**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON, D.C.
      20549**





**Form
      10-QSB**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended June 30, 2006





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


**EXCHANGE
      ACT**





For
      the
      transition period from __________________ to ____________________








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




**VIRTUALSCOPICS,
      INC.**




(Name
      of
      Small Business Issuer in its charter)





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


**(585)
      249-6231**


( Issuer's
      Telephone Number, Including Area Code )





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


**None.**


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


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








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





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




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





As
      of
      July 31, 2006, there were 21,889,075 shares of the issuer’s common stock, $0.001
      par value, outstanding.





Transitional
      Small Business disclosure format. Yes o No x










TABLE
      OF
      CONTENTS





Page
                NumbersPART
                I
            
            FINANCIAL
                INFORMATIONITEM
                1: Financial Statements (unaudited)Condensed
                Consolidated Balance Sheet as of June 30, 2006 (unaudited)
            
            2Condensed
                Consolidated Statements of Operations for the three and six months
              ended
                June 30, 2006 and 2005 (unaudited)
            
            3Condensed
                Consolidated Statements of Cash Flows for the six months
              ended
                June 30, 2006 and 2005 (unaudited)
            
            4Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            5-9ITEM
                2: Management's Discussion and Analysis of
              Financial
                Condition and Results of Operations
            
            10-16ITEM
                3: Controls and Procedures
            
            16PART
                II
            
            OTHER
                INFORMATIONITEM
                1: Legal Proceedings
            
            17ITEM
                2: Unregistered Sales of Equity Securities and Use of Proceeds
            
            17ITEM
                3: Defaults Upon Senior Securities
            
            17ITEM
                4: Submission of Matters to a Vote of Security Holders
            
            17ITEM
                5: Other Information
            
            17ITEM
                6: Exhibits
            
            17-19





i


**PART
      1: FINANCIAL INFORMATION**





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








1


**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Balance Sheet**


***(unaudited)***





**June
      30, 2006**


**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            4,656,164Accounts
                receivable
            
            
            659,781Prepaid
                expenses and other assets
            
            
            325,784Total
                current assets
            
            
            5,641,729Patents,
                net
            
            
            1,877,115Property
                and equipment, net
            
            
            577,376Other
                assets
            
            
            473,925Total
                assets
            
            $
            8,570,145**Liabilities
                and Stockholders' Equity**Current
                liabilitiesNotes
                payable, current portion
            
            $
            72,000Accounts
                payable and accrued expenses
            
            
            401,638Accrued
                payroll
            
            
            488,713Unearned
                revenue
            
            
            256,434Total
                current liabilities
            
            
            1,218,785Notes
                payable, net of current portion
            
            
            46,980Total
                liabilities
            
            
            1,265,765Commitments
                and ContingenciesStockholders'
                EquityPreferred
                stock, $0.001 par value; 15,000,000 shares authorized;8,400
                shares designated Series A; 7,000 issued and outstanding;liquidation
                preference $1,000 per share
            
            
            7Common
                stock, $0.001 par value; 85,000,000 shares authorized;
                21,889,075
            
            
            21,889shares
                issued and outstandingAdditional
                paid-in capital
            
            
            10,074,983Accumulated
                deficit
            
            
            (2,792,499
            )Total
                stockholders' equity
            
            
            7,304,380Total
                liabilities and stockholders' equity
            
            $
            8,570,145




See
      notes
      to condensed consolidated financial statements.





2


**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Statements of Operations**


***(unaudited)***





For
                the Three Months Ended
              June
                30,
            
            For
                the Six Months Ended
              June
                30,2006
            
            2005
            
            2006
            
            2005Revenues
            
            $
            1,261,911
            
            $
            990,920
            
            $
            2,286,264
            
            $
            1,689,983Cost
                of services
            
            
            686,548
            
            
            574,715
            
            
            1,327,296
            
            
            1,107,486Gross
                profit
            
            
            575,363
            
            
            416,205
            
            
            958,968
            
            
            582,497Operating
                expensesResearch
                and development
            
            
            304,290
            
            
            256,164
            
            
            543,589
            
            
            486,934Sales
                and marketing
            
            
            202,140
            
            
            92,953
            
            
            388,722
            
            
            270,228General
                and administrative (1)
            
            
            1,230,178
            
            
            367,328
            
            
            2,106,933
            
            
            694,342Depreciation
                and amortization
            
            
            118,703
            
            
            99,798
            
            
            223,200
            
            
            197,317Total
                operating expenses
            
            
            1,855,311
            
            
            816,243
            
            
            3,262,444
            
            
            1,648,821Operating
                loss
            
            
            (1,279,948
            )
            
