<PAGE>   1
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q

(Mark One)

[X]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

                                       OR

[ ]     Transition Report Pursuant to Section 13 or 15(d) of the Securities
        Exchange Act of 1934

                           For the transition period

                        from ___________ to ___________

                        Commission File Number: 000-21283

                            SIMULATION SCIENCES INC.
             (Exact name of registrant as specified in its charter)

                                    Delaware 
         (State or other jurisdiction of incorporation or organization)
             601 Valencia Avenue, Suite 100, Brea, California 92823
               (Address of principal executive offices) (Zip Code)

                 95-2487793 (I.R.S. Employer Identification No.)

               Registrant's telephone number, including area code:
                                 (714) 579-0412

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ninety (90) days.

                                   Yes [X] No [ ] 

        The registrant had 11,045,032 shares of common stock outstanding as of
October 27, 1997.


<PAGE>   2
                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

                                      INDEX


<TABLE>
<CAPTION>
                                                                                       PAGE NUMBER
<S>                                                                                    <C>
PART I.  FINANCIAL INFORMATION

     Item 1. Financial Statements:
             Consolidated Balance Sheets -
             December 31, 1996 and September 30, 1997 (Unaudited)                              3

             Consolidated Statements of Operations (Unaudited) -
             Three Months and Nine Months Ended September 30, 1996 and 1997                    4

             Consolidated Statements of Cash Flows (Unaudited) -
             Nine Months Ended September 30, 1996 and 1997                                     5

             Notes to Unaudited Consolidated Financial Statements                              6

     Item 2. Management's Discussion and Analysis of Financial
             Condition and Results of Operations                                               9


PART II.  OTHER INFORMATION

     Item 6. Exhibits and Reports on Form 8-K                                                 21
</TABLE>

                                       2

<PAGE>   3
                         PART I - FINANCIAL INFORMATION

                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                               December 31,    September 30,
                                                                                  1996             1997
                                                                               ------------    ------------
<S>                                                                            <C>             <C>         
                                    ASSETS                                                     (unaudited)

CURRENT ASSETS
    Cash and cash equivalents                                                  $ 26,320,519    $  8,581,380
    Accounts receivable, less allowance for doubtful accounts of
        $722,036 and $895,980 at December 31, 1996 and September 30, 1997         8,981,299       9,154,722
    Unbilled accounts receivable                                                  3,671,677      12,083,987
    Deferred income taxes                                                         2,930,073       2,930,073
    Prepaid expenses and other current assets                                       379,122         719,010
                                                                               ------------    ------------
        Total current assets                                                     42,282,690      33,469,172
LONG-TERM INSTALLMENTS RECEIVABLE, net of unamortized discount
    of $1,045,184 and $2,891,500 at December 31, 1996 and September 30, 1997      5,126,866      13,943,819
PROPERTY AND EQUIPMENT
    Computer equipment and programs                                               6,073,879       7,962,350
    Furniture and fixtures                                                        3,885,485       4,240,325
                                                                               ------------    ------------
                                                                                  9,959,364      12,202,675
    Less accumulated depreciation                                                (5,914,287)     (7,245,436)
                                                                               ------------    ------------
        Property and equipment, net                                               4,045,077       4,957,239
GOODWILL, net of accumulated amortization of $58,257 at September 30, 1997                        1,271,948
OTHER ASSETS, net                                                                 1,568,488       6,299,523
DEFERRED INCOME TAXES                                                               174,656         174,656
                                                                               ------------    ------------
                                                                               $ 53,197,777    $ 60,116,357
                                                                               ============    ============


