forward-looking statements, although not all forward-looking statements contain
      such identifying words. All forward-looking statements speak only as of the
      date
      of this report. We do not undertake any obligation to update any forward-looking
      statements or other information contained in this report. Existing stockholders
      and potential investors should not place undue reliance on these forward-looking
      statements. Although we believe that our plans, intentions and expectations
      reflected in or suggested by the forward-looking statements in this report
      are
      reasonable, we cannot assure our stockholders or potential investors that these
      plans, intentions or expectations will be achieved. We disclose important
      factors that could cause our actual results to differ materially from our
      expectations under “Risk Factors” and elsewhere in this report. These risk
      factors qualify all forward-looking statements attributable to us or persons
      acting on our behalf.





Information
      regarding market and industry statistics contained in this report is included
      based on information available to us that we believe is accurate. It is
      generally based on academic and other publications that are not produced for
      purposes of securities offerings or economic analysis. We have not reviewed
      or
      included data from all sources, and we cannot assure our stockholders or
      potential investors of the accuracy or completeness of the data included in
      this
      report. Forecasts and other forward-looking information obtained from these
      sources are subject to the same qualifications and the additional uncertainties
      accompanying any estimates of future market size, revenue and market acceptance
      of products and services. We have no obligation to update forward-looking
      information to reflect actual results or changes in assumptions or other factors
      that could affect those statements. See “Risk Factors” for a more detailed
      discussion of uncertainties and risks that may have an impact on future results.




**ITEM
      3. Controls and Procedures**




We
      maintain a set of disclosure controls and procedures that are designed to ensure
      that information required to be disclosed by us in the reports filed by us
      under
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms. We carried out an evaluation, under the
      supervision and with the participation of our Chief Executive Officer and our
      Chief Financial Officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange
      Act.
      Based on that evaluation, our Chief Executive Officer and our Chief Financial
      Officer concluded that our disclosure controls and procedures are effective
      as
      of the end of the period covered by this report.




There
      have been no changes in our internal control over financial reporting identified
      in connection with the evaluation discussed above that occurred during our
      last
      fiscal quarter that have materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting




12





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





Not
      Applicable.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





Not
      applicable.





**Item
      3. Defaults upon Senior Securities**





Not
      applicable.





**Item
      4. Submission of Matters to a Vote of Security Holders**





Not
      applicable.





**Item
      5. Other Information**





None





**Item
      6. Exhibits**





Exhibit
                31.1
            
            Certification
                of Officer Pursuant to
                Section 302 of the Sarbanes-Oxley Act of 2002Exhibit
                31.2
            
            Certification
                of Officer Pursuant to Section
                302 of the Sarbanes-Oxley Act of 2002.Exhibit
                32.1
            
            Certification
                of Chief Executive Officer
                Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act 0f 2002.Exhibit
                32.2
            
            Certification
                of Chief Financial Officer
                Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act 0f 2002.


.





**SIGNATURES**





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


Dated:
              May 2, 2006
            VIRTUALSCOPICS,
              INC./s/ Robert
              G.
              KlimasewskiRobert
              G. KlimasewskiPresident
              and
              Chief Executive Officer


/s/ Molly
              HendersonMolly
              HendersonChief
              Financial Officer and Vice President of
              Finance





13


**Exhibit
      Index**





31.1
            Certification
                of Chief Executive Officer as required by Rule 13a-14 Or 15d-14 of
                the
                Securities Exchange Act of 1934, as adopted pursuant to Section 302
                Of The
                Sarbanes-Oxley Act of 2002


31.2
            Certification
                of Chief Financial Officer as required by Rule 13a-14 Or 15d-14 of
                the
                Securities Exchange Act of 1934, as adopted pursuant to Section 302
                Of The
                Sarbanes-Oxley Act of 2002


32.1
            Certification
                pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002


32.2
            Certification
                pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002







14