            (400,038
            )
            
            (2,303,476
            )
            
            (1,066,324
            )Other
                income (expense)Interest
                income
            
            
            44,542
            
            
            6,239
            
            
            81,114
            
            
            14,013Other
                expense
            
            
            (3,202
            )
            
            (3,166
            )
            
            (10,379
            )
            
            (12,369
            )Total
                other income (expense)
            
            
            41,340
            
            
            3,073
            
            
            70,735
            
            
            1,644Net
                loss
            
            $
            (1,238,608
            )
            $
            (396,965
            )
            $
            (2,232,741
            )
            $
            (1,064,680
            )Basic
                and diluted net loss percommon
                share
            
            $
            (0.06
            )
            $
            (0.02
            )
            $
            (0.10
            )
            $
            (0.06
            )Weighted
                  average number ofcommon
                  shares outstanding
            
            
            21,889,075
            
            
            17,326,571
            
            
            21,889,075
            
            
            17,326,571








(1)
            Includes
                stock option compensation expense of $564,733 and $989,617 for the
                three
                and six months ended June 30, 2006,
                respectively


See
      notes
      to condensed consolidated financial statements.


3


**VirtualScopics,
      Inc. and Subsidiary**


**Condensed
      Consolidated Statements of Cash Flows**


***(unaudited)***




For
                the Six Months Ended June 30,2006
            
            2005**Cash
                flows from operating activities**Net
                loss
            
            $
            (2,232,741
            )
            $
            (1,064,680
            )Adjustments
                to reconcile net lossto
                net cash used in operating activities:Depreciation
                and amortization
            
            
            223,200
            
            
            197,317Stock
                option compensation expense
            
            
            989,617
            
            
            -Issuance
                of equity instruments to non-employees for services
            
            
            
            
            
            15,300Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (162,008
            )
            
            (22,111
            )Prepaid
                expenses and other assets
            
            
            71,483
            
            
            -Accounts
                payable and accrued expenses
            
            
            (76,038
            )
            
            76,772Accrued
                payroll
            
            
            179,574
            
            
            27,185Unearned
                revenue
            
            
            (310,834
            )
            
            (1,331,348
            )Total
                adjustments
            
            
            914,994
            
            
            (1,036,885
            )Net
                cash used in operating activities
            
            
            (1,317,747
            )
            
            (2,101,565
            )**Cash
                flows from investing activities**Purchase
                of equipment
            
            
            (333,054
            )
            
            (60,161
            )Acquisition
                of patents
            
            
            (63,197
            )
            
            (54,932
            )Net
                cash used in investing activities
            
            
            (396,251
            )
            
            (115,093
            )**Cash
                flows from financing activities**Principal
                payments of notes payable - related parties
            
            
            (37,448
            )
            
            (13,512
            )Cost
                of equity raise
            
            
            -
            
            
            (5,152
            )Net
                cash used in financing activities
            
            
            (37,448
            )
            
            (18,664
            )Net
                decrease in cash and cash equivalents
            
            
            (1,751,446
            )
            
            (2,235,322
            )**Cash
                and cash equivalents**Beginning
                of period
            
            
            6,407,610
            
            
            3,538,446End
                of period
            
            $
            4,656,164
            
            $
            1,303,124**Supplemental
                disclosure of cash flow information**Cash
                paid during the periods for:Interest
            
            $
            4,230
            
            $
            3,280








See
      notes
      to condensed consolidated financial statements.




4


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




NOTE
      1 - Organization
      and Basis of Presentation





Organization


On
      November 4, 2005, VirtualScopics, LLC (“VS”), a New York limited liability
      company, entered into a merger agreement with ConsultAmerica, Inc. (“CA”), a
      Delaware corporation. CA issued 17,326,571 of its unregistered shares of common
      stock for 100% of the outstanding membership units of VS. As a result of the
      exchange, the members of VS became the controlling stockholders of CA. CA did
      not have any meaningful operations prior to the merger. The transaction was
      treated as a recapitalization of VS, and accounted for on a historical cost
      basis for all periods presented. Moreover, the financial statements set forth
      in
      this report for all periods, prior to the recapitalization, are the financial
      statements of VS and the common stock of VS has been retroactively restated
      to
      give the effect to the exchange for CA common stock. Immediately following
      the
      merger, CA changed its name to VirtualScopics, Inc. (the “Company” or “New VS”)
      and its fiscal year end from August 31 to December 31. The Company also changed
      its trading symbol from “CSAA.OB” to “VSCP.OB.” On May 31, 2006, the Company
      began trading on NASDAQ Capital Market under the symbol “VSCP.”





