**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON, D.C.
      20549**





**Form
      10-QSB**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





For
      the
      quarterly period ended September 30, 2007





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


**EXCHANGE
      ACT**





For
      the
      transition period from __________________ to ____________________





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




**VIRTUALSCOPICS,
      INC.**






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




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




**(585)
      249-6231**


( Issuer’s
      Telephone Number, Including Area Code )





(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
xNo
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
      October 31, 2007, there were 23,126,021 shares of the issuer’s common stock,
      $0.001 par value, outstanding.





Transitional
      Small Business disclosure format. Yes o No x









TABLE
      OF
      CONTENTS





Page
                NumbersPART
                I
            FINANCIAL
                INFORMATIONITEM
                1: Financial Statements (unaudited)Condensed
                Consolidated Balance Sheet as of September 30, 2007
            
            2Condensed
                Consolidated Statements of Operations for the three and nine monthsended
                September 30, 2007 and 2006
            
            3Condensed
                Consolidated Statements of Cash Flows for the nine monthsended
                September 30, 2007 and 2006
            
            4Notes
                to Condensed Consolidated Financial Statements
            
            5-10ITEM
                2: Management's Discussion and Analysis ofFinancial
                Condition and Results of Operations
            
            11-17ITEM
                3A(T): Controls and Procedures
            
            17PART
                II
            OTHER
                INFORMATIONITEM
                1: Legal Proceedings
            
            18ITEM
                2: Unregistered Sales of Equity Securities and Use of Proceeds
            
            18ITEM
                3: Defaults Upon Senior Securities
            
            18ITEM
                4: Submission of Matters to a Vote of Security Holders
            
            18ITEM
                5: Other Information
            
            19ITEM
                6: Exhibits
            
            19-20








**PART
      1: FINANCIAL INFORMATION**





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


**VirtualScopics,
        Inc. and Subsidiary**
 **Condensed
        Consolidated Balance Sheet**
 ***(unaudited)***
 
 **September
        30, 2007**




**Assets**Current
                assetsCash
                and cash equivalents
            
            $
            2,672,366Restricted
                cash
            
            
            337,500Accounts
                receivable
            
            
            831,291Prepaid
                expenses and other assets
            
            
            268,931Total
                current assets
            
            
            4,110,088Restricted
                cash
            
            
            80,000Patents,
                net
            
            
            1,958,161Property
                and equipment, net
            
            
            584,602Other
                assets
            
            
            311,199Total
                assets
            
            $
            7,044,050**Liabilities
                and Stockholders' Equity**Current
                liabilitiesNotes
                payable, related parties
            
            $
            20,544Dividends
                Payable
            
            
            12,567Accounts
                payable and accrued expenses
            
            
            554,380Accrued
                payroll
            
            
            382,874Unearned
                revenue
            
            
            247,291Total
                current liabilities
            
            
            1,217,656Commitments
                and Contingencies
            
            
            -Stockholders'
                EquityConvertible
                preferred stock, $0.001 par value; 15,000,000 shares
                authorized;8,400
                shares designated Series A; 4,001 issued and outstanding;liquidation
                preference $1,000 per share
            
            
            46,000
                shares designated Series B; 4,350 issued and 2,175 outstanding;
                liquidationpreference
                $1,000 per share
            
            
            2Common
                stock, $0.001 par value; 85,000,000 shares authorized;
                23,126,021shares
                issued and outstanding
            
            
            23,126Additional
                paid-in capital
            
            
            13,281,109Accumulated
                deficit
            
            
            (7,477,847
            )Total
                stockholders' equity
            
            
            5,826,394Total
                liabilities and stockholders' equity
            
            $
            7,044,050





See
      notes
      to condensed consolidated financial statements.




2


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


For
                the Three Months Ended
              September
                30,
            
            For
                the Nine Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Revenues
            
            $
            1,370,021
            
            $
            1,275,705
            
            $
            4,184,713
            
            $
            3,561,969Cost
                of services
            
            
            963,076
            
            
            695,095
            
            
            2,731,434
            
            
            2,022,391Gross
                profit
            
            
            406,945
            
            
            580,610
            
            
            1,453,279
            
            
            1,539,578Operating
                expensesResearch
                and development
            
            
            336,687
            
            
            251,526
            
            
            1,124,606
            
            
            795,115Sales
                and marketing
            
            
            150,504
            
            
            150,774
            
            
            555,783
            
            
            539,496General
                and administrative
            
            
            778,519
            
            
            1,060,575
            
            
            2,729,634
            
            
            3,167,509Depreciation
                and amortization
            
            
            126,673
            
            
            121,412
            
            
            362,878
            
            
            344,612Total
                operating expenses
            
            
            1,392,383
            
            
            1,584,287
            
            
            4,772,901
            
            
            4,846,732Operating
                loss
            
            
            (985,438
            )
            
            (1,003,677
            )
            
            (3,319,622
            )
            
            (3,307,154
            )Other
                income (expense)Interest
                income
            
            
            22,108
            
            
            54,760
            
            
            114,644
            
            
            135,876Other
                expense
            
            
            (5,699
            )
            
            (1,710
            )
            
            (8,930
            )
            
            (12,090
            )Total
                other income
            
            
            16,409
            
            
            53,050
            
            
            105,714
            
            
            123,786Net
                loss
            
            
            (969,029
            )
            
            (950,627
            )
            
            (3,213,908
            )
            
            (3,183,368
            )Basic
                and diluted net loss per common share
            
            $
            (0.04
            )
            $
            (0.04
            )
            $
            (0.14
            )
            $
            (0.14
            )Weighted
                average number of common shares outstanding
              -
                basic and diluted
            
            
            23,111,021
            
            
            22,449,433
            
            
            23,028,715
            
            
            22,079,452




See
      notes
      to condensed consolidated financial statements.




