**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended June
      30, 2008




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




For
      the
      transition period from
      _____________________________to______________________________________




Commission
      File Number: 000-52018





VirtualScopics,
      Inc.





(Exact
      name of registrant 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





(Registrant’s
      telephone number, including area code)







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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


x  Yes   ̈ No





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


Large
                accelerated filer ̈
            Accelerated
                filer ̈Non-accelerated
                filer ̈(Do not check if a smaller reporting company)
            Smaller
                reporting companyx





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


Yes  ̈ No x




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date. As of July 31, 2008, there were
      23,459,852 shares of the registrant’s common stock, $0.001 par value,
      outstanding.











TABLE
      OF
      CONTENTS





Page NumbersPART
                I
            FINANCIAL
                INFORMATIONITEM
                1: Financial StatementsCondensed
                Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December
                31, 2007
            1Unaudited
                Condensed Consolidated Statements of Operations for the three and
                six
                monthsended
                June 30, 2008 and 2007
            2Unaudited
                Condensed Consolidated Statements of Cash Flows for the six monthsended
                June 30, 2008 and 2007
            3Notes
                to Unaudited Condensed Consolidated Financial Statements
            4-9ITEM
                2: Management's Discussion and Analysis ofFinancial
                Condition and Results of Operations
            10-16ITEM
                4T: Controls and Procedures
            17PART
                II
            OTHER
                INFORMATIONITEM
                1: Legal Proceedings
            18ITEM
                2: Unregistered Sales of Equity Securities and Use of Proceeds
            18ITEM
                3: Defaults Upon Senior Securities
            18ITEM
                4: Submission of Matters to a Vote of Security Holders
            18-19ITEM
                5: Other Information
            19ITEM
                6: Exhibits
            19





i


**PART
      1: FINANCIAL INFORMATION**





**ITEM
      1. Financial Statements**





**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Balance Sheets**





June 30,
            
            December 31,2008
            
            2007(Unaudited)**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            3,238,820
            
            $
            3,955,835Restricted
                cash
            
            
            200,076
            
            
            455,583Accounts
                receivable
            
            
            918,363
            
            
            648,300Prepaid
                expenses and other current assets
            
            
            282,027
            
            
            306,301Total
                current assets
            
            
            4,639,286
            
            
            5,366,019Restricted
                cash
            
            
            -
            
            
            43,216Patents,
                net
            
            
            1,941,489
            
            
            1,948,785Property
                and equipment, net
            
            
            455,660
            
            
            542,679Other
                assets
            
            
            218,552
            
            
            280,317Total
                assets
            
            $
            7,254,987
            
            $
            8,181,016**Liabilities
                and Stockholders' Equity**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            729,247
            
            $
            626,693Accrued
                payroll
            
            
            384,109
            
            
            221,013Unearned
                revenue
            
            
            212,941
            
            
            279,275Total
                current liabilities
            
            
            1,326,297
            
            
            1,126,981Commitments
                and Contingencies
            
            
            -
            
            
            -Stockholders'
                EquityConvertible
                preferred stock, $0.001 par value; 15,000,000 shares authorized;
                8,400
                shares designated Series A; issued and outstanding, 3,976 shares
                at June
                30, 2008 and 4,001 shares at December 31, 2007; liquidation preference
                $1,000 per share
            
            
            4
            
            
            46,000
                shares designated Series B; issued and outstanding, 4,226 shares
                at June
                30, 2008 and 4,230 shares at December 31, 2007; liquidation preference
                $1,000 per share
            
            
            4
            
            
            4Common
                stock, $0.001 par value; 85,000,000 shares authorized; issued and
                outstanding, 23,459,852 shares at June 30, 2008 and 23,225,664 shares
                at
                December 31, 2007
            
            
            23,460
            
            
            23,226Additional
                paid-in capital
            
            
            16,266,168
            
            
            15,616,124Accumulated
                deficit
            
            
            (10,360,946
            )
            
            (8,585,323
            )Total
                stockholders' equity
            
            
            5,928,690
            
            
            7,054,035Total
                liabilities and stockholders' equity
            
            $
            7,254,987
            
            $
            8,181,016




See
      notes
      to condensed consolidated financial statements.




1


**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Statements of Operations**


***(unaudited)***





For the Three Months Ended
              June 30,
            
            For the Six Months Ended
              June 30,2008
            
            2007
            
            2008
            
            2007Revenues
            
            $
            1,733,299
            
            $
            1,536,287
            
            $
            3,367,402
            
            $
            2,814,692Cost
                of services
            
            
            1,021,536
            
            
            967,839
            
            
            2,051,520
            
            
            1,768,358Gross
                profit
            
            
            711,763
            
            
            568,448
            
            
            1,315,882
            
            
            1,046,334Operating
                expensesResearch
                and development
            
            
            212,825
            
            
            380,965
            
            
            464,654
            
            
            787,919Sales
                and marketing
            
            
            384,237
            
            
            193,163
            
            
            673,111
            
            
            405,279General
                and administrative
            
            
            864,663
            
            
            940,893
            
            
            1,762,167
            
            
            1,951,115Depreciation
                and amortization
            
            
            116,765
            
            
            118,493
            
            
            234,332
            
            
            236,205Total
                operating expenses
            
            
            1,578,490
            
            
            1,633,514
            
            
            3,134,264
            
            
            3,380,518Operating
                loss
            
            
            (866,727
            )
            
