Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q, 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 (referred to in this Report as the "Company") 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 stockholders 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.

General

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. 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™, ClassPharmer™, DDDPlus™, and GastroPlus™.

ADMET Predictor
ADMET (Absorption, Distribution, Metabolism, 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 estimates of these properties, even though the molecule has never existed. Drug companies continually search through millions of such "virtual" molecular structures as they attempt to find new drugs. It has been estimated that there are somewhere on the order of 1062 possible drug-like molecular structures. That is such a huge number that it is difficult to comprehend. If we could evaluate a billion molecules (109) per second, it would take 1053 seconds to evaluate them all that's about 1045 years. The age of the universe is said to be less than 1010 years. Clearly, we will never be able to make and test evaluate all of them, so computerized methods are the only hope to even scratch the surface of the total "chemical space" for potential pharmaceutical products.

The vast majority of drug-like 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 as an oral dose (about 80% of medications), 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 many will be toxic in various ways. Identification of such properties in the computer enables researchers to eliminate poor compounds without spending time and money to make them and run experiments to identify their weaknesses. Today, many molecules can be eliminated on the basis of computer predictions provided by ADMET Predictor.

Several independent studies have been published that compare the accuracy of software programs like ADMET Predictor. In each case, ADMET Predictor has been ranked first in accuracy (it was ranked second in one study, but that study was later redone with a more difficult set of test compounds and a newer version of ADMET Predictor, and it was then ranked first). Not one other software product was consistently in the top 4 in these studies. This is a remarkable accomplishment, considering the greater size and resources of many of our competitors.

ADMET Predictor includes ADMET Modeler™. ADMET Modeler was first released in July of 2003 as a separate product, and was integrated into ADMET Predictor in 2006. This powerful program automates the training of the predictive models used in ADMET Predictor, so they are produced in a small fraction of the time once required. For example, new toxicity models were developed in a matter of a few hours once we completed the tedious effort of "cleaning up" the databases (which often contain a significant number of errors). Prior to the availability of ADMET Modeler, we would have needed as much as three months for each new model after cleaning the databases 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 performed by specialists. With ADMET Modeler integrated into ADMET Predictor, scientists without model-building experience can now use their own experimental data to quickly create high-quality predictive models.

During this reporting period, improvement of ADMET Predictor/Modeler has continued. We had resubmitted our Phase II NIH SBIR (Small Business Innovation Research) grant proposal in August 2008. This time the proposal was scored by the reviewers (the previous submittal had been returned unscored). We are awaiting notification regarding funding. The score we received is often in the range of scores that are funded; however, the current financial crisis may affect the total funding available from the NIH for grants like ours. We have continued this work under our own funding, and we've demonstrated further improvements in predictive capability, which we are currently incorporating into the next release of ADMET Predictor. We expect to release the next version in February or March of 2009.

ADMET Predictor is compatible with the popular Pipeline Pilot™ software offered by SciTegic, a subsidiary of Accelrys. This software serves as a tool to allow chemists to run several different software programs in series to accomplish a set workflow for large numbers of molecules. In early discovery, chemists often work with hundreds of thousands or millions of "virtual" molecules - molecules that exist only in a computer. The chemist tries to decide which few molecules from these large "libraries" should be made and tested. Using Pipeline Pilot with ADMET Predictor (and ClassPharmer - see below), perhaps in conjunction with other software products, the chemist can create and screen very large libraries faster and more efficiently than running each program by itself.

ClassPharmer
ClassPharmer continues to evolve into a more and more powerful tool for medicinal and computational chemists. Coupled with ADMET Predictor, the two programs provide an unmatched capability for chemists to search through huge libraries of compounds to find the most interesting classes and molecules that are active against a particular target. In addition, ClassPharmer with ADMET Predictor can take an interesting molecule and generate high quality analogs (i.e., similar new molecules) using several different algorithms to ensure that the new molecules are both active against the target while also being acceptable in a variety of ADMET (Absorption, Distribution, Metabolism, Excretion and Toxicity) properties.