3


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


For
                the Nine Months Ended September 30,2007
            
            2006**Cash
                flows from operating activities**Net
                loss
            
            $
            (3,213,908
            )
            $
            (3,183,368
            )Adjustments
                to reconcile net lossto
                net cash used in operating activities:Depreciation
                and amortization
            
            
            362,878
            
            
            344,612Stock
                option compensation expense
            
            
            1,041,456
            
            
            1,491,678Issuance
                of equity instruments to non-employees for services
            
            
            1,818
            
            
            989Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (169,272
            )
            
            (578,197
            )Prepaid
                expenses and other assets
            
            
            (41,581
            )
            
            152,205Accounts
                payable and accrued expenses
            
            
            38,399
            
            
            (48,786
            )Accrued
                payroll
            
            
            (105,191
            )
            
            190,224Unearned
                revenue
            
            
            (267,728
            )
            
            (460,974
            )Total
                adjustments
            
            
            860,779
            
            
            1,091,751Net
                cash used in operating activities
            
            
            (2,353,129
            )
            
            (2,091,617
            )**Cash
                flows from investing activities**Purchase
                of equipment
            
            
            (190,519
            )
            
            (370,310
            )Acquisition
                of patents
            
            
            (115,910
            )
            
            (111,177
            )Net
                cash used in investing activities
            
            
            (306,429
            )
            
            (481,487
            )**Cash
                flows from financing activities**Repayments
                of notes payable - related parties
            
            
            (59,902
            )
            
            (56,578
            )Net
                proceeds from the issuance of Series B preferred stock and
                warrants
            
            
            1,889,798
            
            
            -Restricted
                cash
            
            
            (417,500
            )
            
            -Net
                proceeds from exercise of stock options
            
            
            18,375
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            1,430,771
            
            
            (56,578
            )Net
                decrease in cash and cash equivalents
            
            
            (1,228,787
            )
            
            (2,629,682
            )**Cash
                and cash equivalents**Beginning
                of period
            
            
            3,901,153
            
            
            6,407,610End
                of period
            
            $
            2,672,366
            
            $
            3,777,928**Supplemental
                disclosure of cash flow information**Cash
                paid during the periods for:Interest
            
            $
            2,616
            
            $
            5,940Non-cash
                financing activity:Dividend
                on Series B preferred stock
            
            $
            12,567
            
            $
            -





See
      notes
      to condensed consolidated financial statements.




4




**VirtualScopics,
      Inc. and Subsidiary**


**Notes
        to Condensed Consolidated Financial Statements**
 ***(unaudited)***


NOTE
      1 - Organization
      and Basis of Presentation





Organization




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





Nature
      of Business




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





Basis
      of Presentation




The
      accompanying unaudited condensed consolidated financial statements of Company
      have been condensed in certain respects and should, therefore, be read in
      conjunction with the audited consolidated financial statements and notes related
      thereto contained in the Company’s Annual Report on Form 10-KSB as of and for
      the year ended December 31, 2006. In the opinion of the management, these
      financial statements contain all adjustments necessary for a fair presentation
      for the interim period, all of which were normal recurring adjustments. The
      results of operations for the nine months ended September 30, 2007 are not
      necessarily indicative of the results to be expected for the full year ending
      December 31, 2007.





NOTE
      2 - Summary
      of Certain Significant Accounting Policies





Principles
      of Consolidation




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




Revenue
      Recognition




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




5


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


NOTE
      2 - Summary
      of Certain Significant Accounting Policies ,
      continued





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





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





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





Research
      and Development




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





NOTE
      3 - Notes
      Payable, Related Parties





Notes
      payable to related parties as of September 30, 2007 amounted to
      $20,544.





During
      2002, the Company entered into note agreements with two founders, along with
      two
      additional employees, for total cash proceeds of $360,000. The notes are payable
      in quarterly installments of principal and interest. The notes bear interest
      at
      the rate of 5.75% per annum and are due on December 31, 2007.





Interest
      expense amounted to $2,616 and $5,940 for the nine months ended September 30,
      2007 and 2006, respectively.





NOTE
      4 - Stock-Based
      Compensation





On
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Payment,” using the modified prospective method. Consequently, for the nine
      months ended September 30, 2007 and 2006, the Company’s condensed consolidated
      statements of operations reflect stock-based compensation expense for stock
      options granted under its long-term stock incentive plans amounting to
      $1,041,456 and $1,491,678, respectively.





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




6




****VirtualScopics,
      Inc. and Subsidiary****


**Notes
          to Condensed Consolidated Financial Statements**
 ***(unaudited)***
  NOTE
        4 - Stock-Based
        Compensation ,
        continued





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





September
                30,2007
            
            2006Risk
                free interest rate
            
            
            4.71
            %
            
            4.88
            %Expected
                term (years)
            
            
            9.0
            
            
            8.9Expected
                volatility
            
            
            98.5
            %
            
            84.2
            %Expected
                dividend yield
            
            
            -
            
            
            -





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





Number
              of
                Shares
            
            Weighted
                Average
              Exercise
                Price
            
            Weighted-Average
                Remaining Contractual TermOptions
                outstanding at January 1, 2007
            
            
            3,129,051
            
            $
            2.22Granted
            
            
            128,000
            
            $
            1.45Cancelled
            
            
            (22,763
            )
            
            ($4.80
            )Exercised
            
            
            (25,000
            )
            
            ($.74
            )Options
                outstanding at September 30, 2007
            
            
            3,209,288
            
            $
            2.24
            
            
            6.7Options
                exercisable at September 30, 2007
            
            
            2,339,505
            
            $
            1.90
            
            
            6.0





The
      weighted-average grant-date fair value of options granted during the nine months
      ended September 30, 2007 and 2006 was $185,440 and $2,407,003, respectively.
      There were a total of 25,000 options exercised as of September 30, 2007,
      resulting in cash proceeds to the Company of $18,375.