            (1,065,066
            )
            
            (1,818,382
            )
            
            (2,334,184
            )Other
                income (expense)Interest
                income
            
            
            17,002
            
            
            43,167
            
            
            45,727
            
            
            92,537Other
                expense
            
            
            (1,385
            )
            
            (1,253
            )
            
            (2,968
            )
            
            (3,231
            )Total
                other income
            
            
            15,617
            
            
            41,914
            
            
            42,759
            
            
            89,306Net
                loss
            
            
            (851,110
            )
            
            (1,023,152
            )
            
            (1,775,623
            )
            
            (2,244,878
            )Series
                B preferred stock dividend
            
            
            84,520
            
            
            -
            
            
            169,760
            
            
            -Net
                loss attributable to common stockholders
            
            $
            (935,630
            )
            $
            (1,023,152
            )
            $
            (1,945,383
            )
            $
            (2,244,878
            )Basic
                and diluted net loss per common share
            
            $
            (0.04
            )
            $
            (0.04
            )
            $
            (0.08
            )
            $
            (0.10
            )Weighted
                average number of common shares outstanding – basic and
                diluted
            
            
            23,358,625
            
            
            23,001,334
            
            
            23,302,346
            
            
            22,986,880





See
      notes
      to condensed consolidated financial statements.




2


**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Statements of Cash Flows**


***(unaudited)***





For the Six Months Ended June 30,2008
            
            2007**Cash
                flows from operating activities**Net
                loss
            
            $
            (1,775,623
            )
            $
            (2,244,878
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            234,332
            
            
            236,205Stock
                option compensation expense
            
            
            687,291
            
            
            745,482Issuance
                of equity instruments for rent
            
            
            170,000
            
            
            -Issuance
                of equity instruments to non-employees for services
            
            
            -
            
            
            1,818Accrual
                for future issuance of equity instruments for rent
            
            
            102,000
            
            
            -Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (270,063
            )
            
            (151,610
            )Prepaid
                expenses and other current assets
            
            
            24,274
            
            
            (45,637
            )Accounts
                payable and accrued expenses
            
            
            (37,573
            )
            
            42,176Accrued
                payroll
            
            
            163,096
            
            
            18,010Unearned
                revenue
            
            
            (66,336
            )
            
            13,214Total
                adjustments
            
            
            1,007,021
            
            
            859,658Net
                cash used in operating activities
            
            
            (768,602
            )
            
            (1,385,220
            )**Cash
                flows from investing activities**Purchase
                of equipment
            
            
            (21,773
            )
            
            (145,942
            )Acquisition
                of patents
            
            
            (56,479
            )
            
            (92,743
            )Net
                cash used in investing activities
            
            
            (78,252
            )
            
            (238,685
            )**Cash
                flows from financing activities**Repayments
                of notes payable - related parties
            
            
            -
            
            
            (39,649
            )Proceeds
                from the exercise of warrants
            
            
            876
            
            
            -Restricted
                cash
            
            
            298,723
            
            
            -Cash
                dividends on series B preferred stock
            
            
            (169,760
            )
            
            -Net
                proceeds from exercise of stock options
            
            
            -
            
            
            18,375Net
                cash provided by (used in) financing activities
            
            
            129,839
            
            
            (21,274
            )Net
                decrease in cash and cash equivalents
            
            
            (717,015
            )
            
            (1,645,179
            )Cash and
              cash
              equivalents atbeginning
                of period
            
            
            3,955,835
            
            
            3,901,153end
                of period
            
            $
            3,238,820
            
            $
            2,255,974**Supplemental
                disclosure of cash flow information**Cash
                paid during the periods for:Interest
            
            $
            -
            
            $
            2,030Issuance
                of common stock for partial payment of rent in equity
            
            $
            170,000
            
            $
            -





See
      notes
      to condensed consolidated financial statements




3


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***


NOTE
      1 - Organization
      and Basis of Presentation





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 measuring specific anatomical structures and metabolic activity using
      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, 2007. In the opinion of the management, these
      unaudited condensed consolidated 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 and six
      months ended June 30, 2008 are not necessarily indicative of the results to
      be
      expected for the full year ending December 31, 2008.





In
      February 2008, the Company received a written notice from the Nasdaq Stock
      Market indicating that its common stock was not in compliance with minimum
      bid
      price required for continued listing on the Nasdaq Capital Market. The notice
      stated that in accordance with section 4310(c)(8) of the Nasdaq Marketplace
      Rules, the Company has until August 6, 2008 to regain compliance by maintaining
      a bid price of common stock at a close of $1.00 or higher for a minimum of
      10
      consecutive business days, or such longer period as Nasdaq may determine to
      show
      the ability to maintain long-term compliance. On August 7, 2008 the Company
      received a Staff Determination Letter from Nasdaq stating that it has not
      regained compliance with the $1.00 minimum bid price requirement and that its
      securities are subject to delisting. On August 11, 2008 the Company requested
      a
      hearing before the Nasdaq Listing Qualifications Panel to appeal the Staff
      Determination. As a result, the delisting is stayed pending the Panel’s
      decision. The Company’s stockholders have authorized the Board of Directors to
      implement a reverse stock split of the Company’s outstanding common stock in a
      ratio from 1:2 to 1:4 as part of its efforts to regain compliance. The Company
      plans to request an additional extension to regain compliance, in the event
      that
      is not granted, the Company intends to implement the reverse stock split
      following the hearing, if accepted by the Hearing Panel. If implemented, the
      Company expects that a reverse stock split will help it regain compliance with
      Nasdaq Capital Market listing standards, although there can be no assurance
      that
      it will be successful in doing so or that it will be able to maintain compliance
      with other continued listing standards.





