**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 June 30, 2007





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


**EXCHANGE
      ACT**





For
      the
      transition period from __________________ to ____________________





**Commission
      file number:** **000-52018**




**VIRTUALSCOPICS,
      INC.**




(Exact
      name of Small Business Issuer as specified in its charter)





**DELAWARE**
            **04-
                3007151**(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)******500
                Linden Oaks, Rochester, New York**
            **14625**(Address
                of principal executive offices)
            (Zip
                Code)




**(585)
      249-6231**


( Issuer’s
      Telephone Number, Including Area Code )





350
      Linden Oaks, Rochester, New York 14625


(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
      July 31, 2007, there were 23,106,021 shares of the issuer’s common stock, $0.001
      par value, outstanding.





Transitional
      Small Business disclosure format. Yes o No x










TABLE
      OF
      CONTENTS





Page
                NumbersPART
                I
            
            FINANCIAL
                INFORMATIONITEM
                1: Financial Statements (unaudited)Condensed
                Consolidated Balance Sheet as of June 30, 2007
            
            2Condensed
                Consolidated Statements of Operations for the three and six monthsended
                June 30, 2007 and 2006
            
            3Condensed
                Consolidated Statements of Cash Flows for the three and six monthsended
                June 30, 2007 and 2006
            
            4Notes
                to Condensed Consolidated Financial Statements
            
            5-9ITEM
                2: Management's Discussion and Analysis ofFinancial
                Condition and Results of Operations
            
            10-15ITEM
                3A(T): Controls and Procedures
            
            15-16PART
                II
            
            OTHER
                INFORMATIONITEM
                1: Legal Proceedings
            
            17ITEM
                2: Unregistered Sales of Equity Securities and Use of Proceeds
            
            17ITEM
                3: Defaults Upon Senior Securities
            
            17ITEM
                4: Submission of Matters to a Vote of Security Holders
            
            17-18ITEM
                5: Other Information
            
            18ITEM
                6: Exhibits
            
            18-20





i


**PART
      1: FINANCIAL INFORMATION**





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




1




**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Balance Sheet**


***(unaudited)***





**June
      30, 2007**


**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            2,255,974Accounts
                receivable
            
            
            813,629Prepaid
                expenses and other assets
            
            
            277,144Total
                current assets
            
            
            3,346,747Patents,
                net
            
            
            1,966,131Property
                and equipment, net
            
            
            600,521Other
                assets
            
            
            342,082Total
                assets
            
            $
            6,255,481**Liabilities
                and Stockholders' Equity**Current
                liabilitiesNotes
                payable, related parties
            
            $
            40,797Accounts
                payable and accrued expenses
            
            
            532,407Accrued
                payroll
            
            
            506,075Unearned
                revenue
            
            
            528,234Total
                current liabilities
            
            
            1,607,513Commitments
                and Contingencies
            
            
            -Stockholders'
                EquityPreferred
                stock, $0.001 par value; 15,000,000 shares authorized;8,400
                shares designated Series A; 4,226 issued and outstanding;liquidation
                preference $1,000 per share
            
            
            4Common
                stock, $0.001 par value; 85,000,000 shares authorized;
                23,036,021shares
                issued and outstanding
            
            
            23,036Additional
                paid-in capital
            
            
            11,133,745Accumulated
                deficit
            
            
            (6,508,817
            )Total
                stockholders' equity
            
            
            4,647,968Total
                liabilities and stockholders' equity
            
            $
            6,255,481




See
      notes
      to condensed consolidated financial statements.




2


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


For
                the Three Months Ended
              June
                30,
            
            For
                the Six Months Ended
              June
                30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            1,536,287
            
            $
            1,261,911
            
            $
            2,814,692
            
            $
            2,286,264Cost
                of services
            
            
            967,839
            
            
            686,548
            
            
            1,768,358
            
            
            1,327,296Gross
                profit
            
            
            568,448
            
            
            575,363
            
            
            1,046,334
            
            
            958,968Operating
                expensesResearch
                and development
            
            
            380,965
            
            
            304,290
            
            
            787,919
            
            
            543,589Sales
                and marketing
            
            
            193,163
            
            
            202,140
            
            
            405,279
            
            
            388,722General
                and administrative
            
            
            940,893
            
            
            1,230,178
            
            
            1,951,115
            
            
            2,106,933Depreciation
                and amortization
            
            
            118,493
            
            
            118,703
            
            
            236,205
            
            
            223,200Total
                operating expenses
            
            
            1,633,514
            
            
            1,855,311
            
            
            3,380,518
            
            
            3,262,444Operating
                loss
            
            
            (1,065,066
            )
            
