10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ____ to____

Commission file number: 000-52018

VIRTUALSCOPICS, INC. 

(Exact name of registrant as specified in its charter)

DELAWARE	04- 3007151
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

500 Linden Oaks, Rochester, New York	14625
(Address of principal executive offices)	(Zip Code)

(585) 249-6231

(Registrant's Telephone Number, Including Area Code)

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

Common Stock, $0.001 par value

NASDAQ Capital Market

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

TITLE OF EACH CLASS:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

¨ Yes x No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Larger accelerated filer  ¨	Accelerated filer ¨
Non-accelerated filer¨  (Do not check if a smaller reporting company)	Smaller reporting company x

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

The aggregate market value of the issuer’s voting and non-voting common equity held by non-affiliates of the issuer as of June 30, 2012 was approximately $18,720,109 (calculated by excluding all shares held by executive officers, directors and holders known to the registrant of five percent or more of the voting power of the registrant's common stock, without conceding that such persons are “affiliates” of the registrant for purposes of the federal securities laws). This amount does not include any value for the issuer’s series A preferred stock, series B preferred stock or series C preferred stock, for which there is no established United States public trading market, or any value for the common stock issuable upon conversion of shares of such preferred stock.

As of February 28, 2013, there were outstanding 29,799,523 shares of the issuer’s common stock, $.001 par value.

Documents Incorporated By Reference: Portions of the Company's Proxy Statement to be delivered to the Company’s stockholders in connection with the Company’s 2012 Annual Meeting of Stockholders, which the Company plans to file with the Securities and Exchange Commission pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, on or prior to April 30, 2013, are incorporated by reference in Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K.

TABLE OF CONTENTS

		Page Numbers
PART I
	ITEM 1: Business	4
	ITEM 1A: Risk Factors	14
	ITEM 2: Properties	18
	ITEM 3: Legal Proceedings	19
	ITEM 4: Mine Safety Disclosures	19
PART II
	ITEM 5: Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
	ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations	21
	ITEM 8: Financial Statements and Supplementary Data	25
	ITEM 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	25
	ITEM 9A: Controls and Procedures	25
	ITEM 9B: Other Information	26
PART III
	ITEM 10: Directors, Executive Officers and Corporate Governance	27
	ITEM 11: Executive Compensation	27
	ITEM 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	27
	ITEM 13: Certain Relationships and Related Transactions, and Director Independence	27
	ITEM 14: Principal Accountant Fees and Services	27
PART IV
	ITEM 15: Exhibits	27

PART I

FORWARD-LOOKING STATEMENTS

Some of the statements under the captions of this report on Form 10-K titled “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” or “Business,” contained or incorporated by reference elsewhere in this report, and in our other reports filed with the Securities Exchange Commission (“SEC”) constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These statements are made pursuant to the safe harbor provisions 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;

· loss of market share due to competing products and services;

· 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 and scientific personnel;

· inability to raise sufficient additional capital to operate our business, if necessary, and;

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

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 “Risk Factors” and elsewhere in this report. These risk factors qualify all forward-looking statements attributable to us or persons acting on our behalf.

Information regarding market and industry statistics contained in this report is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources, and we cannot assure our stockholders or potential investors of the accuracy or completeness of the data included in this report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We have no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. See “Risk Factors” for a more detailed discussion of uncertainties and risks that may have an impact on future results.

ITEM 1: Business

We are a provider of quantitative imaging solutions currently serving the pharmaceutical, biotechnology and medical device industries. We have created a suite of image analysis software tools and applications which are used in detecting and measuring specific anatomical structures and metabolic activity using medical images. Our proprietary software and algorithms provide measurement capabilities designed to improve clinical research and development. We focus on applying our imaging technology to improve the efficiency and effectiveness of the pharmaceutical and medical device research and development processes. We believe our technology can also be used in improving the treatment planning for patients with cancer and other debilitating diseases.

Business Overview

Our image-based measurement and visualization tools enable automated, accurate and reproducible measurement of minute changes that occur in anatomic structures in musculoskeletal, oncological, cardiological and neurological diseases. For pharmaceutical, biotechnology and medical device manufacturers, these tools can significantly alleviate or reduce clinical development bottlenecks by increasing the speed, accuracy and reliability of the demonstration of a new compound’s efficacy. Further, these measurements can be used to assess the viability of continuing a drug development project and eliminate as soon as possible a drug that is likely to fail. Early failure is critical to the pharmaceutical industry to prevent the expenditure of R&D funds on a drug that will not perform as expected. We believe that this is especially important today with the large number of compounds that are awaiting evaluation.

We have also begun pursuing the expansion of the use of our quantitative imaging into new markets. Our first of these applications, which we believe has significant benefits to society, is our blood flow and vascular permeability software tool which could provide patients and oncologists information to assist in the determination whether an anti-angiogenic therapy is having the desired effect. We believe this application will better assist oncologists with treatment planning for patients undergoing anti-angiogenic cancer therapies. We have filed a 510k with the FDA and have exchanged several communications with the FDA on our application. On March 1, 2013 we received confirmation from the FDA that they have received our latest filing and we are awaiting their comments. In the meantime, we are working with consultants to determine the best approach relative to validation and commercialization strategies which includes the marketing and distribution of our first quantitative imaging application outside the drug development market we currently serve. We will continue to assess the best mechanism for channeling our application into the market as well as the process for obtaining reimbursement from payers. Any additional capital requirements necessary to successfully commercialize our first application will depend on feedback from the FDA as well as the insurance providers (payers) who would be providing the reimbursement for the procedure and its analysis. There can be no assurance that approval will be granted or we will experience significant demand for our application, or that we will have sufficient capital available to successfully commercialize this application.

Benefits to Pharmaceutical, Biotech and Medical Device Companies

The benefits to pharmaceutical companies from using our image analysis tools can include shorter clinical development time, and earlier determination of the effectiveness or ineffectiveness of a new drug or compound. Our technology helps to curtail trials that are not likely to be beneficial and to avoid mistaken termination of compounds that are likely to prove efficacious, through:

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

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

· reduced processing time for image data analysis through automation.

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In addition, our technology reduces aggregate clinical development costs through:

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

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

Benefits to Patients and Health Care Providers in Personalized Medicine

The specific opportunities that we are pursuing within personalized medicine are mostly related to the treatment monitoring of patients. Cancer is a leading cause of death throughout much of the developed world, and technologies for closely monitoring disease progression and response to treatment are currently lacking. We believe this presents us with a significant market opportunity.

In personalized medicine, our technology is designed to offer physicians and medical insurers better treatment planning of patients based on determination of patient response to compounds or other treatment options. For example, in oncology we have demonstrated the ability to determine whether patients are showing response to an anti-angiogenic drug after only 48 hours of treatment (Glenn Liu et al., “Dynamic Contrast-Enhanced Magnetic Resonance Imaging as a Pharmacodynamic Measure of Response After Acute Dosing of AG-013736, an Oral Angiogenesis Inhibitor, in Patients With Advanced Solid Tumors: Results From a Phase I Study,” Journal of Clinical Oncology, vol. 20, August 20, 2005).

We believe we are the first company able to provide blood flow and volume measurements for cancer diagnosis and monitoring in a standardized and consistent way across multiple institutions (Jerry M. Collins, “Imaging and Other Biomarkers in Early Clinical Studies: One Step at a Time or Re-Engineering Drug Development?,” Journal of Clinical Oncology, vol. 20, August 20, 2005). These quantitative measurements are vital for assessing patient response to next-generation anti-angiogenic cancer drugs.

Our Technology Solution

Oncology Applications

Automated Measurement of Tumor Structure in Oncology

Rapid determination of drug efficacy depends on precise measurement of tumor structure and function. Yet current practices - direct measurement from films and computer-aided tracing - can be time-consuming, inaccurate and highly variable. Manual approaches often lead to false conclusions when tumors take on abnormal shapes; where a two-dimensional analysis may indicate no change, a three dimensional analysis may show a significant change in tumor volume. The RECIST standard, still the primary imaging endpoint for assessing disease progression or response to treatment in many types of cancer, measures structural changes in tumors through a simple summation of longest diameters, limited to the axial imaging plane. Originally developed for x-ray imaging, it fails to take advantage of the far richer three dimensional information set available with today's imaging technologies.

Our semi-automated, statistically-driven feature analysis provides greater precision, higher throughput and less dependence on a particular reader than manual tracing does. In retrospective analysis for a leading pharmaceutical company, our volumetric measurement showed that tumors found to be stable under RECIST were actually growing significantly. With our semi-automated analysis we believe we could have discovered the failure sooner and avoided the expense of funding the next phase of clinical research. Conversely, volumetric measurement can greatly accelerate clinical research by preventing mistaken kills and identifying efficacious compounds sooner.

Innovation in Image-Based Biomarkers

With a multidisciplinary team of medical professionals (including staff radiologists), scientists and software developers, we deliver unparalleled innovation in the analysis of specific biomarkers. Measurements may include specific FDA-acknowledged (RECIST and tumor volume) biomarkers as well as secondary or exploratory endpoints such as cavitation/necrosis, or shape. By extracting substantially more information from existing imaging modalities such as CT or MRI, we believe we offer a more definite and efficient basis for determining the course of clinical trials.

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Measurement of Blood Flow and Metabolic Activity

A growing number of anti-cancer drugs both on the market (e.g., Iressa and Avastin) and under development are designed to reduce the blood supply available to tumors, thereby depriving them of the ability to grow and spread. During development, these compounds require the ability to accurately measure blood flow and vascular permeability in vivo, in order to determine dose-response relationships and compound efficacy. In the clinic, this same capability is necessary in order to determine whether a particular patient is responding to treatment. We have developed a method, using dynamic contrast enhanced magnetic resonance imaging (DCE-MRI), to accomplish this. This technique involves repeated imaging, generally every five to ten seconds, for a period of several minutes before and after the injection of a gadolinium-based, FDA-approved, contrast agent. Tracer concentration changes over time can then be measured both in normal and cancerous tissues, and based on this information parameters such as blood flow, blood volume and vascular permeability can be derived. These parameters have been shown to relate directly to the activity of anti-angiogenesis and anti-vascular cancer drugs, and to allow the prediction of response or failure after only a few days of treatment.

With dynamic contrast-enhanced series, changes in signal intensity can be related to tracer concentration in tissues. This information can be used to determine the blood flow to the tumor.

Musculoskeletal Applications

Our image analysis provides a degree of accuracy and reproducibility that cannot be duplicated by manual techniques. Standard endpoints, such as pain or functionality scoring are largely subjective and difficult to reproduce. Our quantitative imaging replaces subjective evaluation - knee pain ranked on a scale of 1 to 10 - with an objective quantification - volume of lost cartilage in cubic millimeters. Unlike manual assessment methods, our computer aided approach allows you to track the boundary location of each structure in a data set from one scan to another, even if the patient is not positioned in precisely the same way for each scan, or if there have been some anatomical changes between scans. For cartilage volumes and thickness measurements, the Coefficient of Variation (CV) typically falls between 2% and 4% - we can detect minute changes with statistical confidence, allowing our clients to reduce study populations or shorten study durations.

With our automated analysis, researchers can more confidently make the go/no go decision for a compound early in the evaluation process, allowing scarce resources to be allocated to the most promising candidates. In the evaluation of osteoarthritis, for example, MRI of the cartilage in the knee coupled with automated measurement of volume and composition shows disease changes in months; these changes would not be apparent for years using standard x-ray evaluation.

Reproducible medical image analysis is driven by computer image analysis algorithms that enable quantitative measurement of different structural parameters. Guided by the information present in the images, as well as embedded anatomical knowledge, the algorithms enable segmentation of different structures. From an MRI knee scan, for instance, it is possible to produce a three-dimensional reconstruction that graphically distinguishes cartilage from underlying bone, as well as from ligaments, fluid, degenerated menisci or inflamed synovium. This capability provides a valuable assessment tool for clinical research in osteoarthritis - a disease with multiple endpoints - because it allows sensitive and specific measurement of all the components of the knee joint and detects small changes in any of those components over time.

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Medical Device and Biologics

New research continues to focus on the development of devices and/or biologics that will generate new and better cartilage for patients with osteoarthritis and knee injuries. Our technology uses a suite of tools to assist in the identification of cartilage lesions within the knee. These tools allow for the tracking of structural changes and the quality of new tissue being grown within those lesions. For example, we are currently working with leading biologic and medical device companies to determine the percent fill for lesions implanted with the device/biologic. This analysis serves as a useful tool in that it demonstrates the degree of success of the implant. It is presumed in the industry that the higher the percent fill the lower the degree of pain for the patient. We also provide quality of tissue assessments (i.e. T2 maps) to provide our customers with information on the composition of the repair tissue. It is also believed that the closer the repair tissue is to ‘normal’ tissue the longer the life span is of the repair tissue with the resulting benefit being the ultimate health and comfort of the patient.

Additionally, our motion tracking software capabilities allows us to more precisely measure changes in the structural and tissue quality measurements. It has been demonstrated that this technique can reduce the amount of variability inherent in these types of measurements, thereby, reducing the amount of patients necessary to demonstrate the effectiveness of the medical device and/or biologic.

Cardiovascular Applications

Cardiovascular disease is one of the leading causes of mortality within most developed countries. Early identification of the changes leading the disease can prompt early intervention which can result in longer and better quality of life as well as lower healthcare costs. Imaging provides a valuable tool for the assessment of early development of arterial plaques which can lead to arterial stenosis as well as stroke and myocardial infarction. The current primary imaging tool for screening cardiovascular patients is ultrasound but these carotid ultrasound scans produce a large amount of data which can be laborious and imprecise to analyze. We have developed a suite of patented semi-automated tools for the identification and measurement of carotid plaques which has proven to reduce analysis time to as little as 3 minutes per case compared to the current manual methods which can take over one hour. In addition, these tools have been tested against expert readers in the field and found to be highly precise and accurate and in many cases more sensitive to the appearance of small arterial plaques. This provides a valuable tool for screening of normal/healthy individuals as well as monitoring the use in patients enrolled in clinical trials.

More detailed information about plaque composition and progression can be obtained by using MRI. This modality has advantages over ultrasound in that it can precisely measure plaque volume as well as composition. This is important because it is widely recognized in the industry that certain plaques, in particular those with high lipid or necrotic cores, pose a much higher risk to the health of the patient, while those that are fibrous may pose a lower risk. Therefore, the ability to distinguish between benign and vulnerable plaques may enable treating physicians to better personalize the treatment for each patient. Additionally, certain drugs designed to reduce blood lipids may have greater effect on lipid rich plaques, making this a potentially beneficial screening tool for patients enrolled in clinical trials. Our patented semi-automated tools for the measurement of plaques in MRI and automated identification of lipids and calcification allows accurate and precise analysis of vulnerable plaques.

These proprietary ultrasound and MRI techniques for cardiovascular health are being used in large industry sponsored trials today.

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Neurology Applications

Evaluating diseases such as multiple sclerosis (MS), epilepsy, and Alzheimer’s requires the identification and measurement of neurological structures and lesions. Manual tracing, especially of abnormal neurological structures, requires considerable expertise and time. Tracing introduces significant variability even when all measurements are made by one individual, an effect that is compounded with multiple operators. Intra- and inter-operator variability poses a major obstacle for researchers attempting to take advantage of the power of MRI analysis in the study of neurological disease. VirtualScopics eliminates these problems with automated, statistically driven feature analysis. Our algorithms employ the two types of knowledge that expert radiologists use to measure structures within the brain: differentiation of various tissue types and knowledge of structure, size, location, and shape. Our software incorporates an a priori model of neurological anatomy that enables the measurement of structures with indistinct boundaries such as the hippocampus. Knowledge of anatomical structures also improves reproducibility, allowing disease progression to be precisely monitored over time. To gain higher resolution and superior tissue separability, we reconstruct volumes by co-registering and fusing images from multiple imaging planes and pulse sequences. Moreover, its automatic reconstruction produces a smooth and continuous surface, much closer to actual shape than would result from manual segmentation.

Many neurological conditions can be detected and evaluated with quantitative measures of structures in MRI studies. While automated measurement tracks lesions in MS clinical trials, it also provides a critical tool in measuring hippocampal volume for diagnosing and monitoring both intractable temporal lobe epilepsy and Alzheimer’s disease. Validation studies prove that our automated approach provides greater speed, precision and accuracy in clinical trials than manual methods do. In MS clinical trials, we provide an FDA-approved metric for quickly determining drug efficacy of MS compounds. A VirtualScopics validation study compared manual tracing using two VirtualScopics software algorithms for automated measurement: geometrically constrained region growth (GEORG) and directed clustering. Our Core Lab utilizes both algorithms to achieve an optimal system for quantification of MS lesions in multi-spectral MRI studies. In the MS validation study, mean processing time was 60 minutes for manual tracing, 10 minutes for GEORG, and 3 minutes for directed clustering. Intra- and inter-operator coefficients of variation were 5.1% and 16.5% for manual tracing, 1.4% and 2.3% for region growth and 1.5% and 5.2% for directed clustering. The study also compared our automated measurement and manual tracing from an expert radiologist against a phantom data set, obtained from the McConnell Brain Imaging Center. In all data sets, automated algorithms performed significantly better than manual tracing. Our automated measurements also proved more repeatable than manual methods, an important feature in multi-center clinical trials.

Sales and Marketing

Our sales and business development strategy is centered around the publication and presentation of our technology and services at targeted industry conferences along with an active marketing effort aimed at pharmaceutical, medical device, and biotechnology companies. To date, we have made significant inroads by having contracts with 10 of the 15 leading pharmaceutical, biotechnology and medical device companies. During 2012, we performed services for 123 projects representing 31 customers. We continue to grow our business by leveraging relationships with our current customers and through referrals. As a result, our current customers have been instrumental in introducing us to other therapeutic groups within their organization. Our marketing efforts are instrumental in broadening the awareness of VirtualScopics throughout the industry and educating current customers on the breadth of our services.

Complementing our sales and marketing effort is our strategic alliance with PPD, Inc., signed in October 2010 and expanded to include multiple therapeutic areas in January 2012. The alliance affords us the opportunity to penetrate an expanded customer base through a combined solution to the market. We are working closely to develop the best in kind solution combining core Clinical Resource Organization, or CRO, services with our imaging platform. The alliance also provides for our earlier engagement with potential customers because PPD tends to be engaged earlier in the supplier selection process of the drug development cycle. As of the date of this report we had 10 active projects under the PPD alliance.

In addition to these initiatives, we actively participate in medical conferences to showcase our technology, services and results, as well as joint publications with sponsors which often results in highly visible, research. We have built a strong base of clinical collaborators across varied disease platforms.

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Industry Background and Market Trends

Market in Pharmaceutical and Medical Device Development

Industry Overview

The global pharmaceutical market grew at an expected rate of 1.5% in 2012 with the industry forecasted to generate around $970 billion in revenues with an expected expansion to $1 trillion in 2013. Although impacted by the economic downturn in 2009, the industry is insulated to a greater extent than other industries where consumer spending is far more discretionary. Other factors such as patent expirations, the introduction of cheaper generics, a slowdown in innovative product launches, and hurdles imposed by payers on market access and acceptance have contributed to slowing sales growth in 2012. While the pharmaceutical market is expected to rebound as the global economy recovers, an unprecedented level of potential patent expirations in 2011 and 2012 will curb sales growth. In spite of these pressures, the demand for medicines and treatments is expected to rise due to 1) an aging world population with an increased need for medical care, 2) unhealthy lifestyles leading to increased frequency of chronic diseases, 3) high economic growth in emerging markets leading to an increased demand for better quality healthcare and 4) scientific advances that create the foundation for innovative treatments for previously untreatable diseases.

The global compound annual growth rate (CAGR) for pharmaceutical market growth is forecasted to be 3-6 percent through 2016. The U.S. Pharmaceutical market was expected to expand by 1-4 percent through 2016. Emerging markets on the other hand were expected to grow collectively at a 12-15 percent rate through 2016 to $150-165 billion. Meanwhile, the five major European markets of Germany, France, Italy, Spain and the UK, along with Canada, will only grow at a -1-2% pace.¹ Approximately 32 - 37 new molecular entities (NMEs) are expected to be launched annually over the next five years through 2016 with the FDA approving 39 NMEs in 2012.²

As the growth rate in the demand for prescription drugs decreases, it is getting harder for pharmaceutical companies to maintain the same levels of R&D spending as in the past. Additionally, the cost and complexity of developing new drugs, in part due to the increased scrutiny over product safety and the pressure to demonstrate health outcomes earlier, has increased substantially relative to its eventual potential value. It has been estimated that the average cost to yield a single FDA approved drug is approximately $1.2 billion and the entire research and development and FDA approval process time is between 10 and 15 years. Additionally, for every 5,000 -10,000 compounds that enter at the discovery stage, only one goes on to reach the market. The table below illustrates the complete R&D process from pre discovery to market.

¹ IMS Institute for Healthcare Informatics – The Global Use of Medicines: Outlook Through 2016

² Food and Drug Administration – 2012 Novel New Drugs Summary

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Drug Development Process

Typically, most functions of the drug and medical device R&D process are managed by CROs. Rising costs and falling productivity, among other trends are driving pharmaceutical companies to outsource an increasing range of functions to CROs in search of time and cost savings. This produced strong double-digit growth in the CRO sector between 2003 and 2008. The total CRO market size is estimated to have reached $36.6bn in 2011 with a projected CAGR of 10% over the next five years. The market is highly fragmented and the number of CROs worldwide has reached over 1,100 despite continued consolidation. The leading CRO’s by amount of estimated market share are Quintiles (13%), Covance (9%) and PPD (6%)

Although the FDA has reduced the average approval time for new drugs, clinical development time has been increasing over the years, resulting in total development time being fairly flat in recent years. Growing complexities in protocol design leading to longer clinical development times has been the major contributor to the rising costs that sponsors are facing. The table below illustrates the increasing trend in R&D costs over the years, while the number of new drug approvals continues to stagnate.

The current trend in drug development is for pharmaceutical companies to shift towards a niche market. The 'one size fits all' approach is being replaced by a more targeted, innovative approach to develop treatments for small patient groups with complicated diseases such as cancer, rheumatoid arthritis and immune disorders. Such 'niche buster drugs' are expected to exploit new technologies such as biomarkers and theranostics and will support the continued development of personalized medicine.

With the U.S administration implementing health care reform, increased regulatory oversight and pressure on drug companies to reduce prices, there is a need for R&D to become more efficient and reduce costs to prevent an innovation slowdown in the industry. Many leading pharmaceutical companies have restructured their R&D processes by establishing centers of R&D excellence and disease focused centers although historical commercial success rate for new drugs is low, with only 2 out of 10 drugs matching or exceeding average R&D costs.

Because of these factors, we believe our quantitative imaging analyses offer a solution to these issues within drug development by providing more precise and reliable information in the assessment of compounds being developed. We believe our increased precision and reproducibility enable our customers to make more confident decisions on the efficacy of their compounds.

³ PhRMA – 2012 Profile Pharmaceutical Industry

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Quantitative Image Analysis Services

We have conducted research to determine the current size of the market for image analysis services in clinical trials supporting the pharmaceutical, biotech and medical device industries. Based on our research and discussion within the imaging CRO and medical device and drug development industries, we have found that the market is fragmented, with approximately $400 million in total annual revenues projected for 2013.

Prior to 2011, the industry underwent a growth phase as the use of imaging end-points is becoming more prevalent within the FDA. In 2012, we estimate that the market size was consistent with 2011 as companies experienced reductions in R&D spending and continued consolidation within the pharmaceutical industry. We currently estimate the annual growth rate for the market at 0% to 10% for the next five years. Our estimates are based on the amount of trials currently conducted within therapeutic areas that we work in. We also have performed a bottom-up calculation of the individual growth rates of the companies and academic centers within the industry. We believe that some of the largest players, which offer the broadest set of capabilities, are experiencing flat to modest growth relative to their revenues derived by imaging services. Specifically, BioClinica, Perceptive (division of Parexel), Synarc, Corelab Partners and ICON.

Intellectual Property

We consider our proprietary and patented technology and the technology for which we have applied for patent protection to be of importance to our business plan. We hold eleven patents issued by the United States Patent and Trademark Office. These patents begin to expire in November 2020 through 2028. We have also applied for a number of other patents, both domestically and in foreign jurisdictions. To protect our proprietary technology, we rely primarily on a combination of confidentiality procedures, copyright, trademark and patent laws. Our policy is to require employees and consultants to execute confidentiality and invention assignment agreements upon the commencement of their relationship with us. These agreements provide that confidential information developed or made known during the course of a relationship with us must be kept confidential and not disclosed to third parties except in specific circumstances and for the assignment to us of intellectual property rights developed within the scope of the employment relationship.