NOTE
      2 - Summary
      of Certain Significant Accounting Policies





Principles
      of Consolidation


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.




4


**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
      method for projects of short term nature and a percentage of completion method
      for projects of long term nature 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 licenses, 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 improvements to existing products. These costs are expensed as
      incurred.





Recent
      Accounting Pronouncements


In
      March 2008, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities—an amendment of FASB Statement
      No. 133” (“ SFAS No.
      161”). SFAS No.
      161
      changes the disclosure requirements for derivative instruments and hedging
      activities. Entities are required to provide enhanced disclosures about
      (a) how and why an entity uses derivative instruments, (b) how
      derivative instruments and related hedged items are accounted for under SFAS
      No.
      133 and its related interpretations, and (c) how derivative instruments and
      related hedged items affect an entity’s financial position, financial
      performance and cash flows.  The guidance in SFAS No.
      161
      is effective for financial statements issued for fiscal years and interim
      periods beginning after November 15, 2008, with early application
      encouraged. This Statement encourages, but does not require, comparative
      disclosures for earlier periods at initial adoption.  At this time,
      management is evaluating the impact of the adoption of SFAS No.
      161
      on the Company’s consolidated financial statements.





In
      April
      2008, the FASB issued FASB Staff Position SFAS 142-3, *Determination
      of the Useful Life of Intangible Assets* (“FSP
      SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in
      developing renewal or extension assumptions used to determine the useful life
      of
      a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
      Intangible Assets. The objective of this FSP is to improve the consistency
      between the useful life of a recognized intangible asset under Statement 142
      and
      the period of expected cash flows used to measure the fair value of the asset
      under SFAS 141R, Business Combinations, and other U.S. GAAP principles. FSP
      SFAS
      142-3 is effective for fiscal years beginning after December 15, 2008. The
      adoption of FSP SFAS 142-3 is effective January 1, 2009 and is not expected
      to
      have a material impact on the Company’s consolidated financial statements.




5


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





NOTE
      2 - Summary
      of Certain Significant Accounting Policies ,
      continued





Adoption
      of Statement of Financial Accounting Standards No. 159 and 157


In
      February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
      provides companies with an option to report selected financial assets and
      liabilities at fair value. SFAS No. 159's objective is to reduce both complexity
      in accounting for financial instruments and the volatility in earnings caused
      by
      measuring related assets and liabilities differently. SFAS No. 159 also
      establishes presentation and disclosure requirements designed to facilitate
      comparisons between Companies that choose different measurement attributes
      for
      similar types of assets and liabilities. SFAS No. 159 requires Companies to
      provide additional information that will help investors and other users of
      financial statements to more easily understand the effect of the Company's
      choice to use fair value on its earnings. It also requires entities to display
      the fair value of those assets and liabilities for which the Company has chosen
      to use fair value on the face of the balance sheet. We adopted SFAS No. 159
      as
      of January 1, 2008. The adoption of SFAS No. 159 did not have a material effect
      on the Company’s consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      No. 157”). This Statement defines fair value, establishes a framework for
      measuring fair value and expands disclosure of fair value measurements. SFAS
      No.
      157 applies under other accounting pronouncements that require or permit fair
      value measurements and accordingly, does not require any new fair value
      measurements. We adopted SFAS No. 157 as of January 1, 2008. In February 2008,
      the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB
      Statement No. 157", which provides a one year deferral of the effective date
      of
      SFAS No.157 for non-financial assets and non-financial liabilities, except
      those
      that are recognized or disclosed in the financial statements at fair value
      at
      least annually. Therefore, the Company has adopted the provisions of SFAS No.
      157 with respect to its financial assets and liabilities only. The adoption
      of
      SFAS No. 157 did not have a material effect on the Company’s consolidated
      financial statements.





NOTE
      3 - 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, 2008 and 2007, 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 $687,291
      and $745,482, 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.





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, 2008 and 2007 using the Black-Scholes
      option-pricing model:




6


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


NOTE
      3 - Stock-Based
      Compensation ,
      continued




June 30,2008
            
            2007Risk
                free interest rate
            
            
            3.85
            %
            
            4.71
            %Expected
                term (years)
            
            
            9.7
            
            
            9.0Expected
                volatility
            
            
            89.7
            %
            
            98.5
            %Expected
                dividend yield
            
            
            -
            
            
            -




A
      summary
      of the option activity for the six months ended June 30, 2008 is as
      follows:





Number
              of Shares
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Contractual TermOptions
                outstanding at January 1, 2008
            
            
            3,790,731
            
            
            2.12Granted
            
            
            1,056,932
            
            
            .98Cancelled
            
            
            (16,987
            )
            
            (2.46
            )Exercised
            
            
            -
            
            
            -Options
                outstanding at June 30, 2008
            
            
            4,830,676
            
            
            1.66
            
            
            7.06Options
                exercisable at June 30, 2008
            
            
            2,707,356
            
            
            1.97
            
            
            5.59





The
      weighted-average grant-date fair value of options granted during the six months
      ended June 30, 2008 and 2007 was $1,031,981 and $185,600, respectively. There
      have been no options exercised during the six months ended June 30, 2008.





