**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 March
      31,
      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 April 30, 2008, there were
      23.332,389 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 March 31, 2008 and December 31,
                2007
            1Condensed
                Consolidated Statements of Operations for the three months ended
                March 31,
                2008 and 2007
            2Condensed
                Consolidated Statements of Cash Flows for the three months ended
                March 31,
                2008 and 2007
            3Notes
                to Condensed Consolidated Financial Statements
            4-8ITEM
                2: Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            9-14ITEM
                4T: Controls and Procedures
            14PART II
            OTHER
                INFORMATIONITEM
                1: Legal Proceedings
            15ITEM
                2: Unregistered Sales of Equity Securities and Use of Proceeds
            15ITEM
                3: Defaults Upon Senior Securities
            15ITEM
                4: Submission of Matters to a Vote of Security Holders
            15ITEM
                5: Other Information
            15ITEM
                6: Exhibits
            15-17


i





**PART
      1: FINANCIAL INFORMATION**





**ITEM
      1. Financial Statements**





**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Balance Sheets**





March
                31,
            
            December
                31,2008
            
            2007(Unaudited)**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            3,623,244
            
            $
            3,955,835Restricted
                cash
            
            
            365,003
            
            
            455,583Accounts
                receivable
            
            
            677,126
            
            
            648,300Prepaid
                expenses and other assets
            
            
            369,341
            
            
            306,301Total
                current assets
            
            
            5,034,714
            
            
            5,366,019Restricted
                cash
            
            
            -
            
            
            43,216Patents,
                net
            
            
            1,941,477
            
            
            1,948,785Property
                and equipment, net
            
            
            503,632
            
            
            542,679Other
                assets
            
            
            249,435
            
            
            280,317Total
                assets
            
            $
            7,729,258
            
            $
            8,181,016**Liabilities
                and Stockholders' Equity**Current
                liabilitiesAccounts
                payable and accrued expenses
            
            $
            751,880
            
            $
            626,693Accrued
                payroll
            
            
            284,198
            
            
            221,013Unearned
                revenue
            
            
            258,508
            
            
            279,275Total
                current liabilities
            
            
            1,294,586
            
            
            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 March
                31, 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 March
                31, 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, 23,249,744 shares at March 31, 2008 and 23,225,664 shares
                at
                December 31, 2007
            
            
            23,250
            
            
            23,226Additional
                paid-in capital
            
            
            15,921,250
            
            
            15,616,124Accumulated
                deficit
            
            
            (9,509,836
            )
            
            (8,585,323
            )Total
                stockholders' equity
            
            
            6,434,672
            
            
            7,054,035Total
                liabilities and stockholders' equity
            
            $
            7,729,258
            
            $
            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 March 31,2008
            
            2007Revenues
            
            $
            1,634,103
            
            $
            1,278,405Cost
                of services
            
            
            1,029,984
            
            
            800,519Gross
                profit
            
            
            604,119
            
            
            477,886Operating
                expensesResearch
                and development
            
            
            251,829
            
            
            406,955Sales
                and marketing
            
            
            288,874
            
            
            212,116General
                and administrative
            
            
            897,504
            
            
            1,010,221Depreciation
                and amortization
            
            
            117,567
            
            
            117,712Total
                operating expenses
            
            
            1,555,774
            
            
            1,747,004Operating
                loss
            
            
            (951,655
            )
            
            (1,269,118
            )Other
                income (expense)Interest
                income
            
            
            28,725
            
            
            49,370Other
                expense
            
            
            (1,583
            )
            
            (1,978
            )Total
                other income
            
            
            27,142
            
            
            47,392Net
                loss
            
            
            (924,513
            )
            $
            (1,221,726
            )Series
                B preferred stock cash dividend
            
            
            85,240
            
            
            -Net
                loss attributable to common stockholderss
            
            $
            (1,009,753
            )
            $
            (1,221,726
            )Basic
                and diluted net loss per common share
            
            $
            (0.04
            )
            $
            (0.05
            )Weighted
                average number of common shares outstanding Basic and
                diluted
            
            
            23,246,067
            
            
            22,972,266





See
      notes
      to condensed consolidated financial statements.