                            LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable                                                           $  1,901,847    $  2,569,850
    Accrued vacation and bonus payable                                            1,564,603       2,172,924
    Other accrued liabilities                                                     3,732,078       5,397,244
    Obligations related to acquisitions                                                           9,435,000
    Income taxes payable                                                          2,083,664       1,976,452
    Deferred revenue                                                              5,096,380       5,039,001
                                                                               ------------    ------------
        Total current liabilities                                                14,378,572      26,590,471
OBLIGATION RELATED TO ACQUISITION                                                                   600,000
COMMITMENTS
STOCKHOLDERS' EQUITY
Series A Redeemable Convertible Preferred Stock,
    $.001 par value; 5,000,000 shares authorized,
    100,000 shares designated as Series A Participating
    Preferred Stock, no shares issued and outstanding
    at December 31, 1996 and September 30, 1997                                          --              --
Common stock - $.001 par value; 30,000,000 shares authorized;
    9,987,340 and 11,020,083 shares issued and outstanding at
    December 31, 1996 and September 30, 1997                                          9,987          11,020
    Additional paid-in capital                                                   32,552,964      37,888,565
    Retained earnings                                                             6,256,254      (4,973,699)
                                                                               ------------    ------------
        Total stockholders' equity                                               38,819,205      32,925,886
                                                                               ------------    ------------
                                                                               $ 53,197,777    $ 60,116,357
                                                                               ============    ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       3


<PAGE>   4
                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                  SEPTEMBER 30,                 SEPTEMBER 30,
                                                          ---------------------------    ---------------------------
                                                              1996           1997           1996           1997
                                                          ------------   ------------    ------------   ------------
<S>                                                       <C>            <C>             <C>            <C>         
Revenue                                                           (UNAUDITED)                    (UNAUDITED)
    Software license revenue                              $ 11,644,595   $ 14,986,940    $ 31,281,088   $ 41,913,110
    Services and other revenue                                 452,316        765,140       2,606,800      2,182,302
                                                          ------------   ------------    ------------   ------------
       Total revenue                                        12,096,911     15,752,080      33,887,888     44,095,412
Cost of revenue
    Cost of software license revenue                         1,153,690        818,892       2,932,169      2,613,706
    Cost of services and other revenue                         368,831        696,278       1,921,293      2,001,932
                                                          ------------   ------------    ------------   ------------
       Total cost of revenue                                 1,522,521      1,515,170       4,853,462      4,615,638
                                                          ------------   ------------    ------------   ------------
Gross profit                                                10,574,390     14,236,910      29,034,426     39,479,774
Operating expenses
    Sales and marketing                                      4,566,532      4,442,854      11,905,111     13,188,986
    Research and development                                 2,782,061      4,333,984       9,627,005     11,835,223
    General and administrative                               1,942,716      2,736,086       5,009,229      7,211,969
    In-process research and development and other costs                    11,250,000                     17,520,000
                                                          ------------   ------------    ------------   ------------
       Total operating expenses                              9,291,309     22,762,924      26,541,345     49,756,178
                                                          ------------   ------------    ------------   ------------
Income (loss) from operations                                1,283,081     (8,526,014)      2,493,081    (10,276,404)
Interest and other income, net                                 135,731        480,482         298,984      1,439,435
                                                          ------------   ------------    ------------   ------------
Income (loss) before provision for income taxes              1,418,812     (8,045,532)      2,792,065     (8,836,969)
Provision for income taxes                                     609,478        180,000       1,172,692      2,392,984
                                                          ------------   ------------    ------------   ------------
Net income (loss)                                         $    809,334   $ (8,225,532)   $  1,619,373   $(11,229,953)
                                                          ============   ============    ============   ============

Pro forma and net income (loss) per share                 $       0.10   $      (0.73)   $       0.21   $      (1.02)
                                                          ============   ============    ============   ============

Pro forma and weighted average common shares                 7,764,970     11,301,677       7,764,970     10,961,360
                                                          ============   ============    ============   ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4