NOTE
      4 - Stockholders’
      Equity





During
      the six months ended June 30, 2008, 25 shares of the Company’s series A
      convertible preferred stock and 4 shares of the Company’s series B convertible
      preferred stock were converted into 20,759 and 3,321 shares of the Company’s
      common stock, respectively. Also, the Company received cash proceeds of $876
      for
      the exercise of Company warrants resulting in the issuance of 87,601 shares
      of
      common stock.





The
      Company leases approximately 19,500 square feet of office space at its corporate
      headquarters in Rochester, New York. The rent is paid in two portions: a cash
      portion of $156,000 annually, paid in equal monthly installments, increasing
      3%
      every July, and the stock portion equating up to $204,000 annually, paid in
      equal monthly installments, increasing 3% every July. The stock portion is
      payable in common stock, par value $.001 per share. During the six months ended
      June 30, 2008, the Company
      issued 122,507 shares of the Company’s common stock for payment of the equity
      portion of the rent. The common stock was issued at prices ranging from $1.20
      -
      $2.50 per share for a total cost of $170,000. As of June 30, 2008, the Company
      had $34,000 in accrued expenses pertaining to the equity portion of the rent.




7


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





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.
      Diluted 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
      as of June 30:





2008
            
            2007Series
                A convertible preferred stock
            
            
            3,301,098
            
            
            1,690,205Series
                B convertible preferred stock
            
            
            3,509,092
            
            
            -Warrants
                to purchase common stock
            
            
            4,309,055
            
            
            2,161,892Options
                to purchase common stock
            
            
            4,972,366
            
            
            3,353,317Total
            
            
            16,091,611
            
            
            7,205,414




NOTE
      6 - 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.





The
      Company has concluded that there are no significant uncertain tax positions
      requiring recognition in its financial statements. As of June 30, 2008, 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.




8


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




NOTE
      6 - Income
      Taxes, continued





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, 2008, the Company does not have any interest and penalties accrued
      related to unrecognized tax benefits.





NOTE
      7 - Concentration
      of Credit Risk





The
      Company’s top three customers accounted for approximately 15%, 13% and 12% of
      its total revenue for the six months ended June 30, 2008 as compared to 27%,
      16%
      and 11% for the six months ended June 30, 2007.




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 sheets as of June 30, 2008 and December 31,
      2007
      and the related condensed consolidated statements of operations and cash flows
      for the periods ended June 30, 2008 and 2007, included elsewhere in this report.
      This discussion contains forward-looking statements, the accuracy of which
      involve 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**





VirtualScopics
      was established in December 2000 in Rochester, New York. We are now a leading
      provider of quantitative imaging for pharmaceutical and medical device
      development. Our imaging technology evolved from research initially begun in
      1990 at the University of Rochester’s Medical Center and School of Engineering
      and Applied Sciences. These early efforts were directed primarily toward the
      accurate and reproducible measurement of advanced image-based biomarkers.





We
      have
      an extensive intellectual property portfolio of 18 patents and patents pending,
      covering methods, systems, and biomarkers. Many of these techniques are imbedded
      in the analysis tools used in our clinical trial services today. We utilize
      the
      patented suite of image analysis algorithms to detect, measure and analyze
      specific biological structures from medical image data, such as those provided
      by computed tomography (CT), magnetic resonance imaging (MRI), positron emission
      tomography (PET), and ultrasound. Our technology enables faster and more
      reliable detection of disease progression or therapeutic benefit, which can
      then
      accelerate the clinical trial process. The societal benefits include the ability
      to get the right drugs to market faster and ultimately save lives. Additionally,
      "terminating" an ineffective drug early in the development cycle can save a
      pharmaceutical company millions of dollars. We have developed successful
      collaborative relationships with companies such as Pfizer, Inc., who is an
      investor in the company as with GE Healthcare and are currently working with
      11
      of the leading 15 pharmaceutical and biotech companies in the
      world.





Our
      services support all aspects of imaging in clinical trials, from design to
      FDA
      submission. Our semi-automated systems measure and monitor disease progression
      and changes in biological processes over time. This process provides highly
      reproducible results, enabling us to measure minute changes in various
      biological structures and functions, both rapidly and with a high degree of
      confidence. Other current image analysis techniques can be time-consuming,
      inaccurate and highly variable. Even when the exact same data is being
      repetitively measured, results in these other techniques can vary from
      measurement to measurement, from technician to technician and from radiologist
      to radiologist. We believe our semi-automated methodology provides several
      significant benefits:




·
            Level
                of reproducibility that was previously
                unattainable




·
            Less
                dependence on a single reader




·
            Greater
                precision




·
            Higher
                throughput




·
            Smaller
                sample sizes




·
            Shorter
                analysis times




·
            Shorter
                trial times




10




·
            Significantly
                reduced costs




We
      have
      found that our customers value our extensive imaging knowledge and experience
      coupled with 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. 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. Additionally, once we enter into a new contract for participation
      in a
      drug trial, there are several factors that can effect 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 or awarded. Recognition of revenue
      under the contract may also be affected by the timing and ability of our
      customers to recruit patients and image site identification and training.