7




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


NOTE
      5 - Stockholders’
      Equity





During
      the nine months ended September 30, 2007, approximately 345.45 shares of the
      Company’s Series A convertible preferred stock were converted into 138,195
      shares of the Company’s common stock.





On
      September 17, 2007, the Company completed a private placement of 4,350 shares
      of
      Series B convertible preferred stock, par value $0.001 per share, and warrants
      to purchase the Company’s common stock, par value $0.001 per share, for an
      aggregate purchase price of $4,350,000. As of September 30, 2007, $2,175,000
      of
      the aggregate purchase price remains in escrow until certain approvals have
      been
      obtained from the Company’s stockholders. The Company has reserved ten percent
      of the stated value of the Series B convertible preferred stock that are
      outstanding, or $217,500, for the payment of dividends with an additional
      $217,500 to be reserved after the remaining shares are released from escrow.
      The
      Company also has reserved $200,000 for the payment of investor relation services
      over the next two years.





Each
      share of the Series B convertible preferred stock is initially convertible,
      at
      the holder’s election, into approximately 830.36 shares of common stock and has
      a liquidation preference that is pari passu with the Company’s Series A
      convertible preferred stock and senior to the Company’s common stock. Cumulative
      dividends on the Series B convertible preferred stock accrue on the initial
      stated value of $1,000 per share at an annual rate of 8%, payable monthly in
      cash and/or shares of the Company’s common stock, at the option of the Company.
      As of September 30, 2007, dividends payable to Series B convertible preferred
      stockholders amounted to $12,567.





The
      warrants have a seven-year term and are initially exercisable into 2,167,232
      shares of common stock. The warrants are exercisable, at the holder’s election,
      for shares of the Company’s common stock in either a cash or cashless exercise.
      Half of the warrants have an initial exercise price equal to $1.2043 per share
      and the other half have an initial exercise price of $1.3849 per share. The
      warrants were recorded at fair value of $644,167 (excluding warrants in escrow)
      and was recognized as additional paid in capital. The Company also issued
      warrants to the financial advisor in the transaction, Canaccord Adams, Inc.,
      to
      purchase 67,530 shares of common stock, which was recorded at fair value of
      approximately $57,000 and was recognized as additional paid in capital. The
      value of the warrants was computed using the Black-Scholes option-pricing model
      with the following assumptions: risk free rate of 4.21%, expected term of seven
      years, expected volatility of 69.90%, 0% expected dividend yield, stock price
      of
      $1.23 per share, and exercise prices of $1.2043 and $1.3849 per
      share.





In
      accordance with EITF Topic D-98, “Classification and Measurement of Redeemable
      Securities,” the Series B convertible preferred stock was classified as an
      equity instrument since all events requiring redemption are within the control
      of the Company, and therefore, would not result in the security being classified
      outside of permanent equity.





The
      conversion feature of the Series B convertible preferred stock and warrants
      to
      purchase common stock were evaluated in accordance with SFAS 133, “Accounting
      for Derivative Financial Instruments Indexed to, and Hedging Activities” and
      EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company Own Stock,” and were determined to be equity
      instruments. The characteristics of the Series B warrants which allowed for
      equity treatment are as follows: (1) the contract permits the Company to settle
      in unregistered shares; (2) the Company has sufficient authorized and unissued
      shares available to settle the warrants after considering all other commitments
      that may require the issuance of stock during the maximum period of the warrant;
      (3) the warrant contains an explicit limit on the number of shares to be
      delivered in a share settlement; and, (4) there are no required cash payments
      to
      the counterparty in the event the Company fails to make timely filings with
      the
      SEC.




8




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


NOTE
      5 - Stockholders’
      Equity ,
      continued





In
      accordance with EITF 98-5, “Accounting for Convertible Securities with
      Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and
      EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,”
the Series B convertible preferred stock was considered to have an embedded
      beneficial conversion feature because the conversion price was less than the
      fair value of the Company’s common stock at the issuance date. This beneficial
      conversion feature is calculated after the warrants have been valued with
      proceeds allocated on a relative fair value basis. The Series B convertible
      preferred stock was not convertible at the issuance date and as a result the
      value of the beneficial conversion feature approximating $691,000 was not
      recorded as a deemed dividend. The deemed dividend will be recognized in the
      period the Series B convertible preferred stock becomes convertible which is
      when the stockholder approval becomes effective, November 23, 2007.





NOTE
      6 - Net
      Loss Per Share





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





Securities
      that could potentially dilute earnings per share in the future that were not
      included in the computation of diluted loss per share consist of the following
      as of September 30:





2007
            
            2006Series
                A convertible preferred stock
            
            
            3,322,262
            
            
            1,850,400Warrants
                to purchase common stock
            
            
            2,161,892
            
            
            2,162,490Options
                to purchase common stock
            
            
            3,350,395
            
            
            3,633,912Total
            
            
            8,834,549
            
            
            7,646,802





NOTE
      7 - Income
      Taxes





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





The
      Company has identified its federal tax return and its state tax return in New
      York as “major” tax jurisdictions, as defined. Based on the Company’s
      evaluation, it has been concluded that there are no significant uncertain tax
      positions requiring recognition in the Company’s consolidated financial
      statements. The Company’s evaluation was performed for the tax years ended 2001
      through 2006, the only periods subject to examination. The Company believes
      that
      its income tax positions and deductions will be sustained on audit and does
      not
      anticipate any adjustments that will result in a material change to its
      financial position. In addition, the Company did not record a cumulative effect
      adjustment related to the adoption of FIN 48. As of September 30, 2007, all
      of
      the Company’s deferred tax assets were fully reserved by a valuation allowance
      equal to 100% of the net deferred tax assets. The Company has never been
      profitable and has not paid any income taxes.