<PAGE>   5
                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED SEPTEMBER 30,
                                                                                -------------------------------
                                                                                    1996               1997
                                                                                ------------       ------------
<S>                                                                             <C>                <C>          
                                                                                          (UNAUDITED)
Cash flows from operating activities:
  Net income (loss)                                                             $  1,619,373       $(11,229,953)
  Adjustments to reconcile net income (loss) to net cash
   used in operating activities:
     Depreciation and amortization                                                   692,227          1,389,406
     Provision for doubtful accounts                                                 400,929            175,000
     In-process research and development and other costs                                             17,520,000
     Change in operating assets and liabilities, net of the effect of
      acquisitions:
        Accounts receivable                                                          522,506            685,165
        Unbilled accounts receivable                                              (1,944,790)        (8,412,310)
        Income taxes receivable                                                      555,634
        Prepaid expenses and other current assets                                     61,642           (339,888)
        Other assets                                                              (1,389,218)          (551,765)
        Long-term installments receivable                                         (4,829,575)        (8,816,953)
        Accounts payable                                                             114,104           (370,344)
        Accrued vacation and bonus payable                                           297,011            533,321
        Other accrued liabilities                                                  1,145,206              4,841
        Income taxes payable                                                         497,360           (107,212)
        Deferred revenue                                                             (62,271)        (1,057,379)
                                                                                ------------       ------------
             Net cash used in operating activities                                (2,319,862)       (10,578,071)

Cash flow from investing activities:
  Purchases of property and equipment                                             (2,184,932)        (2,032,202)
  Cash paid for acquisitions                                                                         (6,555,500)
                                                                                ------------       ------------
             Net cash used in investing activities                                (2,184,932)        (8,587,702)

Cash flow from financing activities:
  Proceeds from the sale of stock under stock plans                                  149,877          1,426,634
                                                                                ------------       ------------
             Net cash provided by financing activities                               149,877          1,426,634
                                                                                ------------       ------------
             Net decrease in cash and cash equivalents                            (4,354,917)       (17,739,139)
Cash and cash equivalents at beginning of period                                   5,442,283         26,320,519
                                                                                ------------       ------------
Cash and cash equivalents at end of period                                      $  1,087,366       $  8,581,380
                                                                                ============       ============

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
     Income taxes                                                               $    274,944       $  2,039,359
                                                                                ============       ============

Supplemental disclosures related to acquisitions:
  The Company acquired certain assets and technology of
  other companies as described in Note 5. These acquisitions
  are summarized as follows:
     In-process research and development                                                           $ 16,270,000
     Purchased technology                                                                             3,304,270
     Fair value of assets acquired                                                                    3,369,697
     Goodwill                                                                                         1,330,205
     Common stock issued                                                                             (3,910,000)
     Cash paid for acquisitions                                                                      (6,555,500)
     Obligations related to acquisitions                                                            (10,035,000)
                                                                                                   ------------
     Liabilities assumed                                                                           $  3,773,672
                                                                                                   ============
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       5


<PAGE>   6



                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION AND ACCOUNTING POLICIES

    The consolidated balance sheet as of September 30, 1997, the related
consolidated statements of operations for the three and nine month periods ended
September 30, 1996 and 1997, and the consolidated statements of cash flows for
the nine month periods ended September 30, 1996 and 1997 are unaudited and in
the opinion of management contain all necessary adjustments, consisting of
normal recurring adjustments, for a fair presentation of such financial
information. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's 1996 Report on Form 10-K filed with the Securities
and Exchange Commission. Interim results are not necessarily indicative of
results for a full year.

    The consolidated financial statements and notes are presented as permitted
by Form 10-Q, and do not contain certain information included in the Company's
audited consolidated financial statements and notes for the year ended December
31, 1996.

    Goodwill - Goodwill represents the excess of the purchase price over the
fair value of net assets acquired and is amortized using the straight line
method over ten years. The Company periodically evaluates the recoverability of
goodwill and, based on its most recent analysis, believes that no impairment
exists at September 30, 1997.

