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, 2008 ("FY08") and August 31, 2007 ("FY07").

                                                  FY08                     FY07
                                         ---------------------    ---------------------
Net sales                                $ 8,968        100.0%    $ 8,858        100.0%
Cost of sales                              2,100         23.4       2,082         23.5
                                         --------     --------    --------     --------
Gross profit                               6,868         76.6       6,776         76.5
                                         --------     --------    --------     --------
Selling, general, and administrative       3,699         41.3       3,458         39.0
Research and development                     991         11.1         815          9.2
                                         --------     --------    --------     --------
Total operating expenses                   4,690         52.3       4,273         48.2
                                         --------     --------    --------     --------
Income from operations                     2,178         24.3       2,503         28.3
                                         --------     --------    --------     --------
Interest income                              185          2.1         114          1.3
Miscellaneous Income                          --           --           1           --
Gain on sale of assets                        --           --           4          0.1
Gain on currency exchange                     83          0.9           2          0.1
                                         --------     --------    --------     --------
Total other income                           268          3.0         121          1.4
                                         --------     --------    --------     --------
Net income before taxes                    2,446         27.3       2,624         29.6
                                         --------     --------    --------     --------
Provision for income taxes                  (721)        (8.0)     (1,158)       (13.1)
                                         --------     --------    --------     --------
Net income                                 1,725         19.2%      1,466         16.6%
                                         ========     ========    ========     ========

FY08 COMPARED WITH FY07

NET SALES

Consolidated net sales increased $110,000, or 1.2%, to $8,968,000 in fiscal year 2008 (FY08) from $8,858,000 in fiscal year 2007 (FY07). Sales from pharmaceutical software and services increased approximately $300,000, or 5.2%; however, our Words+, Inc. subsidiary's sales decreased approximately $190,000, or 6.1%, for the year. We attribute the increase in pharmaceutical software sales primarily to increased licenses, both to new customers and for new modules, additional licenses to renewal customers, and contract studies, which outweighed a few licenses not renewed by some customers. We attribute the decrease in Words+ sales primarily to decreases in sales of "Freedom" and "TuffTalker Plus" which was discontinued in FY08, and hardware products such as MessageMates and other input devices. Those declines in sales outweighed increased sales of our "Say-it SAM!" and "TuffTalker" products.

COST OF SALES

Consolidated cost of sales increased $18,000, or 0.9%, to $2,100,000 in FY08 from $2,082,000 in FY07; however, as a percentage of revenue, cost of sales decreased 0.1%. For pharmaceutical software and services, cost of sales increased $92,000, or 13.0%, and as a percentage of revenue, cost of sales increased to 13.2% in FY08 from 12.3% in FY07. A significant portion of cost of sales for pharmaceutical software products 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 $61,000, or 17.0%, in FY08 compared with FY07; however, as a percentage of revenue, amortization cost increased only 0.7% in FY08 compared with FY07. Royalty expense, another significant portion of cost of sales, increased approximately $31,000, or 8.9%, in FY08 compared with FY07, while as a percentage of revenue, royalty expense increased only 0.2% in FY08 compared with

FY07. We pay a royalty on GastroPlus basic software sales but not on its modules or other software sales. We began to pay royalties on the newly released Enslein Metabolism Module in our ADMET Predictor software at the end of FY08 in accordance with our agreement with Enslein Research, Inc.

For Words+, cost of sales decreased $74,000, or 5.4%. As a percentage of revenue, cost of sales increased 0.3% to 44.7% in FY08 from 44.4% in FY07. Sales from "TuffTalker" products, with higher costs per unit, increased in FY08, resulting in the higher percentage of cost of sales. The decline in sales from the discontinued "TuffTalker Plus", which had higher unit costs, was not enough to offset the increase in costs incurred for the sales of the "TuffTalker" product.

GROSS PROFIT

Consolidated gross profit increased $92,000, or 1.4%, to $6,868,000 in FY 08 from $6,776,000 in FY07. We attribute this increase to the increase in sales of pharmaceutical software and contract studies which outweighed increases in cost of goods sold and the decrease in Gross Profit from Words+ operations.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses for FY08 increased by $241,000, or 7.0%, to $3,699,000, compared to $3,458,000 for FY07. For Simulations Plus, SG&A expenses increased $141,000, or 6.9%. The major increases in expenses were travel expenses due to increased air fares and personal vehicle mileage allowance, professional fees, such as web site design fees, tax credit research fees, valuation service fees, and additional fees for an additional Board member. Investor relations fees, such as fees paid to the American Stock Exchange for stock splits, and increases in salaries and payroll-related expenses, such as health insurance, 401(K) and payroll taxes, also added to SG&A. Some of these are one-time fees. Major decreases in expenses were the elimination of the bonus previously paid to the Company's CEO, whose compensation is now a fixed amount with no bonus, as well as bad debts and legal costs that were expensed as part of the purchased assets of Bioreason Inc. in FY07, while no such expense was incurred in FY08. However, those decreases did not offset the increases in other expenses mentioned above.