Improvements during the first quarter were focused on incorporating more new features requested by our users around the world, as well as adding other new capabilities identified in-house. We released ClassPharmer 4.6 in January 2009, after the end of this reporting period.

ClassPharmer's molecule design capabilities provide ways for chemists to rapidly generate large numbers of novel chemical structures based on intelligence from compounds that have already been synthesized and tested, or from basic chemical reactions selected by the user. Export of results is available in Microsoft Excel™ format as well as other convenient file formats requested by users.

DDDPlus
DDDPlus sales have continued to grow as formulation scientists continue to recognize the value of this one-of-a-kind simulation software in their work. Improvements have been added to further enhance the value of this product, including numerous user convenience features have been added, as well as more sophisticated handling of dosage forms that incorporate multiple polymers for controlled release. Work on the next update of DDDPlus has included making the program match the user interface in our flagship GastroPlus product as closely as possible since many formulation scientists can use both programs. Additions to the programs capabilities and built-in databases for excipient ingredients and dissolution media have also been made. A new release of DDDPlus is expected early in 2009.

GastroPlus
GastroPlus continues to enjoy its "gold standard" status in the industry for its class of simulation software. It is used from early drug discovery through preclinical development and into early clinical trials. At an international conference in Shanghai, China, in May 2008, Pfizer scientists presented a scientific poster describing a two-year study in which all four commercially available PBPK (physiologically based pharmacokinetics) simulation programs on the market were compared for their ability to predict human pharmacokinetics from preclinical (animal and in vitro) data. The study was divided into two arms: intravenous and oral dosing. GastroPlus was ranked first in both arms. No other software was ranked consistently second or third. This independent evaluation, which was accomplished via analysis of 21 Pfizer proprietary compounds with data from early discovery all the way through human trials, provides the strongest possible validation of the superiority of GastroPlus in pharmaceutical research and development.

The information provided through GastroPlus simulations guides project decisions in various ways. Among the kinds of knowledge gained through such simulations are: (1) the best "first dose in human" for a new drug prior to Phase I trials,
(2) 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, (3) 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, (4) when certain properties of a new compound are probably adequately estimated through computer ("in silico") predictions or simple experiments rather than through more expensive and time-consuming in vitro or animal experiments, (5) what the likely variations in blood and tissue concentration levels of a new drug would be in a large population, in different age groups or in different ethnic groups, and (6) 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.

On May 19, 2008, we announced the release of GastroPlus version 6.0 - a major new release that includes several important improvements to the program. We improved the PKPlus™ Module to enable it to fit pharmacokinetic models to multiple data sets, including both intravenous and oral dosage forms. The feedback we have received from customers for that change has been enthusiastic. We made further improvements to the new sophisticated kidney model to simulate how drugs are cleared in urine. We added numerous convenience features requested by our users. We also added the ability of the program to track metabolites of a parent drug, including metabolites of metabolites, to as many levels as desired. This is a significant new capability because it allows the user to predict how much of each metabolite will be generated, and into which tissues the metabolite is likely to partition. Some metabolites can be therapeutically active, while others can be toxic, so knowing how much is produced and where it goes is valuable information to assess the likelihood of both therapeutic and adverse effects.

Our marketing intelligence and reorder history indicate that GastroPlus continues to enjoy a dominant position in the number of users worldwide. In addition to virtually every major pharmaceutical company, licenses include government agencies in the U.S and abroad, 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 many hundreds of companies, represents major growth potential for GastroPlus. Our experience has been that the number of new companies adopting GastroPlus has been growing steadily, adding to the base of annual licenses each year.

CONTRACT RESEARCH AND CONSULTING SERVICES
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 frequently 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. Long-term collaborations and shorter-term consulting contracts serve both to showcase our technologies and as a way to build and strengthen customer relationships.

