Recently the considerable potential of virtualreality has been recognized for the scientific study,diagnosis and treatment in the field of mental healthcare.It provides unique opportunity to provide natural interfaceand to mimic actual challenges faced by impaired subjectsin their lives. In spite of certain limitations, some workhas emerged which provides guidelines for futureresearch efforts. Shortlist of such applications includesassessment and treatment of phobias; obsessivecompulsive disorders, posttraumatic stress disorders andhyperactive attention deficit syndromes. This paper is aneffort to highlights these recent and ongoing researchprojects and compare this unique paradigm withconventional non -VR techniques by discussion ofpotential benefits and possible shortcomings. Due to thenature of research, ethical and human factors cannot beover emphasized. Paper also describes the limitations ofVR in the field of practical psychology as media hype hasover sold its potential. With recent advances intechnology, it is not unrealistic to hope that VR will soonbe a part of clinician's armoury.