For Words+, expenses increased by $100,000, or 2.9%. There was a shift in expense from one category to another from FY07 to FY08. In FY07, we hired a marketing consultant who became an employed sales manager of Words+ in March 08, increasing salaries and travel expenses while reducing consultant fees. The estimated allowance for bad debts was also increased. Those increases outweighed decreases in commissions, telephone expenses, and technical service costs.

RESEARCH AND DEVELOPMENT

We incurred approximately $1,719,000 of research and development ("R&D") costs for both companies during FY08. Of this amount, $728,000 was capitalized and $991,000 was expensed. During FY07 we incurred approximately $1,397,000 of research and development costs, of which approximately $583,000 was capitalized and approximately $815,000 was expensed. The 23.1% increase in research and development expenditure from FY07 to FY08 was due primarily to increases in salary expenses due to expanding the staff in the Life Sciences Department, as well as salary increases for existing staff in both companies.

INCOME FROM OPERATIONS

During FY08, we generated income from operations of $2,178,000, as compared to $2,503,000 for FY07, a decrease of 13.0%. We attribute this decrease to increases in SG&A expenses, including one-time fees, as well as R&D costs which outweighed the increase in gross profit generated by sales of pharmaceutical software and study contract services, in addition to a decrease in income from Words+ operations.

OTHER INCOME AND (EXPENSE)

The net of other income over other expense for FY08 increased by $147,000, or 121.5%, to $268,000, compared to $121,000 for FY07. This is due primarily to an increase in interest income on Money Market accounts and gain on currency exchange.

PROVISION OF INCOME TAXES

Provision for income taxes for FY08 decreased by $437,000, or 40.3%, to $721,000, compared to $1,158,000 for FY07. In FY07, because we had exhausted our net operating loss ("NOL") carry forward as well as the R&D tax credits that were known at the time, our tax accountants estimated our provisional income tax rate at 44%. In FY08, we hired a tax credit specialist company, Tax Projects Group, to identify potential unused tax credits. As a result of several months of research covering the previous 3 tax years (2006, 2005, and 2004), they discovered an additional $276,000 of unused R&D tax credits. This increase in R&D tax credits allowed us to reduce our income tax provision to as low as 29% in FY08. Please refer to the notes to the financial statements for the details. The additional R&D tax credit is subject to review by tax agencies.

NET INCOME

Net income for FY08 increased by $259,000, or 17.7%, to $1,725,000, compared to $1,466,000 for FY07. We attribute this increase in net income primarily to increased sales of pharmaceutical software licenses, other income, and decreased provision for income taxes, which outweighed increased cost of sales, and operating expenses, as well as a decrease in net income from Words+ operations. Shareholders' equity grew by 29%, from $7.7 million to $9.9 million during FY08.

SEASONALITY

Sales of our pharmaceutical products exhibit minimal seasonal fluctuation, with the first fiscal quarter almost always below average for all quarters. This trend has continued for 9 out of the last 10 years. 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.

                           Net Simulations Plus Sales

                          First      Second       Third       Fourth
FY                       Quarter     Quarter     Quarter     Quarter      Total
--------------------------------------------------------------------------------
                                             (in thousands)

2008 . . . . . . . . .     1,438      1,550        1,975        1,092      6,055
2007 . . . . . . . . .       824      1,808        1,659        1,465      5,756
2006 . . . . . . . . .       199        884        1,096        1,007      3,186
2005 . . . . . . . . .       524        410          662          473      2,069
2004 . . . . . . . . .       642        742          603          869      2,856
2003 . . . . . . . . .       507        582          614        1,403      3,106
2002 . . . . . . . . .       390        554          504          595      2,043
2001 . . . . . . . . .       221        373          305          282      1,181
2000 . . . . . . . . .       151        467          143          174        935
1999 . . . . . . . . .        87         93          117          164        461
1998 . . . . . . . . .        11         11           13           27         62

We believe that sales of Words+ products to schools were slightly seasonal, prior to FY06, with greater sales to schools during our third and fourth fiscal quarter (March-May and June-August), as shown in the table below.

                                Net Words+ Sales

                          First      Second       Third       Fourth
FY                       Quarter     Quarter     Quarter     Quarter      Total
--------------------------------------------------------------------------------
                                            (in thousands)

2008 . . . . . . . . .      545        630          994          744       2,913
2007 . . . . . . . . .      632        726          972          772       3,102
2006 . . . . . . . . .      620        598          692          759       2,669
2005 . . . . . . . . .      543        622          762          757       2,684
2004 . . . . . . . . .      497        626          630          598       2,351
2003 . . . . . . . . .      571        538          646          624       2,379

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 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.