***Results
      of Operations***





***Results
      of Operations for Quarter Ended June 30, 2008 Compared to Quarter Ended June
      30,
      2007***





*Revenue*





We
      had
      revenues of $1,733,000 for the quarter ended June 30, 2008 compared to
      $1,536,000 for the comparable period in 2007, representing a $197,000, or 13%,
      increase. During the quarter, we performed work for 25 customers, representing
      64 different projects, in connection with our pharmaceutical drug trials in
      the
      fields of oncology, arthritis and neurology. This compares to 22 customers
      and
      55 projects during the same period in 2007. Historically, Pfizer has represented
      a significant portion of our revenues. We have made significant progress in
      the
      diversification of our revenues, as such, during the second quarter of 2008
      14%
      of our revenues were generated from Pfizer, compared to 33% in the same period
      of 2007. The second quarter of 2008 was the first quarter in the company’s
      history that Pfizer was not its largest customer. We continue to broaden our
      customer base and the work we are performing with our existing customers to
      ensure that we are not heavily reliant on any one customer. As of June 30,
      2008,
      we had active projects with 11 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 are experiencing
      increased demand for our services in Phase II/III trials, and as a result,
      we
      expect that a majority of our work on pharmaceutical trial projects will be
      focused in Phase I, II and III studies throughout the rest of 2008.





The
      increase in revenues in the quarter ended June 30, 2008 compared to June 30,
      2007 was attributed to the higher demand for our services and the broadening
      of
      our customer base. Additionally, the shift of more of our business to later
      stage trials as well as broader visibility in the market has resulted in added
      business due to the larger average size of the Phase II/III contracts compared
      to early stage contracts.





*Gross
      Profit*





We
      had a
      gross profit of $712,000 for the second fiscal quarter of 2008 compared to
      $568,000 for the comparable period in 2007. Our gross profit margin improved
      four percentage points to 41% in the second quarter of 2008 compared to the
      same
      period in 2007 due to efficiencies made in our process throughout the past
      year
      along with reductions in our headcount made at the end of 2007. Also
      impacting the improvement in gross margin is the inherent efficiency obtained
      in
      performing work in later stage clinical trials. Our stated objective is to
      expand our technology and services into later stage (Phase II/III) trials.
      We
      have seen recent success with this objective in the fact that during the second
      quarter of 2008, 44% of our revenues were generated from Phase II/III trials
      as
      compared to 27% during the same quarter a year ago. We anticipate this trend
      to
      continue throughout the rest of 2008.




11


*Research
      and Development*





Research
      and development costs decreased in the quarter ended June 30, 2008 by $168,000,
      or 44%, to $213,000, when compared to the quarter ended June 30, 2007. The
      decrease was a result of the realignment of our resources at the end of 2007
      to
      better reflect the demand in the market for our services and the direction
      of
      our self funded research and development initiatives. We plan to continue to
      centralize the majority of our future research and development efforts around
      the development and commercialization of image-based biomarkers which have
      early
      indications of correlation to disease progression, with a focus in Oncology,
      Musculoskeletal, Cardiovascular and Central Nervous System disease areas.
      Additionally, we will continue efforts to refine our processes through the
      use
      of our software platform in order to gain efficiencies which we believe will
      enhance our operating margins, and standardize our processes. As of June 30,
      2008, there were 10 employees in our research and development group, which
      includes the algorithm development and software development groups.





*Sales
      and Marketing*




Sales
      and
      marketing costs increased in the quarter ended June 30, 2008 by $191,000, or
      99%, to $384,000, when compared to the quarter ended June 30, 2007. The increase
      was a result of the doubling of our sales force over the past year as well
      as a
      new marketing strategy to better align our marketing materials with our value
      proposition and service offering in the industry. We plan to incur the majority
      of our marketing expenses for 2008 in the first and second quarters. As a
      result, we anticipate our level of spending within marketing to be reduced
      in
      the second half of 2008. 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, 2008 were $865,000,
      a
      decrease of $76,000 or 8%, when compared to the quarter ended June 30, 2007.
      The
      decrease was largely due to the reduction in stock compensation expense for
      vested stock options during the second quarter of 2008 compared to the second
      quarter of 2007. We do not anticipate significant increases in our general
      and
      administrative costs for the remainder of 2008.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges were constant in the quarter ended June 30, 2008 when
      compared to the quarter ended June 30, 2007.





*Other
      Income (Expense)*





Interest
      income for the quarter ended June 30, 2008 was $17,000, representing interest
      derived on our operating and savings accounts, compared to interest income
      of
      $43,000 in the three months ended June 30, 2007. The interest income was lower
      due to the lower rates of return on our savings accounts in the second quarter
      of 2008 compared to the second quarter of 2007. Other expense for the quarters
      ended June 30, 2008 and 2007 was $1,400 and $1,300, respectively.