9


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


NOTE
        7 - Income
        Taxes ,
        continued
  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
          September 30, 2007, the Company does not have any interest and penalties
          accrued
          related to unrecognized tax benefits.
 Legal
        Proceedings


In
      the
      summer of 2005, the former President and Chief Executive Officer of
      VirtualScopics, LLC, Dr. Stuart Shapiro, made a demand for severance payments
      under an employment agreement with the Company alleged by him to be due in
      connection with his termination. He commenced an arbitration proceeding in
      May
      2006. In April 2007, the Company agreed to terms of a settlement with Dr.
      Shapiro to include a cash payment of $75,000 payable within six months plus
      options to purchase 115,000 shares of the Company’s common stock. The Company’s
      results of operations reflect stock-based compensation expense of approximately
      $127,000 for these stock options. The value of the options was computed using
      the Black-Scholes option-pricing model with the following assumptions: risk
      free
      rate of 4.65%, expected term of six years, expected volatility of 95.4%, zero
      expected dividend yield, and stock price equal to the exercise price of $1.40.
      As of September 30, 2007, the Company paid $55,000 of the $75,000 cash
      settlement leaving an accrued liability of $20,000.





NOTE
      9 - Concentration
      of Credit Risk





The
      Company’s top three customers accounted for approximately 50% of its total
      revenue for the nine-month period ended September 30, 2007 and 2006. The
      Company’s top three customers all accounted for individually more than 10% of
      total revenue during the nine-month period ended September 30, 2007, as compared
      to one customer accounting for approximately 37% of total revenue during the
      nine-month period ended September 30, 2006.





NOTE
      10 - Restricted
      Cash





As
      part
      of the
      private placement of Series B convertible preferred stock, t he
      Company has reserved ten percent of the stated value of the Series B convertible
      preferred stock that are outstanding, or $217,500, for the payment of dividends
      with an additional $217,500 to be reserved after the remaining shares are
      released from escrow. The Company also has reserved $200,000 for the payment
      of
      investor relation services over the next two years. Restricted cash as of
      September 30, 2007 amounted to $417,500 of which $80,000 is classified as a
      non-current asset.




10




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





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





**Overview**





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





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





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





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





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





·
            research
                and development;





·
            hiring
                technical, sales and other personnel;





·
            business
                development of customer and strategic relationships; and





·
            raising
                capital.





Revenue
      over the past six years has been derived primarily from image processing
      services in connection with pharmaceutical drug trials. For these services,
      we
      have been concentrating in the areas of oncology and osteoarthritis. We have
      also derived a portion of revenue from consulting services, and pharmaceutical
      drug trials in the neurology and cardiovascular therapeutic areas. We expect
      that the concentration of our revenue will continue in these services and in
      these areas throughout 2007 with a focus in Oncology. We have found that our
      customers value the ability to better understand the efficacy profile of their
      compounds.





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




11




***Recent
      Financing***




On
      September 17, 2007, we closed the private placement of 4,350 shares of our
      Series B convertible preferred stock, par value $0.001 per share (“Series B
      Preferred Stock”) and warrants to purchase our common stock, par value $0.001
      per share, for an aggregate purchase price of $4,350,000.




Out
      of
      the $4,350,000, we received net proceeds of approximately $1.9 million, after
      deducting expenses of the financing with the remaining $2 million being held
      in
      escrow. The total net proceeds to us from the financing, after deducting
      expenses of the financing, will be approximately $3.9 million.  At least
      $200,000 of the net proceeds from the financing must be segregated into a
      separate bank account to be used to pay for investor relations services. Under
      the terms of the Series B Preferred Stock, $217,500 has been set apart to be
      used toward the payment of dividends on the Series B Preferred Stock with an
      additional $217,500 to be reserved after the remaining shares are released
      from
      escrow. The
      remainder of the proceeds from the financing will be used for marketing and
      working capital. Further, 50% of the purchase price was originally held in
      escrow.  Upon delivery of the written consent of a majority of shares of
      our common stock and Series A Convertible Preferred Stock, voting together
      as a
      single class and on an as-converted basis, a portion of that escrowed amount
      was
      released so that only 21% of the purchase price still remains in escrow. The
      remainder of the escrowed funds will be released on November 23, 2007, the
      date
      on which the stockholder approval becomes effective.




The
      purchasers in the financing acquired, in the aggregate, 4,350 shares of our
      Series B Preferred Stock and warrants that are initially exercisable for
      2,167,232 shares of our common stock, subject to the escrow arrangement
      described above. This issuance of the Series B Preferred Stock and warrants
      in
      the financing will cause dilution of our existing stockholders. In addition,
      the
      issuance of the Series B Preferred Stock and warrants triggered certain
      anti-dilution provisions of our Series A Convertible Preferred Stock,
      or Series A Preferred Stock, and previously outstanding warrants to
      purchase approximately 1,400,000 shares of our common stock. As a result, the
      outstanding shares of our Series A Preferred Stock will be convertible into
      approximately 1,721,660 additional shares of our common stock. With respect
      to
      the outstanding warrants, the purchase price will be reduced to approximately
      $1.9269 per share.




We
      entered into the financing for a variety of reasons. Our management reviewed
      our
      short-term and long-term capital requirements, including projected costs, and
      determined that additional capital was necessary for us to continue improving
      the efficiency and effectiveness of our imaging processing services in
      connection with pharmaceutical drug trials and expand the marketing of those
      services. After evaluation of several alternatives, our management determined
      that the financing, as described in this information statement, was the best
      available alternative and provided the necessary capital to pursue our
      short-term and long-term goals.