     Purchased technology - Purchased technology represents an allocation of the
purchase price with respect to certain technology acquired by the Company in its
recent acquisitions (Note 5) and is amortized using the straight line method
over 3 years. The Company periodically evaluates the recoverability of purchased
technology and has written-off $1.3 million related to purchased technology
acquired in a previous year. Such amount is included in in-process research
development and other costs in the accompanying unaudited statements of
operations. Based on its most recent analysis, the Company believes that no
impairment exists at September 30, 1997.

2.  PRO FORMA AND NET INCOME (LOSS) PER SHARE

    Pro forma net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common and dilutive common equivalent
shares outstanding. Weighted average common and common equivalent shares include
common shares, warrants to purchase shares of common stock, stock options using
the treasury stock method, and the pro forma conversion of all outstanding
shares of preferred stock into shares of common stock. Net income (loss) per
share is computed as described above and includes the actual conversion of the
preferred shares into the same number of common shares upon the completion of
the Company's initial public offering in October 1996.

    Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D, stock options granted during the twelve months prior to the date of
the initial filing of the Company's Form S-1 Registration Statement have been
included in the calculation of common equivalent shares using the treasury stock
method as if they were outstanding for all periods presented.

3.  RECENT ACCOUNTING PRONOUNCEMENTS

    The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption is not permitted. When adopted, all
previously reported earnings per share amounts must be restated based upon the
provisions of the new standard. Pro forma basic and diluted loss per share
calculated in accordance with SFAS No. 128 would be ($0.75) and


                                       6


<PAGE>   7
                   SIMULATION SCIENCES INC. AND SUBSIDIARIES

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

($0.71) for the three months ended September 30, 1997 and 1996, respectively,
and ($1.06) and ($0.99) for the nine months ended September 30, 1997 and 1996,
respectively.

    For the years beginning after January 1, 1998, the Company will adopt SFAS
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. The Company is reviewing the
impact of such statements on its financial statements.

4.  STOCK PLANS

    The following table summarizes stock option activity under the 1994 and 1996
Stock Option Plans for the nine months ended September 30, 1997:


<TABLE>
<CAPTION>
                                                                NUMBER OF
                               NUMBER OF       PRICE PER         OPTIONS
                                 SHARES          SHARE         EXERCISABLE
                               ---------    --------------     -----------
<S>                           <C>           <C>                <C>
Balance, January 1, 1997       1,464,812    $2.67 - $10.38        193,137
        Granted                  556,667     9.88 -  18.13        =======
        Exercised               (216,554)    2.67 -   7.50
        Canceled                (124,135)    2.67 -  16.25
                               ----------   --------------
Balance, September 30, 1997    1,680,790     2.67 -  18.13        245,445
                               ==========                         =======
</TABLE>


    Options to purchase an additional 383,500 shares of common stock at $22.875
per share were issued and options to purchase 24,949 shares of common stock were
exercised after September 30, 1997. As of September 30, 1997, there was no
activity under the 1996 Director Plan.

    Employee Stock Purchase Plans - On June 30, 1997, 80,249 shares of common
stock were purchased under the Company's 1996 Employee Stock Purchase Plans at
$7.65 per share. At September 30, 1997, the Company had a liability of $238,934
recorded in connection with the future purchase of common stock under the plan.

5.  ACQUISITIONS

    In March 1997, the Company acquired substantially all of the assets of
Visual Solutions, Inc. for $5.7 million, including acquisition costs, consisting
of $1.8 million in cash and $3.9 million in common stock of the Company. Visual
Solutions, Inc. was a privately held Texas corporation providing commercial
simulation software and related services to the process industries. The
acquisition was primarily accounted for under the purchase method of accounting
and the purchase price was allocated to in-process research and development
($5.2 million), goodwill ($0.3 million), purchased technology ($0.1 million) and
accounts receivable ($0.1 million). The amount allocated to in-process research
and development was based upon management's assumptions.

