EXHIBIT 10.12 SERVICES AND CO-MARKETING AGREEMENT

This Services and Co-Marketing Agreement (“ Agreement ”) is entered into this 1st day of March, 2004 (the “ Effective Date ”), by and between VirtualScopics LLC, a New York limited liability company with its principal place of business at 140 Office Park Way, Pittsford, New York 14534 (“ VirtualScopics ”), and Chondrometrics GmbH ( “ Chondrometrics ” ), a German limited liability company, with its current principal place of business at Munich, Germany. This Agreement, together with those certain Consulting Agreements between VirtualScopics and Dr. Felix Eckstein, dated January 1, 2004 and March 1, 2004, respectively, supercede, and replace entirely, that certain Preliminary Service Agreement between VirtualScopics and Chondrometrics, dated January 30, 2004 (the “ Preliminary Agreement ”). 

A.      Chondrometrics conducts and commercializes medical research with particular emphasis on cartilage degeneration as it relates to the development of Osteoarthritis. Chondrometrics has existing relationships with entities in need of research services to assist in understanding human disease progressions of Osteoarthritis, and/or the efficacy of disease modifying osteoarthritic drugs.

B.      Chondrometrics currently distinguishes itself from its competitors due to Chondrometrics’ status in its industry as the sole provider of cartilage degeneration medical research services validating its findings with highly regarded peer reviews and industry publications.

C.      VirtualScopics is in the business of developing image-based biomarkers and image analysis software tools (such software and tools, together with any documentation, and modifications, updates, and enhancements to the foregoing, the “ VirtualScopics Technology ”) as well as providing customers regulatory compliant image analysis services and field operations to accelerate both drug efficacy testing and drug discovery. VirtualScopics has existing relationships covering a broad range of disease areas including Osteoarthritis.

D.      VirtualScopics and Chondrometrics desire to leverage their research and commercial capabilities by co-marketing each other’s services and abilities, with the goal of expanding each party’s customer base and visibility in the industry, and gaining economic benefits resulting therefrom.

E.      In consideration of and relying upon the covenants and obligations herein, including VirtualScopics’ obligation to make certain payments to Chondrometrics as further set forth in this Agreement, Chondrometrics (1) has permitted, and is permitting, as the case may be, Dr. Felix Eckstein (CEO and CSO of Chondrometrics) to execute two consulting agreements with VirtualScopics relating to services that were provided by Dr. Eckstein from January 1, 2004 through February 29, 2004, and services that will be provided from March 1, 2004 through December 31, 2006 (collectively, the “ Consulting Agreements ”), thereby releasing Dr. Eckstein from certain of his obligations to Chondrometrics so that Dr. Eckstein may perform his obligations under the Consulting Agreements, (2) temporarily is replacing Dr. Eckstein Chondrometrics with outside expert personnel in connection with certain of Dr. Eckstein’s obligations as CEO/CSO of, (3) is permitting Dr. Eckstein to use certain of Chondrometrics’ resources in his work under the Consulting Agreements, and (4) is losing its distinction as the sole provider in its industry of cartilage degeneration medical research services capable of validating its technology and findings through peer reviews and publications, thereby diminishing Chondrometrics’ potential revenue stream to the extent such revenues are derived by such distinction.

THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

1.   Definitions . Capitalized terms not defined elsewhere in this Agreement shall have the meanings ascribed to them in this Section 1.

1.1. “ Cartilage Analysis ” means a manual, semi-automated or automated process for segmenting MR images to quantify the volume or other morphological parameters of total cartilage or cartilage sub-regions in Research Trials and Clinical Trials for Osteoarthritis.

1.2. “ Non-Cartilage Analysis ” means a manual, semi-automated or automated process for segmenting MR images to quantify characteristics of tissues related to Osteoarthritis other than cartilage, including, but not limited to, Bone Marrow Edema, Meniscus, and Fluid.

1.3. “ Clinical Trial ” means Cartilage Analysis and Non-Cartilage Analysis that is performed for the purpose of understanding the efficacy of a disease modifying osteoarthritic drug in humans, intended and/or required to be submitted to a regulatory body as part of a drug approval submission. The paying entity for a Clinical Trial can be a pharmaceutical, biotechnology, or medical device company, or a governmental or non-governmental research agency.

1.4. “ Research Trial ” means Cartilage Analysis and Non-Cartilage Analysis that is performed for the purpose of understanding human cartilage physiology or disease progressions of Osteoarthritis. The paying entity for a Research Trial can be a pharmaceutical, biotechnology, or medical device company, or a governmental or non-governmental research agency. Results from a Research Trial are not intended or required to be submitted to a government regulatory body as part of a drug approval submission.

