-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 CxcspK03KJqkg1CQ0iAKoA7lInLbtMZ8xXH8/NXdLu8ZMQagu95IGMwTf01rwDvW
 Zh3W5x14aoFjS6TNUmDhRQ==

<SEC-DOCUMENT>0001019687-06-002875.txt : 20061122
<SEC-HEADER>0001019687-06-002875.hdr.sgml : 20061122
<ACCEPTANCE-DATETIME>20061122150008
ACCESSION NUMBER:		0001019687-06-002875
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		5
CONFORMED PERIOD OF REPORT:	20060831
FILED AS OF DATE:		20061122
DATE AS OF CHANGE:		20061122

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SIMULATIONS PLUS INC
		CENTRAL INDEX KEY:			0001023459
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373]
		IRS NUMBER:				954595609
		FISCAL YEAR END:			0831

	FILING VALUES:
		FORM TYPE:		10KSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-32046
		FILM NUMBER:		061236153

	BUSINESS ADDRESS:	
		STREET 1:		1220 W. AVENUE J
		STREET 2:		*
		CITY:			LANCASTER
		STATE:			CA
		ZIP:			93534-2902
		BUSINESS PHONE:		661-723-7723

	MAIL ADDRESS:	
		STREET 1:		1220 W. AVENUE J
		CITY:			LANCASTER
		STATE:			CA
		ZIP:			93534-2902
</SEC-HEADER>
<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>simulations_10ksb-083106.txt
<TEXT>
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934

                    For the fiscal year ended August 31, 2006
                                       or

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                        Commission file number: 001-32046

                             SIMULATIONS PLUS, INC.
                 (Name of small business issuer in its charter)

             CALIFORNIA                                 95-4595609
   (State or other jurisdiction)          (I.R.S. Employer Identification No.)

       42505 TENTH STREET WEST
       LANCASTER, CA 93534-7059                      (661) 723-7723
   (Address of principal executive             (Issuer's telephone number,
     offices including zip code)                   including area code)

           SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE.

              SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
                    COMMON STOCK, PAR VALUE $0.001 PER SHARE

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
                                                                 Yes [X]  No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]

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

The issuer had revenues of approximately $5,855,000 for the fiscal year ended
August 31, 2006.

As of November 21, 2006, the aggregate market value of the common equity held by
non-affiliates of the issuer (3,366,226 shares) was approximately $10,266,989
based upon the November 21, 2006 closing price ($3.05) of one share on such
date.

As of November 21, 2006, the issuer had outstanding 7,368,226 shares of common
stock and no shares of preferred stock.
                                            DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the 2007
Annual Meeting of Shareholders are incorporated herein by reference into Part
III.



<PAGE>

                             SIMULATIONS PLUS, INC.
                                   FORM 10-KSB
                    FOR THE FISCAL YEAR ENDED AUGUST 31, 2006

                                Table of Contents
                                                                            Page
                                                                            ----


                                     PART I
                                     ------

Item 1.    Description of Business                                             1
Item 2.    Description of Property                                            10
Item 3.    Legal Proceedings                                                  10
Item 4.    Submission of Matters to a Vote of Security Holders                10


                                     PART II
                                     -------

Item 5.    Market for Common Equity and Related Stockholder Matters           11
Item 6.    Management's Discussion and Analysis or Plan of Operation          12
Item 7.    Financial Statements                                               18
Item 8.    Changes In and Disagreements with Accountants on Accounting
                and Financial Disclosure                                      18
Item 8A.   Controls and Procedures                                            18
Item 8B.   Other Information                                                  18


                                    PART III
                                    --------

Item 9.    Directors, Executive Officers, Promoters and Control Persons;
                Compliance with Section 16(a) of the Exchange Act             19
Item 10.   Executive Compensation                                             19
Item 11.   Security Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters                               19
Item 12.   Certain Relationships and Related Transactions                     19
Item 13.   Exhibits                                                           19
Item 14.   Principal Accounting Fees and Services                             22


           Signatures                                                         23
           Financial Statements                                              F-1
           Exhibits



<PAGE>

FORWARD-LOOKING STATEMENTS
- --------------------------

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB, OR THE "REPORT," ARE
"FORWARD-LOOKING STATEMENTS." THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT THE PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS OF SIMULATIONS PLUS, INC., A CALIFORNIA CORPORATION AND OTHER
STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL FACTS.
FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER INCLUDED IN OTHER
PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
OR THE "COMMISSION," REPORTS TO OUR SHAREHOLDERS AND OTHER PUBLICLY AVAILABLE
STATEMENTS ISSUED OR RELEASED BY US INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE OUR ACTUAL RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON
MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT
RESULTS OF OPERATIONS. WHEN USED IN THIS REPORT, THE WORDS "EXPECT,"
"ANTICIPATE," "INTEND," "PLAN," "BELIEVE," "SEEK," "ESTIMATE" AND SIMILAR
EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
BECAUSE THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. THERE
ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS, INCLUDING OUR
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER FACTORS.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

BUSINESS
- --------

Simulations Plus, Inc. (the "Company" or "Simulations Plus", or "we" or "our")
and its wholly owned subsidiary, Words+, Inc. ("Words+") produce different types
of products: (1) Simulations Plus, incorporated in 1996, develops and produces
software for use in pharmaceutical research and for education, and also provides
contract research services to the pharmaceutical industry, and (2) Words+,
founded in 1981, produces computer software and specialized hardware for use by
persons with disabilities, as well as a personal productivity software program
called Abbreviate! for the retail market. For the purposes of this document, we
sometimes refer to the two businesses as "Simulations Plus" when referring to
the business that is primarily pharmaceutical software and services, and
"Words+" when referring to the business that is primarily assistive technologies
for persons with disabilities.


SIMULATIONS PLUS
- ----------------

PRODUCTS
- --------
We currently offer four software products for pharmaceutical research: ADMET
Predictor(TM)/ ADMET Modeler(TM), ClassPharmer(TM), DDDPlus(TM), and
GastroPlus(TM).

ADMET PREDICTOR/ADMET MODELER
- -----------------------------
ADMET (Absorption, Distribution, Metabolism and Excretion and Toxicity)
Predictor consists of a library of statistically significant numerical models
that predict various properties of chemical compounds from just their molecular
structures. This capability means a chemist can merely draw a molecule diagram
and get reasonable estimates of these properties, even though the molecule has
never existed. Drug companies search through millions of such "virtual"
molecular structures as they attempt to find new drugs. The vast majority of


                                       1


<PAGE>

these molecules are not suitable as medicines for various reasons. Some have
such low solubility that they will not dissolve well, some have such low
permeability through the intestinal wall that they will not be absorbed well,
some degrade so quickly that they are not stable enough to have a useful shelf
life, some bind to proteins (like albumin) in blood to such a high extent that
little unbound drug is available to reach the target, and some will be toxic in
various ways. Identification of such properties as early as possible enables
researchers to eliminate poor compounds without spending time and money to make
them and then run experiments to identify these weaknesses. Today, many
molecules can be eliminated on the basis of computer predictions, such as those
provided by ADMET Predictor.

During the 4th quarter, we continued the integration of ADMET Predictor and
ADMET Modeler into a single program for greater user convenience. The two
programs were designed to work together from the start, but this integration
will make it even easier to use the model-building capabilities of ADMET
Modeler. In addition, we believe that integration of the two into a single
package will enhance the competitive posture of ADMET Predictor. The new ADMET
Predictor 2.0 with integrated ADMET Modeler was released in September 2006
shortly after the end of the 4th quarter.

ADMET MODELER
- -------------
ADMET Modeler was first released in July of 2003. This powerful program is used
to generate the predictive models used in ADMET Predictor in a small fraction of
the time once required to build these models. For example, the new toxicity
models were developed in a matter of a few hours once we completed the tedious
effort of "cleaning up" the databases (which seem to always contain a number of
errors). Prior to the availability of ADMET Modeler, we would have needed as
much as three months after cleaning the databases for each new model to obtain
similar results.

Pharmaceutical companies spend enormous amounts of money conducting a wide
variety of experiments on new molecules each year. Using such data to build
predictive models provides a second return on this investment; however, in the
past, model-building has traditionally been a tedious activity that required a
specialist. With ADMET Modeler, scientists without model-building experience can
now use their own experimental data to quickly create high quality predictive
models.

During the 4th quarter, in addition to integrating ADMET Modeler into ADMET
Predictor, we also added a number of important improvements to ADMET Modeler,
including: (1) a new, state-of-the-art modeling method known as Kernel Partial
Least Squares (KPLS); (2) an advanced method for selecting the best model among
a matrix of models that each use different numbers of inputs and different model
architectures; (3) improved methods for the sensitivity analysis that helps to
select the most important inputs for a particular model, and (4) an integrated
Model Editor that allows users to easily hide or display models, as well as to
change the "tooltips" (helpful hints) that appear when the mouse is paused over
any model column.

CLASSPHARMER(TM)
- ----------------
In November 2005, we acquired certain secured assets of Bioreason, Inc. from its
former creditors, including two patents governing classification algorithms and
a software package called ClassPharmer. ClassPharmer is a molecule
classification software program, similar in nature to ChemTK(TM), which we had
acquired from Sage Informatics, LLC a few months before in August 2005, but with
more sophisticated proprietary classification algorithms and various additional
convenience features. The Bioreason version of ClassPharmer was programmed in a
combination of programming languages that made it run much more slowly than
ChemTK, and certain elements of the ChemTK user interface were more
user-friendly and visually pleasing than ClassPharmer.


                                       2


<PAGE>

We completed the integration of ChemTK and ClassPharmer and released
ClassPharmer 4.0 in March 2006. Additional improvements based on customer
feedback were incorporated into Version 4.1, which was released just after the
end of the 4th quarter. As announced in our press release of October 9, 2006,
monies received from ClassPharmer sales and acquired accounts payable had
exceeded one million dollars at that time, this exceeding the original
acquisition costs in only 11 months.

DDDPLUS
- -------
DDDPlus (Dose Disintegration and Dissolution Plus) was first released in
February 2005. DDDPlus simulates how different tablets and capsules disintegrate
and dissolve during IN VITRO (laboratory) dissolution experiments. The program
also simulates the effects of changing formulation excipients (additives that
are not the active drug), and changing the experimental apparatus and fluids
used in the experiment. We believe this tool will be a valuable asset for
formulation scientists as they search for optimum formulations that provide
desirable properties at minimum cost, as well as optimum experimental conditions
under which to measure disintegration and dissolution to best predict what will
happen in human. The market for this tool includes hundreds of drug delivery
companies as well as all pharmaceutical and biotech companies.

Over 60 companies evaluated Version 1.0 of DDDPlus. This was an indication of
the strong interest and business potential in this area. Through the evaluation
process, we received valuable feedback about what would be required for various
customers to license the software, and we have now incorporated those
improvements. We have also added significant new functionality by enabling
formulation scientists to optimize experimental conditions to achieve a desired
dissolution-time profile, and to handle polymer matrix formulations that are
often used in controlled release formulations. Version 2.0 was released in the
3rd quarter and was evaluated at several potential customer sites. A number of
additional suggestions have been received and incorporated into Version 2.1,
which is now shipping. Although no DDDPlus licenses were sold during the 4th
quarter, two have been sold during the 1st quarter of FY 2007 at the time of
this writing, and approximately 35 companies have recently requested evaluation
copies. We are arranging on-line demonstrations for these companies to ensure
that they understand the capabilities and features of the product during their
evaluations.

We continue to remain confident that significant sales of DDDPlus licenses will
take place. The initial release served us well to stimulate interest in this
first-of-its-kind software and to get formulation scientists thinking about how
to use such a capability in their work. Because such scientists have never used
software like DDDPlus before, this is an educational process to show them how
such a tool can actually save time and money, similar to the process we had with
GastroPlus ten years ago.

GASTROPLUS
- ----------
GastroPlus simulates the absorption and pharmacokinetics of drugs in the human
gastrointestinal tract as well as in a number of standard laboratory animals.
This sophisticated simulation has equations for the movement of the drug through
the gastrointestinal tract, how fast it dissolves or precipitates along the way,
whether it is converted to a different molecular form (i.e., degraded) in the
gastrointestinal tract prior to absorption, and how fast it is absorbed through
various regions of the intestinal wall into the blood stream. With additional
inputs, it also simulates the concentration of drug in the blood plasma versus
time. With the optional PBPKPlus(TM) Module, concentrations in a variety of
tissues and organs can also be predicted. With the optional PDPlus(TM) module,
the program can also simulate how a drug affects the body, such as reducing
pain, reducing blood pressure, reducing depression, and causing adverse side
effects.

We believe GastroPlus is the "gold standard" in the industry for its class of
simulation software. It is used from early drug discovery through development
and into early clinical trials. The information provided through GastroPlus
simulations guides project decisions in various ways. Among the kinds of


                                       3


<PAGE>

knowledge gained through such simulations are: (1) whether a potential new drug
compound is likely to be absorbed at high enough levels to achieve the desired
blood concentrations needed for effective therapy, (2) whether the absorption
process is affected by certain enzymes and transporter proteins in the
intestinal tract that may cause the amount of drug reaching the blood to be very
different from one region of the intestine to another, (3) when certain
properties of a new compound can be adequately estimated through computer ("in
silico") predictions or simple experiments rather than through more expensive
and time-consuming IN VITRO or animal experiments, (4) what the likely
variations in blood and tissue concentration levels would be in a large
population, in different age groups or in different ethnic groups, and (5)
whether a new formulation for an existing approved drug is likely to demonstrate
"bioequivalence" (equivalent blood concentration versus time) to the currently
marketed dosage form in a human trial.

Our marketing intelligence indicates that GastroPlus enjoys a dominant position
in the number of users worldwide. In addition to virtually every major
pharmaceutical company, licenses include a growing number of smaller
pharmaceutical and biotech companies, generic drug companies, and drug delivery
companies (companies that design the tablet or capsule for a drug compound that
was developed by another company). Although these companies are smaller than the
pharmaceutical giants, they can also save considerable time and money through
simulation. We believe this part of the industry, which includes hundreds of
companies, represents major growth potential for GastroPlus. Our experience has
been that the number of new companies adopting GastroPlus shows steady growth,
adding to the base of annual licenses each year.

During the fourth quarter, we continued development of version 5.2, which adds a
significant number of user convenience features as well as expanded simulation.

We are aware that other companies have developed competitive software; however,
based on customer feedback, we believe that the competitive threat to GastroPlus
is limited. Version 5.0 with the new PBPKPlus(TM) module, released in December
2005, further extended the utility of GastroPlus. Version 5.1 added additional
functionality and user convenience, and we are now working on version 5.2, which
expands the program's utility further in response to customer requests for added
features. During the fourth quarter, we were awarded a two-year contract by one
of the pharmaceutical giants to further expand the capabilities of GastroPlus,
most of which we expect will be available to all of our users.

Our recognized expertise in oral absorption and pharmacokinetics is evidenced by
the fact that our staff members have been speakers or presenters at over 40
prestigious scientific meetings worldwide in the past three years. We conduct
contracted studies for customers who prefer to have studies run by our
scientists rather than to license our software and train someone to use it. The
demand for our consulting services has been increasing steadily, and we expect
this trend to continue. Consulting contracts serve both to showcase our
technologies and as a way to build relationships with new customers, as well as
strengthening relationships with our existing customers.

CONTRACT RESEARCH SERVICES
- --------------------------
In addition to our software products, we also offer contract research services
to the pharmaceutical industry in the area of gastrointestinal absorption,
pharmacokinetics, structure-property model building, and related technologies.
These studies provide us an additional source of revenue, as well as a means to
introduce our software products to new customers. Such studies are also
beneficial to us to validate and enhance our products by studying actual data in
the pharmaceutical industry. The business of contracted studies is growing, and
we believe it could contribute significantly to our revenues and earnings;
however, we plan to control growth in this area such that it does not adversely
impact our product development stream. We are also adding scientific staff to
increase our ability to meet the growing demand for consulting services.


                                       4


<PAGE>

PHARMACEUTICAL SIMULATIONS SOFTWARE PRODUCT DEVELOPMENT
- -------------------------------------------------------
Although all of our development work cannot be disclosed for competitive
reasons, some of our development efforts during this reporting period included:


(1) ADMET Predictor/ADMET Modeler upgrades
- ------------------------------------------
The initial toxicity predictions in ADMET Predictor were released during fiscal
year 2005, and we have continued to add new toxicity models steadily. At this
time, we are working on additional such models, but we are not revealing their
nature for competitive reasons. We are also working on other improvements to
ADMET Predictor/ADMET Modeler that will be announced in the coming months.

(2) DDDPlus
- -----------
We have continued to improve DDDPlus by adding capabilities and features
requested by our customers and potential customers who have been conducting beta
testing, as well as capabilities and features identified in-house.

(3) MembranePlus(TM)
- --------------------
MembranePlus is a computer program that simulates IN VITRO experiments that
measure the permeability of new drug-like molecules through a layer of living
cells or through an artificial membrane. These experiments are conducted in
order to estimate the permeability of new drug compounds through the human
intestinal wall and into the blood. However, such experiments do not produce
results that are easily translated into human permeabilities. We believe that a
detailed mechanistic simulation of these IN VITRO experiments will provide the
insight and understanding needed to provide reasonably accurate estimates of
permeability in different regions of the human intestinal tract from IN VITRO
data.

This development effort accelerated during fiscal year 2005 with the hiring of a
new Ph.D. scientist who focused on this program. The simulation is currently
predicting the movement of drug molecules through the bulk fluid, into the
membranes at the surface of a cell layer, through the surface membrane, through
the interior of the cell, into the opposite surface membrane, and through it to
the bulk fluid on the opposite side of the cell layer. Although a few technical
issues remain to be resolved, we are optimistic that the simulation will become
a unique tool for the analysis of data from these experiments, and will enable
researchers to more accurately human intestinal permeability from these IN VITRO
experiments. We are not aware of any other effort to produce a product of this
nature.

This project was put on hold in September 2005 because the scientist responsible
for MembranePlus, Dr. Viera Lukacova, was assigned to take over GastroPlus when
the previous product manager left the company. She has done an outstanding job
with GastroPlus, and has been promoted to Simulation Technologies Team leader.
We are interviewing candidates to expand the Simulation Technologies Team, one
of whom will work on MembranePlus under Dr. Lukacova's direction.

MARKETING AND DISTRIBUTION
- --------------------------
We market our pharmaceutical software and consulting services through attendance
and presentations at scientific meetings, exhibits at trade shows, seminars at
pharmaceutical companies and government agencies, through our web pages on the
Internet, and using various communication media to our compiled database of
prospect and customer names. Until recently, our scientific team has also been
our only sales and marketing team. We believe that this was more effective than
a separate sales team for several reasons: (1) customers appreciate talking
directly with developers who can answer a wide range of technical questions
about methods and features, (2) our scientists benefit from direct customer
contact through gaining an appreciation for the environment and problems of the
customer, and (3) the relationships we build through scientist-to-scientist
contact are stronger than through salesperson-to-scientist contacts. One of our
scientists recently moved to the marketing and sales department and is now a


                                       5


<PAGE>

full-time field sales representative. His strong familiarity with our product
line after over two years as a product scientist and software developer prepared
him well for his new role. In addition, we added an in-house support person
during the fiscal year to improve our ability to follow up on leads generated at
scientist meetings, through our web site, and through our other communication
media.

We use our web pages on the Internet to provide product information, provide
software updates, and as a forum for user feedback and information exchange. We
have cultivated significant market share in North America, Europe, and in Japan,
and Internet and e-mail technologies have had a strong positive influence on our
ability to communicate with existing and potential customers worldwide.

PRODUCTION
- ----------
Our pharmaceutical software products are designed and developed entirely by our
development team at our Lancaster, California facility as well as our Chief
Scientist, Dr. Michael Bolger, in Petaluma, California. The principal materials
and components used in the manufacture of simulation software products include
CD-ROMs and instruction manuals, which are also produced in-house. Robotic CD
burner technology along with in-house graphic art and engineering talent enable
us to accomplish this production in a cost-efficient manner.

COMPETITION
- -----------
In our pharmaceutical software and services business, we compete against a
number of established companies that provide screening, testing and research
services, and products that are not based on simulation software. There are also
software companies whose products do not compete directly, but are sometimes
closely related. Our competitors in this field include companies with financial,
personnel, research and marketing resources that are greater than ours. While
management believes there is currently no significant competitive threat to
GastroPlus, DDDPlus, or ClassPharmer, ADMET Predictor/ADMET Modeler operates in
a more competitive environment; however, independent product comparisons have
been very favorable toward our offerings. Several other companies presently
offer simulation or modeling software, or simulation-software-based services, to
the pharmaceutical industry.

Major pharmaceutical companies conduct drug discovery and development efforts
through their internal development staffs and through outsourcing some of this
work. Smaller companies need to outsource a greater percentage of this research.
Thus, we compete not only with other software suppliers, but also with the
in-house development teams at some pharmaceutical companies.

We are not aware of any significant threat from competition in the area of
gastrointestinal absorption simulation. Although competitive products exist,
both new licenses and license renewals for GastroPlus have continued to grow in
spite of this competition. We believe that we enjoy a dominant market share in
this segment.

We believe the key factors in competing in this field are our ability to develop
simulation and modeling software and related products and services to
effectively predict activities and ADMET-related behaviors of new drug-like
compounds, our ability to develop and maintain a proprietary database of results
of physical experiments that will serve as a basis for simulated studies and
empirical models, our ability to continue to attract and retain a highly skilled
scientific and engineering team, and our ability to develop and maintain
relationships with research and development departments of pharmaceutical
companies, universities and government agencies.


                                       6


<PAGE>

WORDS+
- ------

PRODUCTS
- --------
Our wholly owned subsidiary, Words+, Inc. has been an industry pioneer and
technology leader for over 25 years in introducing and improving augmentative
and alternative communication and computer access software and devices for
disabled persons. We intend to continue to be at the forefront of the
development of new products. We will continue to enhance our major software
products, E Z Keys and Say-it! SAM, as well as our growing line of hardware
products. We will also consider acquisitions of other products, businesses and
companies that are complementary to our existing augmentative and alternative
communication and computer access business lines. We purchased the Say-it! SAM
technologies from SAM Communications, LLC of San Diego in December 2003. This
acquisition gave us our smallest, lightest augmentative communication system,
which is based on a Hewlett-Packard iPAQ personal digital assistant (PDA).
PDA-based communication devices have been very successful in the augmentative
communication market, and this technology purchase has enabled us to move into
this market segment faster and at lower cost than developing the product
ourselves. SAM-based products now account for a significant share of our growing
Words+ revenues. Since the acquisition of the Say-it! SAM technologies, we have
continued to add new functionality to the SAM software and to offer it on
additional hardware platforms.

MARKETING AND DISTRIBUTION
- --------------------------
We market augmentative and alternative communication products through a network
of employee representatives and independent dealers and resellers.

At the present time we have 37 sales representatives worldwide: 1
salary/commission salesperson in California, 14 independent distributors and 6
independent resellers in the U.S., and 16 sales representatives overseas - 4 in
Australia, and 1 each in New Zealand, Canada, England, Norway, Finland, The
Netherlands, France, Italy, Israel, Japan, Korea, Mexico and Malaysia. We also
have 3 inside sales/support persons, who answer e-mails and telephone inquiries
on our toll-free telephone line and who provide technical support. Additional
outside sales persons and independent dealers and resellers are being actively
recruited.

We direct our marketing efforts to speech pathologists, occupational therapists,
rehabilitation engineers, special education teachers, disabled persons and
relatives of disabled persons. We maintain a mailing list of over 10,000 people
made up of these professionals, consumers and relatives, and we mail various
marketing materials to this list. These materials include our catalog of
products and announcements regarding new and enhanced products.