***Results
      of Operations***





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





*Revenue*





We
      had
      revenues of approximately $1.4 million for the quarter ended September 30,
      2007
      compared to $1.3 million for the comparable period in 2006. During the quarter,
      we performed work for 27 customers, representing 58 different projects, in
      connection with our pharmaceutical drug trials in the fields of oncology,
      osteoarthritis and various other projects compared to 48 for the comparable
      period in 2006. During the quarters ended September 30, 2007 and 2006, Pfizer
      was our largest customer representing 29% of the quarterly revenues. As of
      September 30, 2007, we had active projects with 9 of the top 15 pharmaceutical
      companies. The majority of the pharmaceutical trial projects for which we have
      performed work to date are in pre-clinical, Phase I or Phase II studies. We
      expect that a majority of our work on pharmaceutical trial projects will
      continue to be focused in Phase I and II studies through the end of 2007. During
      the three months ended September 30, 2007, 38% of the revenues were derived
      from
      studies in musculoskeletal diseases, 38% in oncology studies, 13% from
      Department of Defense projects, 11% from consulting and other therapeutic areas.




12





The
      increase in revenues in the quarter ended September 30, 2007 compared to
      September 30, 2006 was attributed to work performed for the Department of
      Defense as well as the broadening of our customer base, as outlined above.





*Gross
      Profit*





We
      had a
      gross profit of $407,000 for the third fiscal quarter of 2007 compared to
      $581,000 for the comparable period in 2006. Our gross profit margin declined
      in
      the third quarter of 2007 compared to the same period in 2006 due to the new
      projects started with the Department of Defense which have lower inherent
      margins than our clinical trials business. During the third quarter of 2007,
      we
      had 8 additional employees in our service cost group as compared to the same
      period in 2006 to support current and future plans for revenue growth as a
      result of the shift of our business to Phase I/II studies from research and
      development activities. We anticipate the shift to Phase I/II studies will
      yield
      stronger economies of scale due to the inherent increase in the number of
      analyses performed.





*Research
      and Development*





Research
      and development costs increased in the quarter ended September 30, 2007 by
      $85,000, or 34%, to $337,000, when compared to the quarter ended September
      30,
      2006. The increase was largely attributed to the shift of our technical and
      scientific employees out of the operations and into research and development,
      as
      our technology has become more commercialized allowing our development employees
      to spend more time in research and development and less time in the day to
      day
      operations. As of September 30, 2007, there were 17 employees in our research
      and development group, which includes the algorithm development and software
      development groups compared to 13 as of September 30, 2006.





*Sales
      and Marketing*




Sales
      and
      marketing costs remained constant in the quarter ended September 30, 2007 when
      compared to the quarter ended September 30, 2006. We plan to invest a portion
      of
      the proceeds from the sale of the Series B convertible preferred stock in sales
      and marketing efforts, including the hiring of additional salespeople as well
      as
      further expenditures in developing our marketing initiatives.





*General
      and Administrative*





General
      and administrative expenses for the quarter ended September 30, 2007 were
      $779,000, a decrease of $282,000 or 27%, when compared to the quarter ended
      September 30, 2006. The decrease was due to a $206,000 reduction in stock
      compensation expense for vested stock options. Also contributing to the decrease
      was a reduction in payroll costs in 2007 due to elimination of the Chief
      Operating Officer position, as the Chief Operating Officer completed the
      transition into the Chief Executive Officer position.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges increased slightly by $5,000 or 4% for the quarter
      ended September 30, 2007 when compared to the quarter ended September 30, 2006.
      There was an increase in depreciation charges resulting from the purchase of
      new
      hardware and software to support our delivery of services to our customers.
      We
      intend to continue to invest in our IT infrastructure in order to meet the
      demands of our customers. The increase in depreciation was offset by a decrease
      in amortization of a deferred asset that is amortized based on an estimate
      of
      the hours of usage over the life of the asset.




13





*Interest
      Income (Expense)*





Interest
      income for the quarter ended September 30, 2007 was $22,000, representing
      interest derived on our operating and savings accounts, compared to interest
      income of $55,000 in the three months ended September 30, 2006. The interest
      income declined due to lower average rates of return on our savings accounts
      in
      the third quarter of 2007 compared to the third quarter of 2006. Interest
      expense for the quarters ended September 30, 2007 and 2006 was $600 and $1,700,
      respectively. This decrease in interest expense was due to a reduction in
      principal resulting from quarterly payments of loans from certain company
      stockholders.





*Net
      Loss*





Net
      loss
      for the quarter ended September 30, 2007 was $969,000 compared to a net loss
      of
      $951,000 for the quarter ended September 30, 2006. The increase in our net
      loss
      over the prior period was primarily related to lower operating margins, as
      outlined above.





***Results
      of Operations for the Nine Months Ended September 30, 2007 Compared to the
      Nine
      Months Ended September 30, 2006***





*Revenues*





Our
      revenues for the nine months ended September 30, 2007 were $4,185,000, an
      increase of $623,000 or 17% over the nine months ended September 30, 2006.
      The
      increase in sales is a reflection of the broadening of our customer base, the
      broader penetration of our services in the industry as well as the work
      commenced on our two projects with the Department of Defense. In 2007, 27%
      of
      the revenues for the first nine months were generated from Pfizer, as compared
      to 37% in the same period of 2006. We performed services for a total of 63
      projects in the first nine months of 2007, as compared to 62 in the first nine
      months of 2006. During the first nine months of 2007, we derived 47% of our
      revenues from musculoskeletal projects, 33% from oncology projects, 11% from
      Department of Defense projects, and 9% 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 $1,453,000 for the nine months ended September 30, 2007 compared
      to $1,540,000 for the comparable period in 2006. Our gross profit margin
      declined from 43% in the first three quarters of 2006 to 35% in the first three
      quarters of 2007. The decline is the result of new projects started with the
      Department of Defense which have lower inherent margins than our clinical trials
      business. During the first nine months of 2007, we hired 8 additional employees
      in our service cost group to support current and future plans for revenue growth
      as a result of the shift of our business to Phase I/II studies from research
      and
      development activities. We anticipate the shift to Phase I/II studies will
      yield
      stronger economies of scale due to the inherent increase in the number of
      analyses performed.