1.5. “ Trial Commitment ” means each contract or agreement with respect to which Research Trial or Clinical Trial services are being by provided by VirtualScopics or Chondrometrics, as the case may be.

(a)   “ Gross Revenues ” means all amounts actually collected by VirtualScopics, net of any discounts or other sales incentives, and any sales tax collected, for each Research Trial Commitment and each Clinical Trial Commitment during the term of the Commitment. However, Gross Revenues shall not include (a) amounts collected for any Clinical Trial Commitment pursuant to which (i) solely Non-Cartilage Analysis is being provided, or (ii) Cartilage Analysis is being provided by a third party, or (b) amounts collected under the following Clinical Trial Commitment or Research Trial Commitment entered into by VirtualScopics prior to January 1, 2004: (1) the Pfizer GARP Study commencing in 2002, (2) the Pfizer BOIS Study commencing in 2002, (3) the Pfizer KANON Study commencing in 2002, and (4) the DePuy Meniscus Study started in 2003). All other amounts collected under Trial Commitments (net of any discounts or other sales incentives, any sales tax collected, and subject to the exclusions specified in clause (a) above), including all amounts collected from January 2005 onwards, will be included in Gross Revenues, irrespective of the date of commencement.

1.6. “ Intellectual Property Rights ” means any and all rights in and to all patents, patent applications, copyrights, trademarks, trade secrets, know-how and any other proprietary rights.

1.7. “ Marketing Materials ” of a party means those materials being used by such party to promote itself and its business, and which are delivered to the other party for marketing purposes as contemplated in Sections 2.4 and 3 hereof. Marketing Materials include, without limitation (a) marketing brochures or other printed materials generally promoting such party, its staff and resources, and the research and other service capabilities of such party, (b) publications, if any, relating to work performed by such party, its owners, employees, or agents, pertaining to Osteoarthritic research as well as any other research that may be relevant in sales pitches to prospects in the Osteoarthritis field, (c) web site materials, and (d) any other documentation or information that may be useful in promoting such party to third parties.

1.8. “ Osteoarthritic Initiative ” means the government and industry sponsored study using imaging and image analysis to determine end-points for detecting progression of Osteoarthritis.

2.   Collaborative Work for Research Trials .

2.1. Proposals. Throughout the Term (as defined in Section 11.1 hereof), VirtualScopics and Chondrometrics intend to submit separate Research Trial proposals to third parties for project contracts and grant proposals (each, a “ Project ”). Unless otherwise agreed to by the parties, VirtualScopics will provide Non-Cartilage Analysis and/or Cartilage Analysis, and Chondrometrics will provide solely Cartilage Analysis for each Project. Each party will solicit and separately negotiate client Projects; provided, however, (a) in no event will a party provide services to a third party if such party, to the best of such party’s knowledge, should have reason to believe that the third party already is receiving, or is contracting to receive, the same or similar services from the other party, and (b) each party will consult with the other party as necessary to prevent providing overlapping or conflicting services to the other party’s clients.

2.2. Osteoarthritis Initiative . Each party intends to submit a proposal for a Project to the Osteoarthritis Initiative. In this instance, VirtualScopics’ Project will specify that VirtualScopics is to provide Non-Cartilage Analysis, including end-points of interest, and Chondrometrics’ Project will specify that Chondrometrics is to provide Cartilage Analysis. Further, if Chondrometrics is unable to finalize a Project with the Osteoarthritic Initiative that meets Chondrometrics’ financial expectations, Cartilage Analysis may alternatively be provided by VirtualScopics under a separate Project upon the parties’ mutual written agreement. Thereafter, from time to VirtualScopics and Chondrometrics may each submit additional separate proposals to the Osteoarthritic Initiative based on the parties’ mutual agreement and under the same conditions formulated above.

2.3. Generally . Each of VirtualScopics and Chondrometrics agrees not submit a Research Trial proposal to, or otherwise solicit Research Trial business from, the Osteoarthritic Initiative, without giving written notice to each other. VirtualScopics maintains the right to analyze the cartilage images of the Osteoarthritic Initiative analyzed by Chondrometrics for comparative and publication purposes, including a collaborative publication with Dr. Felix Eckstein.

2.4. Co-Marketing Efforts . Each of VirtualScopics and Chondrometrics agrees to exercise commercially reasonable best efforts to market and promote the other party’s Research Trial capabilities with the goal of establishing numerous Projects throughout the Term.