*Net
      Loss*





Net
      loss
      for the quarter ended June 30, 2008 was $851,000 compared to a net loss of
      $1,023,000 for the quarter ended June 30, 2007. The decrease in our net loss
      over the prior period was primarily related to the increase in revenues and
      improvement in gross margin, as outlined above.




12


***Results
      of Operations for the Six Months Ended June 30, 2008 Compared to the Six Months
      Ended June 30, 2007***





*Revenues*





Our
      revenues for the six months ended June 30, 2008 were $3,367,000, an increase
      of
      $552,000 or 20% over the first half of 2007. The increase in sales is a
      reflection of the broadening of our customer base, the broader penetration
      of
      our services in the industry and the shift to later stage clinical trials which
      are inherently larger contracts. We have made significant progress in the
      diversification of our revenues, as such, during the first half of 2008 15%
      of
      our revenues were generated from Pfizer, compared to 27% in the same period
      of
      2007. We continue to broaden our customer base and the work we are performing
      with our existing customers to ensure that we are not heavily reliant on any
      one
      customer. We performed services for a total of 70 projects in the first half
      of
      2008, as compared to 63 in the first half of 2007. We are experiencing increased
      demand for our services in Phase II/III trials, and as a result, we expect
      that
      a majority of our work on pharmaceutical trial projects will be focused in
      Phase
      I, II and III studies throughout the rest of 2008.





*Gross
      Profit*





We
      had a
      gross profit of $1,316,000 for the six months ended June 30, 2008 compared
      to
      $1,046,000 for the comparable period in 2007. Our gross profit margin improved
      two percentage points to 39% for the first two quarters combined in 2008
      compared to 37% in the first two quarters combined in 2007. The improvement
      is
      the result of better operating efficiencies along with cost reductions that
      were
      made at the end of 2007 to better align our cost structure with the demand
      for
      our services in the market. Also impacting the improvement in gross margin
      is
      the inherent efficiency obtained in performing work in later stage clinical
      trials. We have seen recent success with this objective in the fact that during
      the first half of 2008, 36% of our revenues were generated from Phase II/III
      trials as compared to 21% during the same quarter a year ago.





*Research
      and Development*





Total
      research and development expenditures were $465,000 in the first half of 2008
      compared to $788,000 for the comparable period in 2007, a decrease of 41%.
      The
      decrease was largely attributed to the realignment of our resources, as
      previously stated, at the end of 2007 to better reflect market demand. The
      realignment resulted in a reduction in our resources within biomarker research.
      We plan to continue to these efforts by focusing on commercialization and
      refining our process through the use of our software platform.





*Sales
      and Marketing*





Sales
      and
      marketing costs for the six months ended June 30, 2008 increased to $673,000,
      an
      increase of $268,000 or 66% over the first half of 2007. The increase was a
      result of the doubling of our sales force over the past year as well as a new
      marketing strategy to better align our marketing materials with our value
      proposition and service offering in the industry. We plan to incur the majority
      of our marketing expenses for 2008 in the first and second quarters. We
      anticipate our level of spending within marketing to be reduced in the second
      half of 2008.





*General
      and Administrative*





General
      and administrative expenses for the six months ended June 30, 2008 were
      $1,762,000, a decrease of $189,000 or 10%, over the first half of 2007. The
      decrease is mainly due to a reduction in stock compensation expense for vested
      stock options and the settling of a legal matter with a former executive during
      the second quarter of 2007.




13






*Depreciation
      and Amortization*





Depreciation
      and amortization charges remained consistent in the six months ended June 30,
      2008 and 2007.





*Other
      Income (Expense)*





Interest
      income for the six months ended June 30, 2008 was $46,000 and composed of
      interest derived on the Company’s operating and savings accounts, compared to
      interest income of $93,000 in the same period in 2007. The decrease in interest
      income was a reflection of the lower average rates of return on our savings
      accounts in 2008 compared to 2007. Other expense for the six month period ended
      June 30, 2008 and 2007 were $3,000, representing interest due to loans from
      certain stockholders of the Company and bank and other fees.





*Net
      Loss*





Our
      net
      loss for the six months ended June 30, 2008 was $1,776,000 compared to a net
      loss of $2,245,000 for the same period in 2007. The improvement in our net
      loss
      over the prior period was primarily related to higher revenues and gross profit,
      as outlined above.





**Liquidity
      and Capital Resources**





Our
      working capital as of June 30, 2008 was approximately $3,313,000 compared to
      $4,239,000 as of December 31, 2007. The decrease in working capital was a result
      of investments in sales and marketing, research and development along with
      information technology purchases and patent costs.





Net
      cash
      used in operating activities totaled $769,000 in the six months ended June
      30,
      2008 compared to $1,385,000 in the comparable 2007 period. This significant
      decrease in usage was a result of increases in revenues and gross profit along
      with a reduction in spending in research and development and general and
      administrative expenses. Also impacting operating cash flow was the timing
      of
      receivables and payment of accounts payable and payroll.





We
      invested $78,000 in the purchase of equipment and the acquisition of patents
      in
      the first half of 2008, compared to $239,000 for the investment of these items
      in the first half of 2007. The decrease represents investments for furniture
      and
      leasehold improvements related to the move to a new location during the first
      half of 2007 that did not reoccur in the first half of 2008.