            (1,279,948
            )
            
            (2,334,184
            )
            
            (2,303,476
            )Other
                income (expense)Interest
                income
            
            
            43,167
            
            
            44,542
            
            
            92,537
            
            
            81,114Other
                expense
            
            
            (1,253
            )
            
            (3,202
            )
            
            (3,231
            )
            
            (10,379
            )Total
                other income
            
            
            41,914
            
            
            41,340
            
            
            89,306
            
            
            70,735Net
                loss
            
            $
            (1,023,152
            )
            $
            (1,238,608
            )
            $
            (2,244,878
            )
            $
            (2,232,741
            )Basic
                and diluted net loss per common share
            
            $
            (0.04
            )
            $
            (0.06
            )
            $
            (0.10
            )
            $
            (0.10
            )Weighted
                average number of common sharesOutstanding
                - basic and diluted
            
            
            23,001,334
            
            
            21,889,075
            
            
            22,986,880
            
            
            21,889,075




See
      notes
      to condensed consolidated financial statements.




3




**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Statements of Cash Flows**


***(unaudited)***




For
                the Six Months Ended
              June
                30,2007
            
            2006**Cash
                flows from operating activities**Net
                loss
            
            $
            (2,244,878
            )
            $
            (2,232,741
            )Adjustments
                to reconcile net lossto
                net cash used in operating activities:Depreciation
                and amortization
            
            
            236,205
            
            
            223,200Stock
                option compensation expense
            
            
            745,482
            
            
            989,617Issuance
                of equity instruments to non-employees for services
            
            
            1,818
            
            
            -Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (151,610
            )
            
            (162,008
            )Prepaid
                expenses and other assets
            
            
            (45,637
            )
            
            71,483Accounts
                payable and accrued expenses
            
            
            42,176
            
            
            (76,038
            )Accrued
                payroll
            
            
            18,010
            
            
            179,574Unearned
                revenue
            
            
            13,214
            
            
            (310,834
            )Total
                adjustments
            
            
            859,658
            
            
            914,994Net
                cash used in operating activities
            
            
            (1,385,220
            )
            
            (1,317,747
            )**Cash
                flows from investing activities**Purchase
                of equipment
            
            
            (145,942
            )
            
            (333,054
            )Acquisition
                of patents
            
            
            (92,743
            )
            
            (63,197
            )Net
                cash used in investing activities
            
            
            (238,685
            )
            
            (396,251
            )**Cash
                flows from financing activities**Repayments
                of notes payable - related parties
            
            
            (39,649
            )
            
            (37,448
            )Net
                proceeds from exercise of stock options
            
            
            18,375
            
            
            -Net
                cash used in financing activities
            
            
            (21,274
            )
            
            (37,448
            )Net
                decrease in cash and cash equivalents
            
            
            (1,645,179
            )
            
            (1,751,446
            )**Cash
                and cash equivalents**Beginning
                of period
            
            
            3,901,153
            
            
            6,407,610End
                of period
            
            $
            2,255,974
            
            $
            4,656,164**Supplemental
                disclosure of cash flow information**Cash
                paid during the periods for:Interest
            
            $
            2,030
            
            $
            4,230





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 securities exchange 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 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 common stock 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” and in May 2006 began trading on
      the NASDAQ Capital Market under the trading symbol of “VSCP.”





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
      proprietary software provides measurement 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, 2006. 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 six months ended June 30, 2007 are not necessarily
      indicative of the results to be expected for the full year ending December
      31,
      2007.





NOTE
      2 - Summary
      of Certain Significant Accounting Policies





Principles
      of Consolidation




The
      accompanying 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.




Revenue
      Recognition




The
      Company applies the revenue recognition principles set forth under the
      Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue
      Recognition,” with respect to its revenues from image analysis, consulting and
      project/data management services, and recognizes revenue when it is realized
      or
      realizable and earned. The Company considers revenue realized or realizable
      and
      earned when an agreement exists, services and products are provided to the
      customer, prices are fixed or determinable, and collectibility is reasonably
      assured. Revenues are reduced for estimated discounts and other allowances,
      if
      any.




5


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***


NOTE
      2 - Summary
      of Certain Significant Accounting Policies ,
      continued





The
      Company provides advanced medical image analysis on a per image basis, and
      recognizes revenue when the image analysis is completed and delivered to the
      customer. Revenue related to project, data and site management services is
      recognized as the services are rendered and in accordance with the terms of
      the
      contract. Consulting revenue is recognized once the services are rendered and
      typically charged as an hourly rate.