    In March 1997, the Company acquired substantially all of the assets of
Salumunek & Assoc., Inc., for approximately $950,000 in cash, including
acquisition costs. Salumunek & Assoc., Inc. was a privately held Texas
corporation providing plant performance monitoring software and related services
to the process industries. The acquisition was accounted for under the purchase
method of accounting and the purchase price was allocated primarily to goodwill.

    In May 1997, the Company entered into an agreement and acquired certain
technology from Bayer AG for $1.0 million in cash, to be paid in equal
installments over a five year period. The acquisition was accounted for under
Statement of Financial Accounting Standards No. 68, Research and Development
Arrangements (SFAS No. 68). In accordance with SFAS No. 68, an asset and
liability have been recorded for an amount equal to the purchase price.


                                       7


<PAGE>   8
                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

     In June 1997, the Company acquired certain technology and assets from
Raytheon Engineers & Constructors, Inc. for $1.1 million in cash, including
transaction costs, plus assumed liabilities of $30,000. The acquisition was
primarily accounted for under the purchase method of accounting and the purchase
price was primarily allocated to in-process research and development. The amount
allocated to in-process research and development was based upon management's
assumptions.

     In September 1997, the Company acquired certain business planning
products from Shell Oil Products Company for $1.6 million, including
transaction costs. The purchase price is to be paid in cash in the fourth
quarter of 1997. The acquisition was accounted for under the purchase method of
accounting and the purchase price was allocated to intangible assets.

     In September 1997, the Company acquired certain royalty rights and a
purchase option with respect to certain advanced multivariable process control
technology from Shell Oil Products Company for $1.1 million, including
transaction costs. The purchase price is to be paid in cash in the fourth
quarter of 1997. The acquisition was accounted for under the purchase method of
accounting and the purchase price was allocated to intangible assets.

     In September 1997, the Company acquired an irrevocable, perpetual,
exclusive royalty-free license with respect to certain solver and modeling
technology from Shell Oil Products Company for a total of $6.2 million,
including transaction costs. The purchase price is to be paid in 1998 as
follows: $1.7 million in cash and $4.5 million in common stock. The acquisition
was accounted for under the purchase method of accounting and the purchase price
was allocated to in-process research and development ($6.0 million) and goodwill
($0.2 million). The amount allocated to in-process research and development was
based upon management's assumptions.

     On September 30, 1997, the Company acquired substantially all of the assets
of W.R. Biles & Associates, Inc. for $5.6 million, including acquisition costs.
The purchase price consisted of $2.5 million in cash and $2.7 of assumed net
liabilities (net of $0.8 million in assets), plus transaction costs. W.R. Biles
& Associates, Inc. was a privately held Texas based corporation providing
process information solutions to companies in the chemical, pharmaceutical, food
and beverage and other industries. The acquisition was accounted for under the
purchase method of accounting and the net purchase price was allocated to
in-process research and development ($4.0 million), purchased technology ($1.6
million), accounts receivable ($0.7 million) and fixed assets ($0.1 million) and
accrued liabilities ($3.7 million). The amount allocated to in-process research
and development was based upon management's assumptions.

    The following unaudited pro forma information presents results of operations
of the Company for the year ended December 31, 1996 and the nine month period
ended September 30, 1997, as if the W.R. Biles and Associates, Inc. acquisition
had been consummated as of the beginning of 1996. The pro forma information is
presented for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the combined
enterprise.

<TABLE>
<CAPTION>
                              Year Ended       Nine Months Ended
                           December 31, 1996   September 30, 1997
                           -----------------   ------------------
<S>                           <C>                 <C>
Total revenues                $56,185,185         $48,823,800
Net loss                     (  2,286,959)       (  8,550,341) 
Loss per share               ($      0.30)       ($      0.78)
</TABLE>

                                       8


<PAGE>   9
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

    Simulation Sciences Inc. is a leading provider of commercial application
software and related services to the petroleum, petrochemical, industrial
chemical and other process industries, as well as the engineering and
construction firms that support those industries. The Company's software
products are designed to increase customers' profitability by reducing their
capital investment costs, increasing yields, improving product quality and 
enhancing management decision making.