Competition

Our main competitors are imaging clinical research organizations (iCROs) providing clinical trial services to pharmaceutical companies. As of the date of this report, we believe that none of the leading imaging CROs have technology capabilities that are comparable to our technology. Imaging CROs typically provide manual and non-differentiated interpretation of medical images for the pharmaceutical industry. As a result, we believe that currently there is an opportunity for us to establish a technology advantage and a set of differentiated services in the advanced image-based biomarker market.

The main CROs which participate in imaging trials are BioClinica, Core Lab Partners, Synarc, Perceptive and ICON. It is our understanding that these companies use predominately manual approaches that are unable to quantify minute structures in medical images. As a result, it may be difficult for them to offer differentiated services to achieve higher profit margins and at the same levels of reproducibility as ours. Additionally, some academic centers have worked on software that has applications for neurological diseases. However, we believe these organizations lack the required FDA compliance standards and ability to scale their operations to meet customer demand and we believe they offer inferior technology.

Our technology competition is largely comprised of a limited number of university research centers that are developing the next generation of image analysis tools. Aside from university centers, there are a few commercial entities that have a desire to provide these advanced imaging services; however, we believe they are constrained by a lack of technical capabilities.

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Government Regulation

Healthcare in the United States is heavily regulated by the federal government, and by state and local governments. The federal laws and regulations affecting healthcare change constantly, thereby increasing the uncertainty and risk associated with any healthcare-related company.

The federal government regulates healthcare through various agencies, including the following:

· the Food and Drug Administration, or FDA, which administers the Food, Drug, and Cosmetic Act, or FD&C Act, as well as other relevant laws;

· Centers for Medicare & Medicaid Services, or CMS, which administers the Medicare and Medicaid programs;

· the Office of Inspector General, or OIG, which enforces various laws aimed at curtailing fraudulent or abusive practices, including by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the OIG to exclude health care providers and others from participating in federal healthcare programs; and

· the Office of Civil Rights which administers the privacy aspects of the Health Insurance Portability and Accountability Act of 1996, or HIPAA.

All of the aforementioned are agencies within the Department of Health and Human Services, or HHS. Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare program, the Public Health Service within HHS under the Public Health Service Act, the Department of Justice through the Federal False Claims Act and various criminal statutes, and state governments under the Medicaid program and their internal laws regulating all healthcare activities.

FDA

The FDA regulates medical devices. A “medical device,” or device, is an article, including software and software associated with another medical device, which, among other things, is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals. Computer software that complements a CT or MRI scan, such as VirtualScopics, we believe is considered a medical device and is therefore subject to FDA regulation. To date, our sales have been to the pharmaceutical and medical device industries to support their clinical trials. We would need to obtain FDA clearance or approval, as discussed below, before using our technology and services for diagnostic or treatment planning in a clinical setting. We have begun our process for obtaining clearance for our first personalized medicine application (DCE-MRI), no assurance can be given that such clearance or approval would be granted or that it would be granted in a timely manner.

Devices are subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation be conducted before a device receives approval for commercial distribution. In the United States, we generally are able to obtain permission to distribute a new device in two ways. The first applies to any new device that is substantially equivalent to a device first marketed prior to May 1976. In this case, to obtain FDA permission to distribute the device, we generally must submit a premarket notification application (a section 510(k) submission), and receive an FDA order finding substantial equivalence to a device (first marketed prior to May 1976) and permitting commercial distribution of that device for its intended use. A 510(k) submission must provide information supporting its claim of substantial equivalence to the predicate device.

If clinical data from human experience are required to support the 510(k) submission, these data must be gathered in compliance with investigational device exemption (IDE) regulations for investigations performed in the United States. The 510(k) process is normally used for software products of the type that we propose distributing. The FDA review process for premarket notifications submitted pursuant to section 510(k) takes on average about 90 days, but it can take substantially longer if the agency has concerns, and there is no guarantee that the agency will “clear” the device for marketing, in which case the device cannot be used for diagnosis and distributed in the United States. Nor is there any guarantee that the agency will deem the article subject to the 510(k) process, as opposed to the more time-consuming and resource intensive and problematic, premarket approval, or PMA, process described below.

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The second, more comprehensive, approval process applies to a new device that is not substantially equivalent to a pre-1976 product. In this case, two steps of FDA approval generally are required before we can market the product in the United States. First, we must comply with IDE regulations in connection with any human clinical investigation of the device. Second, the FDA must review our PMA application, which contains, among other things, clinical information acquired under the IDE. The FDA will approve the PMA application if it finds there is reasonable assurance the device is safe and effective for its intended use.

Certain changes to existing devices that do not significantly affect safety or effectiveness can be made with in vitro testing under reduced regulatory procedures, generally without human clinical trials and by filing a PMA supplement to a prior PMA. Exported devices are subject to the regulatory requirements of each country to which the device is exported, as well as certain FDA export requirements.

After approval or clearance to market is given, the FDA and foreign regulatory agencies, upon the occurrence of certain events, have the power to withdraw the clearance or require changes to a device, its manufacturing process, or its labeling or additional proof that regulatory requirements have been met.

A device manufacturer is also required to register with the FDA. As a result, we may be subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements and other regulations. In the European Union, we are required to maintain certain International Organization for Standardization (ISO) certifications in order to sell product and to undergo periodic inspections by notified bodies to obtain and maintain these certifications. These regulations require us to manufacture products and maintain documents in a prescribed manner with respect to design, manufacturing, testing and control activities. Further, we are required to comply with various FDA and other agency requirements for labeling and promotion. The Medical Device Reporting regulations require that we provide information to the FDA whenever there is evidence to reasonably suggest that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury. In addition, the FDA prohibits us from promoting a medical device for unapproved indications.

We currently meet the requirements of Good Clinical Practices: Consolidated Guidance, which governs the conduct of clinical trials, and our software complies with the FDA’s Regulation 21 CFR Part 11 (Electronic Records; Signatures) and 21 CFR Part 820.30, which outline the requirements for design controls in medical devices. As mentioned throughout this section, as we develop our approach into personalized medicine, FDA approval would most likely be required for the use of our software in that market.

Privacy Provisions of HIPAA

HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates “covered entities” (healthcare providers, insurers and clearinghouses) and indirectly regulates “business associates” with respect to the privacy of patients’ medical information. All entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is our policy to comply with HIPAA requirements.

Research and Development Costs

We incurred $1,603,177 and $1,450,608 in research and development costs for the years ended December 31, 2012 and 2011, respectively.

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Customers

One customer accounted for 45% of our revenue during the year ended December 31, 2012 and this same customer accounted for 55% of our revenue during the year ended December 31, 2011. The following table sets forth information as to revenue and percentage of revenue for these years for our three largest customers in 2012 and corresponding revenues for 2011:

	For the Years Ended December 31,
Customer	2012				2011
Novartis	$	5,773,140	(45	)%	$	7,897,108	(55	)%
Eisai	$	1,176,487	(9	)%	$	588,529	(4	)%
Merck	$	1,127,330	(9	)%	$	484,544	(3	)%

Employees

As of December 31, 2012, we had 96 employees and eight contract radiologists. Of our employees, 91are full-time.

ITEM 1A: Risk Factors

You should carefully consider the following risk factors before making an investment decision.  If any of the following risks actually occur, our business, financial condition, or results of operations could be materially adversely affected.  In such cases, the trading price of our common stock could decline, and you may lose all or part of your investment.

If our products and services do not continue to attract interest from new and existing customers, we may not achieve future growth.

If we are unable to continue to attract interest in the industry for our services, we could fail to achieve future growth which would have a detrimental effect on our business. Our ability to generate revenues is highly dependent on building and maintaining relationships with leading pharmaceutical and biotechnology companies. No assurance can be given that a sufficient number of such companies will increase their demand for our services, thereby limiting the overall market for quantitative imaging services and not enable us to increase our revenue to the extent expected. In addition, the rate of the growth of MRI and CT image-based biomarkers is difficult to predict. Failure to attract and maintain a significant customer base would have a detrimental effect on our business, operating results and financial condition.

The majority of the contracts we have with customers are cancelable for any reason by giving 30 days advance notice.

Our customers typically engage us to perform services for them on a project-by-project basis and are required by us to enter into a written contractual agreement for the work, labor and services to be performed. Generally, our project contracts are terminable by the customer for any or no reason on 30 days’ advance notice to us. If a number of our customers were to exercise cancellation rights, our business and operating results would be materially and adversely affected.

If we are unable to manage and sustain our growth, our operating results would be adversely affected.

We have seen a growing demand for our image analysis services over the past several years. We are also planning to seek growth through the expansion of the use of quantitative imaging into new markets. Although there can be no assurance that our past growth will continue, if it does continue we may be unable to scale our capacity efficiently to meet this demand. If we are unable to do so, we may fail to maintain our operating margins or achieve expected operating margins. This may have a material and adverse effect on our operating results.

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Our services may become obsolete if we do not effectively respond to rapid technological change on a timely basis.

Our services depend on the needs of our customers and their desire to utilize image-related services in drug and medical device development and clinical diagnosis and treatment. Since the image-based biomarker industry is characterized by evolving technologies, uncertain technology and limited availability of standards, we must respond to new research findings and technological changes affecting our customers. We may not be successful in developing and marketing, on a timely and cost-effective basis, new or modified products and services, which respond to technological changes, evolving customer requirements and competition. If we are unsuccessful in this regard, our business and operating results could be materially and adversely affected.

We have a history of operating losses and uncertain future profitability.

Since its inception there have been periods where VirtualScopics incurred losses from operating activities. As we work to grow our business, we may face risks and difficulties in our business including uncertainties of further market penetration, competition, cost increases and delays in achieving business objectives. There can be no assurance that we will succeed in addressing any or all of these risks or that we will achieve future profitability and the failure to do so would have a material adverse effect on our business, financial condition and operating results.

Although we believe that our products and services do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur which could have a material adverse effect on our business.

Portions of our business are reliant upon patented and patentable systems and methods used in our image analysis and related intellectual property. In the event that products and services we sell are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our products and services or obtain a license for the manufacture and/or sale of such products and services. In such event, there can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, there can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. In addition, if our products and services or proposed products and services are deemed to infringe or likely to infringe upon the patents or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business.

We are subject to pharmaceutical, medical device and healthcare industry regulations, which could adversely affect the nature and extent of the products and services we offer.

Many aspects of the pharmaceutical, medical device and healthcare industry are subject to regulation at the federal level. From time to time, the regulatory entities that have jurisdiction over the industry adopt new or modified regulations or take other actions as a result of their own regulatory processes or as directed by other governmental bodies. This changing regulatory environment could adversely affect the nature and extent of the services we are able to offer.

To date, our sales have been within the clinical trial industry. To enter the patient treatment or personalized medicine market we would need to obtain FDA clearance or approval before marketing our services in this area. We have begun this process, but there can be no assurance that such clearance or approval would be granted or that it would be granted in a timely manner. To effectively market our products to physicians as a treatment aid, we would also need to obtain appropriate coverage and favorable reimbursement from third-party payers, such as Medicare and insurance companies, in order to more fully benefit from the market opportunity. There can be no assurance that appropriate coverage would be granted or that reimbursement levels or conditions of coverage would be adequate to ensure acceptance among physicians. Additionally, the efforts of governments and third-party payers to contain or reduce the cost of health care, such as a number of legislative and regulatory proposals currently being discussed, could affect our ability to implement our plans in this area.

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We may in the future experience competition from academic sites, imaging CROs, and other competing technologies.

Competition in the development of imaging solutions may become more widespread as with emerging technologies such as proteomics and genomics which can serve as predictive tools of drug efficacy. Competitors range from university-based research and development projects which would develop advanced tools to development stage companies and major domestic and international companies which would commercialize the tools. Some of these entities have greater financial, technical, marketing, sales, distribution and other resources than ours. There can be no assurance that we can continue to develop our technologies or that present or future competitors will not develop technologies that render our image-based biomarker industry obsolete or less marketable or that we will be able to introduce new products and product enhancements that are competitive with other products marketed by industry participants.

We have experienced significant demand from one customer, thereby increasing our dependence on the customer until we can further diversify our customer base.

While we continue to serve a broad range of customers, we’ve experienced strong demand from one of our customers, and our dependence on that customer to sustain our continued growth has increased. In 2012 and 2011, this customer accounted for 45% and 55% of our revenue, respectively. We continue to see demand from other customers, however, not to the same significant pace. We continue to invest on our sales and marketing efforts to further diversify our customers and more broadly penetrate the market, in order to minimize reliance on any one customer. As with all of our contracts, this customer may terminate its contractual relationship with us for any or no reason on 30 days’ advance notice. A decision by the customer to cancel all of its studies with us could have an adverse impact on the growth of our business.

Consolidation within the pharmaceutical industry and changes within healthcare regulation may have an adverse impact on our business.

Over the past few years, there have been several mergers and acquisitions among pharmaceutical and biotechnology companies. Historically, these transactions have positively impacted our business due to the ability to use our strong relationships within one of the merged entities to better penetrate the combined entity, however, there can be no assurance that consolidation within the industry will continue to be beneficial to us. Additionally, with the recent political landscape and changes within the healthcare industry, there may be an adverse impact on our business if the cost of imaging significantly increases or no longer becomes standard of care for patients. Although, we don’t believe imaging will decline in its level of use, if it does we may need to reduce prices or invest in research to advance the education and science of medical imaging.

The trading price of our stock may be adversely affected if we are not able to continue to grow the business.

We intend to continue to use our cash on hand to broaden our market penetration of our services within the industry and pursue the application of one of our technologies in the personalized medicine market. If our plans or assumptions with respect to our business change or prove to be inaccurate, we may be required to use part or all of our cash to fund general operating expenses and/or reduce costs within the organization. This will depend on a number of factors, including, but not limited to:

· the lack of significant cancellations of customer contracts

· the further market penetration of our products and services; and

· our ability to manage and sustain the growth of our business; and

· costs associated with successfully launching personalized medicine applications.

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We currently do not plan to raise additional capital, however, if we need to raise additional capital, it may not be available on acceptable terms, or at all. Our failure to obtain required capital, or the acquisition of capital on less favorable terms, would have a material adverse effect on our business. If we issue additional equity securities in the future, you could experience dilution or a reduction in priority of your securities.

The market price of our common stock may fluctuate significantly.

The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our control, such as the announcement of new products or product enhancements by us or our competitors; developments concerning intellectual property rights and regulatory approvals; quarterly variations in our competitors’ results of operations; changes in earnings estimates or recommendations by securities analysts; developments in our industry; product liability claims or other litigation; and general market conditions and other factors, including factors unrelated to our own operating performance.

Our common stock may be considered a “penny stock” and may be difficult to sell.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market or exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is currently below $5.00 per share and therefore may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of our stockholders to sell their shares.

Our strategic alliance with PPD is an important aspect of our growth, and the market may not value our strategic alliance with PPD as we anticipate.

In 2010, we formed an alliance with PPD to provide a joint solution to provide clients with an integrated and customized clinical development and medical imaging solution for oncology clinical trials. The alliance was expanded in January 2012 to include cardiovascular, central nervous system and medical device studies. If the market does not value this model as we anticipate, our ability to grow our business may be negatively impacted. Additionally, the agreement may be terminated by either party on 90 days notice. In the event PPD terminates the agreement, we may also experience a negative impact in our ability to experience the level of growth the company has historically achieved.

Our common stock has traded at prices below $1.00 and we may not be able to maintain our NASDAQ listing.

As of the date of this report, and as previously disclosed in reports filed with the SEC, the Company is out of compliance with section 5550(a)(2) of the Nasdaq Marketplace Rules, the minimum bid price requirements. Nasdaq has extended the compliance period due to general market conditions and the Company now has until August 26, 2013 to regain compliance by maintaining a bid price of our common stock of $1.00 or higher for a minimum of 10 consecutive business days, or such longer period as Nasdaq may determine to show the ability to maintain long-term compliance. There can be no assurance that we will be able to do so, or, maintain compliance with this or other listing requirements. The Company intends to take steps necessary to maintain its Nasdaq listing. However, if our common stock is delisted from Nasdaq, trading in our common stock could be conducted on the OTC Bulletin Board or in the over-the-counter market in what is commonly referred to as the "pink sheets." If this occurs, a shareholder will find it more difficult to dispose of our common stock or to obtain accurate quotations as to the price of our common stock. Lack of any active trading market would have an adverse effect on a shareholder's ability to liquidate an investment in our common stock easily and quickly at a price acceptable to the shareholder. It might also contribute to volatility in the market price of our common stock and could adversely affect our ability to raise additional equity or debt financing on acceptable terms or at all.

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A significant number of the shares of our common stock are eligible for sale, and their sale could negatively affect the market price of our common stock.

Sales of a significant number of shares of our common stock in the public market or the possibility of such sales, could harm the market price of our common stock and impede our ability to raise capital through the issuance of equity securities. As of December 31, 2012, we had 29,799,523 shares of common stock outstanding. These shares are eligible for resale in the public market either immediately or subject to applicable limitations of Rule 144. In addition to these outstanding shares of common stock, we also have shares to be issued upon the conversion or exercise of outstanding options, warrants and convertible securities. The series B convertible preferred stock and the warrants to purchase common stock issued in our 2007 private placement are convertible into 1,474,427 shares of our common stock and registered for resale under a registration statement on Form S-3. The 1,818,485 shares of our common stock issuable upon conversion of our series A convertible preferred stock and warrants sold in our November 2005 private placement are eligible for resale under Rule 144. We have filed registration statements on Form S-8 to register the sale of up to 6,900,000 shares issued or to be issued pursuant to our Amended and Restated 2006 Long-Term Incentive Plan. Additionally, outstanding warrants issued prior to 2005 and options under our 2001 and 2005 long-term incentive plans are convertible into 45,493 shares and 588,082 shares of our common stock, respectively, and will be available for resale following cash exercise after the applicable holding period under Rule 144, or immediately following a net exercise of those securities. Sales of our common stock in the public market may have an adverse effect on the market for the shares of our common stock.

Our principal stockholders have significant voting power and may take actions that may not be in the best interests of other stockholders.

Our officers, directors, principal stockholders (greater than 10%) and their affiliates control approximately 30% of our outstanding voting securities. If these stockholders act together, they will be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.

We do not anticipate paying dividends on our common stock in the foreseeable future, and the lack of dividends may have a negative effect on the stock price.

We currently intend to retain our future earnings to support operations and to finance expansion and meet dividend obligations on our series B convertible preferred stock. In addition, the terms of our series B preferred stock limit our ability to pay dividends to the holders of our common stock. Therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

ITEM 2: Properties

In July, 2007 we began leasing approximately 19,500 square feet of office space at our corporate headquarters in Rochester, New York. The base annual rent under the lease is $360,000, and increases three percent (3%) a year. During the first twenty months of the lease, the rent was paid in two portions: a cash portion of $156,000 annually, paid in equal monthly installments, increasing three percent (3%) annually; and, a stock portion of $204,000 annually, paid in equal monthly installments, increasing three percent (3%) annually. The stock portion was payable in shares of our common stock. In February 2009, the Landlord exercised their option to receive their remaining rental payments in all cash. In June 2012, the Company renewed its lease with a lease term for five years with a lease commencement date of July 1, 2012. The base annual rent under the lease is $309,075, and increases two percent (2%) per year over the term of the lease.

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ITEM 3: Legal Proceedings

None.

ITEM 4: Mine Safety Disclosures

Not applicable.

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PART II

ITEM 5: Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our shares of common stock are listed for trading on the NASDAQ Capital Market under the trading symbol “VSCP.” The following table sets forth the high and low closing sales prices for our common stock as reported on the NASDAQ Capital Market for the period from January 1, 2011 through December 31, 2012. These prices do not include retail markup, markdown or commission and may not necessarily represent actual transactions. Investors should not rely on historical stock price performance as an indication of future price performance.

Fiscal Year Ended December 31, 2011

	HIGH		LOW
First Quarter	$	2.89	$	1.58
Second Quarter		2.20		1.66
Third Quarter		1.89		1.00
Fourth Quarter		1.16		0.82

Fiscal Year Ended December 31, 2012

	HIGH		LOW
First Quarter	$	1.61	$	0.87
Second Quarter		1.56		0.81
Third Quarter		1.08		0.83
Fourth Quarter		0.91		0.57

As of February 28, 2013, we had approximately 76 registered holders of record of shares of our common stock.

Dividend Policy

We have never declared a cash dividend on our common stock. We intend to retain any earnings to fund future growth and the operation of our business and, therefore, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our Series B Preferred Stock and Series C-1 Preferred Stock limit our ability to pay dividends to the holders of our common stock. Thereafter, dividends may be paid on our common stock only if and when declared by our board of directors and paid on an as-converted basis to the holders of our Series A, Series B, and Series C-1 convertible preferred stock.

Equity Compensation Plan Information

The following table summarizes information, as of December 31, 2012, relating to our equity compensation plans:

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	Number of Securities to be Issued Upon Exercise of Outstanding Options			Weighted- Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)
Plan Category	(a)			(b)		(c)
Equity compensation plans approved by security holders		5,748,529	(1)	$	1.24		1,084,930
Equity compensation plans not approved by security holders		350,000	(2)	$	2.50		-
Total		6,098,529		$	1.31		1,084,930

(1)       This amount includes shares under the plans of VirtualScopics, LLC, in addition to 45,493 shares of our common stock to holders of warrants granted by VirtualScopics, LLC, in exchange for consideration in the form of goods and services. Also we agreed to issue 5,630,444 shares of common stock collectively, under our 2001, 2005 and 2006 Long Term Incentive Plans. Also included are 67,530 shares of common stock underlying warrants we issued to the placement agent in connection with our September 2007 private placement, which was approved by stockholders in November 2007 and an additional, 5,062 warrants issued to the placement agent as a result of the Series C-1 financing which triggered certain anti-dilution provisions of the Company’s Series B warrants

(2)       In November 2005, our Board of Directors granted to our Chairman and former CEO, Robert Klimasewski, an option to purchase 350,000 shares of our common stock at $2.50 per share.

Recent Sales of Unregistered Securities

We made no sales of unregistered securities during the quarter ended December 31, 2012.

Issuer Repurchases of Equity Securities

None.

ITEM 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with VirtualScopics’ consolidated balance sheet, and related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2012 and 2011, 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 in “Risk Factors” and elsewhere in this report. We disclaim any obligation to update information contained in any forward-looking statements.

Overview

VirtualScopics, Inc. is a leading provider of imaging solutions to accelerate drug and medical device development. We have developed a robust software platform for analysis and modeling of both structural and functional medical images. In combination with our industry-leading experience and expertise in advanced imaging biomarker measurement, this platform provides a uniquely clear window into the biological activity of drugs and devices in clinical trial patients, allowing our customers to make better decisions faster.

Since inception, revenues have 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 small portion of revenue from consulting services, and pharmaceutical drug trials in the neurology and cardiovascular areas. We expect that the concentration of our revenue will continue in these services and in those areas in 2013. Revenues are recognized as the medical images that we process are quantified and delivered to our customers and/or the services are performed. Beginning in 2011, we began to pursue the personalized medicine market, however, we do not anticipate significant revenues from this market opportunity in 2013 as we are in the early stages of commercialization including our strategy relative to regulatory approval and validation of our software.

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As of December 31, 2012, the amount remaining to be earned from active projects and awards was approximately $22 million. The reduction in backlog when compared to prior year is due to the generation of revenue from the backlog, softness in new project awards in 2012 and the ordinary close out of projects with balances remaining. Once we enter into a new contract for participation in a drug trial, there are several factors that can effect whether we will realize the full benefits under the contract, and the time over which we will realize that revenue. Customers may not continue our services due to performance reasons with their compounds in development. Furthermore, the contracts may contemplate performance over multiple years. Therefore, revenue may not be realized in the fiscal year in which the contract is signed or the award is made. Recognition of revenue under the contract may also be affected by the timing of patient recruitment and image site identification and training. Additionally, the majority of contracts we have with customers are cancelable for any reason by giving 30 days advance notice.

Results of Operations

Results of Operations for Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues

We had revenues of $12,963,000 for the year ended December 31, 2012 compared to $14,282,000 for the year ended December 31, 2011, representing a 9% decrease. The decrease in revenues is related to a slowdown in the amount of new projects awarded in 2012 and delays in decisions being made by new and reoccurring customers on outstanding proposals as well as delays in the initiation of previously awarded and contracted projects. In July of 2012 we hired two individuals to augment our sales efforts in Europe and the US West Coast, two areas which we believed had been underserviced in the past. We believe these individuals will help enable us to better attack the market and provide us greater visibility in those regions. In addition to hiring sales representatives, we have reorganized our sales function which will allow our sales personnel more time to pursue opportunities and interface with existing and prospective customers. Although the amount of new project awards has been slower than we experienced in previous years, we did see an increased number of requests for proposals in 2012, in particular through the PPD channel. We believe that this increase in requests for proposals and our strategic alliance with PPD, Inc. will help increase the level of business activity from what we have experienced in 2011 and 2012. As of December 31, 2012, we had active projects with 10 of the leading 15 pharmaceutical and biotechnology companies in the world.