Occasionally,
      the Company provides software development services to its customers, which
      may
      require significant development, modification, and customization. Software
      development revenue is billed on a fixed price basis and recognized upon
      delivery of the software and acceptance by the customer on a completed contract
      basis in accordance with the American Institute of Certified Public Accountants
      Statement of Position 81-1, “Accounting for Performance of Construction-Type and
      Certain Production-Type Contracts.” The Company does not sell software license,
      upgrades or enhancements, or post-contract customer services.





Reimbursements
      received for out-of-pocket expenses incurred are reported as revenue in the
      financial statements in accordance with Emerging Issues Task Force No. 01-14,
      “Income Statement Characterization of Reimbursements received for
‘Out-of-Pocket’ Expenses Incurred.”





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.




Reclassifications




Certain
      reclassifications have been made to prior year amounts to conform to the current
      year’s presentation. These changes had no effect on reported financial position
      or results of operations.





NOTE
      3 - Notes
      Payable





Notes
      payable to related parties as of June 30, 2007 amounted to $40,797.





During
      2002, the Company entered into note agreements with two 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 December 31, 2007.





Interest
      expense amounted to $2,030 and $4,230 for the quarters ended June 30, 2007
      and
      2006, respectively.





NOTE
      4 - Stock-Based
      Compensation





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 six
      months ended June 30, 2007 and 2006, the Company’s condensed consolidated
      statements of operations reflect stock-based compensation expense for stock
      options granted under its long-term stock incentive plans amounting to $745,482
      and $989,617, respectively.





Stock
      options issued under the Company’s long-term incentive plans are granted with an
      exercise price equal to no less than the market price of the Company’s stock at
      the date of grant and expire up to ten years from the date of grant. These
      options generally vest over a three- or four-year period.




6




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


NOTE
      4 - Stock-Based
      Compensation ,
      continued





The
      fair
      value of stock options granted was determined on the grant date using
      assumptions for risk free interest rate, the expected term, expected volatility,
      and expected dividend yield. The risk free interest rate is based on U.S.
      Treasury zero-coupon yield curve over the expected term of the option. The
      expected term assumption is primarily based on the Company’s historical data
      related to exercise and post-vesting cancellation information, which is expected
      to be similar to future results. Since the Company has limited historical
      volatility information, it bases its expected volatility on the historical
      volatility of similar entities whose share prices are publicly available. In
      making its determination as to similarity, the Company considered the industry,
      stage of life cycle, size, and financial leverage of such other entities. The
      Company’s model includes a zero dividend yield assumption, as the Company has
      not historically paid nor does it anticipate paying dividends on its common
      stock. The Company’s model does not include a discount for post-vesting
      restrictions, as the Company has not issued awards with such restrictions.
      The
      periodic expense is then determined based on the valuation of the options,
      and
      at that time an estimated forfeiture rate is used to reduce the expense
      recorded. The Company’s estimate of pre-vesting forfeitures is primarily based
      on the Company’s historical experience and is adjusted to reflect actual
      forfeitures as the options vest. The following assumptions were used to estimate
      the fair value of options granted for the six months ended June 30, 2007 and
      2006 using the Black-Scholes option-pricing model:





June
                30,2007
            
            2006Risk
                free interest rate
            
            
            4.71
            %
            
            4.72
            %Expected
                term (years)
            
            
            9.0
            
            
            8.8Expected
                volatility
            
            
            98.5
            %
            
            80.6
            %Expected
                dividend yield
            
            
            -
            
            
            -





A
      summary
      of the option activity for the six months ended June 30, 2007 is as
      follows:





Number
              of
                Shares
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted-Average
                Remaining Contractual TermOptions
                outstanding at January 1, 2007
            
            
            3,129,051
            
            $
            2.22Granted
            
            
            128,000
            
            $
            1.45Cancelled
            
            
            (19,841
            )
            
            ($4.91
            )Exercised
            
            
            (25,000
            )
            
            ($.74
            )Options
                outstanding at June 30, 2007
            
            
            3,212,210
            
            $
            2.25
            
            
            6.9Options
                exercisable at June 30, 2007
            
            
            2,070,738
            
            $
            1.82
            
            
            6.0





The
      weighted-average grant-date fair value of options granted during the six months
      ended June 30, 2007 and 2006 was $185,600 and $2,232,010, respectively. There
      were a total of 25,000 options exercised as of June 30, 2007, resulting in
      cash
      proceeds to the Company of $18,375.





NOTE
      5 - Stockholders’
      Equity





During
      the six months ended June 30, 2007, 120 shares of the Company’s Series A
      convertible preferred stock were converted into 48,195 shares of the Company’s
      common stock.