We currently have three funded collaborations to extend the capabilities of GastroPlus into new types of analysis. All three are from the top 5 pharmaceutical companies (3 different companies), and all are for significant improvements to GastroPlus. One is funding the extension of GastroPlus' capabilities into the area of drug-drug interactions. Another is funding the development of the ocular drug delivery capabilities. The third is funding the development of a nasal-pulmonary drug delivery capability. These extensions will further push GastroPlus ahead of its competitors by providing the most comprehensive simulation capabilities available.

WORDS+ SUBSIDIARY

PRODUCTS
Our wholly owned subsidiary, Words+, Inc., has been an industry pioneer and technology leader for over 27 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 line of hardware products. We are also considering acquisitions of other products, businesses and companies that are complementary to our existing augmentative and alternative communication and computer access business lines. We acquired 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 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 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.

During last fiscal year, after the introduction of the newest Say-it! SAM version late in the first quarter, sales of our new PDA-based (personal-digital-assistant-based) Say-it! SAM augmentative communication device set new records, contributing nicely to the highest quarter in our history in the third quarter. Just before the end of the last quarter we introduced the Conversa™. This product offers the most human-sounding synthetic speech output available in the marketplace utilizing AT&T synthetic voices and our new custom designed Sound Pack. To quote one young adult client who changed to the Conversa after using a variety of augmentative communication devices from our competitors for most of her life "I actually sound like a regular woman for the first time in my life!" We are adding the Sound Pack design to other products.

We have clients utilizing new access methods such as the Fiber Optic Switch that is a new part of our product line, a new EMG (muscle signal) switch called Libertas and eye gaze systems from a variety of manufacturers, and we are regularly evaluating and interfacing new access technology.

Results of Operations

Comparison of Three Months Ended November 30, 2008 and 2007.

The following table sets forth our consolidated statements of operations (in
thousands) and the percentages that such items bear to net sales:

                                                        Three Months Ended
                                                  11/30/08               11/30/07
       Net sales                             $ 2,133        100 %   $ 1,984        100 %
       Cost of sales                             526       24.7         486       24.5
       Gross profit                            1,607       75.3       1,498       75.5
       Selling, general and administrative       904       42.4         930       46.9
       Research and development                  301       14.1         226       11.4
       Total operating expenses                1,205       56.5       1,156       58.3
       Income from operations                    402       18.8         342       17.2
       Other income                               51        2.4          63        3.2
       Net income before taxes                   453       21.2         405       20.4
       (Provision for) income taxes             (141 )     (6.6 )      (162 )     (8.2 )
       Net income                            $   312       14.6 %   $   243       12.3 %

Net Sales
Our consolidated net sales increased $149,000, or 7.5%, to $2,133,000 in the first fiscal quarter of Fiscal Year 2009 ("1QFY09") from $1,984,000 in the first fiscal quarter of Fiscal Year 2008 ("1QFY08)". Sales from pharmaceutical software and services decreased approximately $9,000, or 0.6%, while our Words+, Inc. subsidiary's sales increased approximately $158,000, or 29.0%, for the quarter. We attribute the decrease in pharmaceutical software sales primarily to a reduction in the number of ClassPharmer licenses from one large pharmaceutical company due to budget constraints, an additional discount provided to a long-standing collaboration partner, and a shift of approximately $260,000 out of the first quarter, both because some licenses were renewed earlier in 4QFY08 and because some were renewed later in 2QFY09. Our ADMET Predictor software revenues increased due to orders for new module licenses as well as an increase in the number of users. Revenues from contract studies increased over $100,000; however total increases were slightly lower than total declines in pharmaceutical sales.

We attribute the increase in Words+ sales primarily to increased sales of our new PDA version of our "Say-it! SAM" speech output device and new product Conversa™. During the first fiscal quarter of FY08, our inventory of the discontinued previous PDA had been depleted, resulting in an inability to accept orders for these units until the new device was close to production. Sales of new versions of "Say-it! SAM" and Conversa™ outweighed the decreases in revenue from other products.