Gross Profit

We had a gross profit of $5,251,000 for the year ended December 31, 2012 compared to $6,274,000 for the comparable period in 2011. The gross margin for the year ended December 31, 2012 was 41% compared to 44% for the year ended December 31, 2011. Our margins declined year over year primarily as a result of the decrease in revenues encountered during 2012 as discussed above. During 2012, we performed work for 31 customers, representing 123 different projects, in connection with their pharmaceutical drug trials primarily in the fields of oncology and musculoskeletal diseases (osteoarthritis and rheumatoid arthritis) along with various other projects. This compares to 36 customers representing 133 projects in 2011.

In 2012, 48% of our revenues were generated from Phase III studies compared to 51% in 2011. Additionally, for the year ended December 31, 2012, oncology, musculoskeletal and other projects represented 69%, 21%, and 10%, respectively, of our revenues. This compares to 77%, 18%, and 5%, respectively, for 2011.

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Research and Development

Research and development costs increased in 2012 by $153,000, or 11%, to $1,603,000, when compared to 2011. The increase was due to hiring within our software development group and consultant and professional fees in support of our personalized medicine initiative, along with our efforts to secure our first 510k with the FDA. Our research and development efforts within our core business center around refining our processes through the use of our software platform in order to gain efficiencies which we believe will better allow us to standardize our processes and improve our gross margin. Additionally, we continue to invest in the commercialization of new imaging techniques across various imaging modalities and therapeutic areas. As of December 31, 2012 and 2011, there were 14 and 12 employees in our research and development group, respectively, which includes the algorithm and software development groups.

Sales and Marketing

Sales and marketing costs increased in 2012 by $292,000, or 26%, to $1,411,000, when compared to 2011. The increase was the result of hiring two experienced sales individuals to cover the European and West Coast US territories in the third quarter of 2012. Our sales and marketing efforts include conference attendance and presentations, technically-focused webinars, customer webinars and related travel along with advertising in key scientific journals. During 2012, we made further investments in driving awareness of our strategic alliance with PPD and the benefits it provides the pharmaceutical and medical device industries. The PPD alliance was expanded in January 2012 to include cardiovascular, central nervous system and medical device studies. As December 31, 2012 and 2011, there were 7 and 4 individuals in our sales and marketing department, respectively.

General and Administrative

General and administrative expenses for the year ended December 31, 2012 were $3,060,000, representing a decrease of $118,000 or 4%, when compared to 2011. The decrease was driven by a reduction in non-cash stock compensation costs and general cost controls within our core business offset by hiring within our quality control group and consultant fees in support of our personalized medicine initiative. General and administrative expenses include both personnel and non-personnel costs. Departments included within general and administrative function are finance, information technology, quality, human resources and the CEO position. Non-payroll related costs included within general and administration include stock option expense, audit and legal fees, regulatory and compliance fees, Nasdaq listing fees, board fees, non-capitalizable hardware and software costs and licenses and non-sales related travel costs.

Depreciation and Amortization

Depreciation and amortization charges decreased for the year ended December 31, 2012 by $58,000 or 12%, to $421,000, when compared to 2011. The reduction is due to the complete amortization of our right to use an MRI unit at the University of Rochester (a related party) during 2011. Offsetting this reduction was higher depreciation charges related to recent capital purchases, including the purchase and installation cost of an ERP system in 2011. The amortization and depreciation costs are based on the timing and life of patents and property and equipment. We continue to invest in our patent portfolio, however, we do not anticipate significant expenditures are necessary to support our current business and future strategies. Our IT systems are the basis of our operating platform, therefore, we will continue to invest in our IT infrastructure to ensure we have a robust and reliable operating system.

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Other income(expense), net

Interest income for the year ended December 31, 2012 was $3,000, representing interest derived on the Company’s operating and savings accounts, compared to interest income of $18,000 in 2011. The decrease in interest income was due to lower interest rates earned on the account balances in 2012. Other expense for the years ended December 31, 2012 and 2011 remained relatively consistent, decreasing to $24,000 from $32,000. Additionally, we recognized an unrealized loss of $265,000 related to the fair value of certain warrants that were issued in connection with our 2007 Series B offering (see Financial Statement Note 5). During 2011, we recognized an unrealized gain of $669,000 related to the fair value of those warrants. The aggregate decrease of $934,000 when compared to 2011 is attributable to the higher average price of our common stock prior to closing the Series C-1 financing in April 2012 and the decrease in the number of derivative instruments outstanding due to the elimination of the anti-dilution adjustment provision in certain Series B warrants as part of the Series C-1 financing. As of December 31, 2012, the Company had 214,229 warrants outstanding subject to the anti-dilution adjustment provision as compared to the 902,038 at December 31, 2011.

Net Income (Loss)

Our net loss for the year ended December 31, 2012 was $1,529,000 compared to a net income of $703,000 for the year ended December 31, 2011. The decrease in our net income over the prior period was attributable to lower revenues and gross profit in addition to the non-cash unrealized loss on the change in fair value of derivative liabilities, as discussed above.

Liquidity and Capital Resources

Our working capital as of December 31, 2012 and 2011 was approximately $8,972,000 and $6,353,000, respectively. The increase in working capital was primarily a result of the financing agreement we entered into during 2012 with Merck GHI that resulted in the receipt of net proceeds of approximately $2,700,000. Additionally, there was cash provided by operating activities of $43,000 in 2012 as compared to $1,443,000 in 2011 due to the timing differences of non-cash expenses and the receipt of accounts receivables during the years.

We invested $194,000 in the purchase of equipment and the acquisition of patents in 2012, compared to $419,000 for the investment in these items in 2011. The decrease represents prior year investments in our IT and IS infrastructure and the costs associated with the acquisition of a new IT storage system to support our services that did not reoccur in 2012. We anticipate that our IT related costs will increase in 2013 as we continue to invest in our operating system and infrastructure in connection with our personalized medicine initiative and support of our core business. During 2012 we incurred $23,000 in patent costs associated with filing costs for intellectual property, as compared to $7,000 in 2011. The increase is due to the timing of office actions within our existing patent filings.

Net cash provided in financing activities was $2,937,000 and $137,000 in 2012 and 2011, respectively. The increase is a result of proceeds received from the exercise of options and warrants and the closing of the financing with Merck GHI during 2012. The terms of the Merck GHI financing provide for a second closing of series C-2 preferred stock, if, among other things, we meet certain milestones toward the development of a quantitative imaging center on or before April 3, 2013. We do not expect that this second closing will occur, however, we intend to continue to pursue our efforts in support of obtaining FDA acceptance.

We currently expect that existing cash will be sufficient to fund our existing operations for the next 12 months and foreseeable future. Although we believe we have sufficient capital to continue our efforts to commercialize our personalized medicine solutions in the short term, our capital requirements will depend on the feedback we receive from the FDA and insurance providers (payers). As a result, there can be no assurance that we will have sufficient capital available to successfully commercialize our personalized medicine applications. If in the future 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.

24

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements, other than operating leases (as described in “Contractual Obligations” below) 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.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2012 which we expect to have an effect on our liquidity and cash flow in future periods. (See Item 2: Description of Property for a full description of our lease obligations.) 

	Payments Due by Period
			Less than
	Total		1 Year		1-5 Years
Operating Leases	$	1,455,206	$	313,471	$	1,141,735

ITEM 8: Financial Statements and Supplementary Data

The financial statements required hereby are located on pages F-1 through F-21 of this report.

ITEM 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

ITEM 9A: 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.

25

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2012 based on criteria for effective control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act of 2002, which permits the Company to provide only management's report in this annual report.

Changes in Internal Controls over Financial Reporting

An evaluation was performed under the supervision of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as required under Exchange Act Rules 13a-15(d) and 15d-15(d), of whether any change in the Company’s internal control over financial reporting occurred during the fiscal quarter ended December 31, 2012. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that no change in the Company’s internal controls over financial reporting occurred during the fiscal quarter ended December 31, 2012 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B: Other Information

On December 28, 2012, the Company entered into amendments to the Employment Agreements with Chief Executive Officer, Jeffrey Markin, and Chief Business and Financial Officer, Molly Henderson.  The amendments, among other things, are intended to make sure that certain payments on termination to which Mr. Markin or Ms. Henderson have not yet vested are made with a six month delay, where required under Section 409A of the Internal Revenue Code for “specified employees” and to otherwise comply with Section 409A.  The Amendments did not increase any amounts to which either Mr. Markin or Ms. Henderson are entitled but did adjust the timing of certain payments depending on whether or not Mr. Markin or Ms. Henderson are “specified employees” at termination.

26

PART III

ITEM 10: Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

The information required by this Item regarding our directors and executive officers is incorporated in this report by reference to our Proxy Statement for our 2012 Annual Meeting of Stockholders where such information appears under the heading “Directors and Executive Officers” in our Proxy Statement for our 2012 Annual Meeting of Stockholders.

Section 16(a) Beneficial Ownership Reporting Compliance

The discussion under the heading “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for the 2012 Annual Meeting of Stockholders is incorporated herein by reference to such proxy statement.

Code of Ethics

The Company has adopted a Code of Ethics that is applicable to our principal executive officer and principal financial officer and can be viewed on our website www.virtualscopics.com.

ITEM 11. Executive Compensation

The information required by this Item is incorporated in this report by reference to our definitive Proxy Statement referred to in Item 10 above where such information appears under the heading “Executive Compensation and Other Matters.”

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item regarding security ownership of certain beneficial owners and management is incorporated in this report by reference to our definitive Proxy Statement referred to in Item 10 above where such information appears under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans.”

ITEM 13. Certain Relationships and Related Transactions

The information required by this Item is incorporated in this report by reference to our definitive Proxy Statement referred to in Item 10 above where such information appears under the heading “Certain Relationships and Related Transactions.”

ITEM 14. Principal Accountant Fees and Services

The information required by this Item is incorporated in this report by reference to our definitive Proxy Statement referred to in Item 10 above where such information appears under the heading “Principal Accounting Fees and Services.”

ITEM 15: Exhibits

The list of exhibits required by this Item is incorporated in this Item by reference to the exhibit index attached after the signature page to this report.

27

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

March 27, 2013	VirtualScopics, Inc. (Registrant)
	/s/ Molly Henderson
	Chief Business and Financial Officer, Sr. Vice President

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey Markin and Molly Henderson, or either of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and any documents related to this report and filed pursuant to the Securities and Exchange Act of 1934, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

DATE	SIGNATURE	TITLE
March 27, 2013	/s/ Jeffrey Markin	President and Chief Executive Officer
	(Jeffrey Markin)	(Principal Executive Officer)
March 27, 2013	/s/ Molly Henderson	Chief Business and Financial Officer and
	(Molly Henderson)	Sr. Vice President
		(Principal Financial and Accounting Officer)
March 27, 2013	/s/ Robert Klimasewski	Chairman of the Board of Directors
	(Robert Klimasewski)
March 27, 2013	/s/ Norman Mintz	Director
	(Norman Mintz)
March 27, 2013	/s/ Charles Phelps	Director
	(Charles Phelps)
March 27, 2013	/s/ David Rubin	Director
	(David Rubin)
March 27, 2013	/s/ Dan Kerpelman	Director
	(Dan Kerpelman)
March 27, 2013	/s/ Terence Walts	Director
	(Terence Walts)
March 27, 2013	/s/ Mostafa Analoui	Director
	(Mostafa Analoui)

28

Exhibit Index

2.1	Securities Purchase Agreement dated September 12, 2007 by and among the VirtualScopics, Inc. and the Buyers listed on the Schedule of Buyers attached thereto (Incorporated herein by reference to Exhibit 10.1 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on September 17, 2007 (File No. 000-52018)). (Schedules and exhibits have been omitted pursuant to Regulation S-B Item 601(b)(2) and will be made available to the Commission upon request).
3.1	Certificate of Incorporation of VirtualScopics, Inc. dated April 21, 1988 (Incorporated herein by reference to Exhibit 3.1 of the VirtualScopics, Inc.’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on November 4, 2004 (File No. 333-120253)).
3.2	Certificate of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated February 2, 1989 (Incorporated herein by reference to Exhibit 3.1a of the VirtualScopics, Inc.’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on November 4, 2004 (File No. 333-120253)).
3.3	Certificate for Renewal and Revival of Certificate of Incorporation of VirtualScopics, Inc. dated February 23, 2004 (Incorporated herein by reference to Exhibit 3.1b of the VirtualScopics, Inc.’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on November 4, 2004 (File No. 333-120253)).
3.4	Certificate of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated August 20, 2004 (Incorporated herein by reference to Exhibit 3.1c of the VirtualScopics, Inc.’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on November 4, 2004 (File No. 333-120253)).
3.5	Certificate of Amendment of Certificate of Incorporation of VirtualScopics, Inc. dated October 7, 2005 (Incorporated by reference to Exhibit 3.5 the VirtualScopics, Inc.’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2006 (File No. 333- 120253)).
3.6	Certificate of Amendment to Certificate of Incorporation of VirtualScopics, Inc. dated November 4, 2005 (Incorporated herein by reference to Exhibit 3.1 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on November 10, 2005 (File No. 333-120253)).
3.7	Certificate of Designation of Rights and Preferences of the Series C-1 Preferred Stock and the Series C-2 Preferred Stock of VirtualScopics, Inc., dated April 3, 2012 (Incorporated herein by reference to Exhibit 3.1 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
3.8	Amended and Restated Certificate of Designations, Powers, Preferences and Other Rights and Qualifications of Series A Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.1 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2012 (File No. 000-52018)).
3.9	Amended and Restated Certificate of Designation of Rights and Preferences of the Series B Preferred Stock(Incorporated herein by reference to Exhibit 3.2 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2012 (File No. 000-52018)).
3.10	Amended and Restated Bylaws of VirtualScopics, Inc. dated August 28, 2007 (Incorporated herein by reference to Exhibit 3.9 to the VirtualScopics, Inc.’s Registration Statement of Form S-3 filed with the Securities Exchange Commission on October 11, 2007 (File No. 333- 146635)).

29

4.1	Registration Rights Agreement Dated September 12, 2007 between the VirtualScopics, Inc. and the Buyers listed on the Schedule of Buyers thereto (Incorporated herein by reference to Exhibit 10.3 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on September 17, 2007 (File No. 000-52018)).
4.2	Form of Warrant to Purchase Common Stock of VirtualScopics (Incorporated herein by reference to Exhibit 10.2 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on September 17, 2007 (File No. 000-52018)).
4.3	Form of Series C Warrant (Incorporated herein by reference to Exhibit 4.1 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
4.4	Form of Amended and Restated Series B Warrant (Incorporated herein by reference to Exhibit 4.2 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.1	VirtualScopics, Inc. 2005 Long Term Incentive Plan (Incorporated herein by reference to Exhibit 10.1 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on November 10, 2005 (File No. 333-120253)).*
10.2	Option Agreements with Robert Klimasewski dated November 5, 2005 (Incorporated herein by reference to Exhibit 10.18 to the VirtualScopics, Inc. Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 2, 2006 (File No. 333-133747)).*
10.3	Form of April 28, 2006 Indemnification Agreement by and among VirtualScopics, Inc. and the directors and officers of the VirtualScopics, Inc. (Incorporated herein by reference to Exhibit 10.19 to the VirtualScopics, Inc. Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 2, 2006 (File No. 333-133747)).*
10.4	VirtualScopics, Inc. Amended and Restated 2006 Long Term Incentive Plan (incorporated herein by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed with the Commission on April 10, 2009 (File No. 000-52018))
10.5	Indemnification Agreement by and among VirtualScopics, Inc. and Norman Mintz, dated as of August 1, 2007. (Reference is made to the VirtualScopics, Inc. Form of Indemnification Agreement by and among VirtualScopics, Inc., and the directors and officers of the VirtualScopics, Inc. filed as Exhibit 10.19 to the VirtualScopics, Inc. Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 2, 2006 (File No. 333- 133747)).*
10.6	Non-Employee Director Compensation Plan (Incorporated herein by reference to Exhibit 10.1 to the VirtualScopics, Inc. Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2008 (File No. 000-52018)).*
10.7	Company Bonus Plan (Incorporated herein by reference to Exhibit 10.3 of the VirtualScopics, Inc. Quarterly  Report on Form 10-Q filed with the Securities and Exchange Commission on May 15, 2009 (File No. 000-52018)).*
10.8	Employment Agreement dated February 24, 2009, by and between Jeffrey Markin and VirtualScopics, Inc.*  (Incorporated herein by reference to Exhibit 10.17 to the VirtualScopics, Inc., Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2009 (File No. 000-52018)).
10.9	Employment Agreement dated February 24, 2009, by and between Molly Henderson and VirtualScopics, Inc.*  (Incorporated herein by reference to Exhibit 10.18 to the VirtualScopics, Inc., 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2009 (File No. 000-52018)).
10.10	Strategic Alliance Agreement between VirtualScopics, Inc. and PPD Development, LP, dated October 20, 2010 (Incorporated herein by reference to Exhibit 10.1 to the VirtualScopics, Inc. Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2010 (File No. 000-52018)).

30

10.11	Amendment to the Strategic Alliance Agreement between VirtualScopics, Inc. and PPD Development, LP, dated January 24, 2012 (Incorporated herein by reference to Exhibit 10.1 to the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on January 26, 2012 (File No. 000-52018)).
10.12	Series C Preferred Stock and Warrant Purchase Agreement between VirtualScopics, Inc. and Merck Global Health Innovation Fund, LLC dated April 3, 2012 (Incorporated herein by reference to Exhibit 10.1 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.13	Investor Rights Agreement between VirtualScopics, Inc. and Merck Global Health Innovation Fund, LLC dated April 3, 2012 (Incorporated herein by reference to Exhibit 10.2 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.14	Voting Agreement between VirtualScopics, Inc. and Robert Klimasewski effective April 3, 2012 (Incorporated herein by reference to Exhibit 10.3 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.15	Voting Agreement between VirtualScopics, Inc. and SRK Management Company effective April 3, 2012 (Incorporated herein by reference to Exhibit 10.4 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.16	Voting Agreement between VirtualScopics, Inc. and Philip J. Hempleman and the 1998 Hempleman Family Trust effective April 3, 2012 (Incorporated herein by reference to Exhibit 10.5 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.17	Voting Agreement between VirtualScopics, Inc. and Kirk Balzer effective April 3, 2012 (Incorporated herein by reference to Exhibit 10.6 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.18	Indemnification Agreement between VirtualScopics, Inc. and David Rubin dated April 3, 2012 (Incorporated herein by reference to Exhibit 10.7 of the VirtualScopics, Inc. Report on Form 8-K filed with the Securities and Exchange Commission on April 4, 2012 (File No. 000-52018)).
10.19	Amendment to Employment Agreement, by and between Jeffrey Markin and VirtualScopics, Inc. dated December 28, 2012.*
10.20	Amendment to Employment Agreement, by and between Molly Henderson and VirtualScopics, Inc. dated December 28, 2012.*
21	Subsidiaries of VirtualScopics, Inc.
23.1	Consent of Marcum LLP
24	Power of Attorney (included on the signature page to this report)
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
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	XBRL Taxonomy Extension Definition Linkbase.
101.INS	XBRL Instance Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.
101.SCH	XBRL Taxonomy Extension Schema Linkbase.
*	Management contract or compensatory plan or arrangement.

31

VirtualScopics, Inc. and Subsidiary

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2012 and 2011	F-3
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011	F-4
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2012 and 2011	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011	F-6
Notes to Consolidated Financial Statements	F-7 - F-23

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Stockholders of

VirtualScopics, Inc.

We have audited the accompanying consolidated balance sheets of VirtualScopics, Inc. and Subsidiary (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VirtualScopics, Inc. and Subsidiary as of December 31, 2012 and 2011, and the consolidated results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Marcum LLP

Marcum LLP

New York, NY

March 27, 2013

F-2

VirtualScopics, Inc. and Subsidiary

Consolidated Balance Sheets

	December 31,
	2012			2011
Assets
Current assets
Cash	$	8,523,807		$	5,737,009
Accounts receivable, net of allowance for doubtful accounts of $15,000		1,762,507			2,435,496
Prepaid expenses and other current assets		437,698			361,376
Total current assets		10,724,012			8,533,881
Patents, net		1,470,436			1,582,938
Property and equipment, net		399,569			514,230
Other assets		5,428			27,140
Total assets	$	12,599,445		$	10,658,189
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable and accrued expenses	$	856,702		$	843,275
Accrued payroll		481,661			759,470
Unearned revenue		272,509			421,486
Derivative liabilities		15,950			156,596
Dividends payable		125,333			-
Total current liabilities		1,752,155			2,180,827
Commitments and Contingencies (See Note 10)
Stockholders’ Equity
Convertible preferred stock, $0.001 par value; 15,000,000 shares authorized;
Series C-1; 3,000 shares authorized; issued and outstanding, 3,000 and 0 shares at December 31, 2012 and December 31, 2011, respectively, liquidation preference $1,000 per share		3			-
Series B; 6,000 shares authorized; issued and outstanding, 600 at December 31, 2012 and December 31, 2011, liquidation preference $1,000 per share		1			1
Series A; 8,400 shares authorized; issued and outstanding, 2,190 at December 31, 2012 and December 31, 2011, liquidation preference $1,000 per share		2			2
Series C-2; 3,000 shares authorized; none issued and outstanding, at December 31, 2012 and December 31, 2011, liquidation preference $1,000 per share		-			-
Common stock, $0.001 par value; 85,000,000 shares authorized; issued and outstanding, 29,799,523 and 29,370,687 shares at December 31, 2012 and 2011, respectively		29,800			29,371
Additional paid-in capital		21,781,084			17,882,936
Accumulated deficit		(10,963,600	)		(9,434,948	)
Total stockholders’ equity		10,847,290			8,477,362
Total liabilities and stockholders’ equity	$	12,599,445		$	10,658,189

The accompanying notes are an integral part of these consolidated financial statements

F-3

VirtualScopics, Inc. and Subsidiary

Consolidated Statements of Operations

	For the Years Ended December 31,
	2012			2011
Revenues	$	11,950,447		$	13,115,459
Reimbursement revenues		1,012,717			1,166,144
Total revenues		12,963,164			14,281,603
Cost of services		6,698,992			6,841,321
Cost of reimbursement revenues		1,012,717			1,166,144
Total cost of services		7,711,709			8,007,465
Gross profit		5,251,455			6,274,138
Operating expenses
Research and development		1,603,177			1,450,608
Sales and marketing		1,410,877			1,119,100
General and administrative		3,059,735			3,177,934
Depreciation and amortization		420,733			478,908
Total operating expenses		6,494,522			6,226,550
Operating (loss) income		(1,243,067	)		47,588
Other income (expense)
Interest income		3,403			18,103
Other expense		(24,401	)		(31,798	)
Unrealized (loss) gain on change in fair value of the derivative liabilities		(264,587	)		669,402
Total other (expense) income		(285,585	)		655,707
Net (Loss) Income		(1,528,652	)		703,295
Preferred stock deemed dividend		1,806,919			-
Preferred stock dividends		137,333			48,989
Net (loss) income available to common stockholders	$	(3,472,904	)	$	654,306
Basic and diluted (loss) earnings per common share	$	(0.12	)	$	0.02
Weighted average number of common shares outstanding
Basic		29,644,775			28,950,864
Diluted		29,644,775			33,413,825

The accompanying notes are an integral part of these consolidated financial statements

F-4

VirtualScopics, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2012 and 2011

	Series A						Series B					Series C-1
	Preferred Stock						Preferred Stock					Preferred Stock				Common Stock				Additional			Accumulated
	Shares			Amount			Shares			Amount		Shares		Amount		Shares		Amount		Paid in Capital			Deficit			Total
Balances at December 31, 2010		3,188		$	3			800		$	1		-	$	-		27,414,620	$	27,415	$	15,090,254		$	(10,138,243	)	$	4,979,430
Conversion of Series A Preferred to Common Stock		(998	)		(1	)											828,709		829		(828	)
Conversion of Series B Preferred to Common Stock								(200	)								166,072		166		(166	)
Cashless exercise of warrants																	531,506		532		.(532	)					-
Exercise of warrants																	87,188		87		104,914						105,001
Reclassification of derivative liabilities upon exercise of warrants																					1,783,710						1,783,710
Cashless exercise of employee stock options																	239,805		240		(240	)					-
Exercise of employee stock options																	76,986		77		92,306						92,383
Withholding taxes paid on cashless exercise of employee stock options																					(11,722	)					(11,722	)
Amortization of stock option costs																					844,004						844,004
Restricted stock units issuance																	25,801		25		30,225						30,250
Series B preferred stock dividends based on 8% annual rate																					(48,989	)					(48,989	)
Net income																								703,295			703,295
Balances at December 31, 2011		2,190			2			600			1		-		-		29,370,687		29,371		17,882,936			(9,434,948	)		8,477,362
Exercise of warrants																	357,075		357		262,143						262,500
Reclassification of derivative liabilities in connection with series C-1 preferred stock issuance																					405,233						405,233
Exercise of employee stock options																	20,000		20		20,180						20,200
Amortization of stock option costs																					612,946						612,946
Restricted stock units issuance																	51,761		52		68,497						68,549
Series B preferred stock dividends based on 8% annual rate																					(48,000	)					(48,000	)
Series C-1 preferred stock issued in private placement, net of issuance costs													3,000		3						2,666,482						2,666,485
Series C-1 preferred stock dividends based on 4% annual rate																					(89,333	)					(89,333	)
Net loss																								(1,528,652	)		(1,528,652	)
Balances at December 31, 2012		2,190		$	2			600		$	1		3,000	$	3		29,799,523	$	29,800	$	21,781,084		$	(10,963,600	)	$	10,847,290

The accompanying notes are an integral part of these consolidated financial statements

F-5

VirtualScopics, Inc. and Subsidiary

Consolidated Statements of Cash Flows

	For the Years Ended December 31,
	2012			2011
Cash flows from operating activities
Net (loss) income	$	(1,528,652	)	$	703,295
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization		420,733			478,908
Gain on the disposal of property and equipment		-			(8,369	)
Provision for doubtful accounts		-			(15,000	)
Stock-based compensation		612,946			880,622
Fair value adjustment of derivative liabilities		264,587			(669,402	)
Changes in operating assets and liabilities
Accounts receivable		672,989			307,029
Prepaid expenses and other assets		(54,610	)		(116,695	)
Unearned revenue		(148,977	)		206,978
Accounts payable and accrued expenses		81,976			(262,931	)
Accrued payroll		(277,809	)		(61,637	)
Total adjustments		1,571,835			739,503
Net cash provided by operating activities		43,183			1,442,798
Cash flows from investing activities
Purchases of property and equipment		(170,413	)		(411,861	)
Acquisition of patents		(23,157	)		(6,661	)
Net cash used in investing activities		(193,570	)		(418,522	)
Cash flows from financing activities
Proceeds from the exercise of stock options		20,200			92,383
Withholding taxes paid on the cashless exercise of employee stock options		-			(11,722	)
Proceeds from the exercise of warrants		262,500			105,001
Proceeds from the issuance of Series C-1 preferred stock and warrant, net of issuance costs		2,666,485			-
Cash dividends on series B preferred stock		(12,000	)		(48,989	)
Net cash provided by financing activities		2,937,185			136,673
Net increase in cash		2,786,798			1,160,949
Cash
Beginning of year		5,737,009			4,576,060
End of year	$	8,523,807		$	5,737,009
Supplemental disclosure of cash flow information
Cash paid during the year for:
Taxes	$	18,621		$	66,457
Non-cash financing activities:
Issuance of restricted awards in settlement of accrued liability for board fees	$	68,549		$	30,250
Cashless exercise of stock options and warrants	$	-		$	772
Dividends payable on Series B and C-1 preferred stock	$	125,333		$	-
Reclassification of derivative liabilities upon exercise of warrants to additional paid in capital	$	-		$	1,783,710
Reclassification of derivative liabilities to additional paid in capital in connection with the Series C-1 preferred stock issuance	$	405,233		$	-

The accompanying notes are an integral part of these consolidated financial statements

F-6

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

NOTE 1 - Organization and Basis of Presentation

Nature of Business

The Company’s headquarters are located in Rochester, New York. 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. 