7




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


NOTE
      6 - 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.
      Diluted loss attributable to common shares adjusts basic 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
      as of June 30, 2007:





2007
            
            2006Series
                A convertible preferred stock
            
            
            1,690,205
            
            
            2,800,000Warrants
                to purchase common stock
            
            
            2,161,892
            
            
            2,212,490Options
                to purchase common stock
            
            
            3,353,317
            
            
            3,570,262Total
            
            
            7,205,414
            
            
            8,582,752





NOTE
      7 - Income
      Taxes





Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      No.
      48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
      Statement No. 109” (“FIN No. 48”). FIN No. 48 clarifies the accounting for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with FASB Statement 109, “Accounting for Income Taxes,” and
      prescribes a recognition threshold and measurement process for financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return.





Upon
      adoption, the Company has concluded that there were no significant uncertain
      tax
      positions requiring recognition in its financial statements. As of June 30,
      2007, all of the Company’s deferred tax assets were fully reserved by a
      valuation allowance equal to 100% of the net deferred tax assets. The company
      has never been profitable and has not paid any income taxes.





The
      Company has significant net operating loss and business credit carryovers which
      are subject to a valuation allowance due to the uncertain nature of the
      realization of the losses. The Internal Revenue Code imposes certain limitations
      on the utilization of net operating loss carryovers and other tax attributes
      after a change in control. The Company encountered ownership changes which
      could
      significantly limit the possible utilization of such carryovers. The Company
      has
      not performed a detailed analysis to determine the effect of any such ownership
      changes on its ability to use these net operating loss and credit carryforwards.
      However, it is not anticipated that limitations, if any, would have a material
      impact on the condensed consolidated balance sheet as a result of offsetting
      changes in the deferred tax valuation allowance.





The
      Company will recognize interest and penalties accrued related to unrecognized
      tax benefits as components of its income tax provision. The Company did not
      have
      any interest and penalties accrued upon the adoption of FIN No. 48 and as of
      June 30, 2007, the Company does not have any interest and penalties accrued
      related to unrecognized tax benefits.




8




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


NOTE
      8 - Legal
      Proceedings





In
      the
      summer of 2005, the former President and Chief Executive Officer of
      VirtualScopics, LLC, Dr. Stuart Shapiro, made a demand for severance payments
      under an employment agreement with the Company alleged by him to be due in
      connection with his termination. He commenced an arbitration proceeding in
      May
      2006. In April 2007, the Company agreed to terms of a settlement with Dr.
      Shapiro to include a cash payment of $75,000 payable within six months plus
      options to purchase 115,000 shares of the Company’s common stock. The Company’s
      results of operations reflect stock-based compensation expense of approximately
      $127,000 for these stock options. The value of the options was computed using
      the Black-Scholes option-pricing model with the following assumptions: risk
      free
      rate of 4.65%, expected term of six years, expected volatility of 95.4%, zero
      expected dividend yield, and stock price equal to the exercise price of $1.40.
      As of June 30, 2007, the Company paid $30,000 of the $75,000 cash settlement
      leaving an accrued liability of $45,000.





NOTE
      9 - Concentration
      of Credit Risk





The
      Company’s top three customers accounted for approximately 54% of its total
      revenue for the six-month period ended June 30, 2007, as compared to
      approximately 49% for the six-month period ended June 30, 2006. The Company’s
      top three customers all accounted for individually more than 10% of total
      revenue during the six-month period ended June 30, 2007, as compared to one
      customer accounting for approximately 42% of total revenue during the six-month
      period ended June 30, 2006.




9


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





*The
      following discussion should be read in conjunction with VirtualScopics’
condensed consolidated balance sheet as of June 30, 2007, and related condensed
      consolidated statements of operations and cash flows for the six months ended
      June 30, 2007 and 2006, included elsewhere in this report. This discussion
      contains forward-looking statements, the accuracy of which involves risks and
      uncertainties. Our actual results could differ materially from those anticipated
      in the forward-looking statements for many reasons including, but not limited
      to, those discussed under the heading “Forward Looking Statements” below and
      elsewhere in this report. We disclaim any obligation to update information
      contained in any forward-looking statements.*





**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, in exchange for 17,326,571 shares of our common stock, and changed our
      name
      to VirtualScopics, Inc. At the time of the transaction, the newly issued shares
      constituted approximately 70% of the 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 VirtualScopics and
      plan to continue this business.





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





·
            research
                and development;





·
            hiring
                technical, sales and other personnel;





·
            business
                development of customer and strategic relationships; and





·
            raising
                capital.