    The Company generally licenses its software pursuant to non-cancelable, one
to five year term licenses. The Company receives over 90% of its worldwide
revenue from licenses of its software products. These licenses obligate the
Company to provide customer support, maintenance and any product updates. During
the past five years, the substantial majority of all licenses have been renewed.

    Revenue from the Company's primary simulation product, PRO/II, accounted for
approximately 70% of total revenue in each of the last three years. The
remainder of the Company's revenue is derived from the license of other products
and services.

    The Company recognizes revenue from product licensing agreements in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 91-1, Software Revenue Recognition ("SOP 91-1"). SOP 91-1
generally requires recognition of license revenue upon shipment or renewal and
recognition of revenue for maintenance and support ratably over the life of the
contract. However, if license fees and maintenance and support charges are not
separately identified, then all revenue from the contract must be recognized
ratably over its life. More than 95% of the Company's license contracts entered
into before 1996 did not separately identify software license fees and charges
for maintenance and support obligations. As a result, the Company recognized
revenue from these contracts ratably over the terms of such contracts in
accordance with SOP 91-1 ("Ratable Revenue"). The remaining contracts identified
the cost of the license fee and maintenance and support separately and, under
SOP 91-1, the Company recognized revenue from the license portion of the
contracts upon shipment or renewal ("License Revenue") and from the maintenance
and support portion of such contracts as Ratable Revenue. Accordingly, the
revenue recognized under a contract resulting in License Revenue recognition
will be higher in the quarter of shipment or renewal, and lower in later
quarters, than that recognized under a contract resulting only in Ratable
Revenue recognition. In order to more closely conform to industry-standard
practices regarding licenses and maintenance agreements, the Company began
entering into contracts for new and renewing customers that separately identify
software license fees and maintenance and support charges, resulting in
recognition of License Revenue on an increased portion of contracts. The
substantial majority of the Company's new and renewal contracts now contain
terms that result in License Revenue. For this reason, the Company does not
believe that revenue and results of operations for periods ended on or prior to
June 30, 1996 will be directly comparable to results for future periods.
Furthermore, because the Company had only begun to recognize License Revenue
during the quarter ending March 31, 1996, the Company does not believe that
revenue and results of operations for the nine month period ended September 30,
1997 are directly comparable to the results for the year earlier period. Revenue
recognition on certain service offerings is based on percentage of completion
and on attainment of project milestones.

    During 1997, the Company has pursued its strategy of acquiring complementary
businesses, products and technologies to broaden the Company's product and
service offerings and to further penetrate its markets. During the first nine
months of 1997, the Company completed eight acquisitions of assets, licenses
or technologies. See "Note 5 of Notes to Unaudited Consolidated Financial 
Statements -- Acquisitions".


                                       9


<PAGE>   10
A.  RESULTS OF OPERATIONS

    Three Months Ended September 30, 1996 and September 30, 1997

    The following table sets forth certain items in the Company's consolidated
statements of operations in thousands of dollars and as a percentage of total
revenue for the three months ended September 30, 1996 and 1997.