Nature
      of Business


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





Basis
      of Presentation


The
      accompanying unaudited condensed consolidated financial statements of the
      Company have been condensed in certain respects and should, therefore, be read
      in conjunction with the audited consolidated financial statements and notes
      related thereto contained in the Company’s Annual Report on Form 10-KSB as of
      and for the year ended December 31, 2005. In the opinion of the management,
      these financial statements contain all adjustments necessary for a fair
      presentation for the interim period, all of which were normal recurring
      adjustments. The results of operations for the six months ended June 30, 2006
      are not necessarily indicative of the results to be expected for the full year
      ending December 31, 2006.





NOTE
      2 - Summary
      of Certain Significant Accounting Policies





Principles
      of Consolidation


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





Concentration
      of Credit Risk


The
      Company derived 42% and 79% of its revenue from its largest customer for the
      six
      months ended June 30, 2006 and 2005, respectively.





Revenue
      Recognition


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





5


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***




NOTE
      2 - Summary
      of Certain Significant Accounting Policies ,
      continued





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





Research
      and Development


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





NOTE
      3 - Notes
      Payable





Notes
      payable to related parties as of June 30, 2006 amounted to
      $118,980.





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





Interest
      expense amounted to $4,230 and $7,480 for the six months ended June 30, 2006
      and
      2005, respectively.





NOTE
      4 - Employee
      Stock Options





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Payment,” using the modified prospective method. Consequently, for the three and
      six months ended June 30, 2006, the Company’s results of operations reflected
      compensation expense for new stock options granted under its stock incentive
      plans during the three and six months ended June 30, 2006 and compensation
      expense related to the unamortized portion of stock options granted prior to
      January 1, 2006. The amount included in the general and administrative expenses
      in the condensed consolidated statements of operation related to stock-based
      compensation was $564,733 and $989,617 for the three and six months ended June
      30, 2006, respectively.





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





Prior
      to
      January 1, 2006, the Company accounted for its stock-based employee compensation
      arrangements in accordance with the provisions and related interpretations
      of
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees.” Had compensation cost for stock-based compensation been determined
      consistent with SFAS No. 123R, the net loss and net loss per share for the
      three
      and six months ended June 30, 2005 would have been adjusted to the following
      pro
      forma amounts:


6


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***




NOTE
      4 - Employee
      Stock Options ,
      continued





Three
                Months
              Ended
                June 30,
              2005
            
            Six
                Months
              Ended
                June 30,
              2005Net
                loss, as reported
            
            $
            (396,965
            )
            $
            (1,064,680
            )Deduct:
                Total stock-based employee compensationexpense
                determined under the fair value method
            
            
            (152,963
            )
            
            (449,640
            )Net
                loss, pro forma
            
            $
            (549,928
            )
            $
            (1,514,320
            )Basic
                and diluted net loss per common share:As
                reported
            
            $
            (0.02
            )
            $
            (0.06
            )Pro
                forma
            
            $
            (0.03
            )
            $
            (0.09
            )





The
      fair
      value of each option granted is estimated on the date of grant using the
      Black-Scholes option-pricing method. The Company uses historical data to
      estimate the expected price volatility, the expected option life and the
      expected forfeiture rate. The risk-free rate is based on the U.S. Treasury
      yield
      curve in effect at the time of grant for the estimated life of the option.
      The
      Company has not made any dividend payments nor does it have plans to pay
      dividends in the foreseeable future. The following assumptions were used to
      estimate the fair value of options granted for the three and six months ended
      June 30, 2006 and 2005 using the Black-Scholes option-pricing
      model:





June
                30,2006
            
            2005Risk
                free interest rate
            
            
            4.72
            %
            
            4.15
            %Expected
                term (years)
            
            
            8.8
            
            
            8.6Expected
                volatility
            
            
            80.6
            %
            
            80.6
            %Expected
                dividend yield
            
            
            -
            
            
            -





A
      summary
      of the option activity for the six months ended June 30, 2006 is as
      follows:





Number
              of
                Shares
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted-Average
                Remaining Contractual Term
            
            Aggregate
                Intrinsic ValueOptions
                outstanding at January 1, 2006
            
            
            2,892,166
            
            $
            1.89Granted
            
            
            541,750
            
            $
            4.12Options
                outstanding at June 30, 2006
            
            
            3,433,916
            
            $
            2.24
            
            
            8.03
            
            $
            12,634,337Options
                exercisable at June 30, 2006
            
            
            1,199,701
            
            $
            1.23
            
            
            6.02
            
            $
            5,930,730





The
      weighted-average grant-date fair value of options granted during the six months
      ended June 30, 2006 and 2005 was $2,232,010 and $0, respectively. There have
      been no options exercised as of June 30, 2006.