Revenue
      over the past six years has been derived primarily from image processing
      services in connection with pharmaceutical drug trials. For these services,
      we
      have been concentrating in the areas of oncology and osteoarthritis. We have
      also derived a portion of revenue from consulting services, and pharmaceutical
      drug trials in the neurology and cardiovascular therapeutic areas. We expect
      that the concentration of our revenue will continue in these services and in
      these areas throughout 2007.





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 our existing contracts will not be cancelled on 30 days’
advance notice by a customer.




10





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 that revenue. Customers
      may not continue our services due to performance reasons with their compounds
      in
      development. 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 and image site identification
      and training.





***Results
      of Operations***





***Results
      of Operations for Quarter Ended June 30, 2007 Compared to Quarter Ended June
      30,
      2006***





*Revenue*





We
      had
      revenues of approximately $1.5 million for the quarter ended June 30, 2007
      compared to $1.3 million for the comparable period in 2006. During the quarter,
      we performed work for 25 customers, representing 53 different projects, in
      connection with our pharmaceutical drug trials in the fields of oncology,
      osteoarthritis and various other projects. During the quarters ended June 30,
      2007 and 2006, Pfizer was our largest customer representing 33% of the quarterly
      revenues. As of June 30, 2007, we had active projects with 9 of the top 15
      pharmaceutical companies. 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. We expect that a majority of our work on pharmaceutical trial projects
      will continue to be focused in Phase I and II studies through 2007. During
      the
      three months ended June 30, 2007, 41% of the revenues were derived from studies
      in musculoskeletal diseases, 36% in oncology studies, 13% from Department of
      Defense projects, 7% from consulting, and 3% in other therapeutic areas.





The
      increase in revenues in the quarter ended June 30, 2007 compared to June 30,
      2006 was attributed to the first full quarter of revenues from our work
      pertaining to the Department of Defense as well as the broadening of our
      customer base, as outlined above. Additionally, the shift of more of our
      business to later stage trials as well as the sales and marketing initiatives
      implemented in early 2006 has resulted in added business.





*Gross
      Profit*





We
      had a
      gross profit of $568,000 for the second fiscal quarter of 2007 compared to
      $575,000 for the comparable period in 2006. Our gross profit margin slightly
      declined in the second quarter of 2007 compared to the same period in 2006
      due
      to the new projects started with the Department of Defense which have lower
      inherent margins than our clinical trials business. During the second quarter
      of
      2007, we had 8 additional employees in our service cost group as compared to
      the
      same period in 2006 to support current and future plans for revenue growth
      as a
      result of the shift of our business to Phase I/II studies from research and
      development activities. We anticipate the shift to Phase I/II studies will
      yield
      stronger economies of scale due to the inherent increase in the number of
      analyses performed.





*Research
      and Development*





Research
      and development costs increased in the quarter ended June 30, 2007 by $77,000,
      or 25%, to $381,000, when compared to the quarter ended June 30, 2006. The
      increase was largely attributed to the shift of our technical and scientific
      employees out of the operations and into research and development, as our
      technology has become more commercialized allowing our development employees
      to
      spend more time in research and development and less time in the day to day
      operations. As of June 30, 2007, there were 18 employees in our research and
      development group, which includes the algorithm development and software
      development groups.





11





*Sales
      and Marketing*




Sales
      and
      marketing costs decreased in the quarter ended June 30, 2007 by $9,000, or
      4%,
      to $193,000, when compared to the quarter ended June 30, 2006. The decrease
      was
      a result of the timing of trade shows and conferences, as well as the associated
      travel expenses related to the sales force attending these conferences.
      Offsetting this decline was an increase in salaries in the sales department
      due
      to the hiring of a new sales person in the fourth quarter of 2006, as well
      as an
      additional individual in April, 2007. As of June 30, 2007, we had four
      individuals in our sales department.





*General
      and Administrative*





General
      and administrative expenses for the quarter ended June 30, 2007 were $941,000,
      a
      decrease of $289,000 or 23%, when compared to the quarter ended June 30, 2006.
      The decrease was due to a $225,000 reduction in stock compensation expense
      for
      vested stock options. Also contributing to the decrease was a reduction in
      payroll costs in 2007 due to elimination of the Chief Operating Officer
      position, as the Chief Operating Officer completed the transition into the
      Chief
      Executive Officer position.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges were constant in the quarter ended June 30, 2007 when
      compared to the quarter ended June 30, 2006. There was an increase in
      depreciation charges resulting from the purchase of new hardware and software
      to
      support our delivery of services to our customers. We intend to continue to
      invest in our IT infrastructure in order to meet the demands of our customers.
      The increase in depreciation was offset by a decrease in amortization of a
      deferred asset that is amortized based on an estimate of the hours of usage
      over
      the life of the asset.