Cash
      provided by our financing activities in the six months ended June 30, 2008
      was
      $130,000, compared to cash used of $21,000 in the six months ended June 30,
      2007
      representing the release of restricted cash for investor relations and dividend
      payments offset by monthly dividend payments for the convertible series B
      preferred stock.





We
      plan
      to continue to utilize the net proceeds from our 2007 private placement to
      support our operations, including biomarker development plans as well as our
      sales and marketing efforts, until we achieve cash flow breakeven. We also
      plan
      to continue our sales strategy with presentations to pharmaceutical companies
      and participation in medical conferences.





We
      currently expect that existing cash and cash equivalents will be sufficient
      to
      fund operations for 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.


14





In
      February 2008, the Company received a written notice from the Nasdaq Stock
      Market indicating that its common stock was not in compliance with minimum
      bid
      price required for continued listing on the Nasdaq Capital Market. The notice
      stated that in accordance with section [4310(c)(8) of the Nasdaq Marketplace
      Rules, the Company has until August 6, 2008 to regain compliance by maintaining
      a bid price of common stock at a close of $1.00 or higher for a minimum of
      10
      consecutive business days, or such longer period as Nasdaq may determine to
      show
      the ability to maintain long-term compliance. On August 7, 2008 the Company
      received a Staff Determination Letter from Nasdaq stating that it has not
      regained compliance with the $1.00 minimum bid price requirement and that its
      securities are subject to delisting. On August 11, 2008 the Company requested
      a
      hearing before the Nasdaq Listing Qualifications Panel to appeal the Staff
      Determination. As a result, the delisting is stayed pending the Panel’s
      decision. The Company’s stockholders have authorized the Board of Directors to
      implement a reverse stock split of the Company’s outstanding common stock in a
      ratio from 1:2 to 1:4 as part of its efforts to regain compliance. The Company
      plans to implement the reverse stock split following the hearing, if accepted
      by
      the Hearing Panel. If implemented, the Company expects that a reverse stock
      split will help it regain compliance with Nasdaq Capital Market listing
      standards, although there can be no assurance that it will be successful in
      doing so or that it will be able to maintain compliance with other continued
      listing standards. If the Company is delisted it could have an adverse effect
      on
      the Company’s ability to raise additional capital through debt or equity
      financing.





**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.





**Recent
      Accounting Pronouncements**





In
      March 2008, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities—an amendment of FASB Statement
      No. 133” (“SFAS No. 161”). SFAS No. 161 changes the disclosure requirements
      for derivative instruments and hedging activities. Entities are required to
      provide enhanced disclosures about (a) how and why an entity uses
      derivative instruments, (b) how derivative instruments and related hedged
      items are accounted for under SFAS No. 133 and its related interpretations,
      and
      (c) how derivative instruments and related hedged items affect an entity’s
      financial position, financial performance and cash flows.  The guidance in
      SFAS No. 161 is effective for financial statements issued for fiscal years
      and
      interim periods beginning after November 15, 2008, with early application
      encouraged. This Statement encourages, but does not require, comparative
      disclosures for earlier periods at initial adoption.  At this time,
      management is evaluating the impact of the adoption of SFAS No. 161 on the
      Company’s consolidated financial statements.





In
      April
      2008, the FASB issued FASB Staff Position SFAS 142-3, *Determination
      of the Useful Life of Intangible Assets* (“FSP
      SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in
      developing renewal or extension assumptions used to determine the useful life
      of
      a recognized intangible asset under FASB Statement No. 142, Goodwill and Other
      Intangible Assets. The objective of this FSP is to improve the consistency
      between the useful life of a recognized intangible asset under Statement 142
      and
      the period of expected cash flows used to measure the fair value of the asset
      under SFAS 141R, Business Combinations, and other U.S. GAAP principles. FSP
      SFAS
      142-3 is effective for fiscal years beginning after December 15, 2008. The
      adoption of FSP SFAS 142-3 is effective January 1, 2009 and is not expected
      to
      have a material impact on the Company’s consolidated financial statements.





Adoption
      of Statement of Financial Accounting Standards No. 159 and 157


In
      February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
      provides companies with an option to report selected financial assets and
      liabilities at fair value. SFAS No. 159's objective is to reduce both complexity
      in accounting for financial instruments and the volatility in earnings caused
      by
      measuring related assets and liabilities differently. SFAS No. 159 also
      establishes presentation and disclosure requirements designed to facilitate
      comparisons between Companies that choose different measurement attributes
      for
      similar types of assets and liabilities. SFAS No. 159 requires Companies to
      provide additional information that will help investors and other users of
      financial statements to more easily understand the effect of the Company's
      choice to use fair value on its earnings. It also requires entities to display
      the fair value of those assets and liabilities for which the Company has chosen
      to use fair value on the face of the balance sheet. We adopted SFAS No. 159
      as
      of January 1, 2008. The adoption of SFAS No. 159 did not have a material effect
      on the Company’s consolidated financial statements.