7


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***





A
      summary
      of the status of the nonvested shares as of June 30, 2006 and changes during
      the
      six month period ended June 30, 2006, is presented below:





Nonvested
                Shares
            
            Shares
            
            Weighted-Average
                Grant-Date Fair ValueNonvested
                at January 1, 2006
            
            
            1,699,757
            
            
            2.35Granted
            
            
            541,750
            
            
            4.12Vested
            
            
            (7,292
            )
            
            1.23Nonvested
                at June 30, 2006
            
            
            2,234,215
            
            
            2.78





As
      of
      June 30, 2006, there was $4,513,893 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements. This cost is
      expected to be recognized over a weighted-average period of 9.12 years. The
      total fair value of shares vested during the six months period ended June 30,
      2006 amounted to $8,969.





NOTE
      5 - Net
      Loss Per Share





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





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





June
                30,2006
            
            2005Series
                A convertible preferred stock
            
            
            2,800,000
            
            
            -Warrants
                to purchase common stock
            
            
            2,212,490
            
            
            532,490Options
                to purchase common stock
            
            
            3,570,262
            
            
            2,261,185Total
            
            
            8,582,752
            
            
            2,793,675





NOTE
      6 - Severance
      Payment Demand





In
      the
      summer of 2005, the former President and Chief Executive Officer of VS, Dr.
      Stuart Shapiro, made a demand for severance payments under an employment
      agreement with VS alleged by him to be due in connection with his termination
      in
      the approximate amount of $230,000 and certain options.  On May 3, 2006,
      Dr. Shapiro filed a demand for arbitration with the American Arbitration
      Association seeking $325,000, plus the value of his option to purchase
      approximately 174,570 shares of common stock at $2.25 per share. 
VirtualScopics filed a response on May 24, 2006, denying the allegations and
      asserting several defenses. VS believes the demand is without merit and intends
      to vigorously defend against the demand.  As of June 30, 2006, the Company
      did not accrue any liability related to the demand.








8


**VirtualScopics,
      Inc. and Subsidiary**


**Notes
      to Condensed Consolidated Financial Statements**


***(unaudited)***





NOTE
      7 - Employment
      Agreement





Effective
      May 11, 2006, the Company’s board of directors confirmed the appointment of a
      new Chief Operating Officer, and entered into an employment agreement which
      provides for an annual base salary of $220,000, a bonus of $30,000 in 2006
      upon
      the achievement of certain Company performance targets and restrictive covenants
      against competition. In addition, the Company also provides for the officer
      to
      receive 500,000 stock options exercisable at $4.00 per share vesting over a
      four-year period. The aforementioned agreement may be terminated at any time
      by
      either party.







9


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





**Overview**





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





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





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





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





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





·
            research
                and development;





·
            hiring
                technical, sales and other personnel;





·
            business
                development of customer and strategic relationships; and





·
            raising
                capital.





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





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





10


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





***Results
      of Operations***





***Results
      of Operations for the Three Months Ended June 30, 2006 Compared to the Three
      Months Ended June 30, 2005***





*Revenues*





Our
      revenues for the three months ended June 30, 2006 were $1,262,000, an increase
      of $271,000 or 27% over the comparable quarter of 2005. The strong sales were
      a
      direct reflection of the increase in our customer base. In 2006, 33% of the
      revenues for the second quarter were generated from Pfizer, as compared to
      72%
      in the same period of 2005. We anticipate
      that our revenues from Pfizer will continue to grow; however, we expect the
      relative percentage of the Pfizer business to decline throughout 2006 as we
      continue to broaden our customer base .
      We
      performed services for a total of 42 projects in the second quarter of 2006,
      as
      compared to 24 in the second quarter of 2005. During the second quarter of
      2006,
      we derived 60% of our revenues from musculoskeletal projects, 24% from oncology
      projects, and 16% from consulting and other smaller projects. The majority
      of
      the pharmaceutical trial projects for which we have performed work to date
      are
      in pre-clinical, Phase I or Phase II studies.