*Interest
      Income (Expense)*





Interest
      income for the quarter ended June 30, 2007 was $43,000, representing interest
      derived on our operating and savings accounts, compared to interest income
      of
      $45,000 in the three months ended June 30, 2006. The interest income remained
      relatively stable due to higher average rates of return on our savings accounts
      in the second quarter of 2007 compared to the second quarter of 2006. Interest
      expense for the quarters ended June 30, 2007 and 2006 was $1,200 and $3,000,
      respectively. This decrease in interest expense was due to a reduction in
      principal resulting from quarterly payments of loans from certain company
      stockholders.





*Net
      Loss*





Net
      loss
      for the quarter ended June 30, 2007 was $1,023,000 compared to a net loss of
      $1,239,000 for the quarter ended June 30, 2006. The decrease in our net loss
      over the prior period was primarily related to the increase in revenues and
      the
      decrease in stock compensation expense for vested stock options, as outlined
      above.





***Results
      of Operations for the Six Months Ended June 30, 2007 Compared to the Six Months
      Ended June 30, 2006***





*Revenues*





Our
      revenues for the six months ended June 30, 2007 were $2,815,000, an increase
      of
      $528,000 or 23% over the first half of 2006. The increase in sales is a
      reflection of the broadening of our customer base, the broader penetration
      of
      our services in the industry as well as the work commenced on our two projects
      with the Department of Defense. In 2007, 27% of the revenues for the first
      half
      were generated from Pfizer, as compared to 42% in the same period of 2006.
      We
      performed services for a total of 63 projects in the first half of 2007, as
      compared to 54 in the first half of 2006. During the first half of 2007, we
      derived 51% of our revenues from musculoskeletal projects, 31% from oncology
      projects, 10% from Department of Defense projects, and 8% 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.




12




*Gross
      Profit*





We
      had a
      gross profit of $1,046,000 for the six months ended June 30, 2007 compared
      to
      $959,000 for the comparable period in 2006. Our gross profit margin declined
      slightly from 42% in the first two quarters of 2006 to 37% in the first two
      quarters of 2007. The decline is the result of new projects started with the
      Department of Defense which have lower inherent margins than our clinical trials
      business. During the first half of 2007, we hired 8 additional employees in
      our
      service cost group to support current and future plans for revenue growth as
      a
      result of the shift of our business to Phase I/II studies from research and
      development activities. We anticipate the shift to Phase I/II studies will
      yield
      stronger economies of scale due to the inherent increase in the number of
      analyses performed.





*Research
      and Development*





Total
      research and development expenditures were $788,000 in the first half of 2007
      compared to $544,000 for the comparable period in 2006, an increase of 45%.
      The
      increase was attributable to the additional algorithm and software development
      staff hired in the first half of 2006 and the shift of our technical and
      scientific employees out of the operations and into research and development,
      as
      our technology has become more commercialized allowing our development employees
      to spend more time in research and development and less time in the day to
      day
      operations. 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 six months ended June 30, 2007 increased to $405,000,
      an
      increase of $16,000 or 4% over the first half of 2006. The increase is
      attributable to the hiring of a new business development person at the end
      of
      2006, as well as an additional individual in April, 2007 offset by a decrease
      due to the timing of trade shows and conferences, as well as the associated
      travel expenses related to the sales force attending these conferences. 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 expenses for the six months ended June 30, 2007 were
      $1,951,000, a decrease of $156,000 or 7%, over the first half of 2006. The
      decrease is mainly due to
      a
      $245,000 reduction in stock compensation expense for vested stock
      options offset
      by the settling of a legal matter, during the second quarter of 2007, with
      a
      former executive.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges increased in the six months ended June 30, 2007 by
      $13,000 or 6%, to $236,000, when compared to the same period in 2006. 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 our delivery
      of services to our 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 six months ended June 30, 2007 was $93,000 and composed of
      interest derived on the Company’s operating and savings accounts, compared to
      interest income of $81,000 in the same period in 2006. The increase in interest
      income was a reflection of the higher average rates of return on our savings
      accounts in 2007 compared to 2006. Interest expense for the six month period
      ended June 30, 2007 and 2006 were $3,000 and $10,000, respectively, representing
      interest due to loans from certain stockholders of the Company.




13





*Net
      Loss*





Our
      net
      loss for the six months ended June 30, 2007 was $2,245,000 compared to a net
      loss of $2,233,000 for the same period in 2006. The increase in our net loss
      over the prior period was primarily related to the hiring within our core lab
      to
      support our anticipated growth, settling of a legal matter as well as further
      investments in research and development, offset by a reduction in the
      stock-based compensation expense.