Cost of Sales
Consolidated cost of sales increased $40,000, or 8.3%, to $526,000 in 1QFY09 from $486,000 in 1QFY08; however, the percentage of cost of sales in 1QFY09 and 1QFY08 is almost the same, with a slight increase of 0.2% in 1QFY09 from 1QFY08. For Simulations Plus, cost of sales increased $2,000, or 1.0%. As a percentage of revenues, cost of sales is almost the same, with a slight increase of 0.2% in 1QFY09 from 1QFY08. 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. As more new products became available for sale, this amortization cost increased by approximately $6,000, or 5.3%, in 1QFY09 compared with 1QFY08. Another significant portion of cost of sales is Royalty expense, which is a percentage of revenues generated from the GastroPlus basic program without modules as well as the ADMET Predictor Toxicity module. Royalty expense decreased approximately $4,000, or 4.6%, in 1QFY09 compared with 1QFY08 due to a decline in GastroPlus license sales, resulting from one renewal that was received after the end of the quarter, as well as a special discount to a one of large pharmaceutical customer who has been a valued collaborator for over five years.

For Words+, cost of sales increased $38,000, or 12.9%; however, as a percentage, cost of sales decreased 6.8% between 1QFY09 and 1QFY08. We attribute the percentage decrease in cost of sales for Words+ primarily to a special discount provided for dealer demo units on new "Say-it! SAM" which resulted in lower margins in 1QFY08. There were no such costs in 1QFY09.

Gross Profit
Consolidated gross profit increased $109,000, or 7.3%, to $1,607,000 in 1QFY09 from $1,498,000 in 1QFY08. We attribute this increase to the increase in Words+ revenues, which outweighed a slight decrease in the Simulations Plus revenues.

Selling, General and Administrative Expenses Consolidated selling, general and administrative (SG&A) expenses decreased $26,000, or 2.9%, to $904,000 in 1QFY09 from $930,000 in 1QFY08. For Simulations Plus, SG&A decreased $8,000, or 1.4%. The major decrease in SG&A expense was in investor relations fees, due to expenses associated with a stock split in FY08, while no such expenses were incurred in 1QFY09. This decrease outweighed increases in expenses for trade shows, salaries, and payroll-related expenses.

For Words+, SG&A expenses decreased $18,000, or 5.0%, due primarily to decreases in commission expenses as a result of increases in non-commissionable sales, and bad debts, marketing consultant fees and salaries. These decreases outweighed increases in technical service costs and equipment rental expense.

Research and Development
We incurred approximately $503,000 of research and development costs for both companies during 1QFY09. Of this amount, $202,000 was capitalized and $301,000 was expensed. In 1QFY08, we incurred $400,000 of research and development costs, of which $174,000 was capitalized and $183,000 was expensed. The increase of $103,000, or 25.8%, in total research and development expenditures from 1QFY08 to 1QFY09 was due primarily to increases in salaries because of new hires as well as salary increases to existing staff.

Other income (expense)
Net other income (expense) in 1QFY09 decreased by $12,000, or 19.6%, to $51,000 in 1QFY09 from $63,000 in 1QFY08. This is due primarily to decreased interest revenue from Money Market accounts.

Provision for Income Taxes
The provision for income taxes decreased by $21,000, or 12.9%, to $141,000 in 1QFY09 from $162,000 in 1QFY08 due to a decrease in estimated income tax rate due to expected tax credits in FY09 such as Research and Development credit and Hiring tax credit.

Net Income
Consolidated net income increased by $68,000, or 28.1%, to $312,000 in 1QFY09 from $243,000 in 1QFY08. We attribute this increase in profit primarily to the increases in revenue from Words+ revenues and decrease in SG&A expenses, which outweighed an increase in R&D expense, a lower provision for income taxes, which offset a decrease in other income.

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. In January 2009, the $750,000 in investments in Auction Rate Securities were repurchased by UBS Financial Services, Inc., at par value plus interest.