We participate in industry conferences held worldwide that are attended by
speech pathologists, occupational and physical therapists, special education
teachers, parents and consumers. We and others in the industry demonstrate our
products at these conferences and present technical papers that describe the
application of our technologies and research studies on the effectiveness of our
products. We also advertise in selected publications of interest to persons in
this market.

We estimate that for approximately 50% of our sales of augmentative and
alternative communication ("AAC") software and hardware, some or all of the
purchases are funded by third parties such as Medicaid, Medicare, school special
education budgets, private insurance or other governmental or charitable
assistance. Medicare provides coverage of augmentative communication devices.

Our personnel provide advice and assistance to customers and prospective
customers on obtaining third-party financial assistance for purchasing our
products. Third party funding has grown slowly but continuously for 20 years.
The addition of Medicare coverage for AAC devices was the largest single


                                       7


<PAGE>

increase in third party funding in our history. Our Medicare/Medicaid sales have
grown, and approximately 35% of total sales are funded by Medicare/Medicaid.
Such sales are subject to funding caps that limit the amounts paid for our
products, and payment by some agencies can be slow, making this market segment
somewhat more difficult than others.

PRODUCTION
- ----------
Disability software products are either loaded onto computer hard disk drives by
our employees or copied to diskettes, CD-ROM, or memory cards, which is
performed in-house. Most software customers also buy their notebook personal
computers from us, which we purchase at wholesale prices and resell at a markup.
We purchase microprocessors that are part of dedicated devices such as
MessageMates(TM). We design our cases, printed circuit boards, labels and other
components of products such as MessageMates and MicroCommPacs(TM). We outsource
the extrusion, machining and manufacturing of certain components. All final
assembly and testing operations are done by our employees at our facility.

Our products are shipped from our Lancaster, California facility either directly
to the customer or to the salesperson, dealer or reseller. For major products,
the outside salesperson, dealer or reseller either delivers the product or
visits the customer after delivery to provide training.

COMPETITION
- -----------
The AAC industry in which we operate is highly competitive and some of our
competitors have greater financial and personnel resources than ours. The
industry is made up of about six major competitors including Words+, and a
number of smaller ones. Based on personal conversations with our outside dealers
and customers, we believe that the other major competitors each have revenues
ranging from $3 million to under $30 million, so that there are no large
companies in this industry.

We believe that the competition in this industry is based primarily on the
quality of products, quality of customer training and technical support, and
quality and size of sales forces. Price is a competitive factor but we believe
price is not as important to the customer as obtaining the product most suited
to the customer's needs, along with strong after-sale support. We believe that
we are a leader in the industry in developing and producing some of the most
technologically advanced products and in providing quality customer training and
technical support. We believe that the potential exists for significant
increases in the sales of our disability products; however, there are few
barriers to entry in the form of proprietary or patented technology or trade
secrets in this industry. While we believe that cost of product development and
the need for specialized knowledge and experience in this industry would present
some barrier to entry for new competition, other companies may enter this
industry, including companies with substantially greater financial resources
than ours. Furthermore, companies already in this industry may increase their
market share through increased technology development and marketing efforts.


TRAINING AND TECHNICAL SUPPORT
- ------------------------------

We believe customer training and technical support are important factors in
customer satisfaction for both our pharmaceutical and disability products, and
we believe we are an industry leader in providing customer training and
technical support in both of our business areas. For pharmaceutical software, we
provide in-house seminars at customers' sites. These seminars often serve as
initial training in the event the potential customer decides to license or
evaluate our software. Technical support is provided after the sale in the form
of on-site training (at customer's expense), telephone, fax, and e-mail
assistance to users, as well as software upgrades, if any, that may be released
during the customer's license period. We have also used Internet meetings
extensively to provide demonstrations and customer assistance, resulting in
rapid response to requests worldwide and reducing our travel time and expenses.


                                       8


<PAGE>

For Disability Products, our salesperson, dealer or reseller provides initial
training to the customer for major systems -- typically two to four hours. This
training is typically provided not only to the user of the product but also to
the person's speech pathologists, teachers, parents and others who will be
assisting the user. This initial training for the purchase of full systems is
often provided as a part of the price of the product. We and our dealers charge
a fee for additional training and service calls.

Technical support for both pharmaceutical software and disability products is
provided by our life sciences team and our inside sales and support staff based
at our headquarters facilities in Lancaster, California. We provide free
telephone support offering unlimited toll-free numbers in the U.S. and Canada,
and e-mail support for all of our pharmaceutical software and disability
products worldwide. Technical support for pharmaceutical software products is
minimal, averaging a few person-hours per month. Technical support for Words+
products varies from none for most customers to as much as several hours for
others. Words+ dealers usually train new customers at the customer's location,
which significantly reduces technical support demands on our staff.

RESEARCH AND DEVELOPMENT
- ------------------------

We believe that our ability to grow and remain competitive in our markets is
strongly dependent on significant investment into research and development
("R&D"). R&D activities include both enhancement of existing products and
development of new products. Development of new products and adding
functionality to existing products are capitalized in accordance with Financial
Accounting Standards No. 86 and AICPA Statement of Position 98-1. R&D
expenditures were approximately $1,170,000 during fiscal year 2006, of which
$445,000 was capitalized. R&D expenditures during fiscal year 2005 were
approximately $1,049,000, of which $725,000 was capitalized. R&D expenditures
include the purchase of ClassPharmer in fiscal year 2006, and the assets of Sage
in fiscal year 2005.

Our pharmaceutical business R&D activities during fiscal year 2006 were focused
on improving our ClassPharmer, GastroPlus, ADMET Predictor/ADMET Modeler, and
DDDPlus products.

Our R&D activities for our Words+ subsidiary were focused on improvement of our
E Z Keys(TM) and Say-it! SAM(TM) product lines by offering these software
packages on more platforms, including the Freedom LITE(TM) Convertible and the
Say-it! SAM Tablet XP1, as well as developing language support for Spanish and
French.

EMPLOYEES
- ---------

As of November 28, 2006, we employed 33 full-time and two part-time employees,
including 15 in research and development, seven in marketing and sales, six in
administration and accounting, six in production and one in IT/repairs. Nine
current employees hold Ph.D.'s and one is a Ph.D. candidate in their respective
science or engineering disciplines. Four additional employees hold one or more
Master's degrees. All but two of the senior management team and Board of
Directors hold graduate degrees. We believe that our future success will depend,
in part, on our ability to continue to attract, hire and retain qualified
personnel. The competition for such personnel in the pharmaceutical industry and
in the augmentative and alternative communication device and computer software
industry is intense. None of our employees is represented by a labor union, and
we have never experienced a work stoppage. We believe that our relations with
our employees are good.


                                       9


<PAGE>

PATENTS
- -------

During fiscal year 2006, we owned two patents that were acquired as part of our
acquisition of certain assets of Bioreason, Inc. We primarily protect our
intellectual property through copyrights and trade secrecy. Our intellectual
property consists primarily of source code for computer programs and data files
for various applications of those programs in both the pharmaceutical software
and the disability products businesses. In the disability products business,
electronic device schematics, mechanical drawings, and design details are also
intellectual property. The expertise of our technical staff is a considerable
asset closely related to intellectual property, and attracting and retaining
highly qualified scientists and engineers is essential to our business.

EFFECT OF GOVERNMENT REGULATIONS
- --------------------------------

Our pharmaceutical software products are tools used in research and development
and are neither approved nor approvable by the Food and Drug Administration or
other government agency. Approximately 35% of our products for the disabled are
funded by Medicare or Medicaid programs. Changes in government regulations
regarding the allowability of augmentative communication aids and other
assistive technology under such funding could affect our business.

ITEM 2.  DESCRIPTION OF PROPERTIES

In early February of 2006, we moved to a new location. At this new location, we
lease approximately 13,500 square feet of space under a five-year term with two
(2), three-(3) year options to extend the lease. The base rent starts at the
rate of $18,445 per month plus common area maintenance fees. The base rental
rate will increase at 4% annually. We believe that this new facility is
sufficient for our current needs and growth in the near future.

ITEM 3.  LEGAL PROCEEDINGS

On April 6, 2006 we received notice from a liquidator for the former French
subsidiary of Bioreason (Bioreason SARL), saying that the liquidator had
initiated legal action against Simulations Plus in the French courts with
respect to ClassPharmer distribution rights to European customers, and is
claiming commissions and legal fees with respect to European customers. We have
been working through our U.S. attorneys and a law firm in Paris. We have filed a
counterclaim for our rights and lost sales against Bioreason SARL's assets by
sending a debt recovery declaration to the liquidator on June 15, 2006. We
believe the documentation from our purchase of certain secured assets of
Bioreason clearly shows our rights to the disputed accounts. Although we are
pursuing our rights aggressively, there can be no assurance that the outcome
will be favorable. We expect resolution of this issue in 2007.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2006.


                                       10


<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is currently traded on the American Stock Exchange (AMEX) under
the symbol "SLP". According to records of our transfer agent, we had about 64
stockholders of record and approximately 450 beneficial owners as of August 31,
2006. The following table sets forth the low and high sale prices for the Common
Stock as listed on the AMEX for the last two fiscal years. The Board of
directors declared a 2-for-1 stock split, and the company's common stock has
been trading at the post-split price since August 14, 2006. The prices in the
table below reflect the post-split price. We have not paid cash dividends on our
Common Stock. We currently intend to retain our earnings for future growth, and
therefore do not anticipate paying cash dividends in the foreseeable future. Any
further determination as to the payment of dividends will be at the discretion
of our Board of Directors and will depend among other things, on our financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant.

<TABLE>
<S>     <C>
                                                                             LOW SALES PRICE     HIGH SALES PRICE
                                                                             ---------------     ----------------
         FY06:
                  Quarter ended August 31, 2006 . . . . . . . . . . .               1.90              2.95

                  Quarter ended May 31, 2006 . . . . . . . . . . . . .              1.79              2.58

                  Quarter ended February 28, 2006 . . . . . . . . . .               1.73              2.63

                  Quarter ended November 30, 2005  . . . . . . . . . .              1.43              2.00

         FY05:
                  Quarter ended August 31, 2005 . . . . . . . . . . .               1.66              2.25

                  Quarter ended May 31, 2005 . . . . . . . . . . . . .              1.63              2.40

                  Quarter ended February 28, 2005 . . . . . . . . . .               2.08              3.35

                  Quarter ended November 30, 2004  . . . . . . . . . .              1.61              2.60
</TABLE>


                                       11


<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.

RESULTS OF OPERATIONS

The following sets forth selected items from our statements of operations (in
thousands) and the percentages that such items bear to net sales for the fiscal
years ended August 31, 2006 ("FY06") and August 31, 2005 ("FY05").

<TABLE>
                                                                   FY06                       FY05
                                                        ----------------------------------------------------
<S>                                                         <C>          <C>           <C>          <C>
   Net sales                                                $5,855        100.0%       $4,752        100.0%
   Cost of sales                                             1,604         27.4         1,508         31.7
                                                        ----------------------------------------------------
   Gross profit                                              4,251         72.6         3,244         68.3
                                                        ----------------------------------------------------
   Selling, general, and administrative                      2,972         50.8         2,423         51.0
   Research and development                                    445          7.6           525         11.0
                                                        ----------------------------------------------------
   Total operating expenses                                  3,417         58.4         2,948         62.0
                                                        ----------------------------------------------------
   Income from operations                                      834         14.2           296          6.2
                                                        ----------------------------------------------------
   Interest income                                              21          0.4            44          0.9
   Interest expense, net                                         -            -            (1)           -
   Gain on sale of assets                                       11          0.2            15          0.3
   Gain (Loss) on currency exchange                             23          0.4            (6)        (0.1)
                                                        ----------------------------------------------------
   Total other income                                           55          0.9            52          1.1
                                                        ----------------------------------------------------
   Net income before taxes                                     889         15.2           348          7.3
                                                        ----------------------------------------------------
   Provision for income taxes                                 (213)        (3.6)          (86)        (1.8)
                                                        ----------------------------------------------------
   Net income                                                  676         11.6%          262          5.5%
                                                        ----------------------------------------------------
</TABLE>

FY06 COMPARED WITH FY05
- -----------------------

NET SALES
- ---------
Consolidated net sales increased $1,103,000, or 23.2%, to $5,855,000 in fiscal
year 2006 (FY06) from $4,752,000 in fiscal year 2005 (FY05). Sales from
pharmaceutical software and services increased approximately $1,118,000, or
54.0%; and our Words+, Inc. subsidiary's sales decreased approximately $15,000,
or 0.6%, for the year. We attribute the increase in sales of pharmaceutical
software and services to increased licenses for our GastroPlus and ADMET
Predictor software, as well as licenses of our ClassPharmer software acquired in
November 2005. We attribute the small decrease in Words+ sales primarily to a
decrease in sales of "TuffTalker" and "Freedom" products which outweighed
increases in sales of "Say-it-SAM!" and "TuffTalker Plus" products.

COST OF SALES
- -------------
Our consolidated cost of sales for FY06 increased $96,000, or 6.4%, to
$1,604,000 from $1,508,000 in FY05. As a percentage of sales, cost of sales was
27.4% for FY06, compared to 31.7% for FY05, a 4.3% decrease. For Simulations
Plus, absolute cost of sales increased $179,000, or 75.2%. As a percentage of
sales, cost of sales increased to 13.1% in FY06 from 11.5% in FY05. A
significant portion of cost of sales is the systematic amortization of
capitalized software development costs, which is an independent fixed cost
rather than a variable cost related to sales. This amortization cost increased
approximately $122,000, or 184.5%, in FY06 compared with the same period in
FY05.


                                       12


<PAGE>

For Words+, cost of sales decreased $83,000, or 6.5%. As a percentage of sales,
cost of sales decreased 2.8% between FY06 and FY05. We attribute the percentage
decrease in cost of sales for Words+ primarily to the ability to obtain purchase
discounts through volume purchases of computers and PDAs, which are main
components of the systems we sell.

GROSS PROFIT
- ------------
Consolidated gross profit increased $1,007,000, or 31.0%, to $4,251,000 in FY 06
from $3,244,000 in FY05. We attribute this increase to the increase in sales of
pharmaceutical software in addition to an increase in gross margin on Words+
products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for FY06 increased by
$549,000, or 22.7%, to $2,972,000, compared to $2,423,000 for FY05. For
Simulations Plus, SG&A expenses increased $533,000, or 40.6%. The major
increases in expenses were in the categories of selling expenses such as
commissions and trade shows, 10% of the Company's net income before bonuses and
taxes payable to the Company's President, Walter Woltosz and Corporate
Secretary, Virginia Woltosz as annual bonuses, increases in the stipend paid to
the outside members of the board of directors for the first time since the
Company incorporated, recruitment expense increases as we have added staff,
legal and accounting fees, and salary increases along with payroll-related
expenses such as health insurance, payroll taxes and 401(k) matching
contributions. These increases outweighed decreases in investor relations and
repairs.

For Words+, expenses increased $16,000, or 1.4%, due primarily to increases in
advertising, travel, salary and salary related expenses, and contract labor.
These increases outweighed decreases in commissions, trade shows, insurances,
and repairs.

RESEARCH AND DEVELOPMENT
- ------------------------
We incurred approximately $1,170,000 of research and development costs for both
companies during FY06. Of this amount, $725,000 was capitalized and $445,000 was
expensed. For FY05, we incurred approximately $1,049,000 of research and
development costs, of which approximately $524,000 was capitalized and
approximately $525,000 was expensed. The 11.5% increase in research and
development expenditure from FY05 to FY06 was due primarily to our purchase of
the ClassPharmer(TM) software product from the creditors of Bioreason, as well
as increased R&D staff and increases in salaries and bonuses.

INCOME FROM OPERATIONS
- ----------------------
During FY06, we generated income from operations of $834,000, as compared to
$296,000 for FY05, an increase of 181.8%. We attribute this increase to the
increased sales of pharmaceutical software and services from the previous year
in addition to an increase in income from Words+ operations.

OTHER INCOME AND (EXPENSE)
- --------------------------
The net of other income over other expense for FY06 increased by $3,000, or
5.8%, to $55,000, compared to $52,000 for FY05. Interest income decreased by
$23,000, or 52.3%, due primarily to a decrease in the amortization of present
value discount on long-term receivables to $9,000 in FY06 from $32,000 in FY05,
which outweighed an increase in interest income on bank accounts. The interest
expenses incurred in FY06 and FY05 were almost the same. We recognized a gain of
$11,000 on sale of equipment in FY06 compared with $15,000 in FY05, and a gain
of $23,000 on currency exchange in FY06, while this item was a loss of $6,000 in
FY05.


                                       13


<PAGE>

PROVISION OF INCOME TAXES
- -------------------------
For FY06 as well as FY05, because of our net operating loss ("NOL") carry
forward applicable to Federal tax, and multiple tax credits applicable to both
Federal and State, we accrued only the minimum Franchise tax of $1,600 in the
state of California for the two companies. Based on the reconciliation of the
expected income tax, we made a provision of $213,000 for income taxes in FY06
compared with $86,000 in FY05. Please refer to the notes to the financial
statements for the details.

NET INCOME
- ----------
Net income for FY06 increased by $414,000, or 158.2%, to $676,000, compared to
$262,000 for FY05. We attribute this increase in profit primarily to increased
sales of pharmaceutical software licenses in addition to an increase in profit
margin on Words+ products, which outweighed increases in operating expenses and
income taxes. Shareholders' equity grew by 16.6%, from $4.862 million to $5.669
million during FY06.


SEASONALITY
- -----------

Sales of our pharmaceutical and disability products exhibit minimal seasonal
fluctuation. In the last two years, the highest quarters were in the 3rd and 4th
quarters, and the lowest quarters were in the 1st and 2nd quarters. This
unaudited net sales information has been prepared on the same basis as the
annual information presented elsewhere in this Annual Report on Form 10-KSB and,
in the opinion of management, reflects all adjustments (consisting of normal
recurring entries) necessary for a fair presentation of the information
presented. Net sales for any quarter are not necessarily indicative of sales for
any future period.

Prior to FY05, we believed sales of its Words+ products to schools were slightly
seasonal, with greater sales to schools during our third and fourth fiscal
quarter (March-May and June-August), as shown in the table below.

<TABLE>
<S>     <C>
- -------------------------------------------------------------------------------------------------------------

                                                                Net Words+ Sales


                                          First        Second         Third         Fourth
FY                                       Quarter       Quarter       Quarter        Quarter         Total
                                                                  (in thousands)
- ------------------------------------  -------------  ------------  -------------  -------------  ------------
2006 . . . . . . . . . . . . . .              620           598            692            759         2,669
2005 . . . . . . . . . . . . . .              543           622            762            757         2,684
- -------------------------------------------------------------------------------------------------------------
</TABLE>

Sales of pharmaceutical software, which began in the first quarter of FY99, are
not expected to show significant seasonal behavior. Although a significant
portion of the pharmaceutical industry receives extended summer holidays, the
fourth quarter was the strongest quarter for fiscal year 2004, 2003 and 2002,
but was the second lowest in FY05 and the lowest in FY01. Although no consistent
seasonal trend is observed or expected, management believes that sales may show
quarterly spikes when large orders are received.

LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------

Our principal sources of capital have been cash flows from our operations. We
have achieved continuous positive operating cash flow in the last six fiscal
years. We believe that our existing capital and anticipated funds from
operations will be sufficient to meet our anticipated cash needs for working


                                       14


<PAGE>

capital and capital expenditures for the foreseeable future. Thereafter, if cash
generated from operations is insufficient to satisfy our capital requirements,
we may open a revolving line of credit with a bank, or we may have to sell
additional equity or debt securities or obtain expanded credit facilities. In
the event such financing is needed in the future, there can be no assurance that
such financing will be available to us, or, if available, that it will be in
amounts and on terms acceptable to us. If cash flows from operations became
insufficient to continue operations at the current level, and if no additional
financing was obtained, then management would restructure the Company in a way
to preserve its pharmaceutical and disability businesses while maintaining
expenses within operating cash flows.

INFLATION
- ---------

We have not been affected materially by inflation during the periods presented,
and no material effect is expected in the near future.

RECENT ACCOUNTING ANNOUNCEMENTS
- -------------------------------

In December 2004, the FASB issued Statement of Accounting Standard No. 123R,
"Share-Based Payment", a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS 123R requires all companies to measure compensation
expense for all share-based payments (including employee stock options and
options issued pursuant to employee stock purchase plans) based upon the fair
value of the stock-based awards at the date of grant, and is effective for the
Company for the fiscal year beginning after December 15, 2005. The impact of
adoption of Statement 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future.

In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principles and requires retrospective application to prior periods' financial
statements of changes in accounting principles, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Earlier application is permitted for accounting changes
and errors made occurring in fiscal year beginning after May 31, 2005. The
adoption of SFAS No. 154 did not have a material impact on the Company's
financial position or result of operations

In November 2005, the FASB issued FASB Staff Position (FSP) No. FAS 115-1, "THE
MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS." This FSP establishes the steps required in determining when an
investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. Under this FSP, the
assessment for impairment shall be performed at the individual security level in
each reporting period. When impairment has been determined to be other than
temporary, an impairment loss will be recognized on an impairment loss equal to
the difference between the investment's cost and its fair value. The provisions
of FSP 115-1 shall be effective for reporting periods beginning after December
15, 2005. The adoption of FSP 115-1 did not have a material impact on the
Company's financial position or results of operations.

CRITICAL ACCOUNTING POLICIES
- ----------------------------

Our consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,


                                       15


<PAGE>

revenue, and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Critical accounting policies
for us include revenue recognition, accounting for capitalized software
development costs, and accounting for income taxes.

Revenue Recognition
- -------------------
We recognize revenues related to software licenses and software maintenance in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statements of Position (SOP) No. 97-2, "Software Revenue Recognition." Product
revenue is recorded at the time of unlocking the software on the customer's
computer(s), net of estimated allowances and returns. Post-contract customer
support ("PCS") obligations are insignificant; therefore, revenue for PCS is
recognized at the same time, and the costs of providing such support services
are accrued and amortized over the obligation period.

As a by-product of ongoing improvements and upgrades for our software, some
modifications are provided to customers who have already licensed software at no
additional charge. We consider these modifications to be minimal, as they are
not changing the basic functionality or utility of the software, but rather
adding convenience, such as being able to plot some additional variable on a
graph in addition to the numerous variables that had been available before. Such
software modifications for any single product have been typically once or twice
per year, sometimes more, sometimes less. Thus, they are infrequent. We provide,
for a fee, additional training and service calls to our customers and recognize
such revenues at the time the training or service call is provided.

Generally, we enter into one-year license agreements with our customers for the
use of our software products. We recognize revenue on these contracts when all
the criteria under SOP 97-2 are met.

From time to time, we enter into multi-year license agreements. We believe our
history of collection with these customers is sufficient to overcome the
presumption that revenue should be recognized in time with the expected cash
collections, and we have in the past therefore recognized the entire license
fees, net of an applicable discount, at the time of the software's release and
acceptance by the customer. Beginning with the current fiscal year, however, we
have advised investors through our press releases and conference calls that we
now unlock and invoice software one year at a time for multi-year licenses. This
eliminates the extreme variability in our reported revenues and earnings that
we've experienced in the past.

Capitalized Computer Software Development Costs
- -----------------------------------------------
Software development costs are capitalized in accordance with SFAS No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased, or otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility and is discontinued when the product
is available for sale.

The establishment of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life, and changes in software and hardware technologies.
Capitalized software development costs are comprised primarily of salaries and
direct payroll related costs and the purchase of existing software to be used in
our software products.

Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products (not to exceed five years). Amortization of software
development costs amounted to $287,000 for FY06 and $164,000 for FY05.