**Liquidity
      and Capital Resources**





Our
      working capital as of June 30, 2007 was approximately $1,739,000. The decrease
      in working capital was a result of investments in our operations to support
      planned growth, research and development along with information technology
      purchases and patent costs.





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
      gross proceeds of $7,000,000 from the private placement. The 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.





Net
      cash
      used in operating activities totaled $1,385,000 in the six months ended June
      30,
      2007 compared to $1,318,000 in the comparable 2006 quarter. This slight increase
      in usage was primarily the result of the timing of cash receipts and
      payments.





We
      invested $239,000 in the purchase of equipment and the acquisition of patents
      in
      the first half of 2007, compared to $396,000 for the investment of these items
      in the first half of 2006. The decrease represents a $176,000 investment in
      our
      information technology systems during the first half of 2006 that did not
      reoccur in the first half of 2007.





Cash
      used
      by our financing activity in the six months ended June 30, 2007 was $21,000,
      compared to $37,000 in the six months ended June 30, 2006. The decrease was
      due
      to the
      exercise of employee stock options during the second half of 2007. No options
      were exercised in 2006.





We
      currently expect that existing cash and cash equivalents will be sufficient
      to
      fund our operations for at least the next twelve months. In the meantime, we
      plan to continue to utilize the net proceeds from our 2005 private placement
      to
      support the proposed expansion of our business to serve larger scale clinical
      trials, and to further research and development of existing and new targeted
      therapeutic areas. We also plan to continue our sales and marketing strategy
      with presentations to pharmaceutical companies and participation in medical
      conferences.





We
      believe we could curtail expenses to conserve our cash position, however, we
      believe it would have a negative impact on our ability to grow the business.
      Therefore, in order to maintain our current level of operations after the next
      twelve months, we believe that we may need to raise additional capital. If
      in
      the next twelve months our plans or assumptions change or prove to be
      inaccurate, our cash resources could be consumed sooner and additional capital
      could be required before that time. We have engaged a financial advisor and
      are
      considering various alternatives, including public or private debt or equity
      financings. Our advisor believes that we will not have difficulty raising
      additional funds. We have successfully raised funds in the past, however, there
      can be no assurance that we will 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, which could have
      a
      material adverse effect on our business.





14




**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 on our financial condition, changes in financial condition, revenues
      or
      expenses, results of operations, liquidity, capital resources or capital
      expenditures that is material to investors.





**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 the following risk factors:





·
            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.





All
      statements, other than statements of historical facts, included in this report
      including, without limitation, statements 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
      the heading entitled “Risk Factors” in our annual report on Form 10-KSB for the
      fiscal year ended December 31, 2006 filed with the Securities and Exchange
      Commission (“SEC”) and elsewhere in this report. These risk factors qualify all
      forward-looking statements attributable to us or persons acting on our behalf.





**ITEM
      3A(T). Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**




We
      maintain a set of disclosure controls and procedures, as defined in Section
      13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”), 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(b) of the Exchange Act. Based on that evaluation, our Chief Executive
      Officer and our Chief Financial Officer concluded that our disclosure controls
      and procedures were effective as of the end of the period covered by this
      report.




15





Notwithstanding
      the foregoing, there can be no assurance that the Company’s disclosure controls
      and procedures will detect or uncover all failures of persons within the Company
      to disclose material information otherwise required to be set forth in the
      Company’s periodic reports. There are inherent limitations to the effectiveness
      of any system of disclosure controls and procedures, includes the possibility
      of
      human error and the circumvention or overriding of the controls and procedures.
      Accordingly, even effective disclosure controls and procedures can only provide
      reasonable, not absolute, assurance of achieving their control
      objectives.





**Changes
      in Internal Controls Over Financial Reporting**





An
      evaluation was performed under the supervision of the Company’s management,
      including the CEO and CFO, as required under Exchange Act Rule 13a-15(d) and
      15d-15(d) of whether any change in the Company’s internal control over financial
      reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred
      during the six months ended June 30, 2007. Based on that evaluation, the
      Company’s management, including the CEO and CFO, concluded that no change in the
      Company’s internal controls over financial reporting occurred during the six
      months ended June 30, 2007 that has materially affected or is reasonably likely
      to materially affect, the Company’s internal control over financial reporting.