2


**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Statements of Cash Flows**


***(unaudited)***





For the Three Months Ended March 31,2008
            
            2007**Cash
                flows from operating activities**Net
                loss
            
            $
            (924,513
            )
            $
            (1,221,726
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            117,567
            
            
            117,712Stock-based
                compensation expense
            
            
            403,063
            
            
            406,204Issuance
                of equity instruments to non-employees for services
            
            
            -
            
            
            1,537Accrual
                for future issuance of equity instruments for rent
            
            
            51,000
            
            
            -Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (28,826
            )
            
            (160,631
            )Prepaid
                expenses and other assets
            
            
            (63,041
            )
            
            (94,281
            )Accounts
                payable and accrued expenses
            
            
            61,514
            
            
            83,917Accrued
                payroll
            
            
            63,185
            
            
            (115,708
            )Unearned
                revenue
            
            
            (20,767
            )
            
            (159,589
            )Total
                adjustments
            
            
            583,695
            
            
            79,161Net
                cash used in operating activities
            
            
            (340,818
            )
            
            (1,142,565
            )**Cash
                flows from investing activities**Purchase
                of equipment
            
            
            (15,934
            )
            
            (39,594
            )Acquisition
                of patents
            
            
            (24,395
            )
            
            (45,181
            )Net
                cash used in investing activities
            
            
            (40,329
            )
            
            (84,775
            )**Cash
                flows from financing activities**Restricted
                cash
            
            
            133,796
            
            
            -Cash
                dividends on Series B Preferred Stock
            
            
            (85,240
            )
            
            -Repayments
                of notes payable - related parties
            
            
            -
            
            
            (19,683
            )Net
                cash provided by (used in) financing activities
            
            
            48,556
            
            
            (19,683
            )Net
                decrease in cash and cash equivalents
            
            
            (332,591
            )
            
            (1,247,023
            )**Cash
                and cash equivalents**Beginning
                of period
            
            
            3,955,835
            
            
            3,901,153End
                of period
            
            $
            3,623,244
            
            $
            2,654,130**Supplemental
                disclosure of cash flow information**Cash
                paid during the periods for:Interest
            
            $
            -
            
            $
            1,156





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
      financial statements contain all adjustments necessary for a fair presentation
      for the interim period, all of which were normal recurring adjustments. The
      results of operations for the three months ended March 31, 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. 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. The Company’s intention is to maintain its listing on
      Nasdaq and is currently assessing its options to regain compliance.





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.





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


4


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***





NOTE
      2 -
      Summary of Certain Significant Accounting Policies, continued





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 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 implications of SFAS No.
      161
      and its impact on the consolidated financial statements has not yet been
      determined.





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


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


5


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***





NOTE
      2 -
Summary of Certain Significant Accounting Policies,
      continued





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 three
      months ended March 31, 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 $403,063
      and $406,204, 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 three months ended March 31, 2008
      and
      2007 using the Black-Scholes option-pricing model:





March
                31,2008
            
            2007Risk
                free interest rate
            
            
            3.86
            %
            
            4.71
            %Expected
                term (years)
            
            
            9.7
            
            
            9.0Expected
                volatility
            
            
            89.6
            %
            
            98.5
            %Expected
                dividend yield
            
            
            -
            
            
            -




6


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***





NOTE
      3 - Stock-Based
      Compensation ,
      continued





A
      summary
      of the option activity for the three months ended March 31, 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
            
            
            945,932
            
            
            1.01Cancelled
            
            
            (5,487
            )
            
            (3.46
            )Exercised
            
            
            -
            
            
            -Options
                outstanding at March 31, 2008
            
            
            4,731,176
            
            
            1.70
            
            
            7.24Options
                exercisable at March 31, 2008
            
            
            2,582,231
            
            
            1.16
            
            
            5.73





The
      weighted-average grant-date fair value of options granted during the three
      months ended March 31, 2008 and 2007 was $955,391 and $24,440, respectively.
      There have been no options exercised during the three months ended March 31,
      2008.





NOTE
      4 - Stockholders’
      Equity





During
      the quarter ended March 31, 2008, approximately 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.





