Simulation and modeling have become an integral part of a cost-effective optical system development process. Over the years, this activity has evolved into a complex multi-disciplinary activity. To optimize the resources required for this exercise, a new concept of virtual prototyping is presented. This concept employs computer-aided interactive simulation tools such as ray tracing, solid modeling and error analysis. It addresses the broad issues of system layout, optical and optomechanical design, structural and thermal analysis for the real operating environment, tolerance budgeting and optimization procedures. This concept works in an iterative fashion to achieve the desired system performance at a minimum cost.