                                       16


<PAGE>

Management tests capitalized computer software costs for recoverability whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. No such events or changes in circumstances occurred during year

Income Taxes
- ------------
We utilize SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns.

The objectives of accounting for income taxes are to recognize the amount of
taxes payable or refundable for the current year and deferred tax liabilities
and assets for the future tax consequences of events that have been recognized
in an entity's financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in our
financial statements or tax returns. Fluctuations in the actual outcome of these
future tax consequences could materially impact our financial position or our
results of operations.

Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Simulations Plus,
Inc. and its wholly owned subsidiary, Words+, Inc. All significant intercompany
accounts and transactions are eliminated in consolidation.

Comprehensive Income
- --------------------
We utilize Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in our
financial statements since we did not have any items of comprehensive income in
any period presented.

Concentrations and Uncertainties
- --------------------------------
International sales accounted for 35% and 25% of net sales for FY06 and FY05,
respectively. For Simulations Plus, Inc., three customers accounted for 24%, 9%,
and 9% of net sales for FY06, and for Words+, Inc., one government agency
accounted for 18% and one customer accounted for 10% of net sales during FY06.

We operate in the computer software industry, which is highly competitive and
changes rapidly. Our operating results could be significantly affected by our
ability to develop new products and find new distribution channels for new and
existing products.

For consolidated accounts receivable, four customers comprised 14%, 7%, 7%, and
7% of accounts receivable at August 31, 2006, and one government agency
accounted for 12% of total receivables. For Simulations Plus, four customers
comprised 25%, 13%, 12%, and 12% of accounts receivable at August 31, 2006,
compared with four customers comprising 31%, 13%, 11% and 10% of accounts
receivable at August 31, 2005. For Words+, one government agency accounted for
21% of accounts receivable at August 31, 2006 compared with 25% at August 31,
2005.


                                       17


<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

The responses to this item are included elsewhere in this Form 10-KSB (see pages
F1 - F23) and incorporated herein by reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.

ITEM 8A. CONTROLS AND PROCEDURES.

Our management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of August 31, 2006. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information we are required to disclose in the reports we file under the
Securities Exchange Act of 1934, within the time periods specified in the
Commission's rules and forms. Such evaluation did not identify any change in the
year ended August 31, 2006 that has materially affected, or is reasonable likely
to materially affect, our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION.

         Not applicable.


                                       18


<PAGE>

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
         SECTION 16(A) OF THE EXCHANGE ACT

The information required by Item 9 is incorporated by reference from the
Company's definitive proxy statement (the "Proxy Statement") for its 2007 annual
shareholders' meeting.

ITEM 10. EXECUTIVE COMPENSATION

The information required by Item 10 is incorporated by reference from the
Company's Proxy Statement for its 2007 annual shareholders' meeting.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 11 is incorporated by reference from the
Company's Proxy Statement for its 2007 annual shareholders' meeting.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 12 is incorporated by reference from the
Company's Proxy Statement for its 2007 annual shareholders' meeting.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)      The following exhibits are filed as part of this report as required by
         Item 601 of Regulation S-B:

EXHIBIT
NUMBER                          DESCRIPTION
- ------                          -----------

 3.1        Articles of Incorporation of the Registrant (1)
 3.2        Amended and Restated Bylaws of the Registrant (1)
 4.1        Articles of Incorporation of the Registrant (incorporated by
            reference to Exhibit 3.1 hereof) and Bylaws of the Registrant
            (incorporated by reference to Exhibit 3.2 hereof)
 4.2        Form of Common Stock Certificate (1)
 4.3        Share Exchange Agreement (1)
10.1        Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan")
            and terms of agreements relating thereto (1)+
10.2        Subscription Agreement with Patricia Ann O'Neil (1)
10.3        Security Agreement with Patricia Ann O'Neil (1)
10.4        Promissory Note made by the Registrant in favor of Patricia Ann
            O'Neil (1)
10.5        Warrants to purchase 150,000 shares of Common Stock of the
            Registrant issued to Patricia Ann O'Neil (1)
10.6        First Amendment to Agreement with Patricia Ann O'Neil (1)
10.7        Subscription Agreement with Fernando Zamudio (1)
10.8        Security Agreement with Fernando Zamudio (1)
10.9        Promissory Note made by the Registrant in favor of Fernando Zamudio
            (1)
10.10       Warrant to purchase 100,000 shares of Common Stock of the Registrant
            issued to Fernando Zamudio (1)
10.11       Employment Agreement by and between the Registrant and Walter S.
            Woltosz (1) +


                                       19


<PAGE>

10.12       Performance Warrant Agreement by and between the Registrant and
            Walter S. Woltosz + Virginia E. Woltosz (2) +
10.13       Software Acquisition Agreement by and Between the Registrant and
            Michael B. Bolger (1)
10.14       Sublease Agreement dated May 7, 1993 by and between the Registrant
            and Westholme Partners (along with Consent to Sublease and master
            lease agreement) (1)
10.15       Lease Agreements dated August 22, 1996 by and between Words+, Inc.
            and Abbey-Sierra LLC (1)
10.16       Form of 10% Amended and Restated Promissory Note issued in
            connection with the Registrant's Private Placement (2)
10.17       Form of Subscription Agreement relative to the Registrant's Private
            Placement (1)
10.18       Form of Lock-Up Agreement with Bridge Lenders (2)
10.19       Form of Indemnification Agreement (1)
10.20       Form of Lock-Up Agreement with the Woltosz' (2)
10.21       Letter of Intent by and between the Registrant and Therapeutic
            Systems Research Laboratories (1)
10.22       Form of Representative's Warrant to be issued by the Registrant in
            favor of the Representative (2)
10.23       Form of Warrant issued to Bridge Lenders (2)
10.24       License Agreement by and between the Registrant and Therapeutic
            Systems Research Laboratories (3)
10.25       Grant Award Letter from National Science Foundation (4)
10.26       Distribution Agreement with Teijin Systems Technology LTD. (4)
10.27       Lease Agreements by and between Simulations Plus, Inc. and Martin
            Properties, Inc. (4)
10.28       Software OEM Agreement for Assistive Market Developer by and between
            Words+, Inc. and Digital Equipment Corporation. (4)
10.29       Purchase Agreement by and between Words+, Inc. and Epson America,
            Inc. (4)
10.30       License Agreement with Absorption Systems, LP. (5)
10.31       Service contract with The Kriegsman Group. (5)
10.32       Letter of Engagement with Banchik & Associates. (5)
10.33       Letter of Intent for Cooperative Alliance with Absorption Systems,
            LP. (5)
10.34       OEM/Remarketing Agreement between Words+, Inc. and Eloquent
            Technology, Inc. (6)
10.35       Lease Option Agreement by and between Simulations Plus, Inc. and
            Martin Properties, Inc. (8)
10.36       Auto Rental Lease Agreement by and between Simulations Plus, Inc.
            and Walter and Virginia Woltosz (8)
10.37       Registration Statement - 1,250,000 shares of the Company's 1966
            Stock Options. (9)
10.38       Employment Agreement by and between the Company and Walter S.
            Woltosz (10)
10.39       An addendum to Lease Agreement (11)
10.40       Business Lending Agreement with Wells Fargo Bank (11)
10.41       Technology Transfer Agreement with Sam Communications, LLC. (12)
10.42       Employment Agreement by and between the Company and Walter S.
            Woltosz (14)
10.43       Lease Agreement by and between Simulations Plus, Inc. and Venture
            Freeway, LLC. (15)
31.1        Section 302 - Certification of Chief Executive Officer. (15)
31.2        Section 302 - Certification of Chief Financial Officer. (15)
32          Section 906 - Certification of Chief Executive Officer and Chief
            Financial Officer. (15)


                                       20


<PAGE>

- --------------------------------------------------------------------------------

         (1)      Incorporated by reference to the Company's Registration
                  Statement on Form SB-2 (Registration No. 333-6680) filed on
                  March 25, 1997 (the "Registration Statement").
         (2)      Incorporated by reference to Pre-Effective Amendment No. 1 to
                  the Registration Statement filed on May 27, 1997.
         (3)      Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 1997.
         (4)      Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 1998.
         (5)      Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 1999.
         (6)      Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 2000.
         (7)      Incorporated by reference to the Company's Form 8-K filed on
                  March 1, 2001.
         (8)      Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 2001.
         (9)      Incorporated by reference to the Company's Registration
                  Statement on Form S-8 (Registration No. 333-91592) filed on
                  June 28, 2002 (the "Registration Statement").
         (10)     Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 2002.
         (11)     Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 2003.
         (12)     Incorporated by reference to the Company's Form 8-K filed on
                  December 29, 2003.
         (13)     Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 2004.
         (14)     Incorporated by reference to the Company's Form 10-KSB for the
                  fiscal year ended August 31, 2005.
         (15)     Filed herewith.


(b)      Reports on Form 8-K

         None.


                                       21


<PAGE>

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The Company incurred the following fees to Rose, Snyder & Jacobs, CPAs for
services rendered during the fiscal year ended August 31, 2005:

                Fee Category                       FY06 Fees        FY05 Fees
                ------------                       ---------        ---------

         Audit fees                              $    60,295     $    55,803
         Audit-related fees                               --              --
         Tax fees                                      8,000          13,467
         All other fees                                1,120              --
                                                 -----------     -----------
                        Total fees               $    69,415     $    69,270
                                                 -----------     -----------

         AUDIT FEES - Consists of fees incurred for professional services
         rendered for the audit of Simulations Plus, Inc.'s consolidated
         financial statements and for reviews of the interim consolidated
         financial statements included in our quarterly reports on Form 10-QSB
         and consents for filings with the SEC.

         AUDIT-RELATED FEES - Consists of fees billed for professional services
         that are reasonably related to the performance of the audit or review
         of Simulations Plus, Inc.'s consolidated financial statements, but are
         not reported under "Audit fees."

         TAX FEES - Consists of fees billed for professional services relating
         to tax compliance, tax reporting, and tax advice.

         ALL OTHER FEES - Consists of fees billed for all other services.


                                       22


<PAGE>

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
November 22, 2006.

                                                SIMULATIONS PLUS, INC.


                                                By: /s/ MOMOKO A. BERAN
                                                    ----------------------------
                                                    Momoko A. Beran
                                                    Chief Financial Officer


In accordance with Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
indicated on November 22, 2006.


            SIGNATURE                                   TITLE


    /s/ WALTER S. WOLTOSZ                 Chairman of the Board of Directors
- -----------------------------------       and Chief Executive Officer
    Walter S. Woltosz


      /s/ VIRGINIA E. WOLTOSZ
- -----------------------------------
      Virginia E. Woltosz                 Secretary and Director of the Company


     /s/ DR. DAVID Z. D'ARGENIO
- -----------------------------------
     Dr. David Z. D'Argenio               Director


         DR. RICHARD R. WEISS
- -----------------------------------
     Dr. Richard R. Weiss                 Director


     /s/ MOMOKO A. BERAN
- -----------------------------------
     Momoko A. Beran                      Chief Financial Officer of the Company


                                       23


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                                        CONTENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------


                                                                       Page
                                                                       ----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 F-2

CONSOLIDATED FINANCIAL STATEMENTS

     Consolidated Balance Sheet                                       F-3 - F-4

     Consolidated Statements of Operations                              F-5

     Consolidated Statements of Shareholders' Equity                    F-6

     Consolidated Statements of Cash Flows                            F-7 - F-8

     Notes to Consolidated Financial Statements                       F-9 - F-24



                                      F-1


<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of
Simulations Plus, Inc.
Lancaster, California



         We have audited the accompanying consolidated balance sheet of
simulations Plus, Inc (a California corporation) and Subsidiary as of August 31,
2006 and the related consolidated statements of operations, shareholders' equity
and cash flows for the years ended August 31, 2006 and 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

         We conducted our audits in accordance with the standards established by
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also
includes 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Simulation Plus and Subsidiary as of August 31, 2006, and the consolidated
results of their operations and their cash flows for the years ended August 31,
2006 and 2005 in conformity with accounting principles generally accepted in the
United States of America.



Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants

Encino, California

October 26, 2006


                                      F-2


<PAGE>

<TABLE>
<S>     <C>

                                              SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                         CONSOLIDATED BALANCE SHEET
                                                                    AUGUST 31, 2006
- -----------------------------------------------------------------------------------

                                        ASSETS

CURRENT ASSETS
     Cash and cash equivalents (note 3)                              $    1,685,036
     Accounts receivable, net of allowance for doubtful accounts
         and estimated contractual discounts of $26,982 (note 4)          1,588,583
     Contracts receivable, net of discounts of $4,397                       194,183
     Inventory (note 5)                                                     237,048
     Prepaid expenses and other current assets                               81,295
     Current portion of deferred tax                                        109,034
                                                                     --------------

            Total current assets                                          3,895,179

CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
     net of accumulated amortization of $2,427,726                        1,374,442

PROPERTY AND EQUIPMENT, net (note 6)                                         96,384
CONTRACTS RECEIVABLE                                                         37,180
CUSTOMER RELATIONSHIPS (note 13)                                            100,364
DEFERRED TAX                                                                991,466
OTHER ASSETS                                                                 18,446
                                                                     --------------

                TOTAL ASSETS                                         $    6,513,461
                                                                     ==============


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

                                        F-3


<PAGE>

                                                 SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                            CONSOLIDATED BALANCE SHEET
                                                                       AUGUST 31, 2006
- --------------------------------------------------------------------------------------

                         LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                                     $    215,418
     Accrued payroll and other expenses                                        364,457
     Accrued bonuses to officers                                                98,753
     Accrued income taxes                                                        1,600
     Accrued warranty and service costs                                         34,752
     Deferred revenue                                                          129,461
     Other current liabilities                                                     455
                                                                          ------------

         Total current liabilities                                             844,896

LONG TERM LIABILITIES                                                               --
                                                                          ------------

            Total liabilities                                                  844,896
                                                                          ------------

COMMITMENTS AND CONTINGENCIES (note 7)

SHAREHOLDERS' EQUITY (note 8)
     Preferred stock, $0.001 par value
         10,000,000 shares authorized
         no shares issued and outstanding                                           --
     Common stock, $0.001 par value
         20,000,000 shares authorized
         7,441,496 shares issued and outstanding                                 3,794
     Additional paid-in capital                                              5,274,314
     Retained Earnings                                                         390,457
                                                                          ------------

            Total shareholders' equity                                       5,668,565
                                                                          ------------

                TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $  6,513,461
                                                                          ============


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

                                         F-4


<PAGE>

                                                   SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                                          For the Years Ended August 31,
- ----------------------------------------------------------------------------------------

                                                                2006             2005
                                                                ----             ----

NET SALES                                                   $ 5,855,204      $ 4,752,641

COST OF SALES                                                 1,604,519        1,508,185
                                                            -----------      -----------

GROSS PROFIT                                                  4,250,685        3,244,456
                                                            -----------      -----------

OPERATING EXPENSES
     Selling, general, and administrative                     2,972,298        2,423,467
     Research and development                                   445,252          524,561
                                                            -----------      -----------

        Total operating expenses                              3,417,550        2,948,028
                                                            -----------      -----------

INCOME FROM OPERATIONS                                          833,135          296,428
                                                            -----------      -----------

OTHER INCOME (EXPENSE)
     Interest income                                             21,435           43,462
     Interest expense                                               (50)            (712)
     Miscellaneous income                                           520               --
     Gain on sale of assets                                      10,774           15,491
     Gain on currency exchange                                   22,961           (6,551)
                                                            -----------      -----------

        Total other income                                       55,640           51,690
                                                            -----------      -----------

INCOME BEFORE INCOME TAXES                                      888,775          348,118

BENEFIT FROM (PROVISION FOR) INCOME TAXES
     Benefit from (provision for) income tax                   (212,900)         (85,800)
     Release of valuation allowance                                  --               --
                                                            -----------      -----------

        Total benefit from (provision for) income taxes        (212,900)         (85,800)
                                                            -----------      -----------

NET INCOME                                                  $   675,875      $   262,318
                                                            ===========      ===========

BASIC EARNINGS PER SHARE                                    $      0.09      $      0.04
                                                            ===========      ===========

Diluted earnings per share                                  $      0.08      $      0.03
                                                            ===========      ===========

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING*
     BASIC                                                    7,362,226        7,221,068
                                                            ===========      ===========

     DILUTED                                                  8,144,065        7,961,036
                                                            ===========      ===========

*    The number of shares at August 31, 2005 reflects 2-for-1 stock split effect
     for comparison purpose.


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

                                          F-5


<PAGE>

                                                                   SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                                                          For the Years Ended August 31,
- --------------------------------------------------------------------------------------------------------

                                       Common Stock            Additional     Accumulated
                                       ------------             Paid-In        Earnings
                                    Shares        Amount        Capital        (Deficit)        Total
                                 ----------     ----------     ----------     ----------      ----------

BALANCE, AUGUST 31, 2004          7,128,886     $    3,565     $4,990,122     $ (547,736)     $4,445,951

SHARES ISSUED UPON
    PURCHASING
    SAGE INFORMATICS PRODUCT         29,410             15         49,982             --          49,997

SHARES ISSUED UPON
    EXERCISE OF STOCK
    OPTIONS                         139,400             70        103,822             --         103,892

NET INCOME                               --             --             --        262,318         262,318
                                 ----------     ----------     ----------     ----------      ----------

BALANCE, AUGUST 31, 2005          7,297,696          3,650      5,143,926       (285,418)      4,862,158

SHARES ISSUED UPON
    EXERCISE OF STOCK
    OPTIONS                         143,800            144        130,388             --         130,532

NET INCOME                               --             --             --        675,875         675,875
                                 ----------     ----------     ----------     ----------      ----------

BALANCE, AUGUST 31, 2006          7,441,496     $    3,794     $5,274,314     $  390,457      $5,668,565
                                 ==========     ==========     ==========     ==========      ==========


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

                                                  F-6


<PAGE>

                                                         SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                For the Years Ended August 31,
- ----------------------------------------------------------------------------------------------

                                                                   2006               2005
                                                              -------------      -------------

CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                $     675,875      $     262,318
    Adjustments to reconcile net income to net cash
      provided by operating activities
         Depreciation and amortization of property
           and equipment                                             48,140             42,505
         Amortization of customer relationships                      27,678                 --
         Amortization of capitalized software
           development costs                                        287,357            164,385
         (Gain) on sale of assets                                   (10,774)           (15,491)

         (Increase) decrease in
           Accounts receivable                                     (274,919)           607,502
           Inventory                                                 44,352             77,190
           Deferred tax                                             211,300             84,200
           Other assets                                              (7,587)            35,040
         Increase (decrease) in
           Accounts payable                                         124,377            (61,845)
           Accrued payroll and other expenses                       (33,745)           176,688
           Accrued bonuses to officers                               60,073            (38,946)
           Accrued income taxes                                          --                 --
           Accrued warranty and service costs                         7,013             (4,757)
           Deferred revenue                                         (11,524)           109,584
                                                              -------------      -------------

             Net cash provided by operating activities            1,147,616          1,438,373
                                                              -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of property and equipment                             (61,980)           (70,607)
    Purchases of Bioreason's assets                                (826,192)                --
    Proceeds from sale of assets                                     20,549             22,641
    Capitalized computer software development costs                (479,531)          (474,523)
                                                              -------------      -------------

             Net cash used in investing activities               (1,347,154)          (522,489)
                                                              -------------      -------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from the exercise of stock options                     130,532            103,892
                                                              -------------      -------------

             Net cash provided by financing activities              130,532            103,892
                                                              -------------      -------------

                Net increase (decrease) in cash and
                  cash equivalents                            $     (69,006)     $   1,019,776

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      1,754,042            734,266
                                                              -------------      -------------

CASH AND CASH EQUIVALENTS, END OF YEAR                        $   1,685,036      $   1,754,042
                                                              =============      =============

                                              F-7


<PAGE>


                                                         SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                For the Years Ended August 31,
- ----------------------------------------------------------------------------------------------

                                                                   2006               2005
                                                              -------------      -------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    INTEREST PAID                                             $          50      $         712
                                                              =============      =============

    INCOME TAXES PAID                                         $       1,600      $       1,600
                                                              =============      =============


SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS

      On August 31, 2005, the Company purchased the assets of Sage Informatics
      LLC., including the Chem TK (TM) product line, a chemistry software. The
      partial payment was made by issuing 14,705 shares (Pre-Split) of
      Simulations Plus restricted common stock at $3.40 per share (Pre-Split),
      total of $49,997, equal to the closing price on the date when the
      agreement was signed.


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

                                             F-8
</TABLE>


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND LINES OF BUSINESS

         Organization
         ------------
         Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29,
         1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of
         Words+, Inc. common stock for 2,200,000 (Pre-split) shares of
         Simulations Plus, Inc. common stock, and Words+, Inc. became a wholly
         owned subsidiary of Simulations Plus, Inc. (collectively, the
         "Company").

         Lines of Business
         -----------------
         The Company designs and develops pharmaceutical simulation software to
         promote cost-effective solutions to a number of problems in
         pharmaceutical research and in the education of pharmacy and medical
         students. The Company also developed and sells interactive, educational
         software programs that simulate science experiments conducted in middle
         school, high school, and junior college science classes. In addition,
         the Company's subsidiary designs and develops computer software and
         manufactures augmentative communication devices and computer access
         products that provide a voice for those who cannot speak and allow
         physically disabled persons to operate a standard computer, as well as
         Abbreviate!, a productivity software product for the commercial market.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Our consolidated financial statements and accompanying notes are
         prepared in accordance with accounting principles generally accepted in
         the United States of America. Preparing financial statements requires
         management to make estimates and assumptions that affect the reported
         amounts of assets, liabilities, revenue, and expenses. These estimates
         and assumptions are affected by management's application of accounting
         policies. Actual results could differ from those estimates. Critical
         accounting policies for us include revenue recognition, accounting for
         capitalized software development costs, and accounting for income
         taxes.

         Principles of Consolidation
         ---------------------------
         The consolidated financial statements include the accounts of
         Simulations Plus, Inc. and its wholly owned subsidiary, Words+, Inc.
         All significant intercompany accounts and transactions are eliminated
         in consolidation.

         Revenue Recognition
         -------------------
         The Company recognizes revenues related to software licenses and
         software maintenance in accordance with the American Institute of
         Certified Public Accountants ("AICPA") Statements of Position (SOP) No.
         97-2, "Software Revenue Recognition." Product revenue is recorded at
         the time of shipment, net of estimated allowances and returns.
         Post-contract customer support ("PCS") obligations are insignificant;
         therefore, revenue for PCS is recognized at the time of shipment, and
         the costs of providing such support services are accrued and amortized
         over the obligation period.


                                      F-9


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Revenue Recognition (Continued)
         -------------------------------
         As a by-product of ongoing improvements and upgrades for the new
         programs and new modules of software, some modifications are provided
         to customers who have already purchased software at no additional
         charge. Other software modifications result in new, additional cost
         modules that expand the functionality of the software. These are
         licensed separately. We consider the modifications that are provided
         without charge to be minimal, as they are not significantly changing
         the basic functionality or utility of the software, but rather adding
         convenience, such as being able to plot some additional variable on a
         graph in addition to the numerous variables that had been available
         before, or adding some additional calculations to supplement the
         information provided from running the software. Such software
         modifications for any single product have been typically once or twice
         per year, sometimes more, sometimes less. Thus, they are infrequent.
         The Company provides, for a fee, additional training and service calls
         to its customers and recognizes revenue at the time the training or
         service call is provided.

         Generally, we enter into one-year license agreements with customers for
         the use of our software products. We recognize revenue on these
         contracts when all the criteria under SOP 97-2 are met.