NOTE 2 - Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Estimates included in these consolidated financial statements relate to assessing the collectability of accounts receivable, the valuation of securities underlying share-based compensation and derivative financial instruments, realization of deferred tax assets, tax contingencies and any related valuation allowance, and the useful lives and potential impairment of the Company’s property and equipment and intangible assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

Cash and Cash Equivalents

The Company considers all highly liquid investments when purchased with a maturity of three months or less to be cash equivalents. At December 31, 2012 and 2011, the Company had no cash equivalents.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash. At times, our cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

Accounts Receivable

Accounts receivable are stated at estimated net realizable value.  Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts, if any. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances, if any.

Patents

Costs incurred to acquire and file for patents, including legal costs, are capitalized as long-lived assets and amortized on a straight-line basis over the lower of the estimated useful life or legal life of the patent, which is 20 years.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. When retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any resulting gain or loss is recognized and included in the consolidated statement of operations.

Expenditures for maintenance and repairs, which do not generally extend the useful life of the assets, are charged to expense as incurred. Gains or losses on disposal of property and equipment are reflected in general and administrative expense in the consolidated statement of operations in the period of disposal.

F-7

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Depreciation is computed using the straight-line method over the following useful lives:

	Years
Office/computer equipment		3-5
Furniture and fixtures		5-7
Software		3

Leasehold improvements, which are included in property and equipment, are recorded at cost less accumulated depreciation. Depreciation on leasehold improvements is computed using the straight-line method over the shorter of their estimated useful lives or the lease term, whichever is shorter.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the periods of depreciation and amortization for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value. Through December 31, 2012, the Company has not recorded any impairment charges on its long-lived assets.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option valuation model to value the derivative instruments at inception and on subsequent valuation dates. The warrants issued with the Company’s series B preferred stock, and to the placement agent in the series B financing, do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings. Accordingly, the warrants are recognized as a derivative instrument. Although the Company determined the warrants include an implied downside protection feature, it performed a Monte-Carlo simulation and concluded that the value of the feature is de minimus and the use of the Black-Scholes valuation model is considered to be a reasonable method to value the warrants. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date (Note 5).

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when an agreement exists, services are performed, prices are fixed or determinable, and collectability is reasonably assured. Revenues are reduced for estimated discounts and other allowances, if any.

The Company provides advanced medical image analysis on a per analysis basis, and recognizes revenue when the image analysis is completed. 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.

F-8

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

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. The Company does not sell software in its ordinary course of business, software licenses, upgrades or enhancements, or post-contract customer services.

Reimbursements received by the Company from its customers for out-of-pocket expenses incurred are reported as revenue in the financial statements.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.

Research and Development

Research and development expense relates to the development of new applications and processes including significant improvements to existing applications. These costs are expensed as incurred. Research and development costs for the years ended December 31, 2012 and 2011 were $1,603,177 and $1,450,608, respectively.

Fair Value of Financial Instruments

Fair value of financial instruments is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company has categorized its financial assets and liabilities measured at fair value into a three-level hierarchy. See Note 5 – Derivative Liabilities for a further discussion regarding the Company’s measurement of financial assets and liabilities at fair value.

Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.

F-9

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Convertible Instruments

The Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts that feature conversion options. The accounting standards require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

The Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt. The Company also records, when necessary, deemed dividends for the intrinsic value of the conversion options embedded in preferred stock based upon the difference between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred stock.

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock as defined in ASC 815-40 "Contracts in Entity's Own Equity" (“ASC 815-40”). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).  The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.

Recently Issued and Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued accounting updates to Accounting Standards Codification 820, Fair Value Measurements Topic — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which provide clarifying guidance on how to measure fair value and additional disclosure requirements. The amendments prohibit the use of blockage factors at all levels of the fair value hierarchy and provide guidance on measuring financial instruments that are managed on a net portfolio basis. Additional disclosure requirements include transfers between Levels 1 and 2; and for Level 3 fair value measurements, a description of our valuation processes and additional information about unobservable inputs impacting Level 3 measurements. The updates were effective March 1, 2012 and are to be applied prospectively. The adoption of this guidance did not have an impact on our consolidated financial condition, results of operations or cash flows.

F-10

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Stock Based Compensation

The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a three- or four-year period.

The fair value of stock options granted was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected dividend yield. The risk free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term of the option. The expected term assumption is determined using the weighted average midpoint between vest and expiration for all individuals within the grant. Through the second quarter of 2012, the Company had estimated its expected volatility from an index of historical stock prices of comparable entities whose share prices were publicly traded and averaged with the Company’s historical stock prices, excluding its first ten months of activity due to the discreet and non-recurring nature of the trading. Beginning in the third quarter of 2012, the Company began estimating its expected volatility using only its own historical stock prices, continuing to exclude the first ten months due to the discreet and non-recurring nature of the trading, as management determined this assumption to be a better indicator of value at this time. 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 estimated forfeiture rates used during the years ended December 31, 2012 and 2011 ranged from 7.3% to 7.5%.

The following assumptions were used to estimate the fair value of options granted for the years ended December 31, 2012 and 2011 using the Black-Scholes option-pricing model:

	December 31,
	2012			2011
Risk free interest rate		1.13	%		2.44	%
Expected term (in years)		6.32			6.18
Expected volatility		57.98	%		55.22	%
Expected dividend yield		-			-

Earnings (Loss) Per Share

Basic earnings and loss per share are computed by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock, the exercise of stock options and warrants from the calculation of net loss per share as their effect would be antidilutive.

F-11

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The following table reconciles the numerator and denominator for the calculation:

	For the Years Ended
	December 31,
	2012			2011
Net (loss) income available to common stockholders - basic	$	(3,472,904	)	$	654,306
Denominator - basic:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Basic (loss) earnings per common share	$	(0.12	)	$	0.02
Net (loss) income available to common stockholders - diluted	$	(3,472,904	)	$	703,295
Denominator - diluted:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Common share equivalents of outstanding stock options		-			1,583,594
Common share equivalents of outstanding convertible preferred stock		-			2,316,700
Common share equivalents of outstanding warrants		-			562,667
Weighted average number of common shares outstanding		29,644,775			33,413,825
Dilutive (loss) earnings per common share	$	(0.12	)	$	0.02
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
Convertible preferred stock		4,807,773			-
Stock options		5,980,444			1,306,154
Warrants		2,383,021			87,813

NOTE 3 - Property and Equipment

Property and equipment consisted of the following as of December 31:

	2012			2011
Office/computer equipment	$	917,638		$	922,531
Furniture and fixtures		267,939			265,347
Software		446,611			388,634
Leasehold improvements		143,109			114,669
		1,775,297			1,691,181
Less: accumulated depreciation		(1,375,728	)		(1,176,951	)
	$	399,569		$	514,230

Depreciation expense amounted to $285,074 and $310,426 for the years ended December 31, 2012 and 2011, respectively. The Company disposed of and wrote-off property and equipment with $86,297 of cost and $86,297 of accumulated depreciation for the year ended December 31, 2012 as compared to the year ended December 31, 2011, during which the Company exchanged, disposed of, and wrote-off certain property and equipment resulting in a net gain of $8,369.

NOTE 4 - Patents

On May 24, 2002, the Company purchased from the University of Rochester, a related party, certain patents developed by the Company’s founders and previously licensed by the Company under an Exclusive Right Agreement. The Company paid $1,500,000 and issued warrants to acquire 357,075 shares of common stock to the University of Rochester for the full right and title to the patents. The warrants were recorded at fair value which totaled $157,000. Since May 24, 2002, the Company has invested an additional $1,055,846 in connection with improving and expanding its patent portfolio. These costs consist predominately of legal and filing fees and historically been capitalized as long-lived assets. For the years ended December 31, 2012 and 2011, the Company capitalized $23,157 and $6,661, respectively, of legal expenses and filing fees associated with its patents.

F-12

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Accumulated amortization on the patents amounted to $1,242,410 and $1,106,751 as of December 31, 2012 and 2011, respectively. Amortization expense for the years ended December 31, 2012 and 2011 amounted to $135,659 and $135,224, respectively. The weighted-average remaining amortization period is approximately 14 years as of December 31, 2012. The estimated future amortization of the patents is as follows:

For the Years Ending
December 31,		Amount
	2013	$	136,363
	2014		136,363
	2015		136,363
	2016		136,363
	2017		136,363
	Thereafter		788,621
	Total	$	1,470,436

NOTE 5 - Derivative Liabilities

The warrants issued with the Company’s series B preferred stock, and to the placement agent in the series B financing, do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings.

The derivative liabilities were valued using the Black-Scholes option valuation model and the following assumptions on the following dates:

	December 31, 2012			April 3, 2012			December 31, 2011
Series B warrants:
Risk-free interest rate		0.22	%		0.45	%		0.33	%
Expected volatility		65.94	%		49.60	%		47.71	%
Expected life (in years)		1.69			2.43			2.69
Expected dividend yield		-			-			-
Number of warrants		214,229			902,038			902,038
Fair value	$	15,950		$	521,139		$	156,596

The risk-free interest rate was based on rates established by the Federal Reserve. The Company’s policy for expected volatility is disclosed in Note 2. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock, and does not expect to pay dividends on its common stock in the future.

F-13

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The fair value of these warrant liabilities was $15,950 and $156,596 at December 31, 2012 and 2011, respectively. The net change in fair value during 2012 is $140,646, of which $264,587 is reported in the Company’s consolidated statement of operations as an unrealized loss on the change in fair value of the derivative liabilities and $405,233 is a reclassification of the fair value of the derivative liabilities to equity in connection with the Series C-1 Preferred Stock and Warrant financing (See Note 6). The change in fair value during 2011 was $2,453,112, of which $669,402 was reported in the Company’s consolidated statement of operations as an unrealized gain on the change in fair value of the derivative liabilities and $1,783,710 was a reclassification of the fair value of the derivative liabilities to equity upon the exercise of the warrants. The fair value of the derivative liabilities are re-measured at the end of every reporting period, when certain terms to the warrant agreements are amended, and/or upon the exercise of the warrant. The change in fair value is reported in the consolidated statement of operations as an unrealized gain or loss on the change in fair value of the derivative liability.

Fair Value Measurement

Valuation Hierarchy

ASC 820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2012 and 2011:

			Fair Value Measurements at December 31, 2012
	Total Carrying Value at December 31, 2012		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs  (Level 3)
Derivative liabilities	$	15,950	$	-	$	-	$	15,950

			Fair Value Measurements at December 31, 2011
	Total Carrying Value at December 31, 2011		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs  (Level 3)
Derivative liabilities	$	156,596	$	-	$	-	$	156,596

The carrying amounts of cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

F-14

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting department, who reports to the Chief Financial Officer, determines its valuation policies and procedures.  The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting department and are approved by the Chief Financial Officer. 

Level 3 Valuation Techniques

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates.  This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as, volatility.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in Change in Fair Value of Derivative Liabilities within Other Income (Expense) on the Company’s Consolidated Statements of Operations.

As of December 31, 2012, there were no transfers in or out of level 3 from other levels in the fair value hierarchy.

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

	Years Ended December 31,
	2012			2011
Beginning balance	$	156,596		$	2,609,708
Net unrealized loss (gain) on derivative financial instruments		264,587			(669,402	)
Reclassification to stockholders’ equity		(405,233	)		(1,783,710	)
Ending balance	$	15,950		$	156,596

NOTE 6 – Stockholders’ Equity

Common Stock

The Company has authorized 85,000,000 shares of common stock, par value $0.001. As of December 31, 2012, the Company had reserved 2,327,937 shares of common stock for issuance under its 2001 and 2005 long-term incentive plans, another 350,000 shares of common stock issued to a previous CEO outside of one of its long-term incentive plans, and 6,900,000 shares for its 2006 Long-term Incentive Plan.

Preferred Stock

The Company has authorized 15,000,000 shares of preferred stock, par value $0.001 per share, of which 8,400 are designated as Series A Convertible Preferred Stock, 6,000 are designated as Series B Convertible Preferred Stock, 3,000 are designated as Series C-1 Convertible Preferred Stock (“Series C-1 Preferred Stock”), and 3,000 are designated as Series C-2 Convertible Preferred Stock (“Series C-2 Preferred Stock”) as specified in the Certificate of Designation (the “Certificate”). During the year ended December 31, 2012, there were no conversions of the Company’s convertible preferred stock.

F-15

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

During November and December 2005, the Company completed a private placement totaling 7,000 units at a purchase price of $1,000 per unit. Each unit consisted of one share of Series A Preferred, convertible into 400 shares of common stock, and a detachable warrant to purchase 200 shares of common stock at an exercise price of $4.00 per share. Gross proceeds from the private placement amounted to $7,000,000 and net proceeds amounted to approximately $6,000,000. As a result of the private placement, in September 2007 (see below), Series A Preferred became convertible into 830.36 shares of the Company’s common stock. All Series A warrants have expired.

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. 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 December 31, 2012, there were $36,000 of dividends payable to Series B convertible preferred stockholders. During the years ended December 31, 2012 and 2011, cash dividends paid aggregated to $12,000 and $48,989, respectively.

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. Fifty percent of the warrants have an initial exercise price equal to $1.2043 per share and the other fifty percent 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, 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 2.62%, contractual term of seven years, expected volatility of 67.5%, 0% expected dividend yield, stock price of $1.01 per share, and exercise prices of $1.2043 and $1.3849 per share.

The conversion feature of the Company’s Series B warrants did not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company included the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings. Accordingly the warrants have been classified as derivative liabilities as discussed above.

On April 3, 2012, the Company and Merck Global Health Innovation Fund, LLC (“GHI”) entered into a Series C Preferred Stock and Warrant Purchase Agreement (the “Purchase Agreement”) under which the Company agreed to sell GHI up to 6,000 shares of the Company’s Series C Preferred Stock and warrants to purchase up to 2,722,632 shares of common stock at an exercise price of $1.2043 per share (the “Series C Warrants”) for a purchase price of $6,000,000 in two separate closings. The Series C Preferred Stock is convertible, at GHI’s election, into shares of the Company’s common stock at a conversion rate, which is determined by dividing (i) the stated value per share of $1,000, plus, if consented to by the Company, all accrued and unpaid dividends, by (ii) the conversion price of $1.2043. The conversion price of the Series C Preferred Stock and exercise price of the Series C Warrants is subject to customary anti-dilution provisions. The financing is part of an initiative by GHI to provide funding for the Company’s efforts to expand its quantitative imaging technology into the personalized medicine market.

The initial closing under the Purchase Agreement took place on April 3, 2012 at which the Company sold to GHI 3,000 shares of Series C-1 Preferred Stock which are initially convertible into 2,491,073 shares of common stock and Series C-1 Warrants which are exercisable to purchase 1,361,316 shares of common stock for a purchase price of $3,000,000, net of issuance costs of approximately $334,000. The warrants contain a seven year term and became exercisable on September 30, 2012. The terms of the financing provide for a second closing of $3,000,000 of Series C-2 Preferred Stock, if, among other things, certain milestones are met toward the development of its quantitative imaging center on or before April 3, 2013. The Company does not expect that this second closing will occur, however, it intends to continue to pursue our efforts in support of obtaining FDA acceptance.

F-16

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The Series C-1 Preferred Stock has a 4% cumulative dividend and is senior in liquidation preference to the existing preferred stock and common stock. The Series C-1 holders elected to accrue the dividends making the dividends payable on the earlier of the liquidation of the corporation according to the Series C Certificate of Designation or upon the conversion of the Series C-1 into common stock. Subject to certain exceptions, the Series B holders are only entitled to be paid dividends, if full dividends are first paid or concurrently paid to the holders of the Series C-1 Preferred Stock. As of December 31, 2012, dividends payable to Series B and C-1 convertible preferred stockholders amounted to $36,000 and $89,333, respectively and are included in dividends payable on the Company’s consolidated balance sheet.

In accordance with ASC 470, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” the Series C-1 convertible preferred stock was considered to have an embedded beneficial conversion feature as the effective 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 value of the beneficial conversion feature was calculated using, among other factors, the Company’s closing stock price of $1.56 on April 3, 2012 resulting in the recognition of a one-time non-cash deemed dividend of $1,806,919 during the year ended December 31, 2012.

The issuance of the Series C-1 Preferred Stock triggered certain anti-dilution provisions of the Company’s warrants issued in 2007 in connection with the sale of our Series B Preferred Stock (the “Series B Warrants”). As a result, the exercise price of certain outstanding Series B Warrants was reduced from $1.3849 to $1.2043 per share and an additional 74,174 warrants were issued.

As part of the financing, the Company also agreed with certain holders of the majority of the outstanding Series B Warrants to amend and restate the terms of those warrants. As a result of the amended and restated terms, among other things, the anti-dilution adjustment provision, which required the Company to reduce the exercise price of the Series B Warrants if the Company had issued shares at a lower price, contained in the agreements was eliminated. As of December 31, 2012, the Company had 214,229 warrants outstanding subject to the anti-dilution adjustment provision.

Common Stock Warrant Exercise

During 2012, the Company issued 357,075 shares of common stock upon the exercise of a fixed-price warrant held by the University of Rochester at an exercise price of $0.74 per share, with the Company receiving aggregate proceeds of $262,500.

NOTE 7 – Share-Based Compensation

Stock Options

As of December 31, 2012, the Company’s 2001 Long-Term Incentive Plan, 2005 Long-Term Incentive Plan and 2006 Long-Term Incentive Plan had a total of 5,980,444 in stock option grants. In May 2007, the stockholders of the Company approved the adoption of the Company’s 2006 Stock Plan (the “Plan”). The Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to employees and for the grant of non-statutory stock options, restricted stock, and stock appreciation rights to employees, directors, and consultants. The Compensation Committee of the Company’s board of directors administers the Plan and has the authority to make awards under the Plan and establish vesting and other terms, but cannot grant stock options at less than the fair value of the Company’s common stock on the date of grant or re-price stock options previously granted. The employee stock options granted under the Plan generally vest ratably over three to four years of service and expire seven to ten years from the date of grant (or ninety days after the termination of employment). As of December 31, 2012, 1,084,930 stock options remained eligible for grant under the 2006 Long-Term Incentive Plan. The 2001 and 2005 Long-Term Incentive Plans have been closed for additional grants.

F-17

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

During the years ended December 31, 2012 and 2011, the Company granted options to employees to purchase 405,803 and 752,853 shares of common stock, respectively. These options generally vest ratably during the first four years following their issuance and have a ten-year life. There were 20,000 options exercised resulting in cash proceeds of $20,200 during 2012. This compares to 470,377 options exercised in a cashless manner during 2011, including the exercise of 119,475 non-employee stock options, resulting in the issuance of 239,805 shares of the Company’s common stock. Additionally, there were 76,986 options exercised resulting in cash proceeds of $92,383 during 2011.

A summary of the employee stock option activity for the years ended December 31, 2012 and 2011 are as follows:

	Number of Shares			Weighted Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at January 1, 2011		5,946,848		$	1.24			6.30	$	5,640,172
Granted		752,853			1.91
Exercised		(541,888	)		(0.98	)
Forfeited		(220,087	)		(1.74	)
Options outstanding at December 31, 2011		5,768,690			1.33			6.32		55,000
Granted		405,803			1.13
Exercised		(20,000	)		(1.01	)
Forfeited		(102,823	)		(1.50	)
Expired		(76,632	)		(1.90	)
Options outstanding at December 31, 2012		5,975,038			1.30			5.62	$	6,750
Options exercisable at December 31, 2012		4,245,516			1.32			4.74	$	6,563

Additional information with respect to the outstanding employee stock options as of December 31, 2012 is as follows:

		Options Outstanding				Options Exercisable
Exercise Prices		Number Outstanding at December 31, 2012		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Number Exercisable at December 31, 2012		Weighted Average Exercise Price
	$0.43 – 0.92		834,250		6.26		0.84		634,063		0.82
	$0.93 – 1.01		1,669,519		5.91		0.98		1,252,351		0.99
	$1.02 - 1.19		701,606		7.68		1.12		287,708		1.10
	$1.20 – 1.34		1,428,084		4.82		1.22		1,142,430		1.21
	$1.35 – 4.15		1,341,579		4.62		2.19		928,964		2.30
			5,975,038		5.62		1.30		4,245,516		1.32

F-18

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The weighted-average grant-date fair value of options granted during the year ended December 31, 2012 and 2011 was $250,571 and $783,279, respectively.

For the years ended December 31, 2012 and 2011, the Company’s consolidated statements of operations reflect $612,946 and $844,004, respectively, of stock-based compensation expense for stock options granted under its long-term incentive plans, which is allocated as follows:

	For Years Ended December 31,
	2012		2011
Cost of service revenues	$	57,984	$	47,214
Research and development		78,456		126,144
Sales and marketing		10,222		19,535
General and administrative		466,284		651,111
Total stock-based compensation	$	612,946	$	844,004

A summary of the status of the non-vested shares as of December 31, 2012 and changes during the years ended December 31, 2012 and 2011, is presented below:

Non-vested Shares	Shares			Weighted- Average Grant- Date Fair Value Per Share
Non-vested at January 1, 2011		2,965,494		$	0.71
Granted		752,853			1.04
Vested		(1,184,039	)		(0.77	)
Cancelled Grants		(187,699	)		(0.99	)
Non-vested at December 31, 2011		2,346,609		$	0.77
Granted		405,803			0.62
Vested		(944,818	)		(0.76	)
Cancelled Grants		(78,072	)		(0.82	)
Non-vested at December 31, 2012		1,729,522		$	0.73

As of December 31, 2012, there was $672,088 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.05 years. The total fair value of shares vested during the year ended December 31, 2012 amounted to $718,526.