*Research
      and Development*





Total
      research and development expenditures were $1,125,000 in the first nine months
      of 2007 compared to $795,000 for the comparable period in 2006, an increase
      of
      41%. The increase was attributable to the additional algorithm and software
      development staff hired in the first nine months of 2007 and the shift of our
      technical and scientific employees out of the operations and into research
      and
      development, as our technology has become more commercialized allowing our
      development employees to spend more time in research and development and less
      time in the day to day operations. These costs were composed mostly of salaries
      for our technical, scientific and software development staff. All costs
      associated with the development of a new product or enhancement of an existing
      product or software platform are expensed as incurred.




14




*Sales
      and Marketing*





Sales
      and
      marketing costs for the nine months ended September 30, 2007 increased to
      $556,000, an increase of $16,000 or 3% over the first nine months of 2006.
      The
      increase is attributable to the hiring of a new business development person
      at
      the end of 2006, as well as an additional individual in April, 2007 offset
      by a
      decrease due to the timing of trade shows and conferences, as well as the
      associated travel expenses related to the sales force attending these
      conferences. All costs associated with our selling efforts, including trade
      shows, seminars, customer presentations and proposal related travel are included
      in sales and marketing.





*General
      and Administrative*





General
      and administrative expenses for the nine months ended September 30, 2007 were
      $2,730,000, a decrease of $438,000 or 14%, over the first nine months of 2006.
      The decrease is mainly due to
      a
      $450,000 reduction in stock compensation expense for vested stock
      options offset
      by the settling of a legal matter, during the second quarter of 2007, with
      a
      former executive.





*Depreciation
      and Amortization*





Depreciation
      and amortization charges increased in the nine months ended September 30, 2007
      by $18,000 or 5%, to $363,000, when compared to the same period in 2006. This
      increase is attributed mostly to the rise in depreciation charges for the period
      resulting from the purchase of new hardware and software to support our delivery
      of services to our customers. We intend to continue to invest in our IT
      infrastructure in order to meet the demands of our customers.





*Interest
      Income (Expense)*





Interest
      income for the nine months ended September 30, 2007 was $115,000 and composed
      of
      interest derived on the Company’s operating and savings accounts, compared to
      interest income of $136,000 in the same period in 2006. The decrease in interest
      income was a reflection of lower average rates of return on our savings accounts
      during the third quarter 2007. Interest expense for the nine month period ended
      September 30, 2007 and 2006 were $2,600 and $6,000, respectively, representing
      interest due to loans from certain stockholders of the Company.





*Net
      Loss*





Our
      net
      loss for the nine months ended September 30, 2007 was $3,214,000 compared to
      a
      net loss of $3,183,000 for the same period in 2006. The increase in our net
      loss
      over the prior period was primarily related to the hiring within our core lab
      to
      support our anticipated growth, settling of a legal matter as well as further
      investments in research and development, offset by a reduction in the
      stock-based compensation expense.





**Liquidity
      and Capital Resources**





Our
      working capital as of September 30, 2007 was approximately $2,892,000. The
      increase in working capital was a result of $1,889,798 of net proceeds received
      from the equity raise during the third quarter 2007.





On
      September 17, 2007, the Company completed a private placement of 4,350 shares
      of
      series B convertible preferred stock, par value $0.001 per share and warrants
      to
      purchase the Company’s common stock, par value $0.001 per share. Each share of
      series B preferred stock is initially convertible into 830.36 shares of common
      stock. The warrants have a seven year term and are initially exercisable into
      2,167,232 shares of common stock. The warrants are exercisable, at the holder’s
      election, for shares of the Company’s common stock in either a cash or cashless
      exercise. Half of the warrants have an initial exercise price equal to $1.2043
      per share and the other half have an initial exercise price of $1.3849 per
      share. The Company also issued warrants to the financial advisor in the
      transaction, Canaccord Adams, Inc., to purchase 67,530 shares of common stock.
      As of September 30, 2007, $2,175,000 remained in escrow until stockholder
      approval for the transaction is effective. We have obtained written consents
      from stockholders sufficient to approve the transaction and sent an information
      statement to all stockholders detailing the transaction. We expect the approval
      to be effective November 23, 2007.




15





Net
      cash
      used in operating activities totaled $2,353,000 in the nine months ended
      September 30, 2007 compared to $2,092,000 in the comparable 2006 quarter. This
      slight increase in usage was primarily the result of the timing of cash receipts
      and payments.





We
      invested $306,000 in the purchase of equipment and the acquisition of patents
      in
      the first nine months of 2007, compared to $481,000 for the investment of these
      items in the first nine months of 2006. The decrease represents a $176,000
      investment in our information technology systems during the first nine months
      of
      2006 that did not reoccur in the first nine months of 2007.





Net
      cash
      proceeds from our financing activity in the nine months ended September 30,
      2007
      was $1,431,000, compared to a cash usage of $57,000 in the nine months ended
      September 30, 2006. The increase was due to the equity raise during the nine
      months ended September 30, 2007 as previously described.





We
      currently expect that existing cash and cash equivalents will be sufficient
      to
      fund our operations for at least the next twelve months. In the meantime, we
      plan to continue to utilize the net proceeds from our 2007 private placement
      to
      support the proposed expansion of our business to serve larger scale clinical
      trials, and to increase our sales and marketing initiatives to more broadly
      penetrate the market. We also plan to continue to explore the use of our
      technology in other therapeutic areas.