15





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      No. 157”). This Statement defines fair value, establishes a framework for
      measuring fair value and expands disclosure of fair value measurements. SFAS
      No.
      157 applies under other accounting pronouncements that require or permit fair
      value measurements and accordingly, does not require any new fair value
      measurements. We adopted SFAS No. 157 as of January 1, 2008. In February 2008,
      the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB
      Statement No. 157", which provides a one year deferral of the effective date
      of
      SFAS No.157 for non-financial assets and non-financial liabilities, except
      those
      that are recognized or disclosed in the financial statements at fair value
      at
      least annually. Therefore, the Company has adopted the provisions of SFAS No.
      157 with respect to its financial assets and liabilities only. The adoption
      of
      SFAS No. 157 did not have a material effect on the Company’s consolidated
      financial statements.





**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;


·
            cancelation
                of a significant number of our customer
                contracts


·
            significant
                delays in customer signature for awarded
                projects


·
            significant
                delays in starting and recruiting patients by our
                customers


·
            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;


·
            dilution
                to holders of our common stock if we fail to meet the revenue and
                EBITDA
                milestones for the 2008 fiscal
                year;


·
            possible
                delisting of our common stock from the Nasdaq Capital Market; 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, 2007 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.


16





**ITEM
      4T. 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.





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, including 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 fiscal quarter ended June 30, 2008. 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 fiscal
      quarter ended June 30, 2008 that has materially affected or is reasonably likely
      to materially affect, the Company’s internal control over financial reporting.


17




**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





None





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





On
      April
      08, 2008 and June 13, 2008, the Company issued a total of 122,507 shares of
      common stock to 500 Linden Oaks Associates LLC, as partial payment for the
      lease
      of the Company’s corporate headquarters, pursuant to the terms of its lease. The
      shares were issued at prices ranging from $1.20 - $2.50 per share for a total
      consideration of $170,000. The shares were issued in transactions not involving
      a public offering and exempt from registration pursuant under Section 4(2)
      of
      the Securities Act of 1933, or Securities Act. The purchaser is an accredited
      investor under the Securities Act, was knowledgeable about the Company's
      operations and financial condition and had access to such information. The
      sales
      did not involve any form of general solicitation. The shares were purchased
      for
      investment purposes only and contain restrictions on transfer with certificates
      containing a legend setting forth such the restrictions.




On
      April
      11, 2008 and June 2, 2008, the Company issued a total of 87,601 shares of common
      stock to six persons upon the exercise of warrants issued by VirtualScopics,
      LLC, and assumed by the Company in 2005. The Company received cash proceeds
      of
      $876. The shares were issued in transactions not involving a public offering
      and
      exempt from registration pursuant under Section 4(2) of the Securities Act.
      The
      purchasers are accredited investors under the Securities Act, were knowledgeable
      about the Company's operations and financial condition and had access to such
      information. The sales did not involve any form of general solicitation. The
      shares were purchased for investment purposes only and the shares contain
      restrictions on transfer with certificates containing a legend setting forth
      such the restrictions.





**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 8, 2008.




b)  The
      stockholders voted for the election of nine nominees to serve as directors
      for a
      one-year term expiring in 2009 and until their successors are elected. The
      vote
      was as follows:




**Name
                of Candidate**
            
            **For**
            
            **Withheld**Norman
                Mintz
            
            
            19,192,062
            
            
            3,382,681Robert
                Klimasewski
            
            
            19,166,644
            
            
            3,408,099Sidney
                Knafel
            
            
            19,179,762
            
            
            3,394,981Jeff
              Markin
            
            
            19,145,157
            
            
            3,429,586Colby
                Chandler
            
            
            17,990,530
            
            
            4,584,213Charles
                Phelps
            
            
            22,417,577
            
            
            157,166Dan
                Kerpelman
            
            
            19,175,075
            
            
            3,399,668Mostafa
                Analoui
            
            
            22,401,577
            
            
            173,166Terence
                Walts
            
            
            19,176,975
            
            
            3,397,768




18





There
      were no abstentions and no broker non-votes.




c)
            The
                stockholders voted to approve an amendment to our Certificate of
                Incorporation to effect a reverse stock split of our outstanding
                common
                stock in the range of 1:2 to 1:4. The vote was 20,178,724 for, 2,381,752
                against and 14,267 abstentions. There were no broker
                non-votes.





d)
            The
                stockholders voted to ratify the appointment of Marcum & Kliegman as
                the independent registered public accounting firm of VirtualScopics,
                Inc.
                for fiscal year 2008.  The vote was 20,409,266 for, 2,045,141 against
                and 120,336 abstentions.  There were no broker
                non-votes.





e)
            The
                stockholders voted to approve the Non-Employee Director Compensation
                Plan.
                The vote was 15,588,729 for, 3,490,073 against and 24,520
                abstentions.  There were 3,471,421
                non-votes.




**Item
      5. Other Information**





None





**Item
      6. Exhibits**





Exhibit
      10.1 Non-Employee Director Compensation Plan





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.


19





**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 12,
      2008                                                    
VIRTUALSCOPICS, INC.




/s/
                Jeffrey MarkinJeffrey
                MarkinPresident
                and Chief Executive Officer/s/
                Molly HendersonMolly
                HendersonChief
                Financial Officer and Vice President of
              Finance


20


**Exhibit
      Index**





Exhibit
      10.1 Non-Employee Director Compensation Plan





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


21