Prior to 2008, the Company issued options under the 2006 Long-Term Incentive Plan to non-employee consultants for radiological services performed. These options to non-employees generally vested immediately, had exercise prices ranging from $1.12 to $6.85 and a term of seven or six years from the date of grant. The value of the options was based on the fair value of the services performed and were included in the Company’s statements of operations. During 2012, a total of 6,767 of the non-employee options expired.

The total amount of stock options outstanding as of December 31, 2012 is:

Stock options granted to employees	5,975,038
Stock options granted to consultants	5,406
Total outstanding	5,980,444

F-19

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

During 2012, a total of 405,803 stock options were granted, of that amount 50,000 were granted to executive officers of the Company.

Restricted Stock Awards

A restricted stock award entitles the recipient to receive shares of unrestricted common stock upon vesting of the award. The fair value of each restricted stock award is determined upon granting of the shares and the related compensation expense is recognized ratably over the vesting period and charged to the statements of operations as non-cash compensation expense. Restricted stock awards granted but unvested shares are forfeited upon termination of employment, unless otherwise agreed. The fair value of restricted stock issued under the Plan is determined based on the closing price of the Company’s common stock on the grant date. Under the provisions of the 2006 Long Term Incentive Plan, the Company may grant restricted stock to its employees, Board members and consultants. During 2006, the Board of Directors Compensation Committee approved an equity based compensation structure for non-employee Board members. In 2012 and 2011, respectively, 51,761 and 25,801 restricted stock awards were issued to members of the Board for their services on the Board under the 2006 Long Term Incentive Plan. The restricted stock awards are fully vested and non-forfeitable and are therefore included in the outstanding common stock of the Company as of December 31, 2012. The weighted average grant date fair value of restricted stock issued by the Company during 2012 and 2011 were $68,549 and $30,250 respectively.

The Company incurred $0 and $36,618 in compensation expense in 2012 and 2011 related to the restricted stock awards for services by Board members for those respective periods.

NOTE 8 - Benefit Plan

The Company has a defined contribution plan which covers all of its full-time employees. The employees’ annual contributions are limited to the maximum allowed under the Internal Revenue Code. During 2009, the Company began a matching contribution to participants 401k plans equal to 50% of the participants’ contributions up to a maximum 3% of annual wages. The Company paid a total of $145,479 and $120,551 in 2012 and 2011 to participants representing the employer contribution amount.

NOTE 9 - Income Taxes

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 2009 through 2012, 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. The Company does not expect its unrecognized tax benefit to change during the next 12 months. As of December 31, 2012, 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 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. Section 382 of the Internal Revenue Code imposes certain limitations on the utilization of net operating loss carryovers and other tax attributes after a change in control.  If the Company has a change in ownership, such change could significantly limit the possible utilization of such carryovers. Since its formation, the Company has raised capital through the issuance of capital stock which, combined with purchasing shareholders' subsequent disposition of these shares, may have resulted in an ownership change as defined by Section 382, and also could result in an ownership change in the future upon subsequent disposition.

F-20

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The Company will recognize interest and penalties accrued related to unrecognized tax benefits as components of its income tax provision. The Company does not have any interest and penalties accrued related to unrecognized tax benefits.

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, deferred income taxes and liabilities are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. ASC 740 requires recognition of net deferred tax assets to the extent it is more likely than not that such net assets will be realized. To the extent that the Company believes that its net deferred tax assets will not be realized, a valuation allowance must be recorded against those assets.

The income tax provision consists of the following:

	2012			2011
Current
Federal	$	-		$	-
State		-			-
		-			-
Deferred
Federal		(309,448	)		172,438
State		(42,649	)		23,766
Change in valuation allowance		352,097			(196,204	)
		-			-
Total income tax provision	$	-		$	-

The Company has net operating loss carryforwards (“NOLs”) of approximately $8,723,000 as of December 31, 2012 that will be available to offset future taxable income.  Approximately $677,000 of the NOL carryforward, if realized, will result in a benefit to be recorded in additional paid in capital. The NOLs are due to expire in 2027 through 2032.  The Company has concluded that a full valuation allowance was appropriate for the NOLs as they are more likely than not to be utilized prior to their expiration.

The total net deferred tax asset and liabilities as of December 31, 2012 and 2011 consists of the following:

Deferred tax assets:	2012			2011
Net operating loss carryforwards	$	3,112,584		$	2,805,504
Intangible assets		788,990			908,609
Accrued expenses		117,010			110,920
Research and development tax credit carryforwards		166,693			151,830
Stock-based compensation		1,095,050			1,016,167
Total deferred tax assets		5,280,327			4,993,030
Deferred tax liability:
Property and equipment		(91,688	)		(156,488	)
Subtotal		5,188,639			4,836,542
Less: valuation allowance		(5,188,639	)		(4,836,542	)
Net deferred tax asset	$	-		$	-

F-21

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The difference between the federal statutory and effective income tax rates for the years ended December 31, 2012 and 2011 is as follows:

	2012			2011
Federal statutory rate		(34.00	)%		34.00	%
State and local income taxes, net of federal benefit		(2.67	)%		4.09	%
Stock-based compensation		8.27	%		27.58	%
Loss from derivative financial liabilities		5.88	%		(32.36	)%
Research and development credit		(0.97	)%		(5.94	)%
Other		0.46	%		0.53	%
		(23.03	)%		27.90	%
Less: valuation allowance		23.03	%		(27.90	)%
Provision for income taxes		0.00	%		0.00	%

NOTE 10 - Commitments and Contingencies

Operating Leases

In July, 2007 the Company began leasing approximately 19,500 square feet of office space at our corporate headquarters in Rochester, New York. The base annual rent under the lease is $360,000, and increases three percent (3%) a year. During the first twenty months of the lease, the rent was paid in two portions: a cash portion of $156,000 annually, paid in equal monthly installments, increasing three percent (3%) annually; and, a stock portion of $204,000 annually, paid in equal monthly installments, increasing three percent (3%) annually. The stock portion was payable in shares of our common stock. In February 2009, the Landlord exercised their option to receive their remaining rental payments in all cash. Management believes that the leased property is adequately covered by insurance.

In June 2012, the Company renewed its lease for approximately 19,500 square feet of office space at the corporate headquarters in Rochester, New York. The lease term is for five years with a lease commencement date of July 1, 2012. The base annual rent under the lease is $309,075, and increases two percent (2%) per year over the term of the lease.

In April 2010, the Company entered into a lease agreement for certain equipment. The lease is for 36 months and will expire in March 2013.

Total rent expense for the years ended December 31, 2012 and 2011 was $326,215 and $325,520, respectively.

Future minimum rental commitments under non-cancelable operating leases are as follows:

For the Years Ending
December 31,	Amount
2013	$	322,993
2014		321,688
2015		321,688
2016		321,688
2017		167,149
Total	$	1,455,206

F-22

VirtualScopics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

NOTE 11 - Related Parties

In April 2012, the Company issued Merck Global Health Innovation Fund, LLC (a wholly-owned subsidiary of Merck & Co, Inc. (“Merck”)) 3,000 shares of Series C-1 Preferred Stock which are initially convertible into 2,491,073 shares of common stock and Series C-1 Warrants which are exercisable to purchase 1,361,316 shares of common stock. Revenues generated from Merck were $1,593,897 and $818,653 for the year ending December 31, 2012 and 2011, respectively. The accounts receivable balance due from Merck was $264,024 and $186,550 as of December 31, 2012 and December 31, 2011, respectively.

The Company generated revenues from certain other related parties of $86,106 and $162,842 for the years ended December 31, 2012 and 2011, respectively. The accounts receivable balances due from these other related parties were $23,880 and $0 as of December 31, 2012 and December 31, 2011, respectively.

NOTE 12 – Concentrations of Credit Risk

The Company’s top customer accounted for approximately 45% and 55% of total revenue for the years ended December 31, 2012 and 2011, respectively. The Company’s top customer accounted for approximately 45% and 50% of accounts receivable for the years ended December 31, 2012 and 2011, respectively.

NOTE 13 – Other Matters

On August 29, 2012, the Company received a written notice from the Nasdaq Stock Market (“Nasdaq”) indicating that its common stock was not in compliance with minimum bid price required for continued listing on the Nasdaq Capital Market. In accordance with section 5810(c)(3)(A) of the Nasdaq Marketplace Rules, the Company had until February 25, 2013 to regain compliance by maintaining a bid price of common stock at a close of $1.00 or higher for a minimum of 10 consecutive business days, or such longer period as Nasdaq may determine to show the ability to maintain long-term compliance. On February 26, 2013, Nasdaq extended the compliance period due to general market conditions and the Company now has until August 26, 2013 to regain compliance.

NOTE 14 – Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

F-23

EX-10.19

EXHIBIT 10.19

AMENDMENT TO

EMPLOYMENT AGREEMENT

This Amendment to Employment Agreement (this “Amendment”) is made and effective as of December 28, 2012 (the “Effective Date”), between VirtualScopics, Inc., a Delaware corporation (the “Company”) and L. Jeffrey Markin (the “Executive Officer”).

WHEREAS, the Company and the Executive Officer are parties to an Employment Agreement dated February 24, 2009 (the “Employment Agreement”);

WHEREAS, the Company and the Executive Officer desire to modify certain provisions of the Employment Agreement; and

WHEREAS, Section 16 of the Employment Agreement provides that the parties can amend the Employment Agreement in writing.

NOW, THEREFORE, in consideration of the mutual covenants and conditions contained in this Amendment, and for other good and valuable consideration, the parties hereto agree to modify the Employment Agreement as follows:

1. A new section 19 is inserted into the Employment Agreement that provides as follows:

19.         Section 409A of the Code.

(a)          The compensation and benefits under this Agreement are intended to comply with or be exempt from the requirements of Section 409A of the Code, and this Agreement will be interpreted and administered in a manner consistent with that intent. The preceding provision, however, shall not be construed as a guarantee by the Company of any particular tax effect to the Executive Officer under this Agreement. The Company shall not be liable to the Executive Officer if any payment made under this Agreement that is determined to result in an additional tax, penalty or interest under Section 409A of the Code, nor for reporting in good faith any payment made under this Agreement as an amount includible in gross income under Section 409A of the Code.

(b)          References to “termination of employment” and similar terms used in this Agreement mean, to the extent necessary to comply with Section 409A of the Code, the date that the Executive Officer first incurs a “separation from service” within the meaning of Section 409A of the Code. Each payment under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A of the Code.

(c)          The bonus referred to Section 4(b) of this Agreement shall be paid on a timely basis upon official close of the fiscal year, but in no event later than March 15th of the year following the year over which the bonus is earned.

(d)          To the extent any reimbursement provided under this Agreement is includable in the Executive Officer’s income, such reimbursements shall be paid to the Executive Officer not later than December 31st of the year following the year in which the Executive Officer incurs the expense and the amount of reimbursable expenses provided in one year shall not increase or decrease the amount of reimbursable expenses to be provided in a subsequent year.

(e)          Notwithstanding anything in this Agreement to the contrary, if at the time of the Executive Officer’s separation from service with the Company the Executive Officer is a “specified employee” as defined in Section 409A of the Code, and any payment payable under this Agreement as a result of such separation from service is required to be delayed by six months pursuant to Section 409A of the Code, then the Company will make such payment on the date that is six months following the Executive Officer’s separation from service with the Company. The amount of such payment will equal the sum of the payments that would have been paid to the Executive Officer during the six-month period immediately following the Executive Officer’s separation from service had the payment commenced as of such date and will not include interest.

2. All other provisions and conditions in the Employment Agreement that are not revised or modified by this Amendment remain in full force and effect.

3. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute but one and the same document. A signature transmitted by facsimile or electronic mail shall be deemed to be an original signature for all purposes.

(signature page immediately follows)

2

IN WITNESS WHEREOF, the parties have executed this Amendment as of the Effective Date.

VIRTUALSCOPICS, INC.		EXECUTIVE OFFICER
By:	/s/ Terence A. Walts	By:	/s/ Jeffrey Markin
Terence A. Walts Chairman of the Compensation Committee of the Board of Directors of VirtualScopics, Inc.		Jeffrey Markin
Date:	December 28, 2012	Date:	December 28, 2012

3

EX-10.20

EXHIBIT 10.20

AMENDMENT TO

EMPLOYMENT AGREEMENT

This Amendment to Employment Agreement (this “Amendment”) is made and effective as of December 28, 2012 (the “Effective Date”), between VirtualScopics, Inc., a Delaware corporation (the “Company”) and Molly Henderson (the “Executive Officer”).

WHEREAS, the Company and the Executive Officer are parties to an Employment Agreement dated February 24, 2009 (the “Employment Agreement”);

WHEREAS, the Company and the Executive Officer desire to modify certain provisions of the Employment Agreement; and

WHEREAS, Section 16 of the Employment Agreement provides that the parties can amend the Employment Agreement in writing.

NOW, THEREFORE, in consideration of the mutual covenants and conditions contained in this Amendment, and for other good and valuable consideration, the parties hereto agree to modify the Employment Agreement as follows:

1. A new section 19 is inserted into the Employment Agreement that provides as follows:

19. Section 409A of the Code.

(a)          The compensation and benefits under this Agreement are intended to comply with or be exempt from the requirements of Section 409A of the Code, and this Agreement will be interpreted and administered in a manner consistent with that intent. The preceding provision, however, shall not be construed as a guarantee by the Company of any particular tax effect to the Executive Officer under this Agreement. The Company shall not be liable to the Executive Officer if any payment made under this Agreement that is determined to result in an additional tax, penalty or interest under Section 409A of the Code, nor for reporting in good faith any payment made under this Agreement as an amount includible in gross income under Section 409A of the Code.

(b)          References to “termination of employment” and similar terms used in this Agreement mean, to the extent necessary to comply with Section 409A of the Code, the date that the Executive Officer first incurs a “separation from service” within the meaning of Section 409A of the Code. Each payment under this Agreement shall be designated as a “separate payment” within the meaning of Section 409A of the Code.

(c)          The bonus referred to Section 4(b) of this Agreement shall be paid on a timely basis upon official close of the fiscal year, but in no event later than March 15th of the year following the year over which the bonus is earned.

(d)          To the extent any reimbursement provided under this Agreement is includable in the Executive Officer’s income, such reimbursements shall be paid to the Executive Officer not later than December 31st of the year following the year in which the Executive Officer incurs the expense and the amount of reimbursable expenses provided in one year shall not increase or decrease the amount of reimbursable expenses to be provided in a subsequent year.

(e)          Notwithstanding anything in this Agreement to the contrary, if at the time of the Executive Officer’s separation from service with the Company the Executive Officer is a “specified employee” as defined in Section 409A of the Code, and any payment payable under this Agreement as a result of such separation from service is required to be delayed by six months pursuant to Section 409A of the Code, then the Company will make such payment on the date that is six months following the Executive Officer’s separation from service with the Company. The amount of such payment will equal the sum of the payments that would have been paid to the Executive Officer during the six-month period immediately following the Executive Officer’s separation from service had the payment commenced as of such date and will not include interest.

2. All other provisions and conditions in the Employment Agreement that are not revised or modified by this Amendment remain in full force and effect.

3. This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute but one and the same document. A signature transmitted by facsimile or electronic mail shall be deemed to be an original signature for all purposes.

(signature page immediately follows)

2

IN WITNESS WHEREOF, the parties have executed this Amendment as of the Effective Date.

VIRTUALSCOPICS, INC.		EXECUTIVE OFFICER
By:	/s/Terence A. Walts	By:	/s/ Molly Henderson
Terence A. Walts		Molly Henderson
Chairman of the Compensation Committee of the
Board of Directors of VirtualScopics, Inc.
Date:	December 28, 2012	Date:	December 28, 2012

3

EX-21

Exhibit 21

Subsidiaries of VirtualScopics, Inc.

Name	Jurisdiction of Organization
VirtualScopics New York, LLC	New York

EX-23.1

Exhibit 23.1

Independent Registered Public Accounting Firm’s Consent

We consent to the incorporation by reference in this Registration Statement of VirtualScopics, Inc. on Form S-8 filed on November 29, 2007 (File Number 333-147718), October 1, 2009 (File Number 333-162253), and on Form S-3 filed on October 11, 2007 (File Number 333-146635) of our report dated March 27, 2013, with respect to our audits of the consolidated financial statements of VirtualScopics, Inc. and Subsidiary as of December 31, 2012 and 2011 and for the years then ended, which report is included in this Annual Report on Form 10-K of VirtualScopics, Inc. for the year ended December 31, 2012.

/s/ Marcum LLP

Marcum LLP

New York, NY

March 27, 2013

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

as required by Rule 13a-14 Or 15d-14 of the Securities Exchange Act of 1934,

as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

I, Jeffrey Markin, certify that:

1.    I have reviewed this annual report on Form 10-K of VirtualScopics, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 27, 2013

/s/ Jeffrey Markin

Jeffrey Markin

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

as required by Rule 13a-14 Or 15d-14 of the Securities Exchange Act of 1934,

as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

I, Molly Henderson, certify that:

1.    I have reviewed this annual report on Form 10-K of VirtualScopics, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 27, 2013

/s/ Molly Henderson

Molly Henderson

Chief Business and Financial Officer, Sr. Vice President

EX-32.1

Exhibit 32.1

Certification pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of VirtualScopics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Jeffrey Markin, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Jeffrey Markin

Jeffrey Markin

President and Chief Executive Officer

March 27, 2013

This Certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

Certification pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of VirtualScopics, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Molly Henderson, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 to the best of my knowledge, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 27, 2013

/s/ Molly Henderson

Molly Henderson

Chief Business and Financial Officer, Sr. Vice President

This Certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

XML

Derivative Liabilities (Details 1) (USD $)	Dec. 31, 2012	Apr. 30, 2012	Dec. 31, 2011	Dec. 31, 2010
Derivative liabilities	$ 15,950	$ 521,139	$ 156,596	$ 2,609,708
Fair Value, Inputs, Level 1 [Member]
Derivative liabilities	0		0
Fair Value, Inputs, Level 2 [Member]
Derivative liabilities	0		0
Fair Value, Inputs, Level 3 [Member]
Derivative liabilities	$ 15,950		$ 156,596	$ 2,609,708

XML

Commitments and Contingencies (Details) (USD $)	Dec. 31, 2012
2013	$ 322,993
2014	321,688
2015	321,688
2016	321,688
2017	167,149
Total	$ 1,455,206

XML

Share-Based Compensation (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Rights	These options generally vest ratably during the first four years following their issuance and have a ten-year life.
Proceeds from the exercise of stock options	$ 20,200	$ 92,383
Share Based Compensation Options Grants In Period Weighted Average Grant Date Fair Value	250,571	783,279
Issuance Of Restricted Stock Awards In Settlement Of Accrued Liability	68,549	30,250
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized	672,088
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition	2 years 18 days
Expired - Number of Shares (in shares)	76,632
Granted - Number of Shares (in shares)	405,803	752,853
Restricted stock units issuance	68,549	30,250
Stock-based compensation	612,946	880,622
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value	718,526
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Weighted Average Exercise Price	$ 6.85
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Weighted Average Exercise Price	$ 1.12
Long Term Incentive Plan 2006 [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	1,084,930
Restricted Stock [Member]
Stock-based compensation	0	36,618
Cashless [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		470,377
Executive Officers [Member]
Granted - Number of Shares (in shares)	50,000
Common Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	20,000	76,986
Restricted stock units issuance	$ 52	$ 25
Restricted stock units issuance (in shares)	51,761	25,801
Stock Issued During Period Shares Cashless Exercise Of Employee Stock Options		239,805
Non-Employee Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period		119,475
Expired - Number of Shares (in shares)	6,767
Cash Exercise Of Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period	20,000	76,986

XML

Commitments and Contingencies (Details Textual) (USD $)	1 Months Ended			12 Months Ended
	Jun. 30, 2012	Apr. 30, 2010	Jul. 31, 2007	Dec. 31, 2012	Dec. 31, 2011
Leasing Space, Square Feet	19500		19,500
Base Annual Rent	$ 309,075		$ 360,000
Rent Increased Percentage	2.00%		3.00%
Payments for Rent			156,000
Rent Annual Increasing Percentage			3.00%
Stock Issued During Period, Shares, Issued for Services			204,000
Lease Term		36 months		5 years
Lease Expiration Date		Mar. 01, 2013
Operating Leases, Rent Expense				$ 326,215	$ 325,520

XML

Share-Based Compensation (Details 3) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Non-vested, Shares	2,346,609	2,965,494
Granted, Shares	405,803	752,853
Vested, Shares	(944,818)	(1,184,039)
Cancelled Grants, Shares	(78,072)	(187,699)
Non-vested, Shares	1,729,522	2,346,609
Non-vested, Weighted-Average Grant-Date Fair Value Per Share	$ 0.77	$ 0.71
Granted, Weighted-Average Grant-Date Fair Value Per Share	$ 0.62	$ 1.04
Vested, Weighted-Average Grant-Date Fair Value Per Share	$ (0.76)	$ (0.77)
Cancelled Grants, Weighted-Average Grant-Date Fair Value Per Share	$ (0.82)	$ (0.99)
Non-vested, Weighted-Average Grant-Date Fair Value Per Share	$ 0.73	$ 0.77

XML

Summary of Significant Accounting Policies (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Description Of Classification Of Derivative Instruments	Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date
Research and development	$ 1,603,177	$ 1,450,608
Share Based Compensation Arrangement By Share Based Payment Award Fair Value Assumptions Average Forfeiture Rate	7.30%	7.50%
Patents [Member]
Finite-Lived Intangible Asset, Useful Life	20 years

XML

Concentrations of Credit Risk (Details Textual)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Entity-Wide Accounts Receivable, Major Customer, Percentage	45.00%	50.00%
Entity-Wide Revenue, Major Customer, Percentage	45.00%	55.00%

XML

Patents (Tables)

12 Months Ended

Dec. 31, 2012

Patents [Abstract]

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

The weighted-average remaining amortization period is approximately 14 years as of December 31, 2012. The estimated future amortization of the patents is as follows:

For the Years Ending
December 31,		Amount
	2013	$	136,363
	2014		136,363
	2015		136,363
	2016		136,363
	2017		136,363
	Thereafter		788,621
	Total	$	1,470,436

XML

Income Taxes (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Current
Federal	$ 0	$ 0
State	0	0
Current Income Tax Expense (Benefit)	0	0
Deferred
Federal	(309,448)	172,438
State	(42,649)	23,766
Change in valuation allowance	352,097	(196,204)
Deferred Income Tax Expense (Benefit)	0	0
Total income tax provision	$ 0	$ 0