*Gross
      Profit*





We
      had a
      gross profit of $575,000 for the three months ended June 30, 2006 compared
      to
      $416,000 for the comparable period in 2005. Our gross profit margin also
      increased from 42% in the second quarter 2005 to 46% in the second quarter
      2006.
      This improvement in gross margin is largely attributed to the increase in sales,
      operational process improvements, and the product mix of the services that
      were
      delivered on during the quarter.





*Research
      and Development*





Total
      research and development expenditures were $304,000 in the second quarter of
      2006 compared to $256,000 for the comparable period in 2005, an increase of
      19%.
      The increase in research and development costs for the period was due to the
      additional headcount in our algorithm and software development group. These
      costs were composed mostly of salaries for our technical, scientific and
      software development staff. All costs associated with the development of a
      new
      product or enhancement of an existing product or software platform are expensed
      as incurred.





*Sales
      and Marketing*





Sales
      and
      marketing costs for the three months ended June 30, 2006 was $202,000, an
      increase of $109,000 or 117% over the second quarter of 2005. The increase
      is
      attributable to the broadening of our efforts in sales and marketing, including
      new marketing brochures, greater exposure at targeted trade shows and the hiring
      of a new business development person at the end of 2005. All costs associated
      with our selling efforts, including trade shows, seminars, customer
      presentations and proposal related travel are included in sales and
      marketing.




11


*General
      and Administrative*





General
      and administrative expenses for the three months ended June 30, 2006 costs
      were
      $665,000 (excluding the costs of FAS 123R as discussed below), an increase
      of
      $298,000 or 81%, over the second quarter of 2005. The increase is mainly due
      to
      the additional costs of being a public company which was a result of the
      exchange transaction between ConsultAmerica, Inc. and VirtualScopics, LLC on
      November 4, 2005. These additional costs included legal fees, filing fees,
      as
      well as audit and tax-related services amounting to approximately $235,000
      for
      the second quarter of 2006. The increase was also a result of the hiring of
      administrative functions, including IT, human resources and finance in order
      to
      support the Company’s growth. We expect that our general and administrative
      costs will be higher in 2006 as a result of being a publicly traded
      company.





*Stock
      Option Compensation Expense*





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123R, “Share-Based Payment,” using the modified prospective method.
      Consequently, for the three months ended June 30, 2006, the Company’s results of
      operations reflected compensation expense for new stock options granted and
      vested under its stock incentive plans during the second three months of fiscal
      year 2006 and the unvested portion of previous stock option grants which vested
      during the second three months of fiscal year 2006. The amount recognized in
      the
      financial statements related to stock-based compensation was $565,000 for the
      three months ended June 30, 2006. SFAS No. 123R does not require retroactive
      adjustments; therefore, there was no comparable amount in the June 30, 2005
      statement of operations. Prior to January 1, 2006, the effects of stock options
      are disclosed in the notes to the unaudited condensed consolidated financial
      statements.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges increased in the three months ended June 30, 2006
      by
      $19,000 or 19%, to $119,000, when compared to the same period in 2005. This
      increase is attributed mostly to the rise in depreciation charges for the period
      resulting from the purchase of new hardware and software to support the
      Company’s delivery of services to its customers. We intend to continue to invest
      in our IT infrastructure in order to meet the demands of our
      customers.





*Interest
      Income (Expense)*





Interest
      income for the three months ended June 30, 2006 was $45,000 and composed of
      interest derived on the Company’s operating and savings accounts, compared to
      interest income of $6,000 in the same period in 2005. The increase in interest
      income was a reflection of the higher cash balances on hand during the fiscal
      year 2006 as well as higher average rates of return on our savings accounts
      in
      2006 compared to 2005. Interest expense for the quarters ended June 30, 2006
      and
      2005 was $3,000 representing interest due to loans from certain stockholders
      of
      the Company.





*Net
      Loss*





Our
      net
      loss for the three months ended June 30, 2006 was $1,239,000 compared to a
      net
      loss of $397,000 for the same period in 2005. The increase in our net loss
      over
      the prior period was primarily related to the effects of implementing SFAS
      No.
      123R in 2006 as well as greater general administrative costs associated with
      being a public company, as discussed above.





12


***Results
      of Operations for the Six Months Ended June 30, 2006 Compared to the Six Months
      Ended June 30, 2005***





*Revenues*





Our
      revenues for the six months ended June 30, 2006 were $2,286,000, an increase
      of
      $596,000 or 35% over the first half of 2005. The strong sales were a direct
      reflection of the increase in our customer base. In 2006, 42% of the revenues
      for the first half were generated from Pfizer, as compared to 79% in the same
      period of 2005. We anticipate
      that our revenues from Pfizer will continue to grow; however, we expect the
      relative percentage of the Pfizer business to decline in 2006 as we continue
      to
      broaden our customer base .
      We
      performed services for a total of 49 projects in the first half of 2006, as
      compared to 26 in the first half of 2005. During the first half of 2006, we
      derived 57% of our revenues from musculoskeletal projects, 25% from oncology
      projects, and 18% from consulting and other smaller projects. The majority
      of
      the pharmaceutical trial projects for which we have performed work to date
      are
      in pre-clinical, Phase I or Phase II studies.