16





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





In
      the
      summer of 2005, the former President and Chief Executive Officer of
      VirtualScopics, LLC, Dr. Stuart Shapiro, made a demand for severance payments
      and stock options under an employment agreement with the Company alleged by
      him
      to be due in connection with his termination. He commenced an arbitration
      proceeding in May 2006. The arbitration proceeding was dismissed on April 11,
      2007. The Company has settled the matter with Dr. Shapiro which includes a
      cash
      payment of $75,000 payable within six months plus options to purchase 115,000
      shares of the Company’s common stock. The Company’s results of operations
      reflect stock-based compensation expense of approximately $127,000 for these
      stock options. The value of the options was computed using the Black-Scholes
      option-pricing model with the following assumptions: risk free rate of 4.65%,
      expected term of six years, expected volatility of 95.4%, zero expected dividend
      yield, and stock price equal to the exercise price of $1.40. As of June 30,
      2007, the Company paid $30,000 of the $75,000 cash settlement. (See Part II,
      Item 1, Legal Proceedings in the Quarterly Report on Form 10-QSB dated May
      15,
      2007)





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





During
      the quarter ended June 30, 2007, the Company issued 33,795 shares of common
      stock upon conversion of 84.5 shares of series A convertible preferred stock
      by
      existing holders of those shares pursuant to the terms thereof. The Company
      did
      not receive any cash or other consideration in connection with the conversions.
      Additionally, no commission or other remuneration was paid by the Company in
      connection with such conversions. The issuance of common stock upon conversions
      of the series A convertible preferred stock was made in reliance on the
      exemption provided in Section 3(a)(9) of the Securities Act of 1933, as
      amended.





**Item
      3. Defaults upon Senior Securities**




Not
      applicable.





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





a)
            VirtualScopics,
                Inc. held its Annual Stockholders’ Meeting on May 23,
                2007.




b)
            The
                stockholders voted for the election of eight nominees to serve as
                directors for a one-year term expiring in 2008 and until their successors
                are elected. The vote was as
                follows:




**Name
                of Candidate**
            
            **For**
            
            **Withheld**Warren
                Bagatelle*
            
            
            16,794,865
            
            
            2,107,950Colby
                Chandler
            
            
            16,794,865
            
            
            2,107,950Robert
                Klimasewski
            
            
            16,793,993
            
            
            2,108,822Sidney
                Knafel
            
            
            16,794,865
            
            
            2,107,950Jeff
                Markin
            
            
            16,794,865
            
            
            2,107,950Charles
                Phelps
            
            
            16,795,483
            
            
            2,107,332Saara
                Totterman
            
            
            16,620,278
            
            
            2,282,537Terence
                Walts
            
            
            16,795,483
            
            
            2,107,332




There
      were no abstentions and no broker non-votes.





*
      Warren
      Bagatelle, Chairman of the Board of Directors, passed away suddenly on May
      31,
      2007. On June 5, 2007, the Board of Directors elected Norman N. Mintz to the
      Board of Directors to fill the existing vacancy left by the death of Mr.
      Bagatelle.




17




c)
            The
                stockholders voted to ratify the appointment of Marcum & Kliegman as
                the independent registered public accounting firm of VirtualScopics,
                Inc.
                for fiscal year 2007.  The vote was 18,886,045 for, 11,500 against
                and 5,270 abstentions.  There were no broker
                non-votes.





d)
            The
                stockholders voted to ratify the 2006 VirtualScopics, Inc. Long-Term
                Incentive Plan. The vote was 14,008,271 for, 2,065,727 against and
                7,710
                abstentions. There were no broker
                non-votes.




**Item
      5. Other Information**





None





**Item
      6. Exhibits**





Exhibit
      3.1 Amended and Restated By-Laws of VirtualScopics. Inc., (Incorporated by
      reference to Exhibit 3.8 to the Company’s Registration Statement on Form SB-2,
      Post-Effective Amendment No. 1, dated April 20, 2007 (Commission File No.
      333-133747))





Exhibit
      10.1 Indemnification Agreement by and among VirtualScopics, Inc. and Norman
      Mintz dated August 1, 2007*





Exhibit
      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.





Exhibit
      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.





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 of
      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 of
      2002.





*
      Management contract or compensatory plan or arrangement




18





**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:
              August 14, 2007
            VIRTUALSCOPICS,
              INC./s/
              Jeffrey MarkinJeffrey
              MarkinPresident
              and
              Chief Executive Officer




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




19





**Exhibit
      Index**





Exhibit
      3.1  Amended
      and Restated By-Laws of VirtualScopics. Inc., (Incorporated by reference to
      Exhibit 3.8 to the Company’s Registration Statement on Form SB-2, Post-Effective
      Amendment No. 1, dated April 20, 2007 (Commission File No.
      333-133747))





Exhibit
      10.1 Indemnification Agreement by and among VirtualScopics, Inc., and Norman
      Mintz dated as of August 1, 2007*.




Exhibit
      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





Exhibit
      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





Exhibit
      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





Exhibit
      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





*
      Management contract or compensatory plan or arrangement




20