XML

Stockholders' Equity (Details Textual) (USD $)	1 Months Ended		2 Months Ended	12 Months Ended			1 Months Ended	12 Months Ended		2 Months Ended	1 Months Ended			1 Months Ended			1 Months Ended				1 Months Ended	2 Months Ended	12 Months Ended	2 Months Ended	1 Months Ended	12 Months Ended		1 Months Ended	12 Months Ended
	Sep. 30, 2007	May 31, 2002	Dec. 31, 2005	Dec. 31, 2012	Dec. 31, 2011	Sep. 17, 2007	Apr. 30, 2012 Series B Warrant [Member]	Dec. 31, 2012 Series B Warrant [Member]	Dec. 31, 2011 Series B Warrant [Member]	Dec. 31, 2005 Private Placement [Member]	May 31, 2002 University Of Rochester [Member]	May 24, 2002 University Of Rochester [Member]	Apr. 03, 2012 Common Stock [Member]	Sep. 30, 2007 Warrant [Member]	Sep. 17, 2007 Warrant [Member]	Dec. 31, 2012 Former Chief Executive Officer [Member]	Sep. 30, 2007 Financial Advisor [Member]	Sep. 17, 2007 Financial Advisor [Member]	Dec. 31, 2012 Long Term Incentive Plan 2001 and 2005 [Member]	Dec. 31, 2012 Long Term Incentive Plan 2006 [Member]	Sep. 30, 2007 Series A Convertible Preferred Stock [Member]	Dec. 31, 2005 Series A Convertible Preferred Stock [Member]	Dec. 31, 2012 Series A Convertible Preferred Stock [Member]	Dec. 31, 2005 Series A Convertible Preferred Stock [Member] Private Placement [Member]	Sep. 30, 2007 Series B Preferred Stock [Member]	Dec. 31, 2012 Series B Preferred Stock [Member]	Sep. 17, 2007 Series B Preferred Stock [Member]	Sep. 30, 2007 Series B Preferred Stock [Member] Private Placement [Member]	Dec. 31, 2012 Series C1 Convertible Preferred Stock [Member]	Dec. 31, 2012 Series C-2 Preferred Stock [Member]	Dec. 31, 2012 Series C Preferred Stock [Member]	Dec. 31, 2012 Series C-1 Warrants [Member]
Common stock, shares authorized				85,000,000	85,000,000
Common stock, par value (in dollars per share)				$ 0.001	$ 0.001	$ 0.001
Common Stock, Capital Shares Reserved for Future Issuance																350,000			2,327,937	6,900,000
Stock Issued During Period, Shares, New Issues																								7,000				4,350
Class of Warrant or Right, Exercise Price of Warrants or Rights				0.74																			4.00			1.3849
Convertible preferred stock, shares authorized				15,000,000	15,000,000																								3,000		6,000
Proceeds From Issuance Of Private Placement, Gross Proceeds	$ 4,350,000		$ 7,000,000
Convertible preferred stock, par value (in dollars per share)				$ 0.001	$ 0.001
Preferred Stock Designated During Period, Shares																							8,400			6,000			3,000	3,000
Stock Issued During Period New Issues, Per Share										$ 1,000																		$ 0.001
Stock Conversion Ratio																					830.36	400
Proceeds from Issuance of Private Placement										6,000,000
Preferred Stock, Accrued Dividend, Per Share																										36,000
Annual Dividend Rate																									8.00%
Warrants Exercisable Number															2,167,232
Warrants Exercise Price One																									$ 1.2043
Warrants Exercise Price Two																									$ 1.3849
Fair Value Of Warrants		157,000									157,000						57,000
Risk-free interest rate							0.45%	0.22%	0.33%					2.62%
Share Price													$ 1.56	$ 1.01
Warrants Expiration Period	seven-year term
Expected volatility							49.60%	65.94%	47.71%					67.50%
Expected dividend yield							0.00%	0.00%	0.00%					0.00%
Preferred Stock and Warrant Purchase Agreement Warrants Authorized For Issuance To Acquire Common Stock Shares Number																															2,722,632
Preferred Stock and Warrant Purchase Agreement Exercise Price Of Warrants Authorized																															$ 1.2043
Stock Issued During Period, Value, Issued for Cash																															6,000,000
Preferred Stock Conversion Price Per Share																															$ 1.2043
Preferred Stock and Warrant Purchase Agreement Shares To Be Issued Upon Conversion Of Preferred Stock																													2,491,073
Preferred Stock and Warrant Purchase Agreement, Warrants Issued To Acquire Common Stock Shares, Number																																1,361,316
Proceeds from Issuance or Sale of Equity																													3,000,000
Future Proceeds From Issuance Or Sale Of Equity																														3,000,000
Payments of Stock Issuance Costs																													334,000
Preferred Stock Cumulative Dividend Percentage																													4.00%
Interest and Dividends Payable																										36,000			89,333
Preferred stock deemed dividend				1,806,919	0
Additional Warrants Issued																										74,174
Class Ofwarrant Or Right Reduced Exercise Price Of Warrants Or Rights																										$ 1.2043
Class of Warrant or Right, Outstanding																										214,229
Cash dividends on series B preferred stock				12,000	48,989
Number of warrants							902,038	214,229	902,038	200		357,075						67,530
Proceeds From Warrant Exercises				$ 262,500	$ 105,001
Preferred Stock, Liquidation Preference Per Share																											$ 1,000				$ 1,000

XML

Patents (Details Textual) (USD $)	1 Months Ended	12 Months Ended		1 Months Ended		1 Months Ended
	May 31, 2002	Dec. 31, 2012	Dec. 31, 2011	May 31, 2002 University Of Rochester [Member]	May 24, 2002 University Of Rochester [Member]	May 31, 2002 Patents [Member]	Dec. 31, 2012 Patents [Member]	Dec. 31, 2011 Patents [Member]
Acquisition of patents		$ 23,157	$ 6,661			$ 1,500,000
Number of warrants					357,075
Fair Value Of Warrants	157,000			157,000
Additional Investment							1,055,846
Capitalization Of Legal Expenses and Filing Fees							23,157	6,661
Finite-Lived Intangible Assets, Accumulated Amortization							1,242,410	1,106,751
Amortization of Intangible Assets		$ 135,659	$ 135,224
Finite-Lived Intangible Assets, Remaining Amortization Period		14 Years

XML

Income Taxes (Details 2)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Federal statutory rate	(34.00%)	34.00%
State and local income taxes, net of federal benefit	(2.67%)	4.09%
Stock-based compensation	8.27%	27.58%
Loss from derivative financial liabilities	5.88%	(32.36%)
Research and development credit	(0.97%)	(5.94%)
Other	0.46%	0.53%
Effective Income Tax Rate, Continuing Operations	(23.03%)	27.90%
Less: valuation allowance	23.03%	(27.90%)
Provision for income taxes	0.00%	0.00%

XML

Share-Based Compensation (Details 4)	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Share-Based Compensation Arrangement By Share-Based Payment Award, Options, Outstanding, Number	5,975,038	5,768,690	5,946,848
Employees [Member]
Share-Based Compensation Arrangement By Share-Based Payment Award, Options, Outstanding, Number	5,975,038
Consultants [Member]
Share-Based Compensation Arrangement By Share-Based Payment Award, Options, Outstanding, Number	5,406
Employees And Consultants [Member]
Share-Based Compensation Arrangement By Share-Based Payment Award, Options, Outstanding, Number	5,980,444

XML

Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

NOTE 2 - Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Estimates included in these consolidated financial statements relate to assessing the collectability of accounts receivable, the valuation of securities underlying share-based compensation and derivative financial instruments, realization of deferred tax assets, tax contingencies and any related valuation allowance, and the useful lives and potential impairment of the Company’s property and equipment and intangible assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

Cash and Cash Equivalents

The Company considers all highly liquid investments when purchased with a maturity of three months or less to be cash equivalents. At December 31, 2012 and 2011, the Company had no cash equivalents.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash. At times, our cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

Accounts Receivable

Accounts receivable are stated at estimated net realizable value.  Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts, if any. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances, if any.

Patents

Costs incurred to acquire and file for patents, including legal costs, are capitalized as long-lived assets and amortized on a straight-line basis over the lower of the estimated useful life or legal life of the patent, which is 20 years.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. When retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any resulting gain or loss is recognized and included in the consolidated statement of operations.

Expenditures for maintenance and repairs, which do not generally extend the useful life of the assets, are charged to expense as incurred. Gains or losses on disposal of property and equipment are reflected in general and administrative expense in the consolidated statement of operations in the period of disposal.

Depreciation is computed using the straight-line method over the following useful lives:

	Years
Office/computer equipment		3-5
Furniture and fixtures		5-7
Software		3

Leasehold improvements, which are included in property and equipment, are recorded at cost less accumulated depreciation. Depreciation on leasehold improvements is computed using the straight-line method over the shorter of their estimated useful lives or the lease term, whichever is shorter.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the periods of depreciation and amortization for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value. Through December 31, 2012, the Company has not recorded any impairment charges on its long-lived assets.

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option valuation model to value the derivative instruments at inception and on subsequent valuation dates. The warrants issued with the Company’s series B preferred stock, and to the placement agent in the series B financing, do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings. Accordingly, the warrants are recognized as a derivative instrument. Although the Company determined the warrants include an implied downside protection feature, it performed a Monte-Carlo simulation and concluded that the value of the feature is de minimus and the use of the Black-Scholes valuation model is considered to be a reasonable method to value the warrants. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date (Note 5).

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when an agreement exists, services are performed, prices are fixed or determinable, and collectability is reasonably assured. Revenues are reduced for estimated discounts and other allowances, if any.

The Company provides advanced medical image analysis on a per analysis basis, and recognizes revenue when the image analysis is completed. 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. The Company does not sell software in its ordinary course of business, software licenses, upgrades or enhancements, or post-contract customer services.

Reimbursements received by the Company from its customers for out-of-pocket expenses incurred are reported as revenue in the financial statements.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.

Research and Development

Research and development expense relates to the development of new applications and processes including significant improvements to existing applications. These costs are expensed as incurred. Research and development costs for the years ended December 31, 2012 and 2011 were $1,603,177 and $1,450,608, respectively.

Fair Value of Financial Instruments

Fair value of financial instruments is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company has categorized its financial assets and liabilities measured at fair value into a three-level hierarchy. See Note 5 – Derivative Liabilities for a further discussion regarding the Company’s measurement of financial assets and liabilities at fair value.

Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.

Convertible Instruments

The Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts that feature conversion options. The accounting standards require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

The Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt. The Company also records, when necessary, deemed dividends for the intrinsic value of the conversion options embedded in preferred stock based upon the difference between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred stock.

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock as defined in ASC 815-40 "Contracts in Entity's Own Equity" (“ASC 815-40”). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).  The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.

Recently Issued and Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued accounting updates to Accounting Standards Codification 820, Fair Value Measurements Topic — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which provide clarifying guidance on how to measure fair value and additional disclosure requirements. The amendments prohibit the use of blockage factors at all levels of the fair value hierarchy and provide guidance on measuring financial instruments that are managed on a net portfolio basis. Additional disclosure requirements include transfers between Levels 1 and 2; and for Level 3 fair value measurements, a description of our valuation processes and additional information about unobservable inputs impacting Level 3 measurements. The updates were effective March 1, 2012 and are to be applied prospectively. The adoption of this guidance did not have an impact on our consolidated financial condition, results of operations or cash flows.

Stock Based Compensation

The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a three- or four-year period.

The fair value of stock options granted was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected dividend yield. The risk free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term of the option. The expected term assumption is determined using the weighted average midpoint between vest and expiration for all individuals within the grant. Through the second quarter of 2012, the Company had estimated its expected volatility from an index of historical stock prices of comparable entities whose share prices were publicly traded and averaged with the Company’s historical stock prices, excluding its first ten months of activity due to the discreet and non-recurring nature of the trading. Beginning in the third quarter of 2012, the Company began estimating its expected volatility using only its own historical stock prices, continuing to exclude the first ten months due to the discreet and non-recurring nature of the trading, as management determined this assumption to be a better indicator of value at this time. 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 estimated forfeiture rates used during the years ended December 31, 2012 and 2011 ranged from 7.3% to 7.5%.

The following assumptions were used to estimate the fair value of options granted for the years ended December 31, 2012 and 2011 using the Black-Scholes option-pricing model:

	December 31,
	2012			2011
Risk free interest rate		1.13	%		2.44	%
Expected term (in years)		6.32			6.18
Expected volatility		57.98	%		55.22	%
Expected dividend yield		-			-

Earnings (Loss) Per Share

Basic earnings and loss per share are computed by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock, the exercise of stock options and warrants from the calculation of net loss per share as their effect would be antidilutive.

The following table reconciles the numerator and denominator for the calculation:

	For the Years Ended
	December 31,
	2012			2011
Net (loss) income available to common stockholders - basic	$	(3,472,904	)	$	654,306
Denominator - basic:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Basic (loss) earnings per common share	$	(0.12	)	$	0.02
Net (loss) income available to common stockholders - diluted	$	(3,472,904	)	$	703,295
Denominator - diluted:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Common share equivalents of outstanding stock options		-			1,583,594
Common share equivalents of outstanding convertible preferred stock		-			2,316,700
Common share equivalents of outstanding warrants		-			562,667
Weighted average number of common shares outstanding		29,644,775			33,413,825
Dilutive (loss) earnings per common share	$	(0.12	)	$	0.02
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
Convertible preferred stock		4,807,773			-
Stock options		5,980,444			1,306,154
Warrants		2,383,021			87,813

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Share-Based Compensation (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Options outstanding - Number of Shares (in shares)	5,768,690	5,946,848
Granted - Number of Shares (in shares)	405,803	752,853
Exercised - Number of Shares (in shares)	(20,000)	(541,888)
Forfeited - Number of Shares (in shares)	(102,823)	(220,087)
Expired - Number of Shares (in shares)	(76,632)
Options outstanding - Number of Shares (in shares)	5,975,038	5,768,690	5,946,848
Options exercisable - Number of Shares (in shares)	4,245,516
Options outstanding - Weighted Average Exercise Price (in dollars per share)	$ 1.33	$ 1.24
Granted - Weighted Average Exercise Price (in dollars per share)	$ 1.13	$ 1.91
Exercised - Weighted Average Exercise Price (in dollars per share)	$ (1.01)	$ (0.98)
Forfeited- Weighted Average Exercise Price (in dollars per share)	$ (1.50)	$ (1.74)
Expired - Weighted Average Exercise Price (in dollars per share)	$ (1.90)
Options outstanding - Weighted Average Exercise Price (in dollars per share)	$ 1.3	$ 1.33	$ 1.24
Options exercisable - Weighted Average Exercise Price (in dollars per share)	$ 1.32
Options outstanding - Weighted Average Remaining Contractual Term (in years)	5 years 7 months 13 days	6 years 3 months 25 days	6 years 3 months 18 days
Options exercisable - Weighted Average Remaining Contractual Term (in years)	4 years 8 months 26 days
Options outstanding - Aggregate Intrinsic Value	$ 6,750	$ 55,000	$ 5,640,172
Options exercisable - Aggregate Intrinsic Value	$ 6,563

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Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Future minimum rental commitments under non-cancelable operating leases are as follows:

For the Years Ending
December 31,	Amount
2013	$	322,993
2014		321,688
2015		321,688
2016		321,688
2017		167,149
Total	$	1,455,206

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

The income tax provision consists of the following:

	2012			2011
Current
Federal	$	-		$	-
State		-			-
		-			-
Deferred
Federal		(309,448	)		172,438
State		(42,649	)		23,766
Change in valuation allowance		352,097			(196,204	)
		-			-
Total income tax provision	$	-		$	-

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

The total net deferred tax asset and liabilities as of December 31, 2012 and 2011 consists of the following:

Deferred tax assets:	2012			2011
Net operating loss carryforwards	$	3,112,584		$	2,805,504
Intangible assets		788,990			908,609
Accrued expenses		117,010			110,920
Research and development tax credit carryforwards		166,693			151,830
Stock-based compensation		1,095,050			1,016,167
Total deferred tax assets		5,280,327			4,993,030
Deferred tax liability:
Property and equipment		(91,688	)		(156,488	)
Subtotal		5,188,639			4,836,542
Less: valuation allowance		(5,188,639	)		(4,836,542	)
Net deferred tax asset	$	-		$	-

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

The difference between the federal statutory and effective income tax rates for the years ended December 31, 2012 and 2011 is as follows:

	2012			2011
Federal statutory rate		(34.00	)%		34.00	%
State and local income taxes, net of federal benefit		(2.67	)%		4.09	%
Stock-based compensation		8.27	%		27.58	%
Loss from derivative financial liabilities		5.88	%		(32.36	)%
Research and development credit		(0.97	)%		(5.94	)%
Other		0.46	%		0.53	%
		(23.03	)%		27.90	%
Less: valuation allowance		23.03	%		(27.90	)%
Provision for income taxes		0.00	%		0.00	%

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Related Parties (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Revenue from Related Parties	$ 86,106	$ 162,842
Accounts Receivable, Related Parties	23,880	0
Merck Global Health Innovation Fund Llc [Member]
Revenue from Related Parties	1,593,897	818,653
Accounts Receivable, Related Parties	$ 264,024	$ 186,550
Series C-1 Preferred Stock [Member]
Preferred Stock and Warrant Purchase Agreement Shares Issued	3,000
Series C-1 Warrants [Member]
Preferred Stock and Warrant Purchase Agreement, Warrants Issued To Acquire Common Stock Shares, Number	1,361,316

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Share-Based Compensation (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Stock Option, Number Outstanding	5,975,038	5,768,690	5,946,848
Stock Option, Weighted Average Remaining Life (Years)	5 years 7 months 13 days	6 years 3 months 25 days	6 years 3 months 18 days
Stock Option, Weighted Average Exercise Price	$ 1.3	$ 1.33	$ 1.24
Options Exercisable, Number Exercisable	4,245,516
Options Exercisable, Weighted Average Exercise Price	$ 1.32
Option One Member [Member]
Stock Option, Number Outstanding	834,250
Stock Option, Weighted Average Remaining Life (Years)	6 years 3 months 4 days
Stock Option, Weighted Average Exercise Price	$ 0.84
Options Exercisable, Number Exercisable	634,063
Options Exercisable, Weighted Average Exercise Price	$ 0.82
Option One Member [Member] | Minimum [Member]
Stock Option, Exercise Prices	$ 0.43
Option One Member [Member] | Maximum [Member]
Stock Option, Exercise Prices	$ 0.92
Option Two Member [Member]
Stock Option, Number Outstanding	1,669,519
Stock Option, Weighted Average Remaining Life (Years)	5 years 10 months 28 days
Stock Option, Weighted Average Exercise Price	$ 0.98
Options Exercisable, Number Exercisable	1,252,351
Options Exercisable, Weighted Average Exercise Price	$ 0.99
Option Two Member [Member] | Minimum [Member]
Stock Option, Exercise Prices	$ 0.93
Option Two Member [Member] | Maximum [Member]
Stock Option, Exercise Prices	$ 1.01
Option Three Member [Member]
Stock Option, Number Outstanding	701,606
Stock Option, Weighted Average Remaining Life (Years)	7 years 8 months 5 days
Stock Option, Weighted Average Exercise Price	$ 1.12
Options Exercisable, Number Exercisable	287,708
Options Exercisable, Weighted Average Exercise Price	$ 1.1
Option Three Member [Member] | Minimum [Member]
Stock Option, Exercise Prices	$ 1.02
Option Three Member [Member] | Maximum [Member]
Stock Option, Exercise Prices	$ 1.19
Option Four Member [Member]
Stock Option, Number Outstanding	1,428,084
Stock Option, Weighted Average Remaining Life (Years)	4 years 9 months 25 days
Stock Option, Weighted Average Exercise Price	$ 1.22
Options Exercisable, Number Exercisable	1,142,430
Options Exercisable, Weighted Average Exercise Price	$ 1.21
Option Four Member [Member] | Minimum [Member]
Stock Option, Exercise Prices	$ 1.20
Option Four Member [Member] | Maximum [Member]
Stock Option, Exercise Prices	$ 1.34
Option Five Member [Member]
Stock Option, Number Outstanding	1,341,579
Stock Option, Weighted Average Remaining Life (Years)	4 years 7 months 13 days
Stock Option, Weighted Average Exercise Price	$ 2.19
Options Exercisable, Number Exercisable	928,964
Options Exercisable, Weighted Average Exercise Price	$ 2.3
Option Five Member [Member] | Minimum [Member]
Stock Option, Exercise Prices	$ 1.35
Option Five Member [Member] | Maximum [Member]
Stock Option, Exercise Prices	$ 4.15

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Summary of Significant Accounting Policies (Details)	12 Months Ended
	Dec. 31, 2012
Office and Computer Equipment [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life	5 years
Office and Computer Equipment [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life	3 years
Furniture and Fixtures [Member] | Maximum [Member]
Property, Plant and Equipment, Useful Life	7 years
Furniture and Fixtures [Member] | Minimum [Member]
Property, Plant and Equipment, Useful Life	5 years
Software [Member]
Property, Plant and Equipment, Useful Life	3 years

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Summary of Significant Accounting Policies (Details 1)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Risk free interest rate	1.13%	2.44%
Expected term (in years)	6 years 3 months 25 days	6 years 2 months 5 days
Expected volatility	57.98%	55.22%
Expected dividend yield	0.00%	0.00%

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Organization and Basis of Presentation

12 Months Ended

Dec. 31, 2012

Organization and Basis Of Presentation [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE 1 - Organization and Basis of Presentation

Nature of Business

The Company’s headquarters are located in Rochester, New York. 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.

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Summary of Significant Accounting Policies (Details 2) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Net (loss) income available to common stockholders - basic	$ (3,472,904)	$ 654,306
Denominator - basic:
Weighted average number of common shares outstanding (in shares)	29,644,775	28,950,864
Basic (loss) earnings per common share (in dollars per share)	$ (0.12)	$ 0.02
Net (loss) income available to common stockholders - diluted	(3,472,904)	703,295
Denominator - diluted:
Weighted average number of common shares outstanding (in shares)	29,644,775	28,950,864
Common share equivalents of outstanding stock options	0	1,583,594
Common share equivalents of outstanding convertible preferred stock	0	2,316,700
Common share equivalents of outstanding warrants	$ 0	$ 562,667
Weighted average number of common shares outstanding (in shares)	29,644,775	33,413,825
Dilutive (loss) earnings per common share (in dollars per share)	$ (0.12)	$ 0.02
Warrant [Member]
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	2,383,021	87,813
Stock Options [Member]
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	5,980,444	1,306,154
Convertible Preferred Stock [Member]
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	4,807,773	0

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Derivative Liabilities (Details 2) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Apr. 30, 2012
Beginning balance	$ 156,596	$ 2,609,708	$ 521,139
Net unrealized loss (gain) on derivative financial instruments	(264,587)	669,402
Reclassification to stockholders' equity	0	1,783,710
Ending balance	15,950	156,596	521,139
Fair Value, Inputs, Level 3 [Member]
Beginning balance	156,596	2,609,708
Net unrealized loss (gain) on derivative financial instruments	264,587	(669,402)
Reclassification to stockholders' equity	(405,233)	(1,783,710)
Ending balance	$ 15,950	$ 156,596

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Income Taxes (Details Textual) (USD $)	Dec. 31, 2012
Valuation Allowance Percentage	100.00%
Operating Loss Carryforwards	$ 8,723,000
Additional Paid-In Capital [Member]
Operating Loss Carryforwards	$ 677,000

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Consolidated Balance Sheets (USD $)	Dec. 31, 2012	Dec. 31, 2011
Assets
Cash	$ 8,523,807	$ 5,737,009
Accounts receivable, net of allowance for doubtful accounts of $15,000	1,762,507	2,435,496
Prepaid expenses and other current assets	437,698	361,376
Total current assets	10,724,012	8,533,881
Patents, net	1,470,436	1,582,938
Property and equipment, net	399,569	514,230
Other assets	5,428	27,140
Total assets	12,599,445	10,658,189
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses	856,702	843,275
Accrued payroll	481,661	759,470
Unearned revenue	272,509	421,486
Derivative liabilities	15,950	156,596
Dividends payable	125,333	0
Total current liabilities	1,752,155	2,180,827
Commitments and Contingencies (See Note 10)
Stockholders' Equity
Common stock, $0.001 par value; 85,000,000 shares authorized; issued and outstanding, 29,799,523 and 29,370,687 shares at December 31, 2012 and 2011, respectively	29,800	29,371
Additional paid-in capital	21,781,084	17,882,936
Accumulated deficit	(10,963,600)	(9,434,948)
Total stockholders' equity	10,847,290	8,477,362
Total liabilities and stockholders' equity	12,599,445	10,658,189
Convertible Preferred Stock Series A [Member]
Stockholders' Equity
Convertible preferred stock	2	2
Convertible Preferred Stock Series B [Member]
Stockholders' Equity
Convertible preferred stock	1	1
Convertible Preferred Stock Series C - 1 [Member]
Stockholders' Equity
Convertible preferred stock	3	0
Convertible Preferred Stock Series C - 2 [Member]
Stockholders' Equity
Convertible preferred stock	$ 0	$ 0

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Share-Based Compensation (Details 2) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Stock-based compensation	$ 612,946	$ 844,004
Cost Of Sales [Member]
Stock-based compensation	57,984	47,214
Research and Development Expense [Member]
Stock-based compensation	78,456	126,144
Selling and Marketing Expense [Member]
Stock-based compensation	10,222	19,535
General and Administrative Expense [Member]
Stock-based compensation	$ 466,284	$ 651,111

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Consolidated Statements of Changes in Stockholders' Equity [Parenthetical]	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Series B Preferred Stock [Member]
Preferred Stock, Dividend Rate, Percentage	8.00%	8.00%
Series C Preferred Stock [Member]
Preferred Stock, Dividend Rate, Percentage	4.00%

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Property and Equipment (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Depreciation	$ 285,074	$ 310,426
Property Plant and Equipment, Cost Of Dispositions	86,297
Accumulated Depreciation, Depletion and Amortization, Write-down of Property, Plant and Equipment	86,297
Gain on the disposal of property and equipment	$ 0	$ 8,369

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

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

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Estimates included in these consolidated financial statements relate to assessing the collectability of accounts receivable, the valuation of securities underlying share-based compensation and derivative financial instruments, realization of deferred tax assets, tax contingencies and any related valuation allowance, and the useful lives and potential impairment of the Company’s property and equipment and intangible assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

The Company considers all highly liquid investments when purchased with a maturity of three months or less to be cash equivalents. At December 31, 2012 and 2011, the Company had no cash equivalents.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash. At times, our cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

Accounts Receivable [Policy Text Block]

Accounts Receivable

Accounts receivable are stated at estimated net realizable value.  Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts, if any. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances, if any.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Patents

Costs incurred to acquire and file for patents, including legal costs, are capitalized as long-lived assets and amortized on a straight-line basis over the lower of the estimated useful life or legal life of the patent, which is 20 years.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation. When retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any resulting gain or loss is recognized and included in the consolidated statement of operations.