*Gross
      Profit*





We
      had a
      gross profit of $959,000 for the six months ended June 30, 2006 compared to
      $582,000 for the comparable period in 2005. Our gross profit margin also
      increased from 34% in the first two quarters of 2005 to 42% in the first two
      quarters of 2006. This improvement in gross margin is largely attributed to
      the
      increase in sales, operational process improvements, and the product mix of
      the
      services that were delivered on during the period.





*Research
      and Development*





Total
      research and development expenditures were $544,000 in the first half of 2006
      compared to $487,000 for the comparable period in 2005, an increase of 12%.
      The
      increase was attributable to the additional algorithm and software development
      staff hired in the first half of 2006. These costs were composed mostly of
      salaries for our technical, scientific and software development staff. All
      costs
      associated with the development of a new product or enhancement of an existing
      product or software platform are expensed as incurred.





*Sales
      and Marketing*





Sales
      and
      marketing costs for the six months ended June 30, 2006 increased to $389,000,
      an
      increase of $119,000 or 44% over the first half of 2005. The increase is
      attributable to the broadening of our efforts in sales and marketing, including
      new marketing brochures, greater exposure at targeted trade shows and the hiring
      of a new business development person at the end of 2005. All costs associated
      with our selling efforts, including trade shows, seminars, customer
      presentations and proposal related travel are included in sales and
      marketing.





*General
      and Administrative*





General
      and administrative expenses for the six months ended June 30, 2006 were
      $1,117,000 (excluding the impact of FAS 123R, as discussed below), an increase
      of $422,000, over the first half of 2005. The increase is mainly due to the
      effects of implementing FAS 123R, as discussed below, as well as the additional
      costs of being a public company which was a result of the exchange transaction
      between ConsultAmerica and VirtualScopics, LLC on November 4, 2005. These
      additional costs included legal fees, filing fees, as well as audit and
      tax-related services amounting to approximately $350,000 for the first half
      of
      2006. The increase was also a result of the hiring of administrative functions,
      including IT, human resources and finance in order to support the Company’s
      growth. We expect that our general and administrative costs will increase
      throughout 2006 as a result of being a publicly traded company.





13


*Stock
      Option Compensation Expense*





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS No. 123R, “Share-Based Payment,” using the modified prospective method.
      Consequently, for the six months ended June 30, 2006, the Company’s results of
      operations reflected compensation expense for new stock options granted and
      vested under its stock incentive plans during the first three months of fiscal
      year 2006 and the unvested portion of previous stock option grants which vested
      during the first six months of fiscal year 2006. The amount recognized in the
      financial statements related to stock-based compensation was $990,000 for the
      six months ended June 30, 2006. SFAS No. 123R does not require retroactive
      adjustments; therefore, there was no comparable amount in the June 30, 2005
      statement of operations. Prior to January 1, 2006, the effects of stock options
      are disclosed in the notes to the unaudited condensed consolidated financial
      statements.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges increased in the six months ended June 30, 2006 by
      $26,000 or 13%, to $223,000, when compared to the same period in 2005. This
      increase is attributed mostly to the rise in depreciation charges for the period
      resulting from the purchase of new hardware and software to support the
      Company’s delivery of services to its customers. We intend to continue to invest
      in our IT infrastructure in order to meet the demands of our
      customers.





*Interest
      Income (Expense)*





Interest
      income for the six months ended June 30, 2006 was $81,000 and composed of
      interest derived on the Company’s operating and savings accounts, compared to
      interest income of $14,000 in the same period in 2005. The increase in interest
      income was a reflection of the higher cash balances on hand during the fiscal
      year 2006 as well as higher average rates of return on our savings accounts
      in
      2006 compared to 2005. Interest expense for the six month period ended June
      30,
      2006 and 2005 were $10,000 and $12,000, respectively, representing interest
      due
      to loans from certain stockholders of the Company.





*Net
      Loss*





Our
      net
      loss for the six months ended June 30, 2006 was $2,233,000 compared to a net
      loss of $1,065,000 for the same period in 2005. The increase in our net loss
      over the prior period was primarily related to the effects of implementing
      SFAS
      No. 123R in 2006, as well as higher general and administrative costs associated
      with being a public company.