2.5. Other Commitments . Nothing herein shall restrict either party’s ability to continue providing Research Trial services.

3.   Marketing for Clinical Trials and Research Trials .  

3.1. Throughout the Term each party will exercise commercially reasonable best efforts to market and promote VirtualScopics’ Non-Cartilage Analysis and Cartilage Analysis services for Clinical Trials and Research Trials, and the collaborative efforts of VirtualScopics and Chondrometrics. VirtualScopics will perform any such Cartilage Analysis using a Clinical Trial or Research Trial approach, as the case may be, that has been cross-validated in accordance with a methodology designed by Dr. Eckstein pursuant to the Consulting Agreements.

3.2. At a minimum, Chondrometrics’ obligations hereunder require that it:

(a)   distribute VirtualScopics’ Marketing Materials to existing clients and prospects, when clients and prospects actively demand services for quantitative analysis of cartilage in the context of Clinical Trials and Research Trials;

(b)   distribute VirtualScopics’ Marketing Materials to existing clients and prospects, when clients and prospects show interest in services for quantitative analysis of non-cartilage parameters in the context of Research Trials or Clinical Trials; and

(c)   assist VirtualScopics in preparing and distributing joint press releases promoting VirtualScopics and the collaborative efforts of VirtualScopics and Chondrometrics.

3.3. Chondrometrics shall be prohibited from marketing or otherwise promoting any third party’s Non-Cartilage Analysis or Cartilage Analysis services for Clinical Trials. Further, Chondrometrics will not provide any Clinical Trial services, and will refer all such potential business to VirtualScopics.

4.   Payments . In consideration of the successful performance of all mutual covenants contained in this Agreement, including the consideration described in Recital E, the parties agree to the following:

4.1. VirtualScopics shall pay Chondrometrics an upfront guaranteed payment (each a “ Guaranteed Payment ”) during the first three (3) years of the Term as follows:

(a)   First Year Guaranteed Payment : $110,700, payable (i) $55,350 on the Effective Date, and (ii) $55,350 within six months thereafter;

(b)   Second Year Guaranteed Payment : $75,000, payable on the first anniversary of the Effective Date;

(c)   Third Year Guaranteed Payment : $60,000, payable on the second anniversary of the Effective Date.

Notwithstanding the foregoing, Chondrometrics acknowledges its receipt of $27,675 as partial payment of the $55,350 payment obligation in clause (a)(i) above, which amount was paid to Chondrometrics by VirtualScopics on March 10th, 2004 pursuant to the Preliminary Service Agreement.

4.2. VirtualScopics shall pay Chondrometrics seven percent (7%) of Gross Revenues generated by VirtualScopics (the “ Marketing Fee ”), which amounts during the first three years of the Term shall not be payable unless and until the Guaranteed Payment for such year has been recouped fully. During the first three years of the Term, the Marketing Fee for each year will be deducted from the Guaranteed Payment for such year, and the balance remaining, if any, will be payable within thirty (30) days after the end of such year. The Marketing Fee for the fourth and fifth year of the Term will be calculated at the end of each year, and will be payable within thirty (30) days after the end of each such yearly period.

4.3. For so long as amounts are owed under this Section 4, and for a period of one year thereafter, VirtualScopics shall maintain and make available to Chondrometrics, no more than once per year, and upon ten calendar days written request, such records as are required to establish accurate payments due under this Agreement. Chondrometrics shall, at its expense, have the right to have an auditor inspect such records on a confidential basis during normal business hours. Such inspection is solely for the purpose of verifying the accuracy of payments due under this Section 4.

4.4. The above payments and fees have been established in U.S. Dollars based on a U.S. Dollar to Euro exchange rate band of $1.10 to $1.30 per Euro. If the U.S. Dollar to Euro exchange rate deviates from this band, the parties agree in good faith to renegotiate such payments and fees to establish the appropriate U.S. Dollar value of this Agreement.

4.5. Each payment hereunder shall be due notwithstanding termination of this Agreement, except that the foregoing shall not apply if the Agreement is terminated (a) by VirtualScopics or its successors under Section 11.3 hereof, (b) due to the termination of the March 2004 Consulting Agreement by VirtualScopics pursuant to Sections 3(b), (d), or (e) of that agreement, or (c) due to the termination by Dr. Eckstein of the March 2004 Consulting Agreement (other than pursuant to Section 3(b) thereunder). If after termination of this Agreement VirtualScopics