Expenditures for maintenance and repairs, which do not generally extend the useful life of the assets, are charged to expense as incurred. Gains or losses on disposal of property and equipment are reflected in general and administrative expense in the consolidated statement of operations in the period of disposal.

Depreciation is computed using the straight-line method over the following useful lives:

	Years
Office/computer equipment		3-5
Furniture and fixtures		5-7
Software		3

Leasehold improvements, which are included in property and equipment, are recorded at cost less accumulated depreciation. Depreciation on leasehold improvements is computed using the straight-line method over the shorter of their estimated useful lives or the lease term, whichever is shorter.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the periods of depreciation and amortization for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value. Through December 31, 2012, the Company has not recorded any impairment charges on its long-lived assets.

Derivatives, Policy [Policy Text Block]

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes option valuation model to value the derivative instruments at inception and on subsequent valuation dates. The warrants issued with the Company’s series B preferred stock, and to the placement agent in the series B financing, do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings. Accordingly, the warrants are recognized as a derivative instrument. Although the Company determined the warrants include an implied downside protection feature, it performed a Monte-Carlo simulation and concluded that the value of the feature is de minimus and the use of the Black-Scholes valuation model is considered to be a reasonable method to value the warrants. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date (Note 5).

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when an agreement exists, services are performed, prices are fixed or determinable, and collectability is reasonably assured. Revenues are reduced for estimated discounts and other allowances, if any.

The Company provides advanced medical image analysis on a per analysis basis, and recognizes revenue when the image analysis is completed. 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. The Company does not sell software in its ordinary course of business, software licenses, upgrades or enhancements, or post-contract customer services.

Reimbursements received by the Company from its customers for out-of-pocket expenses incurred are reported as revenue in the financial statements.

Income Tax, Policy [Policy Text Block]

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.

Research and Development Expense, Policy [Policy Text Block]

Research and Development

Research and development expense relates to the development of new applications and processes including significant improvements to existing applications. These costs are expensed as incurred. Research and development costs for the years ended December 31, 2012 and 2011 were $1,603,177 and $1,450,608, respectively.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Fair Value of Financial Instruments

Fair value of financial instruments is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. The Company has categorized its financial assets and liabilities measured at fair value into a three-level hierarchy. See Note 5 – Derivative Liabilities for a further discussion regarding the Company’s measurement of financial assets and liabilities at fair value.

Preferred Stock, Policy [Policy Text Block]

Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.

Convertible Instruments, Policy [Policy Text Block]

Convertible Instruments

The Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts that feature conversion options. The accounting standards require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (i) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (ii) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (iii) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.

Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.

The Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt. The Company also records, when necessary, deemed dividends for the intrinsic value of the conversion options embedded in preferred stock based upon the difference between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred stock.

Common Stock Purchase Warrants and Other Derivative Financial Instruments, Policy [Policy Text Block]

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provides a choice of net-cash settlement or settlement in the Company’s own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock as defined in ASC 815-40 "Contracts in Entity's Own Equity" (“ASC 815-40”). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).  The Company assesses classification of common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities or equity is required.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued and Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued accounting updates to Accounting Standards Codification 820, Fair Value Measurements Topic — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which provide clarifying guidance on how to measure fair value and additional disclosure requirements. The amendments prohibit the use of blockage factors at all levels of the fair value hierarchy and provide guidance on measuring financial instruments that are managed on a net portfolio basis. Additional disclosure requirements include transfers between Levels 1 and 2; and for Level 3 fair value measurements, a description of our valuation processes and additional information about unobservable inputs impacting Level 3 measurements. The updates were effective March 1, 2012 and are to be applied prospectively. The adoption of this guidance did not have an impact on our consolidated financial condition, results of operations or cash flows.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock Based Compensation

The Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. Stock options issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest over a three- or four-year period.

The fair value of stock options granted was determined on the grant date using assumptions for risk free interest rate, the expected term, expected volatility, and expected dividend yield. The risk free interest rate is based on U.S. Treasury zero-coupon yield curve over the expected term of the option. The expected term assumption is determined using the weighted average midpoint between vest and expiration for all individuals within the grant. Through the second quarter of 2012, the Company had estimated its expected volatility from an index of historical stock prices of comparable entities whose share prices were publicly traded and averaged with the Company’s historical stock prices, excluding its first ten months of activity due to the discreet and non-recurring nature of the trading. Beginning in the third quarter of 2012, the Company began estimating its expected volatility using only its own historical stock prices, continuing to exclude the first ten months due to the discreet and non-recurring nature of the trading, as management determined this assumption to be a better indicator of value at this time. 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 estimated forfeiture rates used during the years ended December 31, 2012 and 2011 ranged from 7.3% to 7.5%.

The following assumptions were used to estimate the fair value of options granted for the years ended December 31, 2012 and 2011 using the Black-Scholes option-pricing model:

	December 31,
	2012			2011
Risk free interest rate		1.13	%		2.44	%
Expected term (in years)		6.32			6.18
Expected volatility		57.98	%		55.22	%
Expected dividend yield		-			-

Earnings Per Share, Policy [Policy Text Block]

Earnings (Loss) Per Share

Basic earnings and loss per share are computed by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s convertible preferred stock and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the conversion of preferred stock, the exercise of stock options and warrants from the calculation of net loss per share as their effect would be antidilutive.

The following table reconciles the numerator and denominator for the calculation:

	For the Years Ended
	December 31,
	2012			2011
Net (loss) income available to common stockholders - basic	$	(3,472,904	)	$	654,306
Denominator - basic:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Basic (loss) earnings per common share	$	(0.12	)	$	0.02
Net (loss) income available to common stockholders - diluted	$	(3,472,904	)	$	703,295
Denominator - diluted:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Common share equivalents of outstanding stock options		-			1,583,594
Common share equivalents of outstanding convertible preferred stock		-			2,316,700
Common share equivalents of outstanding warrants		-			562,667
Weighted average number of common shares outstanding		29,644,775			33,413,825
Dilutive (loss) earnings per common share	$	(0.12	)	$	0.02
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
Convertible preferred stock		4,807,773			-
Stock options		5,980,444			1,306,154
Warrants		2,383,021			87,813

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Patents (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
2013	$ 136,363
2014	136,363
2015	136,363
2016	136,363
2017	136,363
Thereafter	788,621
Total	$ 1,470,436	$ 1,582,938

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Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Property, Plant and Equipment [Table Text Block]

Property and equipment consisted of the following as of December 31:

	2012			2011
Office/computer equipment	$	917,638		$	922,531
Furniture and fixtures		267,939			265,347
Software		446,611			388,634
Leasehold improvements		143,109			114,669
		1,775,297			1,691,181
Less: accumulated depreciation		(1,375,728	)		(1,176,951	)
	$	399,569		$	514,230

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Consolidated Statements of Cash Flows (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Cash flows from operating activities
Net (loss) income	$ (1,528,652)	$ 703,295
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization	420,733	478,908
Gain on the disposal of property and equipment	0	(8,369)
Provision for doubtful accounts	0	(15,000)
Stock-based compensation	612,946	880,622
Fair value adjustment of derivative liabilities	264,587	(669,402)
Changes in operating assets and liabilities
Accounts receivable	672,989	307,029
Prepaid expenses and other assets	(54,610)	(116,695)
Unearned revenue	(148,977)	206,978
Accounts payable and accrued expenses	81,976	(262,931)
Accrued payroll	(277,809)	(61,637)
Total adjustments	1,571,835	739,503
Net cash provided by operating activities	43,183	1,442,798
Cash flows from investing activities
Purchase of property and equipment	(170,413)	(411,861)
Acquisition of patents	(23,157)	(6,661)
Net cash used in investing activities	(193,570)	(418,522)
Cash flows from financing activities
Proceeds from the exercise of stock options	20,200	92,383
Withholding taxes paid on the cashless exercise of employee stock options	0	(11,722)
Proceeds from the exercise of warrants	262,500	105,001
Proceeds from the issuance of Series C-1 preferred stock and warrant, net of issuance costs	2,666,485	0
Cash dividends on series B preferred stock	(12,000)	(48,989)
Net cash provided by financing activities	2,937,185	136,673
Net increase in cash	2,786,798	1,160,949
Cash
Beginning of year	5,737,009	4,576,060
End of year	8,523,807	5,737,009
Supplemental disclosure of cash flow information
Taxes	18,621	66,457
Non-cash financing activities:
Issuance of restricted awards in settlement of accrued liability for board fees	68,549	30,250
Cashless exercise of stock options and warrants	0	772
Dividends payable on Series B and C-1 preferred stock	125,333	0
Reclassification of derivative liabilities upon exercise of warrants to additional paid in capital	0	1,783,710
Reclassification of derivative liabilities to additional paid in capital in connection with the Series C-1 preferred stock issuance	$ 405,233	$ 0

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Consolidated Balance Sheets [Parenthetical] (USD $)	Dec. 31, 2012	Dec. 31, 2011
Convertible preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Convertible preferred stock, shares authorized	15,000,000	15,000,000
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	85,000,000	85,000,000
Common stock, shares Issued	29,799,523	29,370,687
Common stock, shares outstanding	29,799,523	29,370,687
Convertible Preferred Stock Series A [Member]
Convertible preferred stock, shares authorized	8,400	8,400
Convertible preferred stock, shares issued	2,190	2,190
Convertible preferred stock, shares outstanding	2,190	2,190
Convertible preferred stock, liquidation preference (in dollars per share)	$ 1,000	$ 1,000
Convertible Preferred Stock Series B [Member]
Convertible preferred stock, shares authorized	6,000	6,000
Convertible preferred stock, shares issued	600	600
Convertible preferred stock, shares outstanding	600	600
Convertible preferred stock, liquidation preference (in dollars per share)	$ 1,000	$ 1,000
Convertible Preferred Stock Series C - 1 [Member]
Convertible preferred stock, shares authorized	3,000	0
Convertible preferred stock, shares issued	3,000	0
Convertible preferred stock, shares outstanding	3,000	0
Convertible preferred stock, liquidation preference (in dollars per share)	$ 1,000	$ 1,000
Convertible Preferred Stock Series C - 2 [Member]
Convertible preferred stock, shares authorized	3,000	0
Convertible preferred stock, shares issued	0	0
Convertible preferred stock, shares outstanding	0	0
Convertible preferred stock, liquidation preference (in dollars per share)	$ 1,000	$ 1,000

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

NOTE 10 - Commitments and Contingencies

Operating Leases

In July, 2007 the Company began leasing approximately 19,500 square feet of office space at our corporate headquarters in Rochester, New York. The base annual rent under the lease is $360,000, and increases three percent (3%) a year. During the first twenty months of the lease, the rent was paid in two portions: a cash portion of $156,000 annually, paid in equal monthly installments, increasing three percent (3%) annually; and, a stock portion of $204,000 annually, paid in equal monthly installments, increasing three percent (3%) annually. The stock portion was payable in shares of our common stock. In February 2009, the Landlord exercised their option to receive their remaining rental payments in all cash. Management believes that the leased property is adequately covered by insurance.

In June 2012, the Company renewed its lease for approximately 19,500 square feet of office space at the corporate headquarters in Rochester, New York. The lease term is for five years with a lease commencement date of July 1, 2012. The base annual rent under the lease is $309,075, and increases two percent (2%) per year over the term of the lease.

In April 2010, the Company entered into a lease agreement for certain equipment. The lease is for 36 months and will expire in March 2013.

Total rent expense for the years ended December 31, 2012 and 2011 was $326,215 and $325,520, respectively.

Future minimum rental commitments under non-cancelable operating leases are as follows:

For the Years Ending
December 31,	Amount
2013	$	322,993
2014		321,688
2015		321,688
2016		321,688
2017		167,149
Total	$	1,455,206

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Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Feb. 28, 2013	Jun. 30, 2012
Entity Registrant Name	VirtualScopics, Inc.
Entity Central Index Key	0001307752
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	vscp
Entity Common Stock, Shares Outstanding		29,799,523
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2012
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2012
Entity Well-Known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Public Float			$ 18,720,109

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Related Parties

12 Months Ended

Dec. 31, 2012

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

NOTE 11 - Related Parties

In April 2012, the Company issued Merck Global Health Innovation Fund, LLC (a wholly-owned subsidiary of Merck & Co, Inc. (“Merck”)) 3,000 shares of Series C-1 Preferred Stock which are initially convertible into 2,491,073 shares of common stock and Series C-1 Warrants which are exercisable to purchase 1,361,316 shares of common stock. Revenues generated from Merck were $1,593,897 and $818,653 for the year ending December 31, 2012 and 2011, respectively. The accounts receivable balance due from Merck was $264,024 and $186,550 as of December 31, 2012 and December 31, 2011, respectively.

The Company generated revenues from certain other related parties of $86,106 and $162,842 for the years ended December 31, 2012 and 2011, respectively. The accounts receivable balances due from these other related parties were $23,880 and $0 as of December 31, 2012 and December 31, 2011, respectively.

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Consolidated Statements of Operations (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Revenues	$ 11,950,447	$ 13,115,459
Reimbursement revenues	1,012,717	1,166,144
Total revenues	12,963,164	14,281,603
Cost of services	6,698,992	6,841,321
Cost of reimbursement revenues	1,012,717	1,166,144
Total cost of services	7,711,709	8,007,465
Gross profit	5,251,455	6,274,138
Operating expenses
Research and development	1,603,177	1,450,608
Sales and marketing	1,410,877	1,119,100
General and administrative	3,059,735	3,177,934
Depreciation and amortization	420,733	478,908
Total operating expenses	6,494,522	6,226,550
Operating (loss) income	(1,243,067)	47,588
Other income (expense)
Interest income	3,403	18,103
Other expense	(24,401)	(31,798)
Unrealized (loss) gain on change in fair value of the derivative liabilities	(264,587)	669,402
Total other (expense) income	(285,585)	655,707
Net (Loss) Income	(1,528,652)	703,295
Preferred stock deemed dividend	1,806,919	0
Preferred stock dividends	137,333	48,989
Net (loss) income available to common stockholders	$ (3,472,904)	$ 654,306
Basic and diluted (loss) earnings per common share (in dollars per share)	$ (0.12)	$ 0.02
Weighted average number of common shares outstanding
Basic (in shares)	29,644,775	28,950,864
Diluted (in shares)	29,644,775	33,413,825

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Derivative Liabilities

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 5 - Derivative Liabilities

The warrants issued with the Company’s series B preferred stock, and to the placement agent in the series B financing, do not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings.

The derivative liabilities were valued using the Black-Scholes option valuation model and the following assumptions on the following dates:

	December 31, 2012			April 3, 2012			December 31, 2011
Series B warrants:
Risk-free interest rate		0.22	%		0.45	%		0.33	%
Expected volatility		65.94	%		49.60	%		47.71	%
Expected life (in years)		1.69			2.43			2.69
Expected dividend yield		-			-			-
Number of warrants		214,229			902,038			902,038
Fair value	$	15,950		$	521,139		$	156,596

The risk-free interest rate was based on rates established by the Federal Reserve. The Company’s policy for expected volatility is disclosed in Note 2. The expected life of the warrants was determined by the expiration date of the warrants. The expected dividend yield was based upon the fact that the Company has not historically paid dividends on its common stock, and does not expect to pay dividends on its common stock in the future.

The fair value of these warrant liabilities was $15,950 and $156,596 at December 31, 2012 and 2011, respectively. The net change in fair value during 2012 is $140,646, of which $264,587 is reported in the Company’s consolidated statement of operations as an unrealized loss on the change in fair value of the derivative liabilities and $405,233 is a reclassification of the fair value of the derivative liabilities to equity in connection with the Series C-1 Preferred Stock and Warrant financing (See Note 6). The change in fair value during 2011 was $2,453,112, of which $669,402 was reported in the Company’s consolidated statement of operations as an unrealized gain on the change in fair value of the derivative liabilities and $1,783,710 was a reclassification of the fair value of the derivative liabilities to equity upon the exercise of the warrants. The fair value of the derivative liabilities are re-measured at the end of every reporting period, when certain terms to the warrant agreements are amended, and/or upon the exercise of the warrant. The change in fair value is reported in the consolidated statement of operations as an unrealized gain or loss on the change in fair value of the derivative liability.

Fair Value Measurement

Valuation Hierarchy

ASC 820, “Fair Value Measurements and Disclosures,” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2012 and 2011:

			Fair Value Measurements at December 31, 2012
	Total Carrying Value at December 31, 2012		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs  (Level 3)
Derivative liabilities	$	15,950	$	-	$	-	$	15,950

			Fair Value Measurements at December 31, 2011
	Total Carrying Value at December 31, 2011		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs  (Level 3)
Derivative liabilities	$	156,596	$	-	$	-	$	156,596

The carrying amounts of cash, accounts receivable, prepaid expenses, accounts payable, and accrued liabilities approximate their fair value due to their short maturities. The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the derivative liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting department, who reports to the Chief Financial Officer, determines its valuation policies and procedures.  The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting department and are approved by the Chief Financial Officer. 

Level 3 Valuation Techniques

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company uses the Black-Scholes option valuation model to value Level 3 financial liabilities at inception and on subsequent valuation dates.  This model incorporates transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as, volatility.

A significant decrease in the volatility or a significant decrease in the Company’s stock price, in isolation, would result in a significantly lower fair value measurement. Changes in the values of the derivative liabilities are recorded in Change in Fair Value of Derivative Liabilities within Other Income (Expense) on the Company’s Consolidated Statements of Operations.

As of December 31, 2012, there were no transfers in or out of level 3 from other levels in the fair value hierarchy.

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

	Years Ended December 31,
	2012			2011
Beginning balance	$	156,596		$	2,609,708
Net unrealized loss (gain) on derivative financial instruments		264,587			(669,402	)
Reclassification to stockholders’ equity		(405,233	)		(1,783,710	)
Ending balance	$	15,950		$	156,596

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Patents

12 Months Ended

Dec. 31, 2012

Patents [Abstract]

Patents [Text Block]

NOTE 4 - Patents

On May 24, 2002, the Company purchased from the University of Rochester, a related party, certain patents developed by the Company’s founders and previously licensed by the Company under an Exclusive Right Agreement. The Company paid $1,500,000 and issued warrants to acquire 357,075 shares of common stock to the University of Rochester for the full right and title to the patents. The warrants were recorded at fair value which totaled $157,000. Since May 24, 2002, the Company has invested an additional $1,055,846 in connection with improving and expanding its patent portfolio. These costs consist predominately of legal and filing fees and historically been capitalized as long-lived assets. For the years ended December 31, 2012 and 2011, the Company capitalized $23,157 and $6,661, respectively, of legal expenses and filing fees associated with its patents.

Accumulated amortization on the patents amounted to $1,242,410 and $1,106,751 as of December 31, 2012 and 2011, respectively. Amortization expense for the years ended December 31, 2012 and 2011 amounted to $135,659 and $135,224, respectively. The weighted-average remaining amortization period is approximately 14 years as of December 31, 2012. The estimated future amortization of the patents is as follows:

For the Years Ending
December 31,		Amount
	2013	$	136,363
	2014		136,363
	2015		136,363
	2016		136,363
	2017		136,363
	Thereafter		788,621
	Total	$	1,470,436

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Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Property Plant and Equipment Useful Life [Table Text Block]

Depreciation is computed using the straight-line method over the following useful lives:

	Years
Office/computer equipment	3-5
Furniture and fixtures	5-7
Software	3

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

The following assumptions were used to estimate the fair value of options granted for the years ended December 31, 2012 and 2011 using the Black-Scholes option-pricing model:

	December 31,
	2012			2011
Risk free interest rate		1.13	%		2.44	%
Expected term (in years)		6.32			6.18
Expected volatility		57.98	%		55.22	%
Expected dividend yield		-			-

Schedule of Earnings Per Share Reconciliation [Table Text Block]

The following table reconciles the numerator and denominator for the calculation:

	For the Years Ended
	December 31,
	2012			2011
Net (loss) income available to common stockholders - basic	$	(3,472,904	)	$	654,306
Denominator - basic:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Basic (loss) earnings per common share	$	(0.12	)	$	0.02
Net (loss) income available to common stockholders - diluted	$	(3,472,904	)	$	703,295
Denominator - diluted:
Weighted average number of common shares outstanding		29,644,775			28,950,864
Common share equivalents of outstanding stock options		-			1,583,594
Common share equivalents of outstanding convertible preferred stock		-			2,316,700
Common share equivalents of outstanding warrants		-			562,667
Weighted average number of common shares outstanding		29,644,775			33,413,825
Dilutive (loss) earnings per common share	$	(0.12	)	$	0.02
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
Convertible preferred stock		4,807,773			-
Stock options		5,980,444			1,306,154
Warrants		2,383,021			87,813

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Concentrations of Credit Risk

12 Months Ended

Dec. 31, 2012

Risks and Uncertainties [Abstract]

Concentration Risk Disclosure [Text Block]

NOTE 12 – Concentrations of Credit Risk

The Company’s top customer accounted for approximately 45% and 55% of total revenue for the years ended December 31, 2012 and 2011, respectively. The Company’s top customer accounted for approximately 45% and 50% of accounts receivable for the years ended December 31, 2012 and 2011, respectively.

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Benefit Plan

12 Months Ended

Dec. 31, 2012

Compensation and Retirement Disclosure [Abstract]

Compensation and Employee Benefit Plans [Text Block]

NOTE 8 - Benefit Plan

The Company has a defined contribution plan which covers all of its full-time employees. The employees’ annual contributions are limited to the maximum allowed under the Internal Revenue Code. During 2009, the Company began a matching contribution to participants 401k plans equal to 50% of the participants’ contributions up to a maximum 3% of annual wages. The Company paid a total of $145,479 and $120,551 in 2012 and 2011 to participants representing the employer contribution amount.

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Stockholders' Equity

12 Months Ended

Dec. 31, 2012

Stockholders Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

NOTE 6 – Stockholders’ Equity

Common Stock

The Company has authorized 85,000,000 shares of common stock, par value $0.001. As of December 31, 2012, the Company had reserved 2,327,937 shares of common stock for issuance under its 2001 and 2005 long-term incentive plans, another 350,000 shares of common stock issued to a previous CEO outside of one of its long-term incentive plans, and 6,900,000 shares for its 2006 Long-term Incentive Plan.

Preferred Stock

The Company has authorized 15,000,000 shares of preferred stock, par value $0.001 per share, of which 8,400 are designated as Series A Convertible Preferred Stock, 6,000 are designated as Series B Convertible Preferred Stock, 3,000 are designated as Series C-1 Convertible Preferred Stock (“Series C-1 Preferred Stock”), and 3,000 are designated as Series C-2 Convertible Preferred Stock (“Series C-2 Preferred Stock”) as specified in the Certificate of Designation (the “Certificate”). During the year ended December 31, 2012, there were no conversions of the Company’s convertible preferred stock.

During November and December 2005, the Company completed a private placement totaling 7,000 units at a purchase price of $1,000 per unit. Each unit consisted of one share of Series A Preferred, convertible into 400 shares of common stock, and a detachable warrant to purchase 200 shares of common stock at an exercise price of $4.00 per share. Gross proceeds from the private placement amounted to $7,000,000 and net proceeds amounted to approximately $6,000,000. As a result of the private placement, in September 2007 (see below), Series A Preferred became convertible into 830.36 shares of the Company’s common stock. All Series A warrants have expired.

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. 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 December 31, 2012, there were $36,000 of dividends payable to Series B convertible preferred stockholders. During the years ended December 31, 2012 and 2011, cash dividends paid aggregated to $12,000 and $48,989, respectively.

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. Fifty percent of the warrants have an initial exercise price equal to $1.2043 per share and the other fifty percent 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, 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 2.62%, contractual term of seven years, expected volatility of 67.5%, 0% expected dividend yield, stock price of $1.01 per share, and exercise prices of $1.2043 and $1.3849 per share.

The conversion feature of the Company’s Series B warrants did not have fixed settlement provisions because their exercise prices may be lowered if the Company issues securities at lower prices in the future. The Company included the reset provisions in order to protect the warrant holders from the potential dilution associated with future financings. Accordingly the warrants have been classified as derivative liabilities as discussed above.