         From time to time, we enter into multi-year license agreements. We
         believe our history of collection with these customers is sufficient to
         overcome the presumption that revenue should be recognized in time with
         the expected cash collections, and we have in the past therefore
         recognized the entire license fees, net of an applicable discount, at
         the time of the software's release and acceptance by the customer.
         However, beginning with the current fiscal year (September 1, 2005
         through August 31, 2006), we unlock and invoice software one year at a
         time for multi-year licenses. Therefore, revenue is recognized one year
         at the time. This will eliminate the extreme variability in our
         reported revenues and earnings that we've experienced in the past that
         was caused by booking multi-year license revenues up front.

         Comprehensive Income
         --------------------
         The Company utilizes Statement of Financial Accounting Standards
         ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
         establishes standards for reporting comprehensive income and its
         components in a financial statement. Comprehensive income as defined
         includes all changes in equity (net assets) during a period from
         non-owner sources. Examples of items to be included in comprehensive
         income, which are excluded from net income, include foreign currency
         translation adjustments and unrealized gains and losses on
         available-for-sale securities. Comprehensive income is not presented in
         the Company's financial statements since the Company did not have any
         of the items of comprehensive income in any period presented.

         Cash and Cash Equivalents
         -------------------------
         For purposes of the statements of cash flows, the Company considers all
         highly liquid investments purchased with original maturities of three
         months or less to be cash equivalents.


                                      F-10


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Inventory
         ---------
         Inventory is stated at the lower of cost (first-in, first-out basis) or
         market and consists primarily of computers and peripheral computer
         equipment.

         Capitalized Computer Software Development Costs
         -----------------------------------------------
         Software development costs are capitalized in accordance with SFAS No.
         86, "Accounting for the Cost of Computer Software to be Sold, Leased,
         or otherwise Marketed." Capitalization of software development costs
         begins upon the establishment of technological feasibility and is
         discontinued when the product is available for sale.

         The establishment of technological feasibility and the ongoing
         assessment for recoverability of capitalized software development costs
         require considerable judgment by management with respect to certain
         external factors including, but not limited to, technological
         feasibility, anticipated future gross revenues, estimated economic
         life, and changes in software and hardware technologies. Capitalized
         software development costs are comprised primarily of salaries and
         direct payroll-related costs and the purchase of existing software to
         be used in the Company's software products.

         Amortization of capitalized software development costs is provided on a
         product-by-product basis on the straight-line method over the estimated
         economic life of the products (not to exceed five years). Amortization
         of software development costs amounted to $287,349 and $164,385 for the
         years ended August 31, 2006 and 2005, respectively. We expect the
         future amortization expense will vary due to increases in capitalized
         computer software development costs.

         Management tests capitalized computer software costs for recoverability
         whenever events or changes in circumstances indicate that the carrying
         amount may not be recoverable. No such events or changes in
         circumstances occurred during year

         Property and Equipment
         ----------------------
         Property and equipment, including equipment under capital leases, are
         recorded at cost, less accumulated depreciation and amortization.
         Depreciation and amortization are provided using the straight-line
         method over the estimated useful lives as follows:

                  Equipment                                       5 years
                  Computer equipment                         3 to 7 years
                  Furniture and fixtures                     5 to 7 years
                  Leasehold improvements                          5 years

         Maintenance and minor replacements are charged to expense as incurred.
         Gains and losses on disposals are included in the results of
         operations.


                                      F-11


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Fair Value of Financial Instruments
         -----------------------------------
         For certain of the Company's financial instruments, including cash and
         cash equivalents, accounts receivable, accounts payable, accrued
         payroll and other expenses, accrued bonuses to officers, and accrued
         warranty and service costs, the carrying amounts approximate fair value
         due to their short maturities.

         Advertising
         -----------
         The Company expenses advertising costs as incurred. Advertising costs
         for the years ended August 31, 2006 and 2005 were $13,000 and $11,000,
         respectively.

         Shipping and Handling
         ---------------------
         Shipping and handling costs are recorded as cost of sales, amounted to
         $93,000 and $83,000 for the years ended August 31, 2006 and 2005,
         respectively.

         Research and Development Costs
         ------------------------------
         Research and development costs are charged to expense as incurred until
         technological feasibility has been established. These costs consist
         primarily of salaries and direct payroll related costs. It also
         includes purchased software which was developed by other companies and
         incorporated into, or used in the development of, our final products.

         Income Taxes
         ------------
         The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
         requires the recognition of deferred tax assets and liabilities for the
         expected future tax consequences of events that have been included in
         the financial statements or tax returns.

         Under this method, deferred income taxes are recognized for the tax
         consequences in future years of differences between the tax bases of
         assets and liabilities and their financial reporting amounts at each
         year-end based on enacted tax laws and statutory tax rates applicable
         to the periods in which the differences are expected to affect taxable
         income. Valuation allowances are established, when necessary, to reduce
         deferred tax assets to the amount expected to be realized. The
         provision for income taxes represents the tax payable for the period
         and the change during the period in deferred tax assets and
         liabilities.

         At the end of fiscal year 2005, we recorded $1,311,800 in deferred tax
         assets. For fiscal year 2006, we recorded a provision for deferred
         taxes in the amount of $211,300, resulting in the deferred tax asset of
         $1,100,500 at August 31, 2006. The evaluation of the deferred tax
         assets is based on our history of generating taxable profits and our
         projections of future profits as well as expected future tax rates to
         determine if the realization of the deferred tax asset is
         more-likely-than-not. Significant judgment is required in these
         evaluations, and differences in future results from our estimates,
         could result in material differences in the realization of these
         assets.


                                      F-12


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Customer relationship
         ---------------------
         The Company purchased customer relationship as a part of the
         acquisition of certain assets of Bioreason Inc (see note 13). Customer
         relationship was recorded at the cost of $128,042, being amortized over
         66 months. Amortization expense and accumulated amortization amounted
         to $27,678. We estimate the amortization expense for the next 5 years
         will approximate $20,000 a year.

         Earnings per Share
         ------------------
         The Company reports earnings per share in accordance with SFAS No. 128,
         "Loss per Share." Basic earnings per share is computed by dividing
         income available to common shareholders by the weighted-average number
         of common shares available. Diluted earnings per share is computed
         similar to basic earnings per share except that the denominator is
         increased to include the number of additional common shares that would
         have been outstanding if the potential common shares had been issued
         and if the additional common shares were dilutive. The components of
         basic and diluted earnings per share for the years ended August 31,
         2006 and 2005 were as follows (the number of shares reflects the effect
         of a 2-for-1 stock split for comparison purpose):

<TABLE>
                                                                                      2006               2005
                                                                                ---------------    ----------------
<S>                                                                             <C>                <C>
                  Numerator
                      Net income attributable to common
                           shareholders                                         $       675,875    $        262,318
                                                                                ===============    ================

                  Denominator
                      Weighted-average number of common shares
                           outstanding during the year                                7,362,226           7,221,068
                      Dilutive effect of stock options                                  781,839             739,968
                                                                                ---------------    ----------------

                  COMMON STOCK AND COMMON STOCK
                      EQUIVALENTS USED FOR DILUTED EARNINGS
                      PER SHARE                                                       8,144,065           7,961,036
                                                                                ===============    ================
</TABLE>

         Stock Options and Warrants
         --------------------------
         In December 2004, the FASB issued Statement of Accounting Standard No.
         123R, "Share-Based Payment", a revision of SFAS No. 123, "Accounting
         for Stock-Based Compensation." SFAS 123R supersedes APB Opinion No. 25,
         "Accounting for Stock Issued to Employees," and requires all companies
         to measure compensation expense for all share-based payments, including
         employee stock options, based upon the fair value of the stock-based
         awards at the date of grant. SFAS 123R will be effective for the
         Company for the fiscal year 2007, beginning September 1, 2006. For
         fiscal year 2006, we accounted for share-based payments to employees
         using APB25's intrinsic value method as permitted; therefore it does
         not recognize any compensation cost for employee stock options.
         Entities electing to remain with the accounting method of APB 25 must
         make pro forma disclosures of net income and earnings per share, as if
         the fair value method of accounting defined in SFAS No. 123 had been
         applied. The Company has elected to account for its stock-based
         compensation to employees under APB 25. On August 18, 2006, the Company
         announced to its employees that the Company will accelerate the vesting
         of stock options previously awarded for which the underlying shares are
         registered, excluding 500,000 options for shares of unregistered stock.
         As a result, Options to purchase approximately 520,000 shares of common
         stock was accelerated, representing approximately 25% of all
         outstanding options.


                                      F-13


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Estimates
         ---------
         The preparation of financial statements 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
         revenue and expenses during the reporting period. Actual results could
         differ from those estimates.

         Concentrations and Uncertainties
         --------------------------------
         International sales accounted for 35% and 25% of net sales for the
         years ended August 31, 2006 and 2005, respectively. For Simulations
         Plus, Inc., one customer accounted for 24% of net sales for the year
         ended August 31, 2006, and for Words+, Inc., one government agency
         accounted for 18% of net sales during the fiscal year 2006.

         The Company operates in the computer software industry, which is highly
         competitive and changes rapidly. The Company's operating results could
         be significantly affected by its ability to develop new products and
         find new distribution channels for new and existing products.

         For Simulations Plus, four customers comprised 25%, 13%, 12% and 12% of
         accounts receivable at August 31, 2006. Four customers comprised 31%,
         13%, 11% and 10% of accounts receivable at August 31, 2005. For Words+,
         one customer comprised 21% of accounts receivable at August 31, 2006.
         One government agency comprised 25% of accounts receivable at August
         31, 2005.

         The Company's subsidiary, Words+, Inc., purchases components for the
         main computer products from three Manufactures. Words+, Inc. also uses
         a number of pictographic symbols that are used in its software products
         which are licensed from a third party. The inability of the Company to
         obtain computers used in its products or to renew its licensing
         agreement to use pictographic symbols could negatively impact the
         Company's financial position, results of operations, and cash flows.

         Recently Issued Accounting Pronouncements
         -----------------------------------------
         In December 2004, the FASB issued Statement of Accounting Standard No.
         123R, "Share-Based Payment", a revision of SFAS No. 123, "Accounting
         for Stock-Based Compensation." SFAS 123R supersedes APB Opinion No. 25,
         "Accounting for Stock Issued to Employees." SFAS 123R requires all
         companies to measure compensation expense for all share-based payments
         (including employee stock options and options issued pursuant to
         employee stock purchase plans) based upon the fair value of the
         stock-based awards at the date of grant, and is effective for the
         Company for fiscal year 2007, which begins on September 1, 2006. The
         impact of adoption of Statement 123R cannot be predicted at this time
         because it will depend on levels of share-based payments granted in the
         future.


                                      F-14


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         Recently Issued Accounting Pronouncements (Continued)
         -----------------------------------------------------
         In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
         Error Corrections." This statement applies to all voluntary changes in
         accounting principles and requires retrospective application to prior
         periods' financial statements of changes in accounting principles,
         unless this would be impracticable. This statement also makes a
         distinction between "retrospective application" of an accounting
         principle and the "restatement" of financial statements to reflect the
         correction of an error. This statement is effective for accounting
         changes and corrections of errors made in fiscal years beginning after
         December 15, 2005. Earlier application is permitted for accounting
         changes and errors made occurring in fiscal year beginning after May
         31, 2005. The adoption of SFAS No. 154 did not have a material impact
         on the Company's financial position or result of operations


         In November 2005, the FASB issued FASB Staff Position (FSP) No. FAS
         115-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS
         APPLICATION TO CERTAIN INVESTMENTS." This FSP establishes the steps
         required in determining when an investment is considered impaired,
         whether that impairment is other than temporary, and the measurement of
         an impairment loss. Under this FSP, the assessment for impairment shall
         be performed at the individual security level in each reporting period.
         When impairment has been determined to be other than temporary, an
         impairment loss will be recognized on an impairment loss equal to the
         difference between the investment's cost and its fair value. The
         provisions of FSP 115-1 shall be effective for reporting periods
         beginning after December 15, 2005. The adoption of FSP 115-1 did not
         have a material impact on the Company's financial position or results
         of operations.

NOTE 3 - CASH AND CASH EQUIVALENTS

         The Company maintains cash deposits at banks located in California.
         Deposits at each bank are insured by the Federal Deposit Insurance
         Corporation up to $100,000 per company. At August 31, 2006, the
         uninsured portions aggregated to $1,237,000. The Company has not
         experienced any losses in such accounts and believes it is not exposed
         to any significant credit risk on cash and cash equivalents.

NOTE 4 - ACCOUNTS RECEIVABLE

         The Company maintains an allowance for doubtful accounts for estimated
         losses that may arise if any of its customers are unable to make
         required payments. Management specifically analyzes the age of customer
         balances, historical bad debt experience, customer credit-worthiness,
         and changes in customer payment terms when making estimates of the
         uncollectability of the Company's trade accounts receivable balances.
         If the Company determines that the financial conditions of any of its
         customers deteriorated, whether due to customer-specific or general
         economic issues, an increase


                                      F-15


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 4 - ACCOUNTS RECEIVABLE (CONTINUED)

         in the allowance may be made. Accounts receivable are written off when
         all collection attempts have failed. The Company also estimates the
         contractual discount obligation for third party funding such as
         Medicare, Medicaid, and private insurance companies. Those estimated
         discounts are reflected in an allowance for doubtful accounts.

NOTE 5 - INVENTORY

         Inventory is stated at the lower of cost (first-in, first-out basis) or
         market and consists primarily of computers and peripheral computer
         equipment.

NOTE 6 - PROPERTY AND EQUIPMENT

         Property and equipment at August 31, 2006 consisted of the following:

                  Automobile                                    $         21,769
                  Equipment                                              154,876
                  Computer equipment                                     317,889
                  Furniture and fixtures                                  57,705
                  Leasehold improvements                                  53,898
                                                                ----------------
                                                                         606,137
                  Less accumulated depreciation
                    and amortization                                     509,753
                                                                ----------------
                      TOTAL                                     $         96,384
                                                                ================

         Depreciation and amortization expense was $48,140 and $42,505 for the
         years ended August 31, 2006 and 2005, respectively.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

         Leases
         ------
         In early February 2006, we moved to a new location. At this new
         location, we lease approximately 13,500 square feet of space under a
         five-year term with two (2), three-(3) year options to extend the
         lease. The base rent starts at the rate of $18,445 per month plus
         common area maintenance fees. The base rental rate will increase at 4%
         annually.

         The Company also leases Ricoh copier/printer equipment under
         non-cancelable operating lease arrangements that expire through October
         2006. Future minimum lease payments under non-cancelable operating
         leases with remaining terms of one year or more at August 31, 2006 were
         as follows:


                                      F-16


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

                           Years Ending                         Operating
                            August 31,                            Leases
                           ------------                       -------------
                              2007                            $     282,961
                              2008                                  287,610
                              2009                                  297,410
                              2010                                  125,650
                              2011                                        -
                                                              -------------
                                                              $     993,631
                                                              =============

         Rent expense was $252,972 and $211,252 for the years ended August 31,
         2006 and 2005, respectively.

         Employee Agreement
         ------------------
         On August 9, 2005, the Company entered into an employment agreement
         with its President/Chief Executive Officer that expires in August 2007.
         The employment agreement provides for an annual salary of $172,000 and
         an annual bonus equal to 5% of the Company's net income before taxes,
         not to exceed $150,000. The agreement also provides that the Company
         may terminate the agreement upon 30 days' written notice if termination
         is without cause. The Company's only obligation would be to pay its
         President the greater of a) 12 months salary or b) the remainder of the
         term of the employment agreement from the date of notice of
         termination.

         License Agreement
         -----------------
         In 1997, the Company entered into an agreement with Therapeutic Systems
         Research Laboratory ("TSRL") to jointly develop a computer simulation
         of the absorption of drug compounds in the gastrointestinal tract. Upon
         execution of a definitive License Agreement on July 9, 1997, TSRL
         received an initial payment of $75,000, and thereafter, the company is
         obligated to pay a royalty of 20% of net sales of GastroPlus software.
         For the years ended August 31, 2006 and 2005, the Company paid
         royalties of $230,000 and $181,951, respectively.

         The Company's subsidiary, Words+, Inc., entered into royalty agreements
         with several vendors to apply their software & technologies into the
         finished goods to be sold. For the years ended August 31, 2006 and
         2005, Words+ incurred such royalties of $41,105 and $114,507,
         respectively.

NOTE 8 - SHAREHOLDERS' EQUITY

         Stock Option Plan
         -----------------
         In September 1996, the Board of Directors adopted and the shareholders
         approved the 1996 Stock Option Plan (the "Option Plan") under which a
         total of 250,000 shares of common stock had been reserved for issuance.
         In March 1999, the shareholders approved an increase in the number of
         shares that may be granted under the Option Plan to 500,000. In
         February 2000, the shareholders approved an increase in the


                                      F-17


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)

         Stock Option Plan (Continued)
         -----------------------------
         number of shares that may be granted under the Option Plan to
         1,000,000. In December 2000, the shareholders approved an increase in
         the number of shares that may be granted under the Option Plan to
         1,250,000. Furthermore, in February 2005, the shareholders approved
         additional 250,000 shares, resulting to the total number of shares that
         may be granted under the Option Plan to 1,500,000. The Option Plan
         terminated in September 2006 by its term. As a result, 407,492 shares
         available for issuance are no longer available.

         On August 18, 2006, the Company accelerated the vesting of stock
         options previously awarded for which the underlying shares are
         registered, excluding 500,000 options for shares of unregistered stock.
         As a result, Options to purchase approximately 520,000 shares of common
         stock was accelerated, representing approximately 25% of all
         outstanding options. The Company's decision for this acceleration was
         to eliminate future compensation expense that the Company would
         otherwise recognize with respect to these options following the
         Company's adoption of SFAS 123(R), Share-Based Payment. The Company
         will adopt FAS No. 123(R) on September 1, 2006, which is the beginning
         of the Company's 2007 fiscal year.

         The following summarizes the stock option transactions (after giving
         effects of the 2-for-1 split):
<TABLE>
<S>     <C>
                                                                                                    Weighted-
                                                                                                    Average
                                                                                                    Exercise
                                                                                    Number           Price
                                                                                  of Options       Per Share
                                                                                -------------    -------------

                  Outstanding, August 31, 2004                                      2,105,432    $       1.09
                           Granted                                                    144,000    $       2.21
                           Exercised                                                 (139,400)   $       1.03
                           Expired/canceled                                           (39,470)   $       1.28
                                                                                -------------

                  Outstanding, August 31, 2005                                      2,070,562    $       1.19

                           Granted                                                    341,000    $       2.11
                           Exercised                                                 (143,800)   $       0.92
                           Expired/canceled                                          (227,690)   $       1.44
                                                                                -------------

                               OUTSTANDING, AUGUST 31, 2006                         2,040,072    $       1.33
                                                                                =============

                               EXERCISABLE, AUGUST 31, 2006                         1,940,072    $       1.31
                                                                                =============
</TABLE>


                                      F-18


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)

         Stock Option Plan (Continued)
         -----------------------------
         The fair value of the options granted during the year ended August 31,
         2006 is estimated at $270,000. The fair value of these options was
         estimated at the date of grant using the Black-Scholes option-pricing
         model with the following weighted-average assumptions for the year
         ended August 31, 2006: dividend yield of 0%, expected volatility of
         11%, risk-free interest rate of 4.46% - 4.88%, and expected life of ten
         years. The weighted-average fair value of options granted during the
         year ended August 31, 2006 was $0.79, and the weighted-average exercise
         price was $2.11.

         The Black-Scholes option valuation model was developed for use in
         estimating the fair value of traded options, which do not have vesting
         restrictions and are fully transferable. In addition, option valuation
         models require the input of highly subjective assumptions, including
         the expected stock price volatility. Because the Company's employee
         stock options have characteristics significantly different from those
         of traded options, and because changes in the subjective input
         assumptions can materially affect the fair value estimate, in
         management's opinion, the existing models do not necessarily provide a
         reliable single measure of the fair value of its employee stock
         options.

         The weighted-average remaining contractual life of options outstanding
         issued under the Plan was 5.2 years at August 31, 2006. The exercise
         prices for the options outstanding at August 31, 2006 ranged from $0.53
         to $2.48, and the information relating to these options is as follows:

<TABLE>
<S>     <C>
                                                                     Weighted-         Weighted-        Weighted-
                                                                      Average           Average          Average
                                                                     Remaining          Exercise         Exercise
                                     Stock             Stock        Contractual          Price            Price
               Exercise             Options           Options      Life of Options     of Options        of Options
                 Price            Outstanding       Exercisable      Outstanding       Outstanding       Exercisable
           ----------------     -------------     --------------   ---------------    -------------      -------------
           $    0.53 - 1.00          795,672           795,672         3.8 years       $     0.73        $     0.73
           $    1.01 - 1.50          670,400           670,400         3.4 years       $     1.33        $     1.33
           $    1.51 - 2.48          574,000           474,000         9.1 years       $     1.63        $     1.62
                                -------------     -------------
                                   2,040,072         1,940,072
                                =============     =============
</TABLE>

         The Company has adopted only the disclosure provisions of SFAS No. 123.
         It applies APB 25 and related interpretations in accounting for its
         plans and does not recognize compensation expense for its stock-based
         compensation plans other than for restricted stock and options issued
         to outside third parties.

         If the Company had elected to recognize compensation expense based upon
         the fair value at the grant date for awards under this plan consistent
         with the methodology prescribed by SFAS No. 123, the Company's net
         income and earnings per share would be reduced to the pro forma amounts
         indicated below for the years ended August 31, 2006 and 2005:


                                      F-19


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)

         Stock Option Plan (Continued)
         -----------------------------

<TABLE>
                                                                                      2006               2005
                                                                                ---------------    ----------------
<S>                                                                             <C>                <C>
                  Net income
                      As reported                                               $       675,875    $        262,318
                      Add: Stock-based employee compensation
                           expense included in reported net income,
                           net of related tax effects                                         -                   -
                      Deduct: Total stock-based employee
                           compensation expense determined under
                           fair value based method for all awards,
                           net of related tax effects                           $      (245,124)   $       (201,096)
                      Pro forma                                                 $       430,751    $         61,222
                  Basic earnings per common share
                      As reported                                               $          0.09    $           0.04
                      Pro forma                                                 $          0.06    $           0.01
                  Diluted earnings per common share
                      As reported                                               $          0.08    $           0.03
                      Pro forma                                                 $          0.05    $           0.01
</TABLE>

         Other Stock Options
         -------------------
         As of August 31, 2006, the Board of Directors holds options to purchase
         22,412 shares of common stock at exercise prices ranging from $0.60 to
         $2.63, which options were granted prior to August 31, 2006.