**Liquidity
      and Capital Resources**





Our
      working capital as of June 30, 2006 was $4,423,000 compared to our working
      capital of $800,000 as of June 30, 2005. The increase was a direct result of
      our
      recently completed private placement in the fourth quarter of 2005, as described
      below.





On
      November 4, 2005 and in two subsequent closings on November 23, 2005 and
      December 2, 2005, we closed on our private placement for the sale of 7,000
      shares of our newly issued series A convertible preferred stock. We received
      net
      cash proceeds of approximately $5.7 million from the private placement. The
      net
      proceeds from our 2005 private placement have been invested in money market
      funds that invest primarily in short-term, highly-rated investments, including
      U.S. Government securities, commercial paper and certificates of deposit
      guaranteed by banks. Under our current policies, we do not use interest rate
      derivative instruments to manage our exposure to interest rate changes. Because
      of the short-term maturities of our investments, we do not believe that a
      decrease in market rates would have a significant negative impact on the value
      of our investment portfolio. As of July 31, 2006, we had approximately 4.2 million
      in cash and cash equivalents.




14


We
      have
      begun to utilize the net proceeds from the private placement to support the
      expansion of our business to serve larger scale clinical trials, further
      research and development of existing and new targeted therapeutic areas, we
      plan
      on also utilizing the funds available to develop and market diagnostic and
      treatment planning products. Additionally, we have begun the added investment
      in
      our sales and marketing efforts through hiring of sales support and broadening
      our marketing materials and participation in medical conferences.





Net
      cash
      used in operating activities totaled $1,318,000 in the first half of 2006
      compared to $2,102,000 for the comparable period in 2005. This decrease in
      usage
      was primarily the result of the timing of collection of receivables as well
      as
      the earning of advance payments from customers.





We
      invested a total of $396,000 in the purchase of equipment and the acquisition
      of
      patents in the first half of 2006, compared to $115,000 in the same period
      in
      2005. We anticipate further spending within our IT infrastructure to support
      the
      Company’s operations.





Net
      cash
      used in our financing activities for the six month period ended June 30, 2006
      was $37,000, compared to $19,000 for the six month period ended June 30, 2005.
      The amounts included in cash used in financing activities represent amounts
      paid
      on loans from certain stockholders of the Company.





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





**Off
      Balance Sheet Arrangements**





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





**Forward
      Looking Statements**





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





·
            adverse
                economic conditions;





·
            inability
                to raise sufficient additional capital, if necessary, 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.




15


All
      statements, other than statements of historical facts, included in this report
      regarding our strategy, future operations, financial position, estimated revenue
      or losses, projected costs, prospects and plans and objectives of management
      are
      forward-looking statements. When used in this report, the words “may,”
“believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan,”
“could,” “would” and similar expressions are intended to identify
      forward-looking statements, although not all forward-looking statements contain
      such identifying words. All forward-looking statements speak only as of the
      date
      of this report. We do not undertake any obligation to update any forward-looking
      statements or other information contained in this report. Existing stockholders
      and potential investors should not place undue reliance on these forward-looking
      statements. Although we believe that our plans, intentions and expectations
      reflected in or suggested by the forward-looking statements in this report
      are
      reasonable, we cannot assure our stockholders or potential investors that these
      plans, intentions or expectations will be achieved. We disclose important
      factors that could cause our actual results to differ materially from our
      expectations under the section entitled “Risk Factors” in our Annual Report on
      Form 10-KSB for the fiscal year ended December 31, 2005 filed with the
      Securities and Exchange Commission (the “SEC”) and in any subsequent reports
      filed with the SEC. These risk factors qualify all forward-looking statements
      attributable to us or persons acting on our behalf.








**ITEM
      3. 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 Exchange Act (the “Exchange Act”) is
      recorded, processed, summarized and reported within the time periods specified
      in the SEC’s rules and forms. We carried out an evaluation, under the
      supervision and with the participation of our Chief Executive Officer and our
      Chief Financial Officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange
      Act.
      Based on that evaluation, our Chief Executive Officer and our Chief Financial
      Officer concluded that our disclosure controls and procedures are effective
      as
      of the end of the period covered by this report.




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








16


**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





For
      information on legal proceedings, see Note 6 to Condensed Consolidated Financial
      Statements, which is incorporated by reference in response to this
      Item 1.





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





Not
      applicable.