On April 3, 2012, the Company and Merck Global Health Innovation Fund, LLC (“GHI”) entered into a Series C Preferred Stock and Warrant Purchase Agreement (the “Purchase Agreement”) under which the Company agreed to sell GHI up to 6,000 shares of the Company’s Series C Preferred Stock and warrants to purchase up to 2,722,632 shares of common stock at an exercise price of $1.2043 per share (the “Series C Warrants”) for a purchase price of $6,000,000 in two separate closings. The Series C Preferred Stock is convertible, at GHI’s election, into shares of the Company’s common stock at a conversion rate, which is determined by dividing (i) the stated value per share of $1,000, plus, if consented to by the Company, all accrued and unpaid dividends, by (ii) the conversion price of $1.2043. The conversion price of the Series C Preferred Stock and exercise price of the Series C Warrants is subject to customary anti-dilution provisions. The financing is part of an initiative by GHI to provide funding for the Company’s efforts to expand its quantitative imaging technology into the personalized medicine market.

The initial closing under the Purchase Agreement took place on April 3, 2012 at which the Company sold to GHI 3,000 shares of Series C-1 Preferred Stock which are initially convertible into 2,491,073 shares of common stock and Series C-1 Warrants which are exercisable to purchase 1,361,316 shares of common stock for a purchase price of $3,000,000, net of issuance costs of approximately $334,000. The warrants contain a seven year term and became exercisable on September 30, 2012. The terms of the financing provide for a second closing of $3,000,000 of Series C-2 Preferred Stock, if, among other things, certain milestones are met toward the development of its quantitative imaging center on or before April 3, 2013.

The Series C-1 Preferred Stock has a 4% cumulative dividend and is senior in liquidation preference to the existing preferred stock and common stock. The Series C-1 holders elected to accrue the dividends making the dividends payable on the earlier of the liquidation of the corporation according to the Series C Certificate of Designation or upon the conversion of the Series C-1 into common stock. Subject to certain exceptions, the Series B holders are only entitled to be paid dividends, if full dividends are first paid or concurrently paid to the holders of the Series C-1 Preferred Stock. As of December 31, 2012, dividends payable to Series B and C-1 convertible preferred stockholders amounted to $36,000 and $89,333, respectively and are included in dividends payable on the Company’s consolidated balance sheet.

In accordance with ASC 470, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” the Series C-1 convertible preferred stock was considered to have an embedded beneficial conversion feature as the effective 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 value of the beneficial conversion feature was calculated using, among other factors, the Company’s closing stock price of $1.56 on April 3, 2012 resulting in the recognition of a one-time non-cash deemed dividend of $1,806,919 during the year ended December 31, 2012.

The issuance of the Series C-1 Preferred Stock triggered certain anti-dilution provisions of the Company’s warrants issued in 2007 in connection with the sale of our Series B Preferred Stock (the “Series B Warrants”). As a result, the exercise price of certain outstanding Series B Warrants was reduced from $1.3849 to $1.2043 per share and an additional 74,174 warrants were issued.

As part of the financing, the Company also agreed with certain holders of the majority of the outstanding Series B Warrants to amend and restate the terms of those warrants. As a result of the amended and restated terms, among other things, the anti-dilution adjustment provision, which required the Company to reduce the exercise price of the Series B Warrants if the Company had issued shares at a lower price, contained in the agreements was eliminated. As of December 31, 2012, the Company had 214,229 warrants outstanding subject to the anti-dilution adjustment provision.

Common Stock Warrant Exercise

During 2012, the Company issued 357,075 shares of common stock upon the exercise of a fixed-price warrant held by the University of Rochester at an exercise price of $0.74 per share, with the Company receiving aggregate proceeds of $262,500.

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Share-Based Compensation

12 Months Ended

Dec. 31, 2012

Disclosure Of Compensation Related Costs, Share-Based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 7 – Share-Based Compensation

Stock Options

As of December 31, 2012, the Company’s 2001 Long-Term Incentive Plan, 2005 Long-Term Incentive Plan and 2006 Long-Term Incentive Plan had a total of 5,980,444 in stock option grants. In May 2007, the stockholders of the Company approved the adoption of the Company’s 2006 Stock Plan (the “Plan”). The Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to employees and for the grant of non-statutory stock options, restricted stock, and stock appreciation rights to employees, directors, and consultants. The Compensation Committee of the Company’s board of directors administers the Plan and has the authority to make awards under the Plan and establish vesting and other terms, but cannot grant stock options at less than the fair value of the Company’s common stock on the date of grant or re-price stock options previously granted. The employee stock options granted under the Plan generally vest ratably over three to four years of service and expire seven to ten years from the date of grant (or ninety days after the termination of employment). As of December 31, 2012, 1,084,930 stock options remained eligible for grant under the 2006 Long-Term Incentive Plan. The 2001 and 2005 Long-Term Incentive Plans have been closed for additional grants.

During the years ended December 31, 2012 and 2011, the Company granted options to employees to purchase 405,803 and 752,853 shares of common stock, respectively. These options generally vest ratably during the first four years following their issuance and have a ten-year life. There were 20,000 options exercised resulting in cash proceeds of $20,200 during 2012. This compares to 470,377 options exercised in a cashless manner during 2011, including the exercise of 119,475 non-employee stock options, resulting in the issuance of 239,805 shares of the Company’s common stock. Additionally, there were 76,986 options exercised resulting in cash proceeds of $92,383 during 2011.

A summary of the employee stock option activity for the years ended December 31, 2012 and 2011 are as follows:

	Number of Shares			Weighted Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at January 1, 2011		5,946,848		$	1.24			6.30	$	5,640,172
Granted		752,853			1.91
Exercised		(541,888	)		(0.98	)
Forfeited		(220,087	)		(1.74	)
Options outstanding at December 31, 2011		5,768,690			1.33			6.32		55,000
Granted		405,803			1.13
Exercised		(20,000	)		(1.01	)
Forfeited		(102,823	)		(1.50	)
Expired		(76,632	)		(1.90	)
Options outstanding at December 31, 2012		5,975,038			1.30			5.62	$	6,750
Options exercisable at December 31, 2012		4,245,516			1.32			4.74	$	6,563

Additional information with respect to the outstanding employee stock options as of December 31, 2012 is as follows:

		Options Outstanding				Options Exercisable
Exercise Prices		Number Outstanding at December 31, 2012		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Number Exercisable at December 31, 2012		Weighted Average Exercise Price
	$0.43 – 0.92		834,250		6.26		0.84		634,063		0.82
	$0.93 – 1.01		1,669,519		5.91		0.98		1,252,351		0.99
	$1.02 - 1.19		701,606		7.68		1.12		287,708		1.10
	$1.20 – 1.34		1,428,084		4.82		1.22		1,142,430		1.21
	$1.35 – 4.15		1,341,579		4.62		2.19		928,964		2.30
			5,975,038		5.62		1.30		4,245,516		1.32

The weighted-average grant-date fair value of options granted during the year ended December 31, 2012 and 2011 was $250,571 and $783,279, respectively.

For the years ended December 31, 2012 and 2011, the Company’s consolidated statements of operations reflect $612,946 and $844,004, respectively, of stock-based compensation expense for stock options granted under its long-term incentive plans, which is allocated as follows:

	For Years Ended December 31,
	2012		2011
Cost of service revenues	$	57,984	$	47,214
Research and development		78,456		126,144
Sales and marketing		10,222		19,535
General and administrative		466,284		651,111
Total stock-based compensation	$	612,946	$	844,004

A summary of the status of the non-vested shares as of December 31, 2012 and changes during the years ended December 31, 2012 and 2011, is presented below:

Non-vested Shares	Shares			Weighted- Average Grant- Date Fair Value Per Share
Non-vested at January 1, 2011		2,965,494		$	0.71
Granted		752,853			1.04
Vested		(1,184,039	)		(0.77	)
Cancelled Grants		(187,699	)		(0.99	)
Non-vested at December 31, 2011		2,346,609		$	0.77
Granted		405,803			0.62
Vested		(944,818	)		(0.76	)
Cancelled Grants		(78,072	)		(0.82	)
Non-vested at December 31, 2012		1,729,522		$	0.73

As of December 31, 2012, there was $672,088 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted-average period of 2.05 years. The total fair value of shares vested during the year ended December 31, 2012 amounted to $718,526.

Prior to 2008, the Company issued options under the 2006 Long-Term Incentive Plan to non-employee consultants for radiological services performed. These options to non-employees generally vested immediately, had exercise prices ranging from $1.12 to $6.85 and a term of seven or six years from the date of grant. The value of the options was based on the fair value of the services performed and were included in the Company’s statements of operations. During 2012, a total of 6,767 of the non-employee options expired.

The total amount of stock options outstanding as of December 31, 2012 is:

Stock options granted to employees	5,975,038
Stock options granted to consultants	5,406
Total outstanding	5,980,444

During 2012, a total of 405,803 stock options were granted, of that amount 50,000 were granted to executive officers of the Company.

Restricted Stock Awards

A restricted stock award entitles the recipient to receive shares of unrestricted common stock upon vesting of the award. The fair value of each restricted stock award is determined upon granting of the shares and the related compensation expense is recognized ratably over the vesting period and charged to the statements of operations as non-cash compensation expense. Restricted stock awards granted but unvested shares are forfeited upon termination of employment, unless otherwise agreed. The fair value of restricted stock issued under the Plan is determined based on the closing price of the Company’s common stock on the grant date. Under the provisions of the 2006 Long Term Incentive Plan, the Company may grant restricted stock to its employees, Board members and consultants. During 2006, the Board of Directors Compensation Committee approved an equity based compensation structure for non-employee Board members. In 2012 and 2011, respectively, 51,761 and 25,801 restricted stock awards were issued to members of the Board for their services on the Board under the 2006 Long Term Incentive Plan. The restricted stock awards are fully vested and non-forfeitable and are therefore included in the outstanding common stock of the Company as of December 31, 2012. The weighted average grant date fair value of restricted stock issued by the Company during 2012 and 2011 were $68,549 and $30,250 respectively.

The Company incurred $0 and $36,618 in compensation expense in 2012 and 2011 related to the restricted stock awards for services by Board members for those respective periods.

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Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 9 - Income Taxes

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 2009 through 2012, 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. The Company does not expect its unrecognized tax benefit to change during the next 12 months. As of December 31, 2012, 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 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. Section 382 of the Internal Revenue Code imposes certain limitations on the utilization of net operating loss carryovers and other tax attributes after a change in control.  If the Company has a change in ownership, such change could significantly limit the possible utilization of such carryovers. Since its formation, the Company has raised capital through the issuance of capital stock which, combined with purchasing shareholders' subsequent disposition of these shares, may have resulted in an ownership change as defined by Section 382, and also could result in an ownership change in the future upon subsequent disposition.

The Company will recognize interest and penalties accrued related to unrecognized tax benefits as components of its income tax provision. The Company does not have any interest and penalties accrued related to unrecognized tax benefits.

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, deferred income taxes and liabilities are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. ASC 740 requires recognition of net deferred tax assets to the extent it is more likely than not that such net assets will be realized. To the extent that the Company believes that its net deferred tax assets will not be realized, a valuation allowance must be recorded against those assets.

The income tax provision consists of the following:

	2012			2011
Current
Federal	$	-		$	-
State		-			-
		-			-
Deferred
Federal		(309,448	)		172,438
State		(42,649	)		23,766
Change in valuation allowance		352,097			(196,204	)
		-			-
Total income tax provision	$	-		$	-

The Company has net operating loss carryforwards (“NOLs”) of approximately $8,723,000 as of December 31, 2012 that will be available to offset future taxable income.  Approximately $677,000 of the NOL carryforward, if realized, will result in a benefit to be recorded in additional paid in capital. The NOLs are due to expire in 2027 through 2032.  The Company has concluded that a full valuation allowance was appropriate for the NOLs as they are more likely than not to be utilized prior to their expiration.

 The total net deferred tax asset and liabilities as of December 31, 2012 and 2011 consists of the following:

Deferred tax assets:	2012			2011
Net operating loss carryforwards	$	3,112,584		$	2,805,504
Intangible assets		788,990			908,609
Accrued expenses		117,010			110,920
Research and development tax credit carryforwards		166,693			151,830
Stock-based compensation		1,095,050			1,016,167
Total deferred tax assets		5,280,327			4,993,030
Deferred tax liability:
Property and equipment		(91,688	)		(156,488	)
Subtotal		5,188,639			4,836,542
Less: valuation allowance		(5,188,639	)		(4,836,542	)
Net deferred tax asset	$	-		$	-

The difference between the federal statutory and effective income tax rates for the years ended December 31, 2012 and 2011 is as follows:

	2012			2011
Federal statutory rate		(34.00	)%		34.00	%
State and local income taxes, net of federal benefit		(2.67	)%		4.09	%
Stock-based compensation		8.27	%		27.58	%
Loss from derivative financial liabilities		5.88	%		(32.36	)%
Research and development credit		(0.97	)%		(5.94	)%
Other		0.46	%		0.53	%
		(23.03	)%		27.90	%
Less: valuation allowance		23.03	%		(27.90	)%
Provision for income taxes		0.00	%		0.00	%

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Property and Equipment (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Property, Plant and Equipment, Gross	$ 1,775,297	$ 1,691,181
Less: accumulated depreciation	(1,375,728)	(1,176,951)
Property and equipment, net	399,569	514,230
Leasehold Improvements [Member]
Property, Plant and Equipment, Gross	143,109	114,669
Furniture and Fixtures [Member]
Property, Plant and Equipment, Gross	267,939	265,347
Software [Member]
Property, Plant and Equipment, Gross	446,611	388,634
Office and Computer Equipment [Member]
Property, Plant and Equipment, Gross	$ 917,638	$ 922,531

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Income Taxes (Details 1) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Deferred tax assets:
Net operating loss carryforwards	$ 3,112,584	$ 2,805,504
Intangible assets	788,990	908,609
Accrued expenses	117,010	110,920
Research and development tax credit carryforwards	166,693	151,830
Stock-based compensation	1,095,050	1,016,167
Total deferred tax asset	5,280,327	4,993,030
Deferred tax liability:
Property and equipment	(91,688)	(156,488)
Subtotal	5,188,639	4,836,542
Less: valuation allowance	(5,188,639)	(4,836,542)
Net deferred tax asset	$ 0	$ 0

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Subsequent Events

12 Months Ended

Dec. 31, 2012

Subsequent Events [Abstract]

Subsequent Events [Text Block]

NOTE 14 – Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

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Derivative Liabilities (Tables)

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments, Valuation Assumptions [Table Text Block]

The derivative liabilities were valued using the Black-Scholes option valuation model and the following assumptions on the following dates:

	December 31, 2012			April 3, 2012			December 31, 2011
Series B warrants:
Risk-free interest rate		0.22	%		0.45	%		0.33	%
Expected volatility		65.94	%		49.60	%		47.71	%
Expected life (in years)		1.69			2.43			2.69
Expected dividend yield		-			-			-
Number of warrants		214,229			902,038			902,038
Fair value	$	15,950		$	521,139		$	156,596

Fair Value, Liabilities Measured on Recurring Basis [Table Text Block]

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2012 and 2011:

			Fair Value Measurements at December 31, 2012
	Total Carrying Value at December 31, 2012		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs  (Level 3)
Derivative liabilities	$	15,950	$	-	$	-	$	15,950

			Fair Value Measurements at December 31, 2011
	Total Carrying Value at December 31, 2011		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs  (Level 3)
Derivative liabilities	$	156,596	$	-	$	-	$	156,596

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

	Years Ended December 31,
	2012			2011
Beginning balance	$	156,596		$	2,609,708
Net unrealized loss (gain) on derivative financial instruments		264,587			(669,402	)
Reclassification to stockholders’ equity		(405,233	)		(1,783,710	)
Ending balance	$	15,950		$	156,596

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Benefit Plan (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2009
Defined Contribution Plan, Employer Matching Contribution, Percent			50.00%
Defined Contribution Plan, Employers Matching Contribution, Annual Vesting Percentage			3.00%
Defined Contribution Plan, Employer Discretionary Contribution Amount	$ 145,479	$ 120,551

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Derivative Liabilities (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Apr. 30, 2012	Dec. 31, 2010
Change In Fair Value Of Derivative Liability	$ 140,646	$ 2,453,112
Derivative liabilities	$ 15,950	$ 156,596	$ 521,139	$ 2,609,708

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Consolidated Statements of Changes in Stockholders' Equity (USD $)	Common Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings [Member]	Total	Series A Preferred Stock [Member]	Series B Preferred Stock [Member]	Series C Preferred Stock [Member]
Balance at Dec. 31, 2010	$ 27,415	$ 15,090,254	$ (10,138,243)	$ 4,979,430	$ 3	$ 1	$ 0
Balance (in shares) at Dec. 31, 2010	27,414,620				3,188	800	0
Conversion of Series A Preferred to Common Stock	829	(828)			(1)
Conversion of Series A Preferred to Common Stock (in shares)	828,709				(998)
Conversion of Series B Preferred to Common Stock	166	(166)
Conversion of Series B Preferred to Common Stock (in shares)	166,072					(200)
Cashless exercise of warrants	532	(532)		0
Cashless exercise of warrants (in shares)	531,506
Exercise of warrants	87	104,914		105,001
Exercise of warrants (in shares)	87,188
Reclassification of derivative liabilities upon exercise of warrants		1,783,710		1,783,710
Cashless exercise of employee stock options	240	(240)		0
Cashless exercise of employee stock options (in shares)	239,805
Reclassification of derivative liabilities in connection with series C-1 preferred stock issuance				0
Exercise of employee stock options	77	92,306		92,383
Exercise of employee stock options (in shares)	76,986
Withholding taxes paid on cashless exercise of employee stock options		(11,722)		(11,722)
Amortization of stock option costs		844,004		844,004
Restricted stock units issuance	25	30,225		30,250
Restricted stock units issuance (in shares)	25,801
Series B preferred stock dividends based on 8% annual rate		(48,989)		(48,989)
Net (loss) income			703,295	703,295
Balance at Dec. 31, 2011	29,371	17,882,936	(9,434,948)	8,477,362	2	1	0
Balance (in shares) at Dec. 31, 2011	29,370,687				2,190	600	0
Exercise of warrants	357	262,143		262,500
Exercise of warrants (in shares)	357,075
Reclassification of derivative liabilities in connection with series C-1 preferred stock issuance		405,233		405,233
Exercise of employee stock options	20	20,180		20,200
Exercise of employee stock options (in shares)	20,000
Amortization of stock option costs		612,946		612,946
Restricted stock units issuance	52	68,497		68,549
Restricted stock units issuance (in shares)	51,761
Series B preferred stock dividends based on 8% annual rate		(48,000)		(48,000)
Series C-1 preferred stock issued in private placement, net of issuance costs		2,666,482		2,666,485			3
Series C-1 preferred stock issued in private placement, net of issuance costs (in shares)							3,000
Series C-1 preferred stock dividends based on 4% annual rate		(89,333)		(89,333)
Net (loss) income			(1,528,652)	(1,528,652)
Balance at Dec. 31, 2012	$ 29,800	$ 21,781,084	$ (10,963,600)	$ 10,847,290	$ 2	$ 1	$ 3
Balance (in shares) at Dec. 31, 2012	29,799,523				2,190	600	3,000

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Property and Equipment

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Property Plant And Equipment Disclosure [Text Block]

NOTE 3 - Property and Equipment

Property and equipment consisted of the following as of December 31:

	2012			2011
Office/computer equipment	$	917,638		$	922,531
Furniture and fixtures		267,939			265,347
Software		446,611			388,634
Leasehold improvements		143,109			114,669
		1,775,297			1,691,181
Less: accumulated depreciation		(1,375,728	)		(1,176,951	)
	$	399,569		$	514,230

Depreciation expense amounted to $285,074 and $310,426 for the years ended December 31, 2012 and 2011, respectively. The Company disposed of and wrote-off property and equipment with $86,297 of cost and $86,297 of accumulated depreciation for the year ended December 31, 2012 as compared to the year ended December 31, 2011, during which the Company exchanged, disposed of, and wrote-off certain property and equipment resulting in a net gain of $8,369.

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Share-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2012

Disclosure Of Compensation Related Costs, Share-Based Payments [Abstract]

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

A summary of the employee stock option activity for the years ended December 31, 2012 and 2011 are as follows:

	Number of Shares			Weighted Average Exercise Price			Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at January 1, 2011		5,946,848		$	1.24			6.30	$	5,640,172
Granted		752,853			1.91
Exercised		(541,888	)		(0.98	)
Forfeited		(220,087	)		(1.74	)
Options outstanding at December 31, 2011		5,768,690			1.33			6.32		55,000
Granted		405,803			1.13
Exercised		(20,000	)		(1.01	)
Forfeited		(102,823	)		(1.50	)
Expired		(76,632	)		(1.90	)
Options outstanding at December 31, 2012		5,975,038			1.30			5.62	$	6,750
Options exercisable at December 31, 2012		4,245,516			1.32			4.74	$	6,563

Schedule of Share-based Compensation, Activity [Table Text Block]

Additional information with respect to the outstanding employee stock options as of December 31, 2012 is as follows:

		Options Outstanding				Options Exercisable
Exercise Prices		Number Outstanding at December 31, 2012		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Number Exercisable at December 31, 2012		Weighted Average Exercise Price
	$0.43 – 0.92		834,250		6.26		0.84		634,063		0.82
	$0.93 – 1.01		1,669,519		5.91		0.98		1,252,351		0.99
	$1.02 - 1.19		701,606		7.68		1.12		287,708		1.10
	$1.20 – 1.34		1,428,084		4.82		1.22		1,142,430		1.21
	$1.35 – 4.15		1,341,579		4.62		2.19		928,964		2.30
			5,975,038		5.62		1.30		4,245,516		1.32

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

For the years ended December 31, 2012 and 2011, the Company’s consolidated statements of operations reflect $612,946 and $844,004, respectively, of stock-based compensation expense for stock options granted under its long-term incentive plans, which is allocated as follows:

	For Years Ended December 31,
	2012		2011
Cost of service revenues	$	57,984	$	47,214
Research and development		78,456		126,144
Sales and marketing		10,222		19,535
General and administrative		466,284		651,111
Total stock-based compensation	$	612,946	$	844,004

Schedule Of Share-Based Compensation, Non-Vested Stock Options, Activity [Table Text Block]

A summary of the status of the non-vested shares as of December 31, 2012 and changes during the years ended December 31, 2012 and 2011, is presented below:

Non-vested Shares	Shares			Weighted- Average Grant- Date Fair Value Per Share
Non-vested at January 1, 2011		2,965,494		$	0.71
Granted		752,853			1.04
Vested		(1,184,039	)		(0.77	)
Cancelled Grants		(187,699	)		(0.99	)
Non-vested at December 31, 2011		2,346,609		$	0.77
Granted		405,803			0.62
Vested		(944,818	)		(0.76	)
Cancelled Grants		(78,072	)		(0.82	)
Non-vested at December 31, 2012		1,729,522		$	0.73

Schedule Of Stock Options Outstanding [Table Text Block]

The total amount of stock options outstanding as of December 31, 2012 is:

Stock options granted to employees	5,975,038
Stock options granted to consultants	5,406
Total outstanding	5,980,444

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Derivative Liabilities (Details) (USD $)					1 Months Ended	12 Months Ended
	Dec. 31, 2012	Apr. 30, 2012	Dec. 31, 2011	Dec. 31, 2010	Apr. 30, 2012 Series B Warrant [Member]	Dec. 31, 2012 Series B Warrant [Member]	Dec. 31, 2011 Series B Warrant [Member]
Series B warrants:
Risk-free interest rate					0.45%	0.22%	0.33%
Expected volatility					49.60%	65.94%	47.71%
Expected life (in years)					2 years 5 months 5 days	1 year 8 months 8 days	2 years 8 months 8 days
Expected dividend yield					0.00%	0.00%	0.00%
Number of warrants					902,038	214,229	902,038
Fair value	$ 15,950	$ 521,139	$ 156,596	$ 2,609,708

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Other Matters

12 Months Ended

Dec. 31, 2012

Other Matters [Abstract]

Other Matters [Text Block]

NOTE 13 – Other Matters

On August 29, 2012, the Company received a written notice from the Nasdaq Stock Market (“Nasdaq”) indicating that its common stock was not in compliance with minimum bid price required for continued listing on the Nasdaq Capital Market. In accordance with section 5810(c)(3)(A) of the Nasdaq Marketplace Rules, the Company had until February 25, 2013 to regain compliance by maintaining a bid price of common stock at a close of $1.00 or higher for a minimum of 10 consecutive business days, or such longer period as Nasdaq may determine to show the ability to maintain long-term compliance. On February 26, 2013, Nasdaq extended the compliance period due to general market conditions and the Company now has until August 26, 2013 to regain compliance.