                                                                Weighted average
                                            Number of Options    exercise price
                                            -----------------    --------------

              Options outstanding                22,412             $ 1.45
              Options exercisable                18,412             $ 1.28


                                      F-20


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 9 - INCOME TAXES

         The components of the income tax provision for the years ended August
         31, 2006 and 2005 were as follows:

                                                     2006             2005
                                                --------------   -------------
                  Current
                      Federal                   $           -    $          -
                      State                            (1,600)         (1,600)
                                                --------------   -------------

                                                       (1,600)         (1,600)
                                                --------------   -------------
                  Deferred
                      Federal                        (151,000)        (74,500)
                      State                           (60,300)         (9,700)
                                                --------------   -------------

                                                     (211,300)        (84,200)
                                                --------------   -------------

                           TOTAL                $    (212,900)   $    (85,800)
                                                ==============   =============


         A reconciliation of the expected income tax (benefit) computed using
         the federal statutory income tax rate to the Company's effective income
         tax rate is as follows for the years ended August 31, 2006 and 2005:

<TABLE>
                                                                                     2006                2005
                                                                                ---------------    ---------------
<S>                                                                                  <C>                 <C>
                  Income tax computed at federal statutory tax rate                  34.0%               34.0%
                  State taxes, net of federal benefit                                 6.0                 6.3
                  Meals & Entertainment                                               0.4                 0.9
                  Extraterritorial income exclusion                                  (9.0)               (7.2)
                  Research and development credit                                    (7.2)              (19.9)
                  Change in prior year estimated taxes                               (1.6)                7.9
                  Other                                                               1.4                 2.6
                                                                                ---------------    ---------------
                      TOTAL                                                          24.0%               24.6%
                                                                                ===============    ===============
</TABLE>


                                      F-21


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 9 - INCOME TAXES (CONTINUED)

         Significant components of the Company's deferred tax assets and
         liabilities for income taxes for the years ended August 31, 2006 and
         2005 are as follows:

<TABLE>
                                                                                      2006               2005
                                                                                ---------------    ----------------
<S>                                                                             <C>                <C>
                  Deferred tax assets
                      Accrued payroll and other expenses                        $       172,100    $        137,200
                      Accrued warranty and service costs                                 14,900              11,900
                      Net operating loss carryforward                                   968,500           1,084,000
                      Tax Credits                                                       624,400             567,800
                      Contributions                                                       7,700               4,100
                      Property and equipment                                                  -                 100
                                                                                ---------------    ----------------

                  Total deferred tax assets                                           1,787,600           1,805,100
                  Less:  Valuation allowance                                                  -                   -
                                                                                ---------------    ----------------

                                                                                      1,787,600           1,805,100
                                                                                ---------------    ----------------

                  Deferred tax liabilities
                      State taxes                                                       (85,700)            (92,100)
                      Property and equipment                                            (12,600)                  -
                      Capitalized computer software development
                           costs                                                       (588,800)           (401,200)
                                                                                ---------------    ----------------

                  Total deferred tax liabilities                                       (687,100)           (493,300)
                                                                                ----------------   -----------------

                  NET DEFERRED TAX ASSETS                                       $     1,100,500    $      1,311,800
                                                                                ===============    ================
</TABLE>

         At August 31, 2006, the Company had federal net operating loss
         carryforwards of approximately $2,673,000.
         Federal net operating loss carry forwards expire through 2024. The
         Company also has a tax credit, totaling approximately $385,000 and
         $240,000 to offset future Federal and State income taxes, respectively.

NOTE 10 - RELATED PARTY TRANSACTIONS

         As of August 31, 2006, included in accrued bonuses to officers was
         $49,377, which represented 5% of the Company's net income before
         bonuses and taxes given to the Company's President, Walter Woltosz, as
         an annual bonus.

         As of August 31, 2006, included in accrued bonuses to officers was
         $49,376, which represented 5% of the Company's net income before
         bonuses and taxes given to the Corporate Secretary, Virginia Woltosz,
         as an annual bonus.


                                      F-22


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 11 - LINES OF BUSINESS

         For internal reporting purposes, management segregates the Company into
         two divisions as follows for the years ended August 31, 2006 and 2005:

<TABLE>
                                                                       August 31, 2006
                                           -------------------------------------------------------------------------
                                             Simulations
                                              Plus, Inc.        Words+, Inc.       Eliminations           Total
                                           ---------------    ---------------    ---------------     ---------------
<S>                                        <C>                <C>                <C>                 <C>
                  Net sales                $    3,186,419     $    2,668,785     $           --      $    5,855,204
                  Income (loss) from
                    operations             $      409,694     $      266,181     $           --      $      675,875
                  Identifiable assets      $    6,443,114     $    1,788,766     $   (1,718,420)     $    6,513,460
                  Capital expenditures     $       39,691     $       27,290     $           --      $       66,981
                  Depreciation and
                    amortization           $       14,450     $       32,624     $           --      $       47,074
                                           -------------------------------------------------------------------------


                                                                       August 31, 2005
                                           -------------------------------------------------------------------------
                                             Simulations
                                              Plus, Inc.        Words+, Inc.       Eliminations           Total
                                           ---------------    ---------------    ---------------     ---------------

                  Net sales                $    2,068,789     $    2,683,852     $           --      $    4,752,641
                  Income (loss) from
                    operations             $       68,152     $      228,276     $           --      $      296,428
                  Identifiable assets      $    5,937,272     $    1,576,215     $   (1,864,428)     $    5,560,859
                  Capital expenditures     $       10,093     $       60,514     $           --      $       70,607
                  Depreciation and
                    amortization           $       12,700     $       29,805     $           --      $       42,505
                                           -------------------------------------------------------------------------
</TABLE>

         Most corporate expenses, such as legal and accounting expenses, public
         relations expenses, and bonuses to President and Secretary are included
         in Simulations Plus, Inc.


                                      F-23


<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                 AUGUST 31, 2006
- --------------------------------------------------------------------------------

NOTE 12 - GEOGRAPHIC REPORTING

         The Company allocates revenues to geographic areas based on the
         locations of its customers. Geographical revenues were as follows for
         the fiscal years ended August 31, 2006 and 2005:

<TABLE>
<S>     <C>
                                                                        August 31, 2006
                                        --------------------------------------------------------------------------------
                                          North                                                  South
         (in `000)                        America        Europe        Asia        Oceania       America       Total
                                        ------------- ------------- ----------- ------------- ------------- ------------

         Simulations Plus, Inc.                1,472           732         982             -             -        3,186

         Words+, Inc.                          2,320           279          43            18             9        2,669
                                        ------------- ------------- ----------- ------------- ------------- ------------

         Total                                 3,792         1,011       1,025            18             9        5,855
                                        ============= ============= =========== ============= ============= ============


                                                                        August 31, 2005
                                        --------------------------------------------------------------------------------
                                          North                                                  South
         (in `000)                        America        Europe        Asia        Oceania       America       Total
                                        ------------- ------------- ----------- ------------- ------------- ------------

         Simulations Plus, Inc.                1,137           456         475             -             -        2,068

         Words+, Inc.                          2,415           196          54            19             -        2,684
                                        ------------- ------------- ----------- ------------- ------------- ------------

         Total                                 3,552           652         529            19             -        4,752
                                        ============= ============= =========== ============= ============= ============
</TABLE>

NOTE 13 - PURCHASE OF BIOREASON'S ASSETS

         On November 4, 2005, we purchased certain secured assets of Bioreason,
         Inc., a technology company, for $826,192. Since the appraised value was
         greater than the actual purchase price, the remaining amount, after
         allocation to the contracts receivable, was allocated proportionally to
         the other assets purchased.

         The purchase price was allocated as it follows.

                          Assets                        Allocated amounts
                          ------                        -----------------
              Long-Term contracts receivable               $   447,496
              Property and equipment                             5,001
              Software                                         245,653
              Customer relationships                           128,042
                                                        -----------------

                   Total                                   $   826,192
                                                        =================

NOTE 14 - EMPLOYEE BENEFIT PLAN

         We maintain a 401(K) Plan for all eligible employees. We make matching
         contributions equal to the 100% of the employee's elective deferral,
         not to exceed 4% of the total employee compensation. We can also elect
         to make a profit-sharing contribution. Contributions by the Company to
         this Plan amounted to $49,000 and $31,000 for the years ended August
         31, 2006 and 2005, respectively.

NOTE 15 - SUBSEQUENT EVENTS

         Since September 1, 2006, an additional 6,000 stock options to purchase
         shares have been exercised by employees.

         On October 30, 2006, the Company entered into equipment lease
         agreement. In this agreement, the Company leases Ricoh Copier/Printer
         for 36 months with the option of earlier termination with a 60-day
         written notice.


                                      F-24

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.43
<SEQUENCE>2
<FILENAME>simulations_10ksb-ex1043.txt
<DESCRIPTION>LEASE AGREEMENT
<TEXT>
<PAGE>

                 [AIR COMMERCIAL REAL ESTATE ASSOCIATION LOGO]

             STANDARD INDUSTRIALICOMMERCIAL MULTI-TENANT LEASE - NET
                     AIR COMMERCIAL REAL ESTATE ASSOCIATION

1. BASIC PROVISIONS ("BASIC PROVISIONS").

         1.1 PARTIES. This Lease ("LEASE"), dated for reference purposes only
MAY 12, 2005 is made by and between FREEWAY VENTURES, LLC ("LESSOR") and
SIMULATIONS PLUS, INC. ("LESSEE"), (collectively the "PARTIES", or individually
a "PARTY ").

         1.2(a) PREMISES: That certain portion of the Project (as defined
below), including all improvements therein or to be provided by Lessor under the
terms of this Lease, commonly known by the street address of 42505 10TH STREET
WEST, located in the City of LANCASTER, County of LOS ANGELES, State of
CALIFORNIA, with zip code 93534, as outlined on Exhibit I attached hereto
("PREMISES") and generally described as (describe briefly the nature of the
Premises): PROFESSIONAL OFFICE AND INCIDENTAL ASSEMBLY OF ELECTRONICS.

In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the any utility raceways of
the building containing the Premises ("Building") and to the common Areas (as
defined in Paragraph 2.7 below), but shall not have any rights to the roof or
exterior walls of the Building or to any other buildings in the Project. The
Premises, the Building, the Common Areas, the land upon which they are located,
along with all other buildings and improvements thereon, are herein collectively
referred to as the "Project." (See also Paragraph 2)

         1.2(b) PARKING. ALL unreserved vehicle parking spaces. (See also
Paragraph 2.6)

         1.3 TERM: FIVE (5) years and -0- months ("Original Term") commencing
SEE ADDENDUM A ("Commencement Date'") and ending 5 YEARS AFTER COMMENCEMENT
("Expiration Date"). (See also Paragraph 3)

         1.4 EARLY POSSESSION: N /A ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)

         1.5 BASE RENT: $18,445.05 per month ("Base Rent"), payable on the FIRST
day of each month commencing SEE ADDENDUM A (See also Paragraph 4)

          |_| If this box is checked, there are provisions in this Lease for the
Base Rent to be adjusted.

          1.6 LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: ONE HUNDRED
 percent (100 %) ("Lessee's Share"). Lessee's Share has been calculated by
 dividing the approximate square footage of the Premises by the approximate
 square footage of the Project. In the event that the size of the Premises
 and/or the Project are modified during the term of this Lease, Lessor shall
 recalculate Lessee's Share to reflect such modification.

         1.7 BASE RENT AND OTHER MONIES PAID UPON EXECUTION:

         (a)      Base Rent: $18,445.05 for the period first month of the lease
         (b)      COMMON AREA OPERATING EXPENSES: $3,532.00 for the period
                  first month of lease
         (c)      Security Deposit: $18,415.05 ("Security Deposit").
                  (See also Paragraph 5)
         (d)      Other: $______ for ______________________
         (e)      TOTAL DUE UPON EXECUTION OF THIS LEASE: $40,442.10

         1.8 AGREED USE: PROFESSIONAL OFFICE AND INCIDENTAL ASSEMBLY OF
ELECTRONICS (See also Paragraph 6)

         1.9 INSURING PARTY. Lessor is the "Insuring Party". (See also Paragraph
8)

         1.10 REAL ESTATE BROKERS: (See also Paragraph 15)

                                  PAGE 1 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

         (a) Representation: The following real estate brokers (the "Brokers")
and brokerage relationships exist in this transaction

(check applicable boxes):

[X] Century 21 Doug Anderson & Assoc., Inc. represents Lessor exclusively
("Lessor's Broker");
[X] Century 21 Doug Anderson & Assoc., Inc. represents Lessee exclusively
("Lessee's Broker"); or
[_] _________________________ represents both Lessor and Lessee ("Dual Agency").

         (b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Brokers the brokerage fee agreed to in a
separate written agreement (or if there is no such agreement, the sum of
Separate Agrmt or ___% of the total Base Rent for the brokerage services
rendered by the Brokers).

         1.11 GUARANTOR: The obligations of the Lessee under this Lease are to
be guaranteed by N/A ("Guarantor"). (See also Paragraph 37)

         1.12 ATTACHMENTS. Attached hereto are the following, all of which
constitute a part of this Lease:

[X] an Addendum consisting of Paragraphs 1 through 6:
[_] a site plan depicting the Premises;
[_] a site plan depicting the Project;
[_] a current set of the Rules and Regulations for the Project;
[_] a current set of the Rules and Regulations adopted by the owners'
association;
[_] a Work Letter;
[X] other (specify); EXHIBIT I - FLOORPLAN AND ARBITRATION AGREEMENT

2. PREMISES.

         2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating Rent, is an approximation which the Parties agree is
reasonable and any payments based thereon are not subject to revision whether or
not the actual size is more or less. NOTE: Lessee is advised to verify the
actual size prior to executing this Lease.

         2.2 CONDITION. Lessor shall deliver that portion of the Premises
contained within the Building ('Unit") to Lessee broom clean and free of debris
on the Commencement Date or the Early Possession Date, whichever first occurs
("Start Date"), and, so long as the required service contracts described in
Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days
following the Start Date, warrants that the existing electrical, plumbing, fire
sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"),
loading doors, sump pumps, if any, and all other such elements in the Unit,
other than those constructed by Lessee, shall be in good operating condition on
said date, that the structural elements of the roof, bearing walls and
foundation of the Unit shall be free of material defects, and that the Unit does
not contain hazardous levels of any mold or fungi defined as toxic under
applicable state or federal law. If a non-compliance with such warranty exists
as of the Start Date, or if one of such systems or elements should malfunction
or fail within the appropriate warranty period, Lessor shall, as Lessor's sole
obligation with respect to such matter, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, malfunction or
failure, rectify same at Lessor's expense. The warranty periods shall be as
follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the
remaining systems and other elements of the Unit. If Lessee does not give Lessor
the required notice within the appropriate warranty period, correction of any
such non-compliance, malfunction or failure shall be the obligation of Lessee at
Lessee's sole cost and expense (except for the repairs to the fire sprinkler
systems, roof, foundations, and/or bearing walls - see Paragraph 7).

         2.3 COMPLIANCE. Lessor warrants that to the best of its knowledge the
improvements on the Premises and the Common Areas comply with the building codes
that were in effect at the time that each such improvement, or portion thereof,
was constructed, and also with all applicable laws, covenants or restrictions of
record, regulations, and ordinances in effect on the Start Date ("Applicable
Requirements"). Said warranty does not apply to the use to which Lessee will put
the Premises, modifications which may be required by the Americans with
Disabilities Act or any similar laws as a result of Lessee's use (see Paragraph
49), or to any Alterations or Utility Installations (as defined in Paragraph
73(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining
whether or not the Applicable Requirements and especially the zoning are
appropriate for Lessee's intended use, and acknowledges that past uses of the
Premises may no longer be allowed. If the Premises do not comply with said
warranty, Lessor shall, except as otherwise provided, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If the Applicable
Requirements are hereafter changed so as to require during the term of this
Lease the construction of an addition to or an alteration of the Unit, Premises

                                  PAGE 2 OF 27

________                                                               ________
INITIALS                                                               INITIALS
<PAGE>

and/or Building, the remediation of any Hazardous Substance, or the
reinforcement or other physical modification of the Unit, Premises and/or
Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of
such work as follows:

                  (a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
Expenditure is required during the last 2 years of this Lease and the cost
thereof exceeds 6 months' Base Rent, Lessee may instead terminate this Lease
unless Lessor notifies Lessee, in writing, within 10 days after receipt of
Lessee's termination notice that Lessor has elected to pay the difference
between the actual cost thereof and the amount equal to 6 months' Base Rent. If
Lessee elects termination, Lessee shall immediately cease the use of the
Premises which requires such Capital Expenditure and deliver to Lessor written
notice specifying a termination date at least 90 days thereafter. Such
termination date shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.

                  (b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall allocate the
obligation to pay for the portion of such costs reasonably attributable to the
Premises pursuant to the formula set out in Paragraph 7.1(d); provided, however,
that if such Capital Expenditure is required during the last 2 years of this
Lease or if Lessor reasonably determines that it is not economically feasible to
pay its share thereof, Lessor shall have the option to terminate this Lease upon
90 days prior written notice to Lessee unless Lessee notifies Lessor, in
writing, within 10 days after receipt of Lessor's termination notice that Lessee
will pay for such Capital Expenditure. If Lessor does not elect to terminate,
and fails to tender its share of any such Capital Expenditure, Lessee may
advance such funds and deduct same, with Interest, from Rent until Lessor's
share of such costs have been fully paid. If Lessee is unable to finance
Lessor's share, or if the balance of the Rent due and payable for the remainder
of this Lease is not sufficient to fully reimburse Lessee on an offset basis,
Lessee shall have the right to terminate this Lease upon 30 days written notice
to Lessor.

                  (c) Notwithstanding the above, the provisions concerning
Capital Expenditures are intended to apply only to non-voluntary, unexpected,
and new Applicable Requirements. If the Capital Expenditures are instead
triggered by Lessee as a result of an actual or proposed change in use, change
in intensity of use, or modification to the Premises then, and in that event,
Lessee shall either: (i) immediately cease such changed use or intensity of use
and/or take such other steps as may be necessary to eliminate the requirement
for such Capital Expenditure, or (ii) complete such Capital Expenditure at its
own expense. Lessee shall not have any right to terminate this Lease.

         2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been advised
by Lessor and/or Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical, HVAC and fire sprinkler
systems, security, environmental aspects, and compliance with Applicable
Requirements and the Americans with Disabilities Act), and their suitability for
Lessee's intended use, (b) Lessee has made such investigation as it deems
necessary with reference to such matters and assumes all responsibility therefor
as the same relate to its occupancy of the Premises, and (c) neither Lessor,
Lessor's agents, nor Brokers have made any oral or written representations or
warranties with respect to said matters other than as set forth in this Lease.
In addition, Lessor acknowledges that (i) Brokers have made no representations,
promises or warranties concerning Lessee's ability to honor the Lease or
suitability to occupy the Premises, and (ii) it is Lessor's sole responsibility
to investigate the financial capability and/or suitability of all proposed
tenants.

         2.5 CROSSED OUT

         2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
parking spaces specified in Paragraph 1.2(b) on those portions of the Common
Areas designated from time to time by Lessor for parking. Lessee shall not use
more parking spaces than said number. Said parking spaces shall be used for
parking by vehicles no larger than full-size passenger automobiles or pick-up
trucks, herein called "Permitted Size Vehicles." Lessor may regulate the loading
and unloading of vehicles by adopting Rules and Regulations as provided in
Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in
the Common Area without the prior written permission of Lessor. In addition:

                  (a) Lessee shall not permit or allow any vehicles that belong
to or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.

                                  PAGE 3 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                  (b) Lessee shall not service or store any vehicles in the
Common Areas. (c) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.

         2.7 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as
all areas and facilities outside the Premises and within the exterior boundary
line of the Project and interior utility raceways and installations within the
Unit that are provided and designated by the Lessor from time to time for the
general non-exclusive use of Lessor, Lessee and other tenants of the Project and
their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, walkways, driveways and landscaped areas.

         2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Project. Under no circumstances shall the
right herein granted to use the Common Areas be deemed to include the right to
store any property, temporarily or permanently, in the Common Areas. Any such
storage shall be permitted only by the prior written consent of Lessor or
Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.

         2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable rules and regulations ("Rules and
Regulations") for the management, safety, care, and cleanliness of the grounds,
the parking and unloading of vehicles and the preservation of good order, as
well as for the convenience of other occupants or tenants of the Building and
the Project and their invitees. Lessee agrees to abide by and conform to all
such Rules and Regulations, and shall use its best efforts to cause its
employees, suppliers, shippers, customers, contractors and invitees to so abide
and conform. Lessor shall not be responsible to Lessee for the non-compliance
with said Rules and Regulations by other tenants of the Project.

         2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:

                  (a) To make reasonable changes to the Common Areas, including,
without limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and unloading
areas, ingress, egress, direction of traffic, landscaped areas, walkways and
utility raceways to the lessee's benefit or advantage:

                  (b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
                  (c) - crossed out
                  (d) - crossed out

                  (e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Project, or any portion thereof; and

                  (f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Project as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.

3. TERM.

         3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.

         3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this Lease
(including but not limited to the obligations to pay Lessee's Share of Common
Area Operating Expenses, Real Property Taxes and insurance premiums and to
maintain the Premises) shall be in effect during such period. Any such early
possession shall not affect the Expiration Date.

         3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease or change the Expiration

                                  PAGE 4 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

Date. Lessee shall not, however, be obligated to pay Rent or perform its other
obligations until Lessor delivers possession of the Premises and any period of
rent abatement that Lessee would otherwise have enjoyed shall run from the date
of the delivery of possession and continue for a period equal to what Lessee
would otherwise have enjoyed, but minus any days of delay caused by the acts or
omissions of Lessee. If possession is not delivered within 60 days after the
Commencement Date, Lessee may, at its option, by notice in writing within 10
days after the end of such 64 day period, cancel this Lease, in which event the
Parties shall be discharged from all obligations hereunder. If such written
notice is not received by Lessor within said 10 day period, Lessee's right to
cancel shall terminate. Except as otherwise provided, if possession is not
tendered to Lessee by the Start Date and Lessee does not terminate this Lease,
as aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms hereof,
but minus any days of delay caused by the acts or omissions of Lessee. If
possession of the Premises is not delivered within 4 months after the
Commencement Date, this Lease shall terminate unless other agreements are
reached between Lessor and Lessee, in writing.

         3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its obligation
to provide evidence of insurance (Paragraph 8.5). Pending delivery of such
evidence, Lessee shall be required to perform all of its obligations under this
Lease from and after the Start Date, including the payment of Rent,
notwithstanding Lessor's election to withhold possession pending receipt of such
evidence of insurance. Further, if Lessee is required to perform any other
conditions prior to or concurrent with the Start Date, the Start Date shall
occur but Lessor may elect to withhold possession until such conditions are
satisfied.

4. RENT.

         4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be rent
("Rent").

         4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:

                  (a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes
of this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the BXIOV[ g Project, including, but not limited to, the following:

                           (i)      The operation, repair and maintenance, in
                                    neat, clean, good order and condition , and
                                    if necessary the replacement, of the
                                    following:

                                    (aa) The Common Areas and Common Area
                                    improvements, including parking areas,
                                    loading and unloading areas, trash areas,
                                    roadways, parkways, walkways, driveways,
                                    landscaped areas, bumpers, irrigation
                                    systems, Common Area lighting facilities,
                                    fences and gates, elevators, roofs, and roof
                                    drainage systems.

                                    (bb) Exterior signs and any tenant
                                    directories.

                                    (cc) Any fire sprinkler systems.

                           (ii)     The cost of water, gas, electricity and
                                    telephone to service the Common Areas and
                                    any utilities not separately metered.

                           (iii)    Trash disposal, pest control services,
                                    property management, security services,
                                    owners' association dues and fees, the cost
                                    to repaint the exterior of any structures
                                    and the cost of any environmental
                                    inspections.

                            (iv)   crossed out

                           (v)      Real Property Taxes (as defined in Paragraph
                                    10).

                           (vi)     The cost of the premiums for the insurance
                                    maintained by Lessor pursuant to Paragraph
                                    8.

                                  PAGE 5 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                           (vii)    Any deductible portion of an insured loss
                                    concerning the Building or the Common Areas.

                           (viii)   Reasonable Auditors', accountants' and
                                    attorneys' fees and costs related to the
                                    operation, maintenance, repair and
                                    replacement of the Project.

                           (ix)     The cost of any reasonable capital
                                    improvement to the Building or the Project
                                    not covered under the provisions of
                                    Paragraph 2.3 provided; however, that Lessor
                                    shall allocate the cost of any such capital
                                    improvement over a 12 year period and Lessee
                                    shall not be required to pay more than
                                    Lessee's Share of 1/144th of the cost of
                                    such capital improvement in any given month.