**Item
      3. Defaults upon Senior Securities**





Not
      applicable.





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





a)
            VirtualScopics,
                Inc. held its Annual Shareholders’ Meeting on May 11,
                2006.





b)
            The
                shareholders voted for the election of seven nominees to serve as
                directors for a one-year term expiring in 2007 and until their successors
                are elected. The vote was as
                follows:





**Name
                of Candidate**
            
            **For**
            
            **Withheld**Warren
                Bagatelle
            
            
            15,458,829
            
            
            1,970,910Colby
                Chandler
            
            
            15,458,829
            
            
            1,970,910Robert
                Klimasewski
            
            
            15,458,829
            
            
            1,970,910Sidney
                Knafel
            
            
            17,411,039
            
            
            18,700Charles
                Phelps
            
            
            15,458,829
            
            
            1,970,910Saara
                Totterman
            
            
            15,458,829
            
            
            1,970,910Terence
                Walts
            
            
            15,458,829
            
            
            1,970,910





There
      were no abstentions and no broker non-votes.





c)
            The
                shareholders voted to ratify the appointment of Marcum & Kliegman as
                the independent registered public accounting firm of VirtualScopics,
                Inc.
                for fiscal year 2006.  The vote was 17,418,325 for, 4,200 against and
                7,214 abstentions.  There were no broker
                non-votes.





**Item
      5. Other Information**





None





**Item
      6. Exhibits**


Exhibit
                  10.1
              
              Option
                  Agreements with Robert Klimasewski dated November 5, 2005 (Incorporated
                  herein by reference to the Company’s Registration Statement on Form SB-2
                  filed with the Securities and Exchange Commission on May 2, 2006
                  (File
                  No.: 333-133747)).Exhibit
                  10.2
              
              Form
                  of April 28, 2006 Indemnification Agreement by and among VirtualScopics,
                  Inc., and the directors and officers of the Company (Incorporated
                  herein
                  by reference to the Company’s Registration Statement on Form SB-2 filed
                  with the Securities and Exchange Commission on May 2, 2006 (File
                  No.:
                  333-133747)).Exhibit
                  10.3
              
              Employment
                  Agreement with Jeffrey Markin dated April 11, 2006 (Incorporated
                  herein by
                  reference to the Company’s Registration Statement on Form SB-2, Amendment
                  No. 1 filed with the Securities and Exchange Commission on July
                  13, 2006
                  (File No.: 333-133747)).Exhibit
                  31.1
              
              Certification
                  of Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.Exhibit
                  31.2
              
              Certification
                  of Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.Exhibit
                  32.1
              
              Certification
                  of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted
                  pursuant
                  to Section 906 of the Sarbanes-Oxley Act 0f 2002.Exhibit
                  32.2
              
              Certification
                  of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
                  pursuant
                  to Section 906 of the Sarbanes-Oxley Act 0f
                  2002.
 
 
 17


**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 10, 2006
            VIRTUALSCOPICS,
              INC./s/ Robert
              G.
              KlimasewskiRobert
              G. KlimasewskiPresident
              and
              Chief Executive Officer


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







18


**Exhibit
      Index**




Exhibit
                  10.1
              
              Option
                  Agreements with Robert Klimasewski dated November 5, 2005 (Incorporated
                  herein by reference to the Company’s Registration Statement on Form SB-2
                  filed with the Securities and Exchange Commission on May 2, 2006
                  (File
                  No.: 333-133747)).Exhibit
                  10.2
              
              Form
                  of April 28, 2006 Indemnification Agreement by and among VirtualScopics,
                  Inc., and the directors and officers of the Company (Incorporated
                  herein
                  by reference to the Company’s Registration Statement on Form SB-2 filed
                  with the Securities and Exchange Commission on May 2, 2006 (File
                  No.:
                  333-133747)).Exhibit
                  10.3
              
              Employment
                  Agreement with Jeffrey Markin dated April 11, 2006 (Incorporated
                  herein by
                  reference to the Company’s Registration Statement on Form SB-2, Amendment
                  No. 1 filed with the Securities and Exchange Commission on July
                  13, 2006
                  (File No.: 333-133747)).Exhibit
                  31.1
              
              Certification
                  of Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.Exhibit
                  31.2
              
              Certification
                  of Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.Exhibit
                  32.1
              
              Certification
                  of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted
                  pursuant
                  to Section 906 of the Sarbanes-Oxley Act 0f 2002.Exhibit
                  32.2
              
              Certification
                  of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
                  pursuant
                  to Section 906 of the Sarbanes-Oxley Act 0f
                  2002.
  
 19