**Off
      Balance Sheet Arrangements**





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





**Forward
      Looking Statements**





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





·
            adverse
                economic conditions;





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





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





·
            adverse
                results of any legal proceedings;





·
            the
                volatility of our operating results and financial condition;





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





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





All
      statements, other than statements of historical fact, included in this report
      including, without limitation, statements regarding our strategy, future
      operations, financial position, estimated revenue or losses, projected costs,
      prospects and plans and objectives of management are forward-looking statements.
      When used in this report, the words “may,” “believe,” “anticipate,” “intend,”
“estimate,” “expect,” “project,” “plan,” “could,” “would” and similar
      expressions are intended to identify forward-looking statements, although not
      all forward-looking statements contain such identifying words. All
      forward-looking statements speak only as of the date of this report. We do
      not
      undertake any obligation to update any forward-looking statements or other
      information contained in this report. Existing stockholders and potential
      investors should not place undue reliance on these forward-looking statements.
      Although we believe that our plans, intentions and expectations reflected in
      or
      suggested by the forward-looking statements in this report are reasonable,
      we
      cannot assure our stockholders or potential investors that these plans,
      intentions or expectations will be achieved. We disclose important factors
      that
      could cause our actual results to differ materially from our expectations under
      the heading entitled “Risk Factors” in our annual report on Form 10-KSB for the
      fiscal year ended December 31, 2006 filed with the Securities and Exchange
      Commission (“SEC”) and elsewhere in this report. These risk factors qualify all
      forward-looking statements attributable to us or persons acting on our behalf.




16




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




**Evaluation
      of Disclosure Controls and Procedures**




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





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 September 30, 2007. Based on that evaluation,
      the Company’s management, including the CEO and CFO, concluded that no change in
      the Company’s internal controls over financial reporting occurred during the
      fiscal quarter ended September 30, 2007 that has materially affected or is
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




17




**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





None





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





During
      the quarter ended September 30, 2007, the Company issued 90,000 shares of common
      stock upon conversion of 225 shares of series A convertible preferred stock
      by
      existing holders of those shares pursuant to the terms thereof. The Company
      did
      not receive any cash or other consideration in connection with the conversions.
      Additionally, no commission or other remuneration was paid by the Company in
      connection with such conversions. The issuance of common stock upon conversions
      of the series A convertible preferred stock was made in reliance on the
      exemption provided in Section 3(a)(9) of the Securities Act of 1933, as
      amended.





**Item
      3. Defaults upon Senior Securities**





Not
      applicable.





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




As
      discussed above, on September 12, 2007, we entered into a Securities Purchase
      Agreement pursuant to which we sold and issued 4,350 shares of our Series B
      Preferred Stock and warrants to purchase our common stock, for an aggregate
      purchase price of $4,350,000. The transaction closed on September 17, 2007.





Under
      NASD Marketplace Rule 4350(i)(1)(D)(ii), we are required to obtain stockholder
      approval for the sale, issuance or potential issuance of our common stock (or
      securities convertible into or exercisable into our common stock) equal to
      20%
      or more of the common stock or 20% or more of the voting power outstanding
      before the issuance for less than the greater of book or market value of the
      stock. The securities issued in the financing were issued at a discount to
      the
      market price of our common stock and constitute more than 20% of our common
      stock outstanding.





The
      holders of a majority of our outstanding common and Series A Preferred Stock
      voting on an as converted basis, representing 13,230,489 outstanding voting
      shares, approved the issuance of the Series B Preferred Stock and warrants
      in
      the transaction by written consent dated as of October 3, 2007.





Our
      stockholders also approved, by written consent, an amendment to the Certificate
      of Designation of Series B Preferred Stock providing that the conversion price
      used to determine the number of votes to which each share of our Series B
      Preferred Stock is entitled will be fixed at $1.23, the closing bid price of
      our
      common stock on September 12, 2007, the date the conversion price was agreed
      to
      by the parties. The amendment was approved by written consent dated as of
      October 3, 2007 of the holders of a majority of our common stock and Series
      A
      Preferred Stock, voting on an as converted basis, representing 13,252,007
      outstanding voting shares. It was also approved by the holders of two-thirds
      of
      our Series B Preferred Stock, voting as a separate class, by written consent
      dated as of September 28, 2007, voting 3,250 shares.





We
      have
      sent a definitive information statement to our stockholders describing these
      actions. The actions will become effective on November 23, 2007.




18




**Item
      5. Other Information**





None





**Item
      6. Exhibits**








2.1  Securities
      Purchase Agreement dated September 12, 2007 by and among the Company and the
      Buyers listed on the Schedule of Buyers attached thereto. (1)





2.2  Securities
      Exchange Agreement, dated November 4, 2005 among ConsultAmerica, Inc.,
      VirtualScopics, LLC and the controlling members of VirtualScopics,
      LLC.(2)





3.1  Certificate
      of Incorporation of VirtualScopics, Inc. dated April 21, 1988. (3)




3.2  Certificate
      of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated
      February 2, 1989. (3)




3.3  Certificate
      for Renewal and Revival of Certificate of Incorporation of VirtualScopics,
      Inc.
      dated February 23, 2004. (3)




3.4  Certificate
      of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated
      August 20, 2004 (3)




3.5  Certificate
      of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated
      October 7, 2005. (4)




3.6  Certificate
      of Amendment to Certificate of Incorporation of VirtualScopics, Inc. dated
      November 4, 2005. (5)




3.7  Certificate
      of Designations, Powers, Preferences and Other Rights and Qualifications of
      Series A Convertible Preferred Stock of VirtualScopics, Inc. dated November
      4,
      2005. (5)




3.8  Certificate
      of Designations, Powers, Preferences and Other Rights and Qualifications of
      Series B Convertible Preferred Stock of VirtualScopics, Inc. dated September
      12,
      2007. (1)




3.9  Amended
      and Restated Bylaws of VirtualScopics, Inc. dated August 28, 2007.
      (6)


4.1  Registration
      Rights Agreement dated September 12, 2007 between the Company and the Buyers
      listed on the Schedule of Buyers thereto. (1)




4.2  Form
      of
      Warrant to Purchase Common Stock of VirtualScopics, Inc. (1)





10.1 Indemnification
      Agreement by and among VirtualScopics, Inc., and Norman Mintz dated as of August
      1, 2007. (7)





10.2  Escrow
      Agreement by and between VirtualScopics, Inc., and each buyer identified on
      the
      Schedule of Buyers attached thereto and Woods Oviatt Gilman LLP, dated September
      12, 2007, with the Amendment and Waiver, dated September 13, 2007.
      (1)





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





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





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





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




19








(1)  Incorporated
      herein by reference to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on September 17, 2007 (File No.
      000-52018).