                           (x)      Any other services to be provided by Lessor
                                    that are stated elsewhere in this Lease to
                                    be a Common Area Operating Expense.

                  (b) Any Common Area Operating Expenses and Real Property Taxes
that are specifically attributable to the Unit, the Building or to any other
building in the Project or to the operation, repair and maintenance thereof,
shall be allocated entirely to such Unit, Building, or other building. However,
any Common Area Operating Expenses and Real Property Taxes that are not
specifically attributable to the Building or to any other building or to the
operation, repair and maintenance thereof, shall be equitably allocated by
Lessor to all buildings in the Project.

                  (c) The inclusion of the improvements, facilities and services
set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation
upon Lessor to either have said improvements or facilities or to provide those
services unless the Project already has the same, Lessor already provides the
services, or Lessor has agreed elsewhere in this tease to provide the same or
some of them.

                  (d) Lessee's Share of Common Area Operating Expenses is
payable monthly on the same day as the Base Rent is due hereunder. The amount of
such payments shall be based on Lessor's estimate of the annual Common Area
Operating Expenses. Within 60 days after written request (but not more than once
each year) Lessor shall deliver to Lessee a reasonably detailed statement
showing Lessee's Share of the actual Common Area Operating Expenses incurred
during the preceding year. If Lessee's payments during such year exceed Lessee's
Share, Lessor shall credit the amount of such over-payment against Lessee's
future payments. If Lessee's payments during such year were less than Lessee's
Share, Lessee shall pay to Lessor the amount of the deficiency within 10 days
after delivery by Lessor to Lessee of the statement.

                  (e) Common Area Operating Expenses shall not include any
expenses paid by any tenant directly to third parties, or as to which Lessor is
otherwise reimbursed by any third party, other tenant, or insurance proceeds.

         4.3 PAYMENT Lessee shall cause payment of Rent to be received by Lessor
in lawful money of the United States, without offset or deduction (except as
specifically permitted in this Lease), on or before the day on which it is due.
All monetary amounts shall be rounded to the nearest whole dollar. In the event
that any invoice prepared by Lessor is inaccurate such inaccuracy shall not
constitute a waiver and Lessee shall be obligated to pay the amount set forth in
this Lease. Rent for any period during the term hereof which is for less than
one full calendar month shall be prorated based upon the actual number of days
of said month. Payment of Rent shall be made to Lessor at its address stated
herein or to such other persons or place as Lessor may from time to time
designate in writing. Acceptance of a payment which is less than the amount then
due shall not be a waiver of Lessor's rights to the balance of such Rent,
regardless of Lessor's endorsement of any check so stating. In the event that
any check, draft, or other instrument of payment given by Lessee to Lessor is
dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in
addition to any Late Charge and Lessor, at its option, may require all future
Rent be paid by cashier's check. Payments will be applied first to accrued late
charges and attorney's fees, second to accrued interest, then to Base Rent and
Common Area Operating Expenses, and any remaining amount to any other
outstanding charges or costs.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
Security Deposit as security for Lessee's faithful performance of its
obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults
under this Lease, Lessor may use, apply or retain all or any portion of said
Security Deposit for the payment of any amount due Lessor or to reimburse or
compensate Lessor for any liability, expense, loss or damage which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of the Security Deposit, Lessee shall within 10 days after written request
therefor deposit monies with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. If the Base Rent increases during the

                                  PAGE 6 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor so that the total amount of the Security Deposit
shall at all times bear the same proportion to the increased Base Rent as the
initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be
amended to accommodate a material change in the business of Lessee or to
accommodate a sublessee or assignee, Lessor shall have the right to increase the
Security Deposit to the extent necessary, in Lessor's reasonable judgment, to
account for any increased wear and tear that the Premises may suffer as a result
thereof. If a change in control of Lessee occurs during this Lease and following
such change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on such change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within 14 days after the expiration or termination of this
Lease, Y Lessor elects to apply the Security Deposit only to unpaid Rent, and
otherwise within 30 days after the Premises have been vacated pursuant to
Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit
not used or applied by Lessor. No part of the Security Deposit shall be
considered to be held in trust, to bear interest or to be prepayment for any
monies to be paid by Lessee under this Lease.

6. USE.

         6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of the Premises in a
manner that is unlawful, creates damage, waste or a nuisance, or that disturbs
occupants of or causes damage to neighboring premises or properties. Other than
guide, signal and seeing eye dogs, Lessee shall not keep or allow in the
Premises any pets, animals, birds, fish (except that fish in a container of one
gallon or less will be allowed), or reptiles. Lessor shall not unreasonably
withhold or delay its consent to any written request for a modification of the
Agreed Use, so long as the same will not impair the structural integrity of the
Building or the mechanical or electrical systems therein, and/or is not
significantly more burdensome to the Project. If Lessor elects to withhold
consent, Lessor shall within 7 days after such request give written notification
of same, which notice shall include an explanation of Lessor's objections to the
change in the Agreed Use.

6.2 HAZARDOUS SUBSTANCES.

                  (a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release, either
by itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee's expense) with all
Applicable Requirements. "Reportable Use" shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, ordinary office
supplies (copier toner, liquid paper, glue, etc.) and common household cleaning
materials, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose
Lessor to any liability therefor. In addition, Lessor may condition its consent
to any Reportable Use upon receiving such additional assurances as Lessor
reasonably deems necessary to protect itself, the public, the Premises and/or
the environment against damage, contamination, injury and/or liability,
including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete
encasements) and/or increasing the Security Deposit.

                  (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and provide
Lessor with a copy of any report, notice, claim or other documentation which it
has concerning the presence of such Hazardous Substance.

                                  PAGE 7 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                  (c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, comply with all Applicable Requirements and take
all investigatory and/or remedial action reasonably recommended, whether or not
formally ordered or required, for the cleanup of any contamination of, and for
the maintenance, security and/or monitoring of the Premises or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance brought onto the Premises
during the term of this Lease, by or for Lessee, or any third party.

                  (d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Lessee, (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from areas outside of the Project not caused or contributed
to by Lessee). Lessee's obligations shall include, but not be limited to, the
effects of any contamination or injury to person, property or the environment
created or suffered by Lessee, and the cost of investigation, removal,
remediation, restoration and/or abatement, and shall survive the expiration or
termination of this Lease. No termination, cancellation or release agreement
entered into by Lessor and Lessee shall release Lessee from its obligations
under this Lease with respect to Hazardous Substances, unless specifically so
agreed by Lessor in writing at the time of such agreement.

                  (e) LESSOR INDEMNIFICATION. Lessor and its successors and
assigns shall indemnify, defend, reimburse and hold Lessee, its employees and
lenders, harmless from and against any and all environmental damages, including
the cost of remediation, which are suffered as a direct result of Hazardous
Substances on the Premises prior to Lessee taking possession or which are caused
by the gross negligence or willful misconduct of Lessor, its agents or
employees. Lessor's obligations, as and when required by the Applicable
Requirements, shall include, but not be limited to, the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease.

                  (f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence of
Hazardous Substances on the Premises prior to the Lessee taking possession,
unless such remediation measure is required as a result of Lessee's use
(including "Alterations", as defined in paragraph 7.3(a) below) of the Premises,
in which event Lessee shall be responsible for such payment. Lessee shall
cooperate fully in any such activities at the request of Lessor, including
allowing Lessor and Lessor's agents to have reasonable access to the Premises at
reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.

                  (g) LESSOR TERMINATION OPTION. If a Hazardous Substance
Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless
Lessee is legally responsible therefor (in which case Lessee shall make the
investigation and remediation thereof required by the Applicable Requirements
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option,
either (i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to remediate such condition exceeds 12 times the then monthly Base Rent or
$100,000, whichever is greater, give written notice to Lessee, within 30 days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition, of Lessor's desire to terminate this Lease as of the date
60 days following the date of such notice. In the event Lessor elects to give a
termination notice, Lessee may, within 10 days thereafter, give written notice
to Lessor of Lessee's commitment to pay the amount by which the cost of the
remediation of such Hazardous Substance Condition exceeds an amount equal to 12
times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall
provide Lessor with said funds or satisfactory assurance thereof within 30 days
following such commitment. In such event, this Lease shall continue in full
force and effect, and Lessor shall proceed to make such remediation as soon as
reasonably possible after the required funds are available. If Lessee does not
give such notice and provide the required funds or assurance thereof within the
time provided, this Lease shall terminate as of the date specified in Lessor's
notice of termination.

         6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully,
diligently and in a timely manner, materially comply with all Applicable
Requirements, the requirements of any applicable fire insurance underwriter or
rating bureau, and the recommendations of Lessor's engineers and/or consultants
which relate in any manner to such Requirements, without regard to whether said
Requirements are now in effect or become effective after the Start Date. Lessee
shall, within 1D days after receipt of Lessor's written request, provide Lessor

                                  PAGE 8 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

with copies of all permits and other documents, and other information evidencing
Lessee's compliance with any Applicable Requirements specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving the failure of Lessee or
the Premises to comply with any Applicable Requirements. Likewise, Lessee shall
immediately give written notice to Lessor of: (i) any water damage to the
Premises and any suspected seepage, pooling, dampness or other condition
conducive to the production of mold; or (ii) any mustiness or other odors that
might indicate the presence of mold in the Premises.

         6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined in
Paragraph 30) and consultants shall have the right to enter into Premises at any
time, in the case of an emergency, and otherwise at reasonable times after
reasonable notice, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease. The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a Hazardous Substance condition (see Paragraph 9.1) is found to
exist or be imminent, or the inspection is requested or ordered by a
governmental authority. In such case, Lessee shall upon request reimburse Lessor
for the cost of such inspection, so long as such inspection is reasonably
related to the a violation or contamination. In addition, Lessee shall provide
copies of all relevant material safety data sheets (MSDS) to Lessor within 10
days of the receipt of written request therefor.

7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.

         7.1 LESSEE'S OBLIGATIONS.

                  (a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations (intended for Lessee's exclusive use, no matter where
located), and Alterations in good order, condition and repair (whether or not
the portion of the Premises requiring repairs, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including, but not limited
to, all equipment or facilities, such as plumbing, HVAC equipment, electrical,
lighting facilities, boilers, pressure vessels, fixtures, interior walls,
interior surfaces of exterior walls, ceilings, floors, windows, doors, plate
glass, and skylights but excluding any items which are the responsibility of
Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices,
specifically including the procurement and maintenance of the service contracts
required by Paragraph 7.1(b) below. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair.

                  (b) SERVICE CONTRACTS. Lessee shall be responsible for the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler and pressure vessels,
(iii) clarifiers, and (iv) any other equipment, if reasonably required by
Lessor. However, Lessor reserves the right if such units are not being properly
maintained, upon notice to Lessee, to procure and maintain any or all of such
service contracts, and Lessee shall reimburse Lessor, upon demand, for the cost
thereof.

                  (c) FAILURE TO PERFORM. If Lessee fails to perform Lessee's
obligations under this Paragraph 7.1, Lessor may enter upon the Premises after
10 days' prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee's
behalf, and put the Premises in good order, condition and repair, and Lessee
shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

                  (d) REPLACEMENT. Subject to Lessee's indemnification of Lessor
as set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee's failure to exercise and perform good maintenance
practices, if an item described in Paragraph 7.1(b) cannot be repaired other
than at a cost which is in excess of 50% of the cost of replacing such item,
then such item shall be replaced by Lessor, and the cost thereof shall be
prorated between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease, on the date on which Base
Rent is due, an amount equal to the product of multiplying the cost of such
replacement by a fraction, the numerator of which is one, and the denominator of
which is 144 (i.e. 1/144th of the cost per month). Lessee shall pay Interest of
prime plus 2 percent on the unamortized balance but may prepay its obligation at
any time.

          7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance), 4.2 (Common Area Operating Expenses), 6 (Use),
7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation),
Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good

                                  PAGE 9 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

order, condition and repair the foundations, exterior walls, structural
condition of interior bearing walls, exterior roof, fire sprinkler system,
Common Area fire alarm and/or smoke detection systems, fire hydrants, parking
lots, walkways, parkways, driveways, landscaping, fences, signs and utility
systems serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease.

         7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.

                  (a) DEFINITIONS. The term "Utility Installations" refers to
all floor and window coverings, air and/or vacuum lines, power panels,
electrical distribution, security and fire protection systems, communication
cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the
Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment
that can be removed without doing material damage to the Premises. The term
"Alterations" shall mean any modification of the improvements, other than
Utility Installations or Trade Fixtures, whether by addition or deletion.
"Lessee Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a).

                  (b) CONSENT. Lessee shall not make any Alterations or Utility
Installations to the Premises without Lessor's prior written consent. Lessee
may, however, make non-structural Utility Installations to the interior of the
Premises (excluding the roof) without such consent but upon notice to Lessor, as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, will not affect the
electrical, plumbing, HVAC, and/or life safety systems, and the cumulative cost
thereof during this Lease as extended does not exceed a sum equal to 3 month's
Base Rent in the aggregate or a sum equal to one month's Base Rent in any one
year. Notwithstanding the foregoing, Lessee shall not make or permit any roof
penetrations and/or install anything on the roof without the prior written
approval of Lessor. Lessor may, as a precondition to granting such approval,
require Lessee to utilize a contractor chosen and/or approved by Lessor. Any
Alterations or Utility Installations that Lessee shall desire to make and which
require the consent of the Lessor shall be presented to Lessor in written form
with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i)
acquiring all applicable governmental permits, (ii) furnishing Lessor with
copies of both the permits and the plans and specifications prior to
commencement of the work, and (iii) compliance with all conditions of said
permits and other Applicable Requirements In a prompt and expeditious manner.
Any Alterations or Utility Installations shall be performed in a workmanlike
manner with good and sufficient materials. Lessee shall promptly upon completion
furnish Lessor with as-built plans and specifications. For work which costs an
amount in excess of one month's Base Rent, Lessor may condition its consent upon
Lessee providing a lien and completion bond in an amount equal to 150% of the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security Deposit with Lessor.

                  (c) LIENS; BONDS. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialman's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than 10 days notice prior to the commencement
of any work in, an or about the Premises, and Lessor shall have the right to
post notices of non-responsibility. If Lessee shall contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond
in an amount equal to 150% of the amount of such contested lien, claim or
demand, indemnifying Lessor against liability for the same.

         7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.

                  (a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.

                  (b) REMOVAL. By delivery to Lessee of written notice from
Lessor not earlier than 90 and not later than 30 days prior to the end of the
term of this Lease, Lessor may require that any or all Lessee Owned Alterations
or Utility Installations be removed by the expiration or termination of this
Lease. Lessor may require the removal at any time of all or any part of any
Lessee Owned Alterations or Utility Installations made without the required
consent.

                                 PAGE 10 OF 27

________                                                               ________
INITIALS                                                               INITIALS
<PAGE>

                  (c) SURRENDER; RESTORATION. Lessee shall surrender the
Premises by the Expiration Date or any earlier termination date, with all of the
improvements, parts and surfaces thereof broom clean and free of debris, and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice. Notwithstanding the
foregoing, if this Lease is for 12 months or less, then Lessee shall surrender
the Premises in the same condition as delivered to Lessee on the Start Date with
NO allowance for ordinary wear and tear. Lessee shall repair any damage
occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee
owned Alterations and/or Utility Installations, furnishings, and equipment as
well as the removal of any storage tank installed by or for Lessee. Lessee shall
also completely remove from the Premises any and all Hazardous Substances
brought onto the Premises by or for Lessee, or any third party (except Hazardous
Substances which were deposited via underground migration from areas outside of
the Project) even if such removal would require Lessee to perform or pay for
work that exceeds statutory requirements. Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee. Any personal property of
Lessee not removed on or before the Expiration Date or any earlier termination
date shall be deemed to have been abandoned by Lessee and may be disposed of or
retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.

8. INSURANCE; INDEMNITY.

         8.1 PAYMENT OF PREMIUMS. The reasonable cost of the premiums for the
insurance policies required to be carried by Lessor, pursuant to Paragraphs
8.2(b), 8.3(a) and 8.3(b), shall be a Common Area Operating Expense. Premiums
for policy periods commencing prior to, or extending beyond, the term of this
Lease shall be prorated to coincide with the corresponding Start Date or
Expiration Date.

         8.2 LIABILITY INSURANCE.

                  (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability policy of insurance protecting Lessee and Lessor as
an additional insured against claims for bodily injury, personal injury and
property damage based upon or arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be on an occurrence basis providing single limit coverage in an amount not
less than $1,000,000 per occurrence with an annual aggregate of not less than
$2,000,000. Lessee shall add Lessor as an additional insured by means of an
endorsement at least as broad as the Insurance Service Organization's
"Additional Insured-Managers or Lessors of Premises" Endorsement and coverage
shall also be extended to include damage caused by heat, smoke or fumes from a
hostile fire. The policy shall not contain any intra-insured exclusions as
between insured persons or organizations, but shall include coverage for
liability assumed under this Lease as an "Insured contract" for the performance
of Lessee's indemnity obligations under this Lease. The limits of said insurance
shall not, however, limit the liability of Lessee nor relieve Lessee of any
obligation hereunder. Lessee shall provide an endorsement on its liability
policy(ies) which provides that its insurance shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.

                  (b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of,
the insurance required to be maintained by Lessee. Lessee shall not be named as
an additional insured therein.

         8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.

                  (a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force a policy or policies of insurance in the name of Lessor, with loss payable
to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full insurable
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by any Lender, but in no event more than the commercially
reasonable and available insurable value thereof. Lessee Owned Alterations and
Utility Installations, Trade Fixtures, and Lessee's personal property shall be
insured by Lessee under Paragraph 8.4. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for debris removal and the
enforcement of any Applicable Requirements requiring the upgrading, demolition,
reconstruction or replacement of any portion of the Premises as the result of a
covered loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence.

                                 PAGE 11 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                  (b) RENTAL VALUE. Lessor shall also obtain and keep in force a
policy or policies in the name of Lessor with loss payable to Lessor and any
Lender, insuring the loss of the full Rent for one year with an extended period
of indemnity for an additional 180 days ("Rental Value insurance"). Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent otherwise payable by Lessee, for the next 12 month period.

                  (c) ADJACENT PREMISES. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Project if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.

                  (d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this tease.

         8.4 LESSEE'S PROPERTY; BUSINESS INTERRUPTION INSURANCE.

                  (a) PROPERTY DAMAGE. Lessee shall obtain and maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property, Trade Fixtures and Lessee Owned Alterations
and Utility Installations. Lessee shall provide Lessor with written evidence
that such insurance is in force.

                  (b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse Lessee
for direct or indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.

                  (c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.

         8.5 INSURANCE POLICIES. Insurance required herein shall be by companies
duly licensed or admitted to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least A-, Vi, as set forth in the most current issue of "Best's
Insurance Guide", or such other rating as may be required by a Lender. Lessee
shall not do or permit to be done anything which invalidates the required
insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor
certified copies of policies of such insurance or certificates evidencing the
existence and amounts of the required insurance. No such policy shall be
cancelable or subject to modification except after 30 days prior written notice
to Lessor. Lessee shall, at least 10 days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand. Such policies shall be for a term of at least one year, or the length of
the remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.

         8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages against the other, for loss of or damage
to its property arising out of or incident to the perils required to be insured
against herein. The effect of such releases and waivers is not limited by the
amount of insurance carried or required, or by any deductibles applicable
hereto. The Parties agree to have their respective property damage insurance
carriers waive any right to subrogation that such companies may have against
Lessor or Lessee, as the case may be, so long as the insurance is not
invalidated thereby.

         8.7 INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with, the use and/or
occupancy of the Premises by Lessee. If any action or proceeding is brought
against Lessor by reason of any of the foregoing matters, Lessee shall upon
notice defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be defended or indemnified.

         8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other

                                 PAGE 12 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or ra4n, indoor air quality,
the presence of mold or from the breakage, leakage, obstruction or other defects
of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting
fixtures, or from any other cause, whether the said injury or damage results
from conditions arising upon the Premises or upon other portions of the
Building, or from other sources or places. Lessor shall not be liable for any
damages arising from any act or neglect of any other tenant of Lessor nor from
the failure of Lessor to enforce the provisions of any other lease in the
Project. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom.

         8.9 FAILURE TO PROVIDE INSURANCE. Lessee acknowledges that any failure
on its part to obtain or maintain the insurance required herein will expose
Lessor to risks and potentially cause Lessor to incur costs not contemplated by
this Lease, the extent of which will be extremely difficult to ascertain.
Accordingly, for any month or portion thereof that Lessee does not maintain the
required insurance and/or does not provide Lessor with the required binders or
certificates evidencing the existence of the required insurance (certificate of
insurance must be supplied to Lessor within 30 days of a written request from
Lessor), the Base Rent shall be automatically increased, without any requirement
for notice to Lessee, by an amount equal to 10% of the then existing Base Rent
or $100, whichever is greater. The parties agree that such increase in Base Rent
represents fair and reasonable compensation for the additional risk/costs that
Lessor will incur by reason of Lessee's failure to maintain the required
insurance. Such increase in Base Rent shall in no event constitute a waiver of
Lessee's Default or Breach with respect to the failure to maintain such
insurance, prevent the exercise of any of the other rights and remedies granted
hereunder, nor relieve Lessee of its obligation to maintain the insurance
specified in this Lease.

9. DAMAGE OR DESTRUCTION.

         9.1 DEFINITIONS.

                  (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction
to the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in 3 months or less from
the date of the damage or destruction, and the cost thereof does not exceed a
sum equal to 6 month's Base Rent. Lessor shall notify Lessee in writing within
30 days from the date of the damage or destruction as to whether or not the
damage is Partial or Total. Notwithstanding the foregoing, Premises Partial
Damage shall not include damage to windows, doors, and/or other similar items
which Lessee has the responsibility to repair or replace pursuant to the
provisions of Paragraph 7.1.

                  (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations and Trade Fixtures, which cannot
reasonably be repaired in 3 months or less from the date of the damage or
destruction and/or the cost thereof exceeds a sum equal to 6 month's Base Rent.
Lessor shall notify Lessee in writing within 30 days from the date of the damage
or destruction as to whether or not the damage is Partial or Total.

                  (c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.

                  (d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements, and
without deduction for depreciation.

                  (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises which requires repair, remediation, or restoration.

         9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect: Notwithstanding the foregoing, if the required insurance
was not in force or the insurance proceeds are not sufficient to effect such
repair, the Insuring Party shall promptly contribute the shortage in proceeds as
and when required to complete said repairs. In the event, however, such shortage
was due to the fact that, by reason of the unique nature of the improvements,
full replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,

                                 PAGE 13 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

within 10 days following receipt of written notice of such shortage and request
therefor. If Lessor receives said funds or adequate assurance thereof within
said 10 day period, the party responsible for making the repairs shall complete
them as soon as reasonably possible and this Lease shall remain in full force
and effect. If such funds or assurance are not received, Lessor may nevertheless
elect by written notice to Lessee within 10 days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall +let
be entitled to reimbursement of any funds contributed by Lessee to repair any
such damage or destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.3, notwithstanding that there may be some
insurance coverage, but the net proceeds of any such insurance shall be made
available for the repairs if made by either Party.

         9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense),
Lessor may either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) terminate this Lease by giving written notice to Lessee within
30 days after receipt by Lessor of knowledge of the occurrence of such damage.
Such termination shall be effective 60 days following the date of such notice.
In the event Lessor elects to terminate this Lease, Lessee shall have the right
within 10 days after receipt of the termination notice to give written notice to
Lessor of Lessee's commitment to pay for the repair of such damage without
reimbursement from Lessor. Lessee shall provide Lessor with said funds or
satisfactory assurance thereof within 30 days after making such commitment. In
such event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible after the required
funds are available. If Lessee does not make the required commitment, this Lease
shall terminate as of the date specified in the termination notice.