We currently hold 3 ARSs at $250,000 each (2 Iowa student loans and 1 Missouri higher education loan). On August 8, 2008, UBS announced a comprehensive settlement, in principle, to all who hold ARSs issued through UBS, that UBS will buy back each ARS at par from most of their clients during a two-year time period beginning January 1, 2009. Because of this settlement announcement, we believe that our investment in ARS is appropriately presented at its face value of $750,000 at August 31, 2008. The face value as of August 31, 2008 was confirmed by a prospectus UBS issued on October 7 informing us that we were being given an option either to keep the ARSs or to sell them to UBS at the face value plus accrued interest. We exercised the option of selling them to UBS. We received a letter from UBS dated November 5, 2008 stating that they had accepted our exercise and will buy back our ARSs at their full face value of $750,000 plus accrued interest. We have been advised by our UBS account manager that this buyback is expected to occur between January 2, 2009 and January 4, 2011.

INFLATION

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

RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. For financial assets and liabilities, SFAS 157 will be effective for the Company in the first fiscal quarter of 2009. As permitted by FSP-FAS 157-2, SFAS 157 is effective for nonfinancial assets and liabilities for the Company during the first fiscal quarter of 2010. Management believes the adoption of SFAS 157 for its financial assets and liabilities will not have a material impact on the Company's consolidated financial statements and continues to evaluate the potential impact of the adoption of SFAS 157 related to its nonfinancial assets and liabilities.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 will be effective for the Company in the first fiscal quarter of 2009. The Company believes the adoption of SFAS 159 will not have a material impact on the Company's consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"), which replaces SFAS 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any resulting goodwill, and any noncontrolling interest in the acquiree. SFAS 141R also provides for disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective for the Company in first fiscal quarter of 2010 and must be applied prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements -- an amendment of Accounting Research Bulletin No. 51" ("SFAS 160"), which establishes accounting and reporting standards for noncontrolling interests ("minority interests") in subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a subsidiary should be accounted for as a component of equity separate from the parent's equity. SFAS 160 will be effective for the Company in the first fiscal quarter of 2010 and must be applied prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently evaluating the potential impact that adoption of SFAS 160 may have on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities -- an amendment of FASB Statement No. 133" ("SFAS 161"), which requires enhanced disclosures about an entity's derivative and hedging activities. SFAS 161 will be effective for The Company second fiscal quarter of 2009.

In June 2006, the Financial Accounting Standards Board ("FASB) issued FASB interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in income tax positions. The provisions of FIN 48 are effective for the Company on September 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. We have reviewed all accounts that create a deferred tax asset or liability which may have the impact, and the balance in those account should not be deferred for tax purposes are included as income for tax purposes, thus increasing taxable income and creating a deferred tax benefit for the following year. We have also reviewed the matter of research and development credit ("R&D credit"). After evaluating the adoption of FIN 48, we believe that the adoption did not have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R)," ("SFAS 158"), which requires the recognition of the overfunded or underfunded status of a defined benefit postretirement plan in a company's balance sheet. This portion of the new guidance is effective on December 31, 2006. Additionally, the pronouncement eliminates the option for companies to use a measurement date prior to their fiscal year-end effective December 31, 2008. Since we do not have any defined benefit pension or postretirement plans that are subject to SFAS 158, we do not expect the pronouncement to have a material impact on our consolidated financial statements.

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, 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 revenue 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 when the following conditions are met: 1) evidence of arrangement exists, such as signed Purchase Orders from customers or executed contracts, 2) delivery has been made, such as unlocking the software on the customer's computer(s), 3) the amount is fixed, and 4) it is collectible. 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 byproduct of ongoing improvements and upgrades to 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 revenue at the time the training or service call is provided.

We enter into one-year license agreements with most of our customers for the use of our pharmaceutical software products. However, from time to time, we enter into multi-year license agreements. We unlock and invoice software one year at a time for multi-year licenses. Therefore, revenue is recognized one year at a time.

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 $466,735 and $429,867 for the fiscal years ended August 31, 2008 and 2007, respectively. We expect future amortization expense to vary due to increases in capitalized computer software development costs.

We test capitalized computer software costs for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable within a reasonable time.

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.

The Company has adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), - "Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB statement 109, "Accounting for Income Taxes", and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our review of prior year tax positions using the criteria and provisions presented in FIN 48 did not result in a material impact on the Company's financial position or results of operations.

Stock-Based Compensation

Effective September 1, 2006, we adopted SFAS No. 123R using the modified prospective method. Under this method, compensation costs includes: (1) compensation cost for all share-based payments granted prior to, but not yet vested as of September 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the options' vesting period, and (2) compensation cost for all share-based payments granted subsequent to September 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R, amortized on a straight-line basis over the options' vesting period.

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.

Estimates

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 . . .