(2)  Incorporated
      herein by reference to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on November 10, 2005 (File No.
      333-120253).





(3)  Incorporated
      herein by reference to the Company’s Registration Statement on Form SB-2 filed
      with the Securities and Exchange Commission on November 4, 2004 (File No.
      333-120253).




(4)  Incorporated
      by reference to the Company’s Annual Report on Form 10-KSB filed with the
      Securities and Exchange Commission on March 30, 2006 (File No. 333-120253).




(5)  Incorporated
      herein by reference to the Company’s Report on Form 8-K filed with the
      Securities and Exchange Commission on November 10, 2005 (File No.
      333-120253).





(6)  Incorporated
      herein by reference to Exhibit 3.9 to the Company’s Registration Statement on
      Form S-3 filed with the Securities and Exchange Commission on October 11, 2007
      (File No. 333-146635)





(7)  Reference
      is made to the Company’s Form of Indemnification Agreement by and among
      VirtualScopics, Inc., and the directors and officers of the Company filed as
      Exhibit 10.19 to the Company’s Current Report of Form 8-K filed with the
      Securities and Exchange Commission on May 2, 2006.





*
      Filed
      herewith




20




**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:
              November 13, 2007
            VIRTUALSCOPICS, INC./s/
              Jeffrey MarkinJeffrey
              MarkinPresident
              and
              Chief Executive Officer  /s/
                Molly HendersonMolly
                HendersonChief
                Financial Officer and Vice President of
                Finance
 21





**Exhibit
      Index**





2.1  Securities
      Purchase Agreement dated September 12, 2007 by and among the Company and the
      Buyers listed on the Schedule of Buyers attached thereto. (1)





2.2  Securities
      Exchange Agreement, dated November 4, 2005 among ConsultAmerica, Inc.,
      VirtualScopics, LLC and the controlling members of VirtualScopics,
      LLC.(2)





3.1  Certificate
      of Incorporation of VirtualScopics, Inc. dated April 21, 1988. (3)




3.2  Certificate
      of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated
      February 2, 1989. (3)




3.3  Certificate
      for Renewal and Revival of Certificate of Incorporation of VirtualScopics,
      Inc.
      dated February 23, 2004. (3)




3.4  Certificate
      of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated
      August 20, 2004 (3)




3.5  Certificate
      of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated
      October 7, 2005. (4)




3.6  Certificate
      of Amendment to Certificate of Incorporation of VirtualScopics, Inc. dated
      November 4, 2005. (5)




3.7  Certificate
      of Designations, Powers, Preferences and Other Rights and Qualifications of
      Series A Convertible Preferred Stock of VirtualScopics, Inc. dated November
      4,
      2005. (5)




3.8  Certificate
      of Designations, Powers, Preferences and Other Rights and Qualifications of
      Series B Convertible Preferred Stock of VirtualScopics, Inc. dated September
      12,
      2007. (1)




3.9 Amended
      and Restated Bylaws of VirtualScopics, Inc. dated August 28, 2007.
      (6)


4.1  Registration
      Rights Agreement dated September 12, 2007 between the Company and the Buyers
      listed on the Schedule of Buyers thereto. (1)




4.2 Form
      of
      Warrant to Purchase Common Stock of VirtualScopics, Inc. (1)





10.1  Indemnification
      Agreement by and among VirtualScopics, Inc., and Norman Mintz dated as of August
      1, 2007. (7)





10.2  Escrow
      Agreement by and between VirtualScopics, Inc., and each buyer identified on
      the
      Schedule of Buyers attached thereto and Woods Oviatt Gilman LLP, dated September
      12, 2007, with the Amendment and Waiver, dated September 13, 2007.
      (1)





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





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





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





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




(1)  Incorporated
      herein by reference to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on September 17, 2007 (File No.
      000-52018).




22




(2)  Incorporated
      herein by reference to the Company’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on November 10, 2005 (File No.
      333-120253).





(3)  Incorporated
      herein by reference to the Company’s Registration Statement on Form SB-2 filed
      with the Securities and Exchange Commission on November 4, 2004 (File No.
      333-120253).




(4) Incorporated
      by reference to the Company’s Annual Report on Form 10-KSB filed with the
      Securities and Exchange Commission on March 30, 2006 (File No. 333-120253).




(5) Incorporated
      herein by reference to the Company’s Report on Form 8-K filed with the
      Securities and Exchange Commission on November 10, 2005 (File No.
      333-120253).





(6)  Incorporated
      herein by reference to Exhibit 3.9 to the Company’s Registration Statement on
      Form S-3 filed with the Securities and Exchange Commission on October 11, 2007
      (File No. 333-146635)





(7)  Reference
      is made to the Company’s Form of Indemnification Agreement by and among
      VirtualScopics, Inc., and the directors and officers of the Company filed as
      Exhibit 10.19 to the Company’s Current Report of Form 8-K filed with the
      Securities and Exchange Commission on May 2, 2006.





*
      Filed
      herewith




23