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 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 March 31:





2008
            
            2007Series
                A convertible preferred stock
            
            
            3,301,098
            
            
            1,724,000Series
                B convertible preferred stock
            
            
            3,509,092
            
            
            -Warrants
                to purchase common stock
            
            
            4,396,656
            
            
            2,161,892Options
                to purchase common stock
            
            
            4,872,866
            
            
            3,272,941Total
            
            
            16,079,712
            
            
            7,158,833





7


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***





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.





Upon
      adoption, the Company has concluded that there were no significant uncertain
      tax
      positions requiring recognition in its financial statements. As of March 31,
      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.





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
      March 31, 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 11%, 13% and 15% of
      its total revenue for the three months ended March 31, 2008 as compared to
      6%,
      19% and 32% for the three months ended March 31, 2007.


8




**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 March 31, 2008 and December 31,
      2007
      and the related condensed consolidated statements of operations and cash flows
      for the quarters ended March 31, 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**





We
      are a
      provider of image-based biomarker solutions to the pharmaceutical, biotechnology
      and medical device industries. Our technology helps to curtail trials that
      are
      not likely to be beneficial and to avoid mistaken termination of compounds
      that
      are likely to prove efficacious, as well as allow our customers to expedite
      compounds that are demonstrating response. This is done through:





·
            improved
                precision in the measurement of existing biomarkers resulting in
                shorter
                observation periods, with beneficial cost savings within a clinical
                trial;





·
            new
                biomarkers, which are better correlated with disease states, again
                reducing trial length and therefore costs; and





·
            reduced
                processing time for image data analysis through automation.





In
      addition, our technology helps reduce aggregate clinical development costs
      through:





·
            improved
                precision for existing biomarkers, thus requiring smaller patient
                populations and lower administrative costs; and





·
            new
                biomarkers that serve as better correlates, leading to better early
                screening and elimination of weak drug candidates in pre-clinical
                trials.





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


9


·
            raising
                capital.





Revenues
      over the past seven 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 2008. Revenues are recognized as the images that we
      process are quantified and delivered to our customers.





We
      have
      found that our customers value the ability to better understand the efficacy
      profile of their compounds. To date, nearly all of our customers have expressed
      interest in expanding their service agreements with us. We have also submitted
      proposals and bids for a number of other contracts. 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 of patient recruitment and image
      site identification and training.





***Results
      of Operations***





***Results
      of Operations for Quarter Ended March 31, 2008 Compared to Quarter Ended March
      31, 2007***





*Revenues*





We
      had
      revenues of approximately $1,634,000 for the quarter ended March 31, 2008
      compared to approximately $1,278,000 for the comparable period in 2007. The
      28%
      increase in our revenues during the quarter was directly related to the increase
      in the demand for our services in the industry. During the quarter, we performed
      work for 26 customers, representing 57 different projects, in connection with
      our pharmaceutical drug trials in the fields of oncology, osteoarthritis and
      various other projects. This compares to 19 customers and 47 projects during
      the
      same period in 2007. As of March 31, 2008, we had active projects with 11 of
      the
      top 15 pharmaceutical companies. During the first three months of 2008, 68%
      of
      the revenues were derived from Phase I, II and III studies compared to 49%
      during the comparable period in 2007. The shift of our business from working
      with customers on their research projects into later phase trials we believe,
      demonstrates the acceptance and value of our services in the industry. We
      anticipate the trend to later stage studies will continue throughout
      2008.





*Gross
      Profit*





We
      had a
      gross profit of $604,000 for the first quarter of 2008 compared to $478,000
      for
      the comparable period in 2007. Our gross profit margin remained constant at
      37%
      in the first three months of 2008 compared to the same period in 2007 due to
      the
      increase in revenues as explained above. 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 decreased in the quarter ended March 31, 2008 by $155,000,
      or 38%, to $252,000, when compared to the quarter ended March 31, 2007. The
      decrease was largely attributed to the realignment of our resources 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 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 to allow for
      diagnostic use. As of March 31, 2008, there were 10 employees in our research
      and development group, which includes the algorithm development and software
      development groups.


10





*Sales
      and Marketing*





Sales
      and
      marketing costs increased in the quarter ended March 31, 2008 by $77,000, or
      36%, to $289,000, when compared to the quarter ended March 31, 2007. The
      increase was a result of hiring of two new sales people during the past four
      months, as well as the initiation of marketing efforts during the quarter.
      We
      are in the process of re-branding our marketing materials in order to have
      a
      consistent and representative reflection of the services we provide and the
      value it generates for our customers. We anticipate the majority of this work
      will be completed during the second quarter of 2008. As of March 31, 2008,
      we
      had four individuals in our sales department.