<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED SEPTEMBER 30,
                                                           -------------------------------------
                                                                  1996                1997
                                                           ----------------    -----------------
                                                            AMOUNT      %       AMOUNT       %
                                                           --------   -----    --------    -----
<S>                                                        <C>        <C>      <C>         <C>  
                                                                     (in thousands)
Revenue
     Software license revenue                              $ 11,645    96.3%   $ 14,987     95.1%
     Services and other revenue                                 452     3.7         765      4.9
                                                           --------   -----    --------    -----
          Total revenue                                      12,097   100.0      15,752    100.0
Cost of revenue
     Cost of software license revenue                         1,154     9.5         819      5.2
     Cost of services and other revenue                         369     3.1         696      4.4
                                                           --------   -----    --------    -----
          Total cost of revenue                               1,523    12.6       1,515      9.6
                                                           --------   -----    --------    -----
Gross profit                                                 10,574    87.4      14,237     90.4
Operating expenses
     Sales and marketing                                      4,566    37.7       4,443     28.2
     Research and development                                 2,782    23.0       4,334     27.5
     General and administrative                               1,943    16.1       2,736     17.4
     In-process research and development and other costs                         11,250     71.4
                                                           --------   -----    --------    -----
          Total operating expenses                            9,291    76.8      22,763    144.5
                                                           --------   -----    --------    -----
Income (loss) from operations                                 1,283    10.6      (8,526)   (54.1)
Interest and other income, net                                  135     1.1         480      3.0
                                                           --------   -----    --------    -----
Income (loss) before provision for income taxes               1,418    11.7      (8,046)   (51.1)
Provision for income taxes                                      609     5.0         180      1.1
                                                           --------   -----    --------    -----
Net income (loss)                                          $    809     6.7%   $ (8,226)   (52.2)%
                                                           ========   =====    ========    =====
</TABLE>


    Total Revenue. Total revenue increased 30% to $15.8 million for the three
months ended September 30, 1997 from $12.1 million for the three months ended
September 30, 1996. Software license revenue, which includes revenue from
software licenses, maintenance and support fees, increased 29% to $15.0 million
for the three months ended September 30, 1997 from $11.6 million for the three
months ended September 30, 1996. The increase in software license revenue was
primarily attributable to renewals of licenses for higher fees, addition of new
products and services to renewing contracts and licenses to new customers.
Services and other revenue, which includes integration, Rigorous On-line
Modeling ("ROM"), consulting and training services, was $0.8 million and $0.5
million for the three months ended September 30, 1997 and 1996, respectively.
The increase in services and other revenue primarily related to an increase in
non-ROM activity.

    Total Cost of Revenue. Total cost of revenue was $1.5 million for the three
months ended September 30, 1997 and 1996. Cost of software license revenue,
which includes costs of production and distribution, customer support and
maintenance, and royalties, decreased 29% to $0.8 million from $1.2 million for
the three months ended September 30, 1997 and 1996, respectively. Cost of
software license revenue as a percentage of software license revenue was 5% and
10% in the three months ended September 30, 1997 and 1996, respectively. The
decrease as a percentage of software license revenue was due primarily to the
increase in software license revenue. Cost of services and other revenue, which
includes costs of personnel involved in project execution and training, as well
as travel, third-party professional fees and related administrative costs,


                                       10


<PAGE>   11
increased 89% to $0.7 million from $0.4 million for the three months ended
September 30, 1997 and 1996, respectively. Cost of services and other revenue as
a percentage of services and other revenue increased to 91% from 82% for the
three months ended September 30, 1997 and 1996, respectively.

    Sales and Marketing. Sales and marketing expenses decreased 3% to $4.4
million for the three months ended September 30, 1997 from $4.6 million for the
three months ended September 30, 1996. Sales and marketing expenses as a
percentage of total revenue were 28% and 38% for the three months ended
September 30, 1997 and 1996, respectively. The Company anticipates that sales
and marketing expenses will increase in dollars and may fluctuate as a
percentage of total revenue in the future.*

    Research and Development. Research and development expenses increased 56% to
$4.3 million for the three months ended September 30, 1997 from $2.8 million for
the three months ended September 30, 1996. Research and development expenses as
a percentage of total revenue were 28% and 23% for three months ended September
30, 1997 and 1996, respectively. The increase in dollars was primarily due to an
increase in the number of technical professionals , including support staff, as
well as personnel hired in connection with acquisitions. The Company expects to
continue to devote substantial resources to its research and development efforts
to continue to develop and support the Company's highly complex software
products.* Accordingly, the Company anticipates that research and development
expenses will increase in dollars and may fluctuate as a percentage of total
revenue in the future.*