         9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs, this Lease shall terminate 60 days following
such Destruction. If the damage or destruction was caused by the gross
negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.

          9.5 DAMAGE NEAR END OF TERM. If at any time during the last 6 months
of this Lease there is damage for which the cost to repair exceeds one month's
Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease
effective 60 days following the date of occurrence of such damage by giving a
written termination notice to Lessee within 30 days after the date of occurrence
of such damage. Notwithstanding the foregoing, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then Lessee
may preserve this Lease by, (a) exercising such option and (b) providing Lessor
with any shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is 10 days
after Lessee's receipt of Lessor's written notice purporting to terminate this
Lease, or (ii) the day prior to the date upon which such option expires. If
Lessee duly exercises such option during such period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such
damage as soon as reasonably possible and this Lease shall continue in full
force and effect. If Lessee fails to exercise such option and provide such funds
or assurance during such period, then this Lease shall terminate on the date
specified in the termination notice and Lessee's option shall be extinguished.

         9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.

                  (a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which Lessee
is not responsible under this Lease, the Rent payable by Lessee for the period
required for the repair, remediation or restoration of such damage shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired, but not to exceed the proceeds received from the Rental Value
insurance. All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.

                  (b) REMEDIES. If Lessor shall be obligated to repair or
restore the Premises and does not commence, in a substantial and meaningful way,
such repair or restoration within 90 days after such obligation shall accrue,
Lessee may, at any time prior to the commencement of such repair or restoration,
give written notice to Lessor and to any Lenders of which Lessee has actual
notice, of Lessee's election to terminate this Lease on a date not less than 60
days following the giving of such notice. If Lessee gives such notice and such
repair or restoration is not commenced within 30 days thereafter, this Lease
shall terminate as of the date specified in said notice. If the repair or
restoration is commenced within such 30 days, this Lease shall continue in full
force and effect. "Commence" shall mean either the unconditional authorization
of the preparation of the required plans, or the beginning of the actual work on
the Premises, whichever first occurs. Not withstanding, Lessee shall have no
obligation to pay rent for any portion of the space that is not useable for
Lessee's business operation for any actual time for which the space is not so
useable.

                                 PAGE 14 OF 27

________                                                               ________
INITIALS                                                               INITIALS
<PAGE>

         9.7 TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be
made concerning advance Base Rent and any other advance payments made by Lessee
to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor.

         9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.

10. REAL PROPERTY TAXES.

         10.1 DEFINITION. As used herein, the terns "Real Property Taxes" small
include any form of assessment; real estate, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance, personal income or
estate taxes); improvement bond; and/or license fee imposed upon or levied
against any legal or equitable interest of Lessor in the Project, Lessor's right
to other income therefrom, and/or Lessor's business of leasing, by any authority
having the direct or indirect power to tax and where the funds are generated
with reference to the Project address and where the proceeds so generated are to
be applied by the city, county or other local taxing authority of a jurisdiction
within which the Project is located. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein: (i)
imposed by reason of events occurring during the term of this Lease, including
but not limited to, a change in the ownership of the Project, (ii) a change in
the improvements thereon, and/or (iii) levied or assessed on machinery or
equipment provided by Lessor to Lessee pursuant to this Lease. In calculating
Real Property Taxes for any calendar year, the Real Property Taxes for any real
estate tax year shall be included in the calculation of Real Property Taxes for
such calendar year based upon the number of days which such calendar year and
tax year have in common. However, if the building is sold to an unrelated third
party and the building is thereby reassessed causing an increase in property
taxes, Lessee shall be responsible for no more than 25% above their portion of
property taxes prior to said sale.

         10.2 PAYMENT OF TAXES. Except as otherwise provided in Paragraph 10.3,
Lessor shall pay the Real Property Taxes applicable to the Project, and said
payments shall be included in the calculation of Common Area Operating Expenses
in accordance with the provisions of Paragraph 4.2.

         10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Project by
other lessees or by Lessor for the exclusive enjoyment of such other lessees.
Notwithstanding Paragraph 10.2 hereof, Lessee shall, however, pay to Lessor at
the time Common Area Operating Expenses are payable under Paragraph 4.2, the
entirety of any increase in Real Property Taxes if assessed solely by reason of
Alterations, Trade Fixtures or Utility Installations placed upon the Premises by
Lessee or at Lessee's request or by reason of any alterations or improvements to
the Premises made by Lessor subsequent to the execution of this Lease by the
Parties.

         10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.

         10.5 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises. When possible, Lessee shall cause its
Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings,
equipment and all other personal property to be assessed and billed separately
from the real property of Lessor. If any of Lessee's said property shall be
assessed with Lessor's real property, Lessee shall pay Lessor the taxes
attributable to Lessee's property within 10 days after receipt of a written
statement setting forth the taxes applicable to Lessee's property.

11. UTILITIES AND SERVICES. Lessee shall pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. Notwithstanding the provisions of
Paragraph 4.2, if at any time in Lessor's sole judgment, Lessor determines that
Lessee is using a disproportionate amount of water, electricity or other
commonly metered utilities, or that Lessee is generating such a large volume of
trash as to require an increase in the size of the trash receptacle and/or an
increase in the number of times per month that it is emptied, then Lessor may
increase Lessee's Base Rent by an amount equal to such increased costs. There
shall be no abatement of Rent and Lessor shall not be liable in any respect
whatsoever for the inadequacy, stoppage, interruption or discontinuance of any
utility or service due to riot, strike, labor dispute, breakdown, accident,
repair or other cause beyond Lessor's reasonable control or in cooperation with
governmental request or directions.

                                 PAGE 15 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

12. ASSIGNMENT AND SUBLETTING.

         12.1 LESSOR'S CONSENT REQUIRED.

                  (a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or encumber (collectively, "assign or assignment") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent.

                  (b) Unless Lessee is a corporation and its stock is publicly
traded on a national stock exchange, a change in the control of Lessee shall
constitute an assignment requiring consent. The transfer, on a cumulative basis,
of 25% or more of the voting control of Lessee shall constitute a change in
control for this purpose.

                  (c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee by an amount
greater than 25% of such Net Worth as it was represented at the time of the
execution of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, whichever was or is greater, shall be
considered an assignment of this Lease to which Lessor may withhold its consent.
"Net Worth of Lessee" shall mean the net worth of Lessee (excluding any
guarantors) established under generally accepted accounting principles.

                  (d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a noncurable
Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days
written notice, increase the monthly Base Rent to 110% of the Base Rent then in
effect. Further, in the event of such Breach and rental adjustment, (1) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to 110% of the price previously in effect, and
(ii) all fixed and non-fixed rental adjustments scheduled during the remainder
of the Lease term shall be increased to 110% of the scheduled adjusted rent.

                  (e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.

                  (f) Lessor may reasonably withhold consent to a proposed
assignment or subletting if Lessee is in Default at the time consent is
requested.

                  (g) Notwithstanding the foregoing, allowing a diminimus
portion of the Premises, le. 20 square feet or less, to be used by a third party
vendor in connection with the installation of a vending machine or payphone
shall not constitute a subletting.

12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

                  (a) Regardless of Lessor's consent, no assignment or
subletting shall: (1) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any other
obligations to be performed by Lessee.

                  (b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of Rent or performance shall constitute a waiver or estoppel
of Lessor's right to exercise its remedies for Lessee's Default or Breach.

                  (c) Lessor's consent to any assignment or subletting shall not
constitute consent to any subsequent assignment or subletting.

                  (d) In the event of any Default or Breach by Lessee, Lessor
may proceed directly against Lessee, any Guarantors or anyone else responsible
for the performance of Lessee's obligations under this Lease, including any
assignee or sublessee, without first exhausting Lessor's remedies against any
other person or entity responsible therefore to Lessor, or any security held by
Lessor.

                  (e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a fee of $500 as consideration for Lessor's considering and
processing said request. Lessee agrees to provide Lessor with such other or
additional information and/or documentation as may be reasonably requested. (See
also Paragraph 36)

                                 PAGE 16 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                  (f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment, entering into such sublease, or entering
into possession of the Premises or any portion thereof, be deemed to have
assumed and agreed to conform and comply with each and every term, covenant,
condition and obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as are contrary
to or inconsistent with provisions of an assignment or sublease to which Lessor
has specifically consented to in writing.

                  (g) Lessor's consent to any assignment or subletting shall not
transfer to the assignee or sublessee any Option granted to the original Lessee
by this Lease unless such transfer is specifically consented to by Lessor in
writing. (See Paragraph 39.2)

         12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

                  (a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease; provided,
however, that until a Breach shall occur in the performance of Lessee's
obligations, Lessee may collect said Rent. In the event that the amount
collected by Lessor exceeds Lessee's then outstanding obligations any such
excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing
or any assignment of such sublease, nor by reason of the collection of Rent, be
deemed liable to the sublessee for any failure of Lessee to perform and comply
with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor all Rent due and to become due under the
sublease. Sublessee shall rely upon any such notice from Lessor and shall pay
all Rents to Lessor without any obligation or right to inquire as to whether
such Breach exists, notwithstanding any claim from Lessee to the contrary.

                  (b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.

                  (c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.

                  (d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.

                  (e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.

13. DEFAULT; BREACH; REMEDIES.

         13.1 DEFAULT; BREACH. A "Default" is defined as a failure by the Lessee
to comply with or perform any of the terms, covenants, conditions or Rules and
Regulations under this Lease. A "Breach" is defined as the occurrence of one or
more of the following Defaults, and the failure of Lessee to cure such Default
within any applicable grace period:

                  (a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.

                  (b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of 3
business days following written notice to Lessee.

                  (c) The commission of waste, act or acts constituting public
or private nuisance, and/or an illegal activity on the Premises by Lessee, where
such actions continue for a period of 3 business days following written notice
to Lessee.

                                 PAGE 17 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                  (d) The failure by Lessee to provide (f) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) an
Estoppel Certificate, (v) a requested subordination, (v) evidence concerning any
guaranty and/or Guarantor, (vii) any document requested under Paragraph 41,
(viii) material data safety sheets (MSDS), or (ix) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of 10 days following
written notice to Lessee.

                  (e) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 2.9 hereof,
other than those described in subparagraphs 13.1(a), (b), (c) or (d), above,
where such Default continues for a period of 30 days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
30 days are reasonably required for its cure, then it shall not be deemed to be
a Breach if Lessee commences such cure within said 30 day period and thereafter
diligently prosecutes such cure to completion.

                  (f) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within 60 days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within 30 days; or (iv) the attachment, execution or other
judicial seizure of substantially all of Lessee's assets located at the Premises
or of Lessee's interest in this Lease, where such seizure is not discharged
within 30 days; provided, however, in the event that any provision of this
subparagraph is contrary to any applicable law, such provision shall be of no
force or effect, and not affect the validity of the remaining provisions.

                  (g) The discovery that any financial statement of Lessee or of
any Guarantor given to Lessor was materially false.

                  (h) If the performance of Lessee's obligations under this
Lease is guaranteed: (1) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within 60 days following written
notice of any such event, to provide written alternative assurance or security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this lease.

         13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties
or obligations, within 10 days after written notice (or in case of an emergency,
without notice), Lessor may, at its option, perform such duty or obligation on
Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and
expenses incurred by Lessor in such performance upon receipt of an invoice
therefor. In the event of a Breach, Lessor may, with or without further notice
or demand, and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach:

                  (a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of the District within which the Premises are located
at the time of award plus one percent. Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding any unpaid Rent and damages as are recoverable

                                 PAGE 18 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

therein, or Lessor may reserve the right to recover all or any part thereof in a
separate suit. If a notice and grace period required under Paragraph 13.1 was
not previously given, a notice to pay rent or quit, or to perform or quit given
to Lessee under the unlawful detainer statute shall also constitute the notice
required by Paragraph 13.1. In such case, the applicable grace period required
by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and
the failure of Lessee to cure the Default within the greater of the two such
grace periods shall constitute both an unlawful detainer and a Breach of this
Lease entitling Lessor to the remedies provided for in this Lease and/or by said
statute.

                  (b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or assign,
subject only to reasonable limitations. Acts of maintenance, efforts to relet,
and/or the appointment of a receiver to protect the Lessor's interests, shall
not constitute a termination of the Lessee's right to possession.

                  (c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises are located.
The expiration or termination of this Lease and/or the termination of Lessee's
right to possession shall not relieve Lessee from liability under any indemnity
provisions of this Lease as to matters occurring or accruing during the term
hereof or by reason of Lessee's occupancy of the Premises.

         13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into this
Lease, all of which concessions are hereinafter referred to as "Inducement
Provisions", shall be deemed conditioned upon Lessee's full and faithful
performance of all of the terms, covenants and conditions of this Lease. Upon
Breach of this Lease by Lessee, any such Inducement Provision shall
automatically be deemed deleted from this Lease and of no further force or
effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision
shall be immediately due and payable by Lessee to Lessor, notwithstanding any
subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this paragraph shall not
be deemed a waiver by Lessor of the provisions of this paragraph unless
specifically so stated in writing by Lessor at the time of such acceptance.

         13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease,
the exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent
shall not be received by Lessor within 5 days after such amount shall be due,
then, without any requirement for notice to Lessee, Lessee shall immediately pay
to Lessor a one-time late charge equal to 10% of each such overdue amount or
$100, whichever is greater. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of such late payment. Acceptance of such late charge by Lessor shall in
no event constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent the exercise of any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder, whether
or not collected, for 3 consecutive installments of Base Rent, then
notwithstanding any provision of this Lease to the contrary, Base Rent shall, at
Lessor's option, become due and payable quarterly in advance.

         13.5 INTEREST. Any monetary payment due Lessor hereunder, other than
late charges, not received by Lessor, when due as to scheduled payments (such as
Base Rent) or within 34 days following the date on which it was due for
non-scheduled payment, shall bear interest from the date when due, as to
scheduled payments, or the 31st day after it was due as to non-scheduled
payments. The interest ("Interest") charged shall be computed at the rate of 10%
per annum but shall not exceed the maximum rate allowed by law. Interest is
payable in addition to the potential late charge provided for in Paragraph 13.4.

         13.6 BREACH BY LESSOR.

                  (a) NOTICE OF BREACH. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph, a reasonable
time shall in no event be less than 30 days after receipt by Lessor, and any
Lender whose name and address shall have been furnished Lessee in writing for
such purpose, of written notice specifying wherein such obligation of Lessor has
not been performed; provided, however, that if the nature of Lessor's obligation
is such that more than 30 days are reasonably required for its performance, then
Lessor shall not be in breach if performance is commenced within such 30 day
period and thereafter diligently pursued to completion.

                  (b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within 30 days after receipt of
said notice, or if having commenced said cure they do not diligently pursue it
to completion, then Lessee may elect to cure said breach at Lessee's expense and
offset from Rent the actual and reasonable cost to perform such cure, provided

                                 PAGE 19 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

however, that such offset shall not exceed an amount equal to the greater of one
month's Base Rent or the Security Deposit, reserving Lessee's right to
reimbursement from Lessor for any such expense in excess of such offset. Lessee
shall document the cost of said cure and supply said documentation to Lessor.

14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(collectively "Condemnation"), this Lease shall terminate as to the part taken
as of the date the condemning authority takes title or possession, whichever
first occurs.. If more than 10% of the floor area of the Unit, or more than 25%
of Lessee's Reserved Parking Spaces, is taken by Condemnation, Lessee may, at
Lessee's option, to be exercised in writing within 10 days after Lessor shall
have given Lessee written notice of such taking (or in the absence of such
notice, within 10 days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in proportion
to the reduction in utility of the Premises caused by such Condemnation.
Condemnation awards and/or payments shall be the property of Lessor, whether
such award shall be made as compensation for diminution in value of the
leasehold, the value of the part taken, or for severance damages; provided,
however, that Lessee shall be entitled to any compensation for Lessee's
relocation expenses, loss of business goodwill and/or Trade Fixtures, without
regard to whether or not this Lease is terminated pursuant to the provisions of
this Paragraph. All Alterations and Utility Installations made to the Premises
by Lessee, for purposes of Condemnation only, shall be considered the property
of the lessee and Lessee shall be entitled to any and all compensation which is
payable therefor. In the event that this Lease is not terminated by reason of
the Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.

15. BROKERAGE FEES.

         15.1 ADDITIONAL COMMISSION. In addition to the payments owed pursuant
to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in
writing, Lessor agrees that: (a) if Lessee exercises any Option, (b) if Lessee
acquires from Lessor any rights to the Premises or other premises owned by
Lessor and located within the Project, (c) if Lessee remains in possession of
the Premises, with the consent of Lessor, after the expiration of this Lease, or
(d) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then, Lessor shall pay Brokers a fee in accordance
with the schedule of the Brokers in effect at the time of the execution of this
Lease.

         15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Brokers shall be third party beneficiaries of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to Brokers any amounts
due as and for brokerage fees pertaining to this Lease when due, then such
amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts
to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor
and Lessee of such failure and if lessor fails to pay such amounts within 10
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker for the limited purpose of collecting any
brokerage fee owed.

         15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS. Lessee
and Lessor each represent and warrant to the other that it has had no dealings
with any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is
entitled to any commission or finder's fee in connection herewith. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.

16.ESTOPPEL CERTIFICATES.

                  (a) Each Party (as "Responding Party") shall within 10 days
after written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Estoppel Certificate" form published by the
AIR Commercial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

                  (b) If the Responding Party shall fail to execute or deliver
the Estoppel Certificate within such 10 day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,

                                 PAGE 20 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

and (iii) if Lessor is the Requesting Party, not more than one month's rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.

                  (c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements as
may be reasonably required by such lender or purchaser, including but not
limited to Lessee's financial statements for the past 3 years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17. DEFINITION OF LESSOR. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises, or, if this
is a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined.

18.SEVERABILITY. The invalidity of any provision of this Lease, as determined by
a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.

19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.

20. LIMITATION ON LIABILITY. The obligations of Lessor under this Lease shall
not constitute personal obligations of Lessor, or its partners, members,
directors, officers or shareholders, and Lessee shall look to the Premises, and
to no other assets of Lessor, for the satisfaction of any liability of Lessor
with respect to this Lease, and shall not seek recourse against Lessor's
partners, members, directors, officers or shareholders, or any of their personal
assets for such satisfaction.

21. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.

22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the use, nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.

23. NOTICES.

         23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease or applicable law shall be in writing and may be delivered in person (by
hand or by courier) or may be sent by regular, certified or registered mail or
U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for delivery or mailing of
notices. Either Party may by written notice to the other specify a different
address for notice, except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for notice. A copy of all notices
to Lessor shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate in writing.

         23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail the notice shall be deemed given 72 hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantee next day
delivery shall be deemed given 24 hours after delivery of the same to the Postal
Service or courier. Notices transmitted by facsimile transmission or similar
means shall be deemed delivered upon telephone confirmation of receipt
(confirmation report from fax machine is sufficient), provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday or
legal holiday, it shall be deemed received on the next business day.

                                 PAGE 21 OF 27

________                                                               ________
INITIALS                                                               INITIALS
<PAGE>

24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessors consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. The acceptance of Rent by
Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by
Lessee may be accepted by Lessor on account of moneys or damages due Lessor,
notwithstanding any qualifying statements or conditions made by Lessee in
connection therewith, which such statements and/or conditions shall be of no
force or effect whatsoever unless specifically agreed to in writing by Lessor at
or before the time of deposit of such payment.

25. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP.

         (a) When entering into a discussion with a real estate agent regarding
a real estate transaction, a Lessor or Lessee should from the outset understand
what type of agency relationship or representation it has with the agent or
agents in the transaction. Lessor and Lessee acknowledge being advised by the
Brokers in this transaction, as follows:

                  (i) LESSOR'S AGENT. A Lessor's agent under a listing agreement
with the Lessor acts as the agent for the Lessor only. A Lessor's agent or
subagent has the following affirmative obligations: To the Lessor: A fiduciary
duty of utmost care, integrity, honesty, and loyalty in dealings with the
Lessor. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills
and care in performance of the agent's duties. (b) A duty of honest and fair
dealing and good faith. (c) A duty to disclose all facts known to the agent
materially affecting the value or desirability of the property that are not
known to, or within the diligent attention and observation of, the Parties. An
agent is not obligated to reveal to either Party any confidential information
obtained from the other Party which does not involve the affirmative duties set
forth above.

                  (ii) LESSEE'S AGENT. An agent can agree to act as agent for
the Lessee only. In these situations, the agent is not the Lessor's agent, even
if by agreement the agent may receive compensation for services rendered, either
in full or in part from the Lessor. An agent acting only for a Lessee has the
following affirmative obligations. To the Lessee: A fiduciary duty of utmost
care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee
and the Lessor: (a) Diligent exercise of reasonable skills and care in
performance of the agent's duties. (b) A duty of honest and fair dealing and
good faith. (c) A duty to disclose all facts known to the agent materially
affecting the value or desirability of the property that are not known to, or
within the diligent attention and observation of, the Parties. An agent is not
obligated to reveal to either Party any confidential information obtained from
the other Party which does not involve the affirmative duties set forth above.

                  (iii) AGENT REPRESENTING BOTH LESSOR AND LESSEE. A real estate
agent, either acting directly or through one or more associate licenses, can
legally be the agent of both the Lessor and the Lessee in a transaction, but
only with the knowledge and consent of both the Lessor and the Lessee. In a dual
agency situation, the agent has the following affirmative obligations to both
the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity,
honesty and loyalty in the dealings with either Lessor or the Lessee. (b) Other
duties to the Lessor and the Lessee as stated above in subparagraphs (i) or
(if). In representing both Lessor and Lessee, the agent may not without the
express permission of the respective Party, disclose to the other Party that the
Lessor will accept rent in an amount less than that indicated in the listing or
that the Lessee is willing to pay a higher rent than that offered. The above
duties of the agent in a real estate transaction do not relieve a Lessor or
Lessee from the responsibility to protect their own interests. Lessor and Lessee
should carefully read all agreements to assure that they adequately express
their understanding of the transaction. A real estate agent is a person
qualified to advise about real estate. If legal or tax advice is desired,
consult a competent professional.

         (b) Brokers have no responsibility with respect to any Default or
Breach hereof by either Party. The Parties agree that no lawsuit or other legal
proceeding involving any breach of duty, error or omission relating to this
Lease may be brought against Broker more than one year after the Start Date and
that the liability (including court costs and attorneys' fees), of any Broker
with respect to any such lawsuit and/or legal proceeding shall not exceed the
fee received by such Broker pursuant to this Lease; provided, however, that the
foregoing limitation on each Broker's liability shall not be applicable to any
gross negligence or willful misconduct of such Broker.

         (c) Buyer and Seller agree to identify to Brokers as "Confidential" any
communication or information given Brokers that is considered by such Party to
be confidential.

                                 PAGE 22 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or termination of this Lease.
In the event that Lessee holds over, then the Base Rent shall be increased to
110% of the Base Rent applicable immediately preceding the expiration or
termination. Nothing contained herein shall be construed as consent by Lessor to
any holding over by Lessee.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.

28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions of this
Lease to be observed or performed by Lessee are both covenants and conditions.
In construing this Lease, all headings and titles are for the convenience of the
Parties only and shall not be considered a part of this Lease. Whenever required
by the context, the singular shall include the plural and vice versa. This Lease
shall not be construed as if prepared by one of the Parties, but rather
according to its fair meaning as a whole, as if both Parties had prepared it.

29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.