*General
      and Administrative*





General
      and administrative expenses for the quarter ended March 31, 2008 were $898,000,
      a decrease of $113,000 or 11%, when compared to the quarter ended March 31,
      2007. The decrease was mainly due to the settling of a legal matter relating
      to
      our former chief executive officer, during the first quarter of 2007.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges remained constant at $118,000 for the quarter ended
      March 31, 2008 when compared to the quarter ended March 31, 2007. This was
      a
      result of depreciation charges related to recent capital purchases being offset
      by a reduction in depreciation charges for assets that have been fully
      depreciated during the past quarter. We continue to invest in our IT
      infrastructure and as such we monitor our assets for obsolescence and will
      write
      off assets, if any, that are no longer in use.





*Interest
      Income (Expense)*





Interest
      income for the quarter ended March 31, 2008 was $29,000, representing interest
      derived on the Company’s operating and savings accounts, compared to interest
      income of $49,000 in the quarter ended March 31, 2007. The decrease in interest
      income was a reflection of lower average rates of return on our savings accounts
      in the first quarter of 2008 compared to first quarter of 2007. Other expense
      for the quarters ended March 31, 2008 and 2007 was $1,600 and $2,000,
      respectively. This decrease in interest expense was due to the full payment
      of
      loans from certain VirtualScopics stockholders during 2007.





*Net
      Loss*





Net
      loss
      for the quarter ended March 31, 2008 was $925,000 compared to a net loss of
      $1,222,000 for the quarter ended March 31, 2007. The decrease in our net loss
      over the prior period was primarily related to the increase in our revenues
      and
      the realignment of our resources at the end of 2007 which reduced our operating
      expenses approximately 11% during the first quarter of 2008 as compared to
      2007.





**Liquidity
      and Capital Resources**





Our
      working capital as of March 31, 2008 was approximately $3,740,000 as compared
      to
      $4,239,000 as of December 31, 2007. The decrease in working capital was the
      result of the planned use of our cash to support operations as well investments
      made within sales and marketing.


11


Net
      cash
      used in operating activities totaled $341,000 in the quarter ended March 31,
      2008 compared to $1,143,000 in the comparable 2007 quarter. This decrease in
      cash usage was primarily the result of the resource realignment we initiated
      at
      the end of 2007. The realignment was necessary to better position our internal
      resources in the areas of the business which were demonstrated to produce the
      greatest value to, as well as generating the majority of the demand from, the
      industry.





We
      invested $40,000 in the purchase of equipment and the acquisition of patents
      in
      the first quarter of 2008, compared to $85,000 for the investment of these
      items
      in the first quarter of 2007. This decrease was attributable to an investment
      made in 2007 in our IT infrastructure. During 2007 we made significant
      investments in our IT storage system to support our operations, which enabled
      us
      to cost effectively and incrementally expand our IT systems to meet our
      customers’ needs.





Cash
      provided by our financing activities in the quarter ended March 31, 2008 was
      $49,000, compared to cash used of $20,000 in the quarter ended March 31, 2007,
      representing the release of restricted cash for investor relations and dividend
      payments offset by monthly dividend payments for the c onvertible
      series B preferred stock.





We
      plan
      to continue to utilize the net proceeds from the 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.





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. 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. The Company’s intention is to maintain its listing on
      Nasdaq and is currently assessing its options to regain compliance.





**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 implications of SFAS No. 161 and its
      impact on the consolidated financial statements has not yet been
      determined.


12





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


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.





**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.


13


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.





**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 March 31, 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 March 31, 2008 that has materially affected or is reasonably
      likely to materially affect, the Company’s internal control over financial
      reporting.


14




**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





None





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





During
      the quarter ended March 31, 2008, approximately 25 shares 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. 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 and series B 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**





Not
      applicable.





**Item
      5. Other Information**





None





**Item
      6. Exhibits**





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.


15


**SIGNATURES**





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





Dated:
                May 6, 2008
            VIRTUALSCOPICS,
                INC.





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


16


**Exhibit
      Index**





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


17