30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

         30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed upon the Premises, to any and all advances made on the security
thereof, and to all renewals, modifications, and extensions thereof. Lessee
agrees that the holders of any such Security Devices (in this Lease together
referred to as "Lender") shall have no liability or obligation to perform any of
the obligations of Lessor under this Lease. Any Lender may elect to have this
Lease and/or any Option granted hereby superior to the lien of its Security
Device by giving written notice thereof to Lessee, whereupon this Lease and such
Options shall be deemed prior to such Security Device, notwithstanding the
relative dates of the documentation or recordation thereof.

         30.2 ATTORNMENT In the event that Lessor transfers title to the
Premises, or the Premises are acquired by another upon the foreclosure or
termination of a Security Device to which this Lease is subordinated (i) Lessee
shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to
such new owner, and upon request, enter into a new lease, containing all of the
terms and provisions of this Lease, with such new owner for the remainder of the
term hereof, or, at the election of the new owner, this Lease will automatically
become a new lease between Lessee and such new owner, and (ii) Lessor shall
thereafter be relieved of any further obligations hereunder and such new owner
shall assume all of Lessor's obligations, except that such new owner shall not:
(a) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership; (b) be subject to any
offsets or defenses which Lessee might have against any prior lessor, (c) be
bound by prepayment of more than one month's rent, or (d) be liable for the
return of any security deposit paid to any prior lessor.

         30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within 60 days after the execution of this Lease, Lessor
shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee's
option, directly contact Lender and attempt to negotiate for the execution and
delivery of a Non-Disturbance Agreement.

         30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises whether founded in tort, contract or equity, or to
declare rights hereunder, the Prevailing Party (as hereafter defined) in any
such proceeding, action, or appeal thereon, shall be entitled to reasonable
attorneys' fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to decision
or judgment. The term, "Prevailing Party" shall include, without limitation, a

                                 PAGE 23 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

Party or Broker who substantially obtains or defeats the relief sought, as the
case may be, whether by compromise, settlement, judgment, or the abandonment by
the other Party or Broker of its claim or defense. The attorneys' fees award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. In addition,
Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach ($200 is a reasonable minimum per
occurrence for such services and consultation).

32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at anytime, in the case of an emergency,
and otherwise at reasonable times after reasonable prior notice for the purpose
of showing the same to prospective purchasers, lenders, or tenants, and making
such alterations, repairs, improvements or additions to the Premises as Lessor
may deem necessary or desirable and the erecting, using and maintaining of
utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect on Lessee's use of the
Premises. All such activities shall be without abatement of rent or liability to
Lessee.

33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any auction
upon the Premises without Lessor's prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
permit an auction.

34. SIGNS. Lessor may place on the Premises ordinary "For Sale" signs at any
time and ordinary "For Lease" signs during the last 6 months of the term hereof.
Except for ordinary "For Sublease" signs which may be placed only on the
Premises, Lessee shall not place any sign upon the Project without Lessor's
prier written consent. All signs must comply with all Applicable Requirements.

35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within 10 days following any such event
to elect to the contrary by written notice to the holder of any such lesser
interest, shall constitute Lessor's election to have such event constitute the
termination of such interest.

36. CONSENTS. Except as otherwise provided herein, wherever in this Lease the
consent of a Party is required to an act by or for the other Party, such consent
shall not be unreasonably withheld or decayed. Lessor's actual reasonable costs
and expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response to, a
request by Lessee for any Lessor consent, including but not limited to consents
to an assignment, a subletting or the presence or use of a Hazardous Substance,
shall be paid by Lessee upon receipt of an invoice and supporting documentation
therefor. Lessor's consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor's consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any determination made by the other
hereunder and reasonably requests the reasons for such determination, the
determining party shall furnish its reasons in writing and in reasonable detail
within 10 business days following such request.

37.GUARANTOR.

         37.1 EXECUTION. The Guarantors, if any, shall each execute a guaranty
in the form most recently published by the AIR Commercial Real Estate
Association.

         37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements, (c)
an Estoppel Certificate, or (d) written confirmation that the guaranty is still
in effect.

38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and performance
of all of the covenants, conditions and provisions on Lessee's part to be
observed and performed under this Lease, Lessee shall have quiet possession and
quiet enjoyment of the Premises during the term hereof.

39. OPTIONS. If Lessee is granted an option, as defined below, then the
following provisions shall apply.

                                 PAGE 24 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

         39.1 DEFINITION. "Option" shall mean: (a) the right to extend the term
of or renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal or first offer to lease
either the Premises or other property of Lessor; (c) the right to purchase or
the right of first refusal to purchase the Premises or other property of Lessor.

         39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Any Option granted to Lessee
in this Lease is personal to the original Lessee, and cannot be assigned or
exercised by anyone other than said original Lessee and only while the original
Lessee is in full possession of the Premises and, if requested by Lessor, with
Lessee certifying that Lessee has no intention of thereafter assigning or
subletting.

         39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.

         39.4 EFFECT OF DEFAULT ON OPTIONS.

                  (a) Lessee shall have no right to exercise an Option: (i)
during the period commencing with the giving of any notice of Default and
continuing until said Default is cured, (ii) during the period of time any Rent
is unpaid (without regard to whether notice thereof is given Lessee), (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessee has been in default under this lease and has been given 3 or more notices
of separate Default, whether or not the Defaults are cured, during the 12 month
period immediately preceding the exercise of the Option.

                  (b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39,4(a).

                  (c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term or
completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days
after such Rent becomes due (without any necessity of Lessor to give notice
thereof),or (ii) if Lessee commits a Breach of this Lease.

40. SECURITY MEASURES. Lessee hereby acknowledges that the Rent payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.

41. RESERVATIONS. Lessor reserves the right: (i) to grant, without the consent
or joinder of Lessee, such easements, rights and dedications that Lessor deems
necessary, (ii) to cause the recordation of parcel maps and restrictions, and
(iii) to create andlor install new utility raceways, so long as such easements,
rights, dedications, maps, restrictions, and utility raceways do not
unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to
sign any documents reasonably requested by Lessor to effectuate such rights. Any
such items will not be included in Lessee's NNN costs.

42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest' and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay. A Party who does not initiate
suit for the recovery of sums paid "under protest" within 6 months shall be
deemed to have waived its right to protest such payment.

43. AUTHORITY; MULTIPLE PARTIES; EXECUTION.

                  individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on its behalf. Each Party shall, within 30 days after request,
deliver to the other Party satisfactory evidence of such authority.

                  (b) If this Lease is executed by more than one person or
entity as "Lessee", each such person or entity shall be jointly and severally
liable hereunder. It is agreed that any one of the named Lessees shall be
empowered to execute any amendment to this Lease, or other document ancillary
thereto and bind all of the named Lessees, and Lessor may rely on the same as if
all of the named Lessees had executed such document.

                  (c) This Lease may be executed by the Parties in counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.

44. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shaft be controlled by the typewritten or
handwritten provisions.

                                 PAGE 25 OF 27

________                                                               ________
INITIALS                                                               INITIALS
<PAGE>

45. OFFER. Preparation of this Lease by either party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.

46. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.

47. WAIVER OF JURY TRIAL. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT
OF THIS AGREEMENT.

48. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the Mediation
and/or the Arbitration of all disputes between the Parties and/or Brokers
arising out of this Lease M is 13 is not attached to this Lease.

49. AMERICANS WITH DISABILITIES ACT. Since compliance with the Americans with
Disabilities Act (ADA) is dependent upon Lessee's specific use of the Premises,
Lessor makes no warranty or representation as to whether or not the Premises
comply with ADA or any similar legislation. In the event that Lessee's use of
the Premises requires modifications or additions to the Premises in order to be
in ADA compliance, Lessee agrees to make any such necessary modifications and/or
additions at Lessee's expense.


LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT WHERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSON AND LESSEE WITH RESPECT TO THE
PREMISES.

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MANE BY THE AIR COMMERCIAL
REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:

1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE. ZONING OF THE PREMISES, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, COMPLIANCE WITH THE
AMERICANS WITH DISABILITIES ACT AND THE SUITABILITY OF THE PREMISES FOR LESSEE`S
INTENDED USE.

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES ARE LOCATED.

The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.

Executed at: Lancaster                       Executed at: Lancaster
On:                                          On:

By LESSOR:                                   By LESSEE:
Freeway Ventures, LLC                        Simulations Plus, Inc.



By: /s/ Stephen P. Wilson                    By: /s/ Walter Woltosz
Name Printed: Stephen P. Wilson              Name Printed: Walter Woltosz
Title:                                       Title: President & CEO

By: /s/ John Larrinaga                       By:
Name Printed: John Larrinaga                 Name Printed:
Title:                                       Title:
Address: 42450 12th St. W., #103             Address:42505 10th St. W., Ste. 101
Lancaster. CA 93534                          Lancaster, CA 93534
Telephone:(661) 537-5128                     Telephone:(661) 723-7723 Ext. 628
Facsimile: (   )                             Facsimile: (   )
Federal ID No.                               Federal ID No.

                                 PAGE 26 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

BROKER:                                     BROKER:
Century 21 Doug Anderson & Assoc., Inc.     same

Attn: Maxi Case                             Attn:
Title: Agent                                Title:
Address: 1727 W. Avenue K
Lancaster, CA 93534                         Address:
Telephone:(661) 940-1800                    Telephone: (   )
Facsimile:(661) 952-2696                    Facsimile: (   )
Email: maxi@maxicase.com                    Email:
Federal ID No.                              Federal ID No.


These forms are often modified to meet changing requirements of law and needs of
the industry. Always write or call to make sure you are utilizing the most
current form: AIR COMMERCIAL REAL ESTATE ASSOCIATION, 700 South Flower Street,
Suite 600, Los Angeles, CA 90017. (213) 687-8777.

          (C)Copyright 1999 By AIR Commercial Real Estate Association.
                              All rights reserved.
              No part of these works may be reproduced in any form
                         without permission in writing.

                                 PAGE 27 OF 27

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                 [AIR COMMERCIAL REAL ESTATE ASSOCIATION LOGO]

                              ARBITRATION AGREEMENT
                             Standard Lease Addendum


                  DATED:    MAY 12, 2005

                  BY AND BETWEEN (LESSOR)     FREEWAY VENTURES LLC

                                 (LESSEE)     SIMULATIONS PLUS INC.

                  ADDRESS OF PREMISES:        42505 10TH ST. W., STE. 101
                                              LANCASTER, CA 93534


Paragraph 1

A. ARBITRATION OF DISPUTES:

Except as provided in Paragraph B below, the Parties agree to resolve any and
all claims, disputes or disagreements arising under this Lease, including, but
not limited to any matter relating to Lessor's failure to approve an assignment,
sublease or other transfer of Lessee's interest in the Lease under Paragraph 12
of this Lease, any other defaults by Lessor, or any defaults by Lessee by and
through arbitration as provided below and irrevocably waive any and ail rights
to the contrary. The Parties agree to at all times conduct themselves in strict,
full, complete and timely accordance with the terms hereof and that any attempt
to circumvent the terms of this Arbitration Agreement shall be absolutely null
and void and of no force or effect whatsoever.

B. DISPUTES EXCLUDED FROM ARBITRATION:

The following claims, disputes or disagreements under this Lease are expressly
excluded from the arbitration procedures set forth herein: t. Disputes for which
a different resolution determination is specifically set forth in this Lease, 2.
All claims by either party which (a) seek anything other than enforcement or
determination of rights under this Lease, or (b) are primarily founded upon
matters of fraud, willful misconduct, bad faith or any other allegations of
tortious action, and seek the award of punitive or exemplary damages, 3. Claims
relating to (a) Lessor's exercise of any unlawful detainer rights pursuant to
applicable law or (b) rights or remedies used by Lessor to gain possession of
the Premises or terminate Lessee's right of possession to the Premises, all of
which disputes shall be resolved by suit filed in the applicable court of
jurisdiction, the decision of which court shall be subject to appeal pursuant to
applicable law and 4. All claims arising under Paragraph 39 of this Lease, which
disputes shall be resolved by the specific dispute resolution procedure provided
in Paragraph 39 to the extent that such disputes concern solely the
determination of rent.

C. APPOINTMENT OF AN ARBITRATOR:

All disputes subject to this Arbitration Agreement, shall be determined by
binding arbitration before: [ ] a retired judge of the applicable court of
jurisdiction (e.g., the Superior Court of the State of California) affiliated
with Judicial Arbitration & Mediation Services, Inc. ("JAMS"), [X] the American
Arbitration Association ("AAA") under its commercial arbitration rules, [_]
_______________________________________________________________________________
or as may be otherwise mutually agreed by Lessor and Lessee (the "Arbitrator").
Such arbitration shall be initiated by the Parties, or either of them, within
ten (10) days after either party sends written notice (the "Arbitration Notice")
of a demand to arbitrate by registered or certified mail to the other party and
to the Arbitrator. The Arbitration Notice shall contain a description of the
subject matter of the arbitration, the dispute with respect thereto, the amount
involved, if any, and the remedy or determination sought. If the Parties have
agreed to use JAMS they may agree on a retired judge from the JAMS panel. If
they are unable to agree within ten days, JAMS will provide a list of three
available judges and each party may strike one. The remaining judge (or if there
are two, the one selected by JAMS) will serve as the Arbitrator. If the Parties
have elected to utilize AAA or some other organization, the Arbitrator shall be
selected in accordance with said organization's rules. In the event the
Arbitrator is not selected as provided for above for any reason, the party
initiating arbitration shall apply to the appropriate Court for the appointment
of a qualified retired judge to act as the Arbitrator.


                                   PAGE 1 OF 2

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

D. ARBITRATION PROCEDURE:

         1. PRE-HEARING ACTIONS. The Arbitrator shall schedule a pre-hearing
conference to resolve procedural matters, arrange for the exchange of
information, obtain stipulations, and narrow the issues. The Parties will submit
proposed discovery schedules to the Arbitrator at the pre-hearing conference.
The scope and duration of discovery will be within the sole discretion of the
Arbitrator. The Arbitrator shall have the discretion to order a pre-hearing
exchange of information by the Parties, including, without limitation,
production of requested documents, exchange of summaries of testimony of
proposed witnesses, and examination by deposition of parties and third-party
witnesses. This discretion shall be exercised in favor of discovery reasonable
under the circumstances. The Arbitrator shall issue subpoenas and subpoenas
duces tecum as provided for in the applicable statutory or case law (e.g., in
California Code of Civil Procedure Section 4282.6).

         2. THE DECISION. The arbitration shall be conducted in the city or
county within which the Premises are located at a reasonably convenient site.
Any Party may be represented by counsel or other authorized representative. In
rendering a decision(s), the Arbitrator shall determine the rights and
obligations of the Parties according to the substantive laws and the terms and
provisions of this Lease. The Arbitrator's decision shall be based on the
evidence introduced at the hearing, including all logical and reasonable
inferences therefrom. The Arbitrator may make any determination and/or grant any
remedy or relief that is just and equitable. The decision must be based on, and
accompanied by, a written statement of decision explaining the factual and legal
basis for the decision as to each of the principal controverted issues. The
decision shall be conclusive and binding, and it may thereafter be confirmed as
a judgment by the court of applicable jurisdiction, subject only to challenge on
the grounds set forth in the applicable statutory or case law (e.g., in
California Code of Civil Procedure Section 1286.2). The validity and
enforceability of the Arbitrator's decision is to be determined exclusively by
the court of appropriate jurisdiction pursuant to the provisions of this Lease.
The Arbitrator may award costs, including without limitation, Arbitrator's fees
and costs, attorneys' fees, and expert and witness costs, to the prevailing
party, if any, as determined by the Arbitrator in his discretion.

         Whenever a matter which has been submitted to arbitration involves a
dispute as to whether or not a particular act or omission (other than a failure
to pay money) constitutes a Default, the time to commence or cease such action
shall be tolled from the date that the Notice of Arbitration is served through
and until the date the Arbitrator renders his or her decision. Provided,
however, that this provision shall NOT apply in the event that the Arbitrator
determines that the Arbitration Notice was prepared in bad faith.

         Whenever a dispute arises between the Parties concerning whether or not
the failure to make a payment of money constitutes a default, the service of an
Arbitration Notice shall NOT toll the time period in which to pay the money. The
Party allegedly obligated to pay the money may, however, elect to pay the money
"under protest" by accompanying said payment with a written statement setting
forth the reasons for such protest. If thereafter, the Arbitrator determines
that the Party who received said money was not entitled to such payment, said
money shall be promptly returned to the Party who paid such money under protest
together with Interest thereon as defined in Paragraph 13.5. If a Party makes a
payment "under protest" but no Notice of Arbitration is filed within thirty
days, then such protest shall be deemed waived. (See also Paragraph 43)


NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call us to make sure you are utilizing the most
current form: AIR Commercial Real Estate Association, 700 South Flower Street,
Suite 600, Los Angeles, CA 90017, Telephone No.: (213) 687-8777. Fax No.: (213)
687-8616.


                                   PAGE 2 OF 2

________                                                               ________
INITIALS                                                               INITIALS

<PAGE>

                                   ADDENDUM TO
              STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-NET
                                 BY AND BETWEEN
               FREEWAY VENTURES, L.L.C AND SIMULATIONS PLAYS, INC,

1.       OCCUPANCY/RENT COMMENCEMENT: The lease and Lessee's rent shall commence
         and Lessee shall be given occupancy within two (2) weeks of the city of
         Lancaster final approval of building, including tenant improvements
         having been received, no later than November 30, 2005.

2.       RENTAL RATE:               Year 1 - $18,445.05 plus NNN
                                    Year 2 - $19,609.14 plus NNN
                                    Year 3 - $20,393.50 plus NNN
                                    Year 4 - $21,209.24 plus NNN
                                    Year 5 - $22,057.61 plus NNN

3.       OPTIONS: Lessee shall have the right to two (2), three (3) year options
         to extend said lease term, provided written notice to exercise this
         option is given to the Lessor no later than one hundred and eighty
         (180) days prior to the expiration of the initial lease term. Base
         rental rate to be calculated on a four percent (4%) annual increase.

4.       TENANT IMPROVEMENTS: Tenant improvements shall be completed basically
         per Exhibit I (Floorplan) at Lessor's expense prior to delivery of
         space to Lessee. Lessee will be allowed input as to paint, carpet and
         other flooring colors with builder's concurrence.

5.       WARRANTIES: Notwithstanding other provisions of the lease, Lessor and
         Lessee understand that this is a new building and the systems in the
         building are either warranted by the builder for one year or by the
         manufacturers for one year or more. All air conditioning compressors
         are warranted by the manufacturer for a period of five (5) years.

6.       BROKER/AGENT RELATIONSHIP: Lessee understands and accepts that Maxi
         Case of Century 21 Doug Anderson & Assoc., Inc. will be a part owner
         of this building during this lease.


__________________________________________________________      ________________
Lessor                                                          Date

__________________________________________________________      ________________
Lessor                                                          Date

__________________________________________________________      ________________
Lessee                                                          Date

__________________________________________________________      ________________
Lessee                                                          Date
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>3
<FILENAME>simulations_10ksb-ex3101.txt
<TEXT>
<PAGE>

                                                                    EXHIBIT 31.1


                          RULE 13A-14(A) CERTIFICATION

                             SIMULATIONS PLUS, INC.
                            a California corporation

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

     I, Walter S. Woltosz, Chief Executive Officer of Simulations Plus, Inc., a
California corporation (the "Company"), do hereby certify, in accordance with
Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002, with respect to the Annual Report on Form 10-KSB of
the Company for the fiscal year ended August 31, 2006, as filed with the
Securities and Exchange Commission herewith under Section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that:

     (1)  I have reviewed this Annual Report on Form 10-KSB of the Company for
          the fiscal year ended August 31, 2006 (the "Annual Report");

     (2)  Based on my knowledge, this Annual 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 Annual Report;

     (3)  Based on my knowledge, the financial statements, and other financial
          information included in this Annual Report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the Company as of, and for, the periods presented in
          this Annual Report;

     (4)  The Company's other certifying officers 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 Company 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
               Company, including its consolidated subsidiaries, is made known
               to us by others within those entities, particularly during the
               period in which this Annual 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 Company's disclosure controls
               and procedures and presented in this Annual Report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               Annual Report based on such evaluation; and

          d.   disclosed in this Annual Report any change in the Company's
               internal control over financial reporting that occurred during
               the Company's most recent fiscal quarter (the Company's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonable likely to materially
               affect, the Company's internal control over financial reporting;
               and

     (5)  The Company's other certifying officers and I have disclosed, based on
          our most recent evaluation, to the Company's auditors and the audit
          committee of the Company'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 Company'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 Company's
               internal control over financial reporting.


Dated: November 22, 2006                           By: /s/ Walter S. Woltosz
                                                       -----------------------
                                                       Walter S. Woltosz
                                                       Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>4
<FILENAME>simulations_10ksb-ex3102.txt
<TEXT>
<PAGE>

                                                                    EXHIBIT 31.2


                          RULE 13A-14(A) CERTIFICATION

                             SIMULATIONS PLUS, INC.
                            a California corporation

                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

     I, Momoko A. Beran, Chief Financial Officer of Simulations Plus, Inc., a
California corporation (the "Company"), do hereby certify, in accordance with
Rules 13a-14 and 15d-14, as created pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002, with respect to the Annual Report on Form 10-KSB of
the Company for the fiscal year ended August 31, 2006, as filed with the
Securities and Exchange Commission herewith under Section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that:

     (1)  I have reviewed this Annual Report on Form 10-KSB of the Company for
          the fiscal year ended August 31, 2006 (the "Annual Report");

     (2)  Based on my knowledge, this Annual 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 Annual Report;

     (3)  Based on my knowledge, the financial statements, and other financial
          information included in this Annual Report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the Company as of, and for, the periods presented in
          this Annual Report;

     (4)  The Company's other certifying officers 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 Company 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
               Company, including its consolidated subsidiaries, is made known
               to us by others within those entities, particularly during the
               period in which this Annual 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 Company's disclosure controls
               and procedures and presented in this Annual Report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               Annual Report based on such evaluation; and

          d.   disclosed in this Annual Report any change in the Company's
               internal control over financial reporting that occurred during
               the Company's most recent fiscal quarter (the Company's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonable likely to materially
               affect, the Company's internal control over financial reporting;
               and

     (5)  The Company's other certifying officers and I have disclosed, based on
          our most recent evaluation, to the Company's auditors and the audit
          committee of the Company'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 Company'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 Company's
               internal control over financial reporting.


Dated: November 22, 2006                             By: /s/ Momoko A. Beran
                                                         -----------------------
                                                         Momoko A. Beran
                                                         Chief Financial Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>5
<FILENAME>simulations_10ksb-ex3200.txt
<TEXT>
<PAGE>

                                                                      EXHIBIT 32


                           CERTIFICATIONS PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
                            (18 U.S.C. SECTION 1350)

         In connection with the Annual Report of Simulations Plus, Inc., a
California corporation (the "Company"), on Form 10-KSB for the year ended August
31, 2006, as filed with the Securities and Exchange Commission (the "Report"),
Walter S. Woltosz, Chief Executive Officer of the Company and Momoko A. Beran,
Chief Financial Officer of the Company, respectively, do each hereby certify,
pursuant of ss. 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350), that
to his/her knowledGe:

         (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/ WALTER S. WOLTOSZ
- -----------------------
Walter S. Woltosz
Chief Executive Officer
November 22, 2006



/S/ MOMOKO A. BERAN
- -----------------------
Momoko A. Beran
Chief Financial Officer
November 22, 2006


(A signed original of this written statement required by Section 906 has been
provided to Simulations Plus, Inc. and will be retained by Simulations Plus,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.)
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