    General and Administrative. General and administrative expenses increased
41% to $2.7 million for the three months ended September 30, 1997 from $1.9
million for the three months ended September 30, 1996. General and
administrative expenses as a percentage of total revenue were 17% and 16% in the
three months ended September 30, 1997 and 1996, respectively. The increase in
general and administrative expenses in dollars was primarily due to the costs
associated with being a publicly held company, personnel-related costs, costs
associated with the Company's tax planning program, and consulting and legal
expenses. The Company anticipates that its general and administrative expenses
will increase in dollars and may fluctuate as a percentage of total revenue in
the future.*

     In-process Research and Development and Other Costs. In-process research
and development expense of $10.0 million for the three months ended September
30, 1997 was due to the allocation of a portion of the purchase price of
technology acquired from Shell Oil Products Company and W. R. Biles &
Associates, Inc. The amounts allocated to in-process research and development
were based upon management's assumptions. Other costs of $1.3 million is due to
the write off of amounts paid in a previous year in connection with certain
technology acquired from Shell Oil Products Company. (See "Note 5 of Notes to
Unaudited Consolidated Financial Statements - Acquisitions").

     Interest and Other Income, Net. Interest and other income, net increased
$345,000 to $480,000 for the three months net ended September 30, 1997 from
$135,000 for the three months ended September 30, 1996. The increase was
primarily attributable to interest income associated with the proceeds received
in the Company's initial public offering in the fourth quarter of 1996 and an
increase in interest income from the effect of the change in contract terms.

    Provision for Income Taxes. The Company's effective tax rate on pre-tax
income, excluding the in-process research and development and other costs,
decreased to 39% from 43% for the three months ended September 30, 1997 and
1996, respectively, due to the Company's implementation of a tax planning
program.

    Net Income (loss). Net loss was $8.2 million for the three months ended
September 30, 1997 compared to net income of $809,000 for the three months ended
September 30, 1996. Excluding the $11.3 million in charges for in-process
research and development and other costs, net income for the three months ended
September 30, 1997 would have been approximately $2.0 million.


* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."


                                       11


<PAGE>   12

    Nine Months Ended September 30, 1996 and September 30, 1997

    The following table sets forth certain items in the Company's consolidated
statements of operations in thousands of dollars and as a percentage of total
revenue for the nine months ended September 30, 1996 and 1997.

<TABLE>
<CAPTION>
                                                              NINE MONTHS ENDED SEPTEMBER 30,
                                                           ---------------------------------------
                                                                  1996                1997
                                                           ------------------  -------------------
                                                            AMOUNT        %     AMOUNT         %
                                                           --------     -----  --------      -----
<S>                                                        <C>        <C>   <C>            <C>  
                                                                          (in thousands)
Revenue:
     Software license revenue                              $ 31,281      92.3% $ 41,913       95.1%
     Services and other revenue                               2,607       7.7     2,182        4.9
                                                           --------     -----  --------      -----
          Total revenue                                      33,888     100.0    44,095      100.0
Cost of revenue:
     Cost of software license revenue                         2,932       8.6     2,613        5.9
     Cost of services and other revenue                       1,922       5.7     2,002        4.6
                                                           --------     -----  --------      -----
          Total cost of revenue                               4,854      14.3     4,615       10.5
                                                           --------     -----  --------      -----
Gross profit                                                 29,034      85.7    39,480       89.5
Operating expenses:
     Sales and marketing                                     11,905      35.1    13,189       29.9
     Research and development                                 9,627      28.4    11,835       26.8
     General and administrative                               5,009      14.8     7,212       16.4
     In-process research and development and other costs                         17,520       39.7
                                                           --------     -----  --------      -----
          Total operating expenses                           26,541      78.3    49,756      112.8
                                                           --------     -----  --------      -----
Income (loss) from operations                                 2,493       7.4   (10,276)     (23.3)
Interest and other income, net                                  299       0.9     1,439        3.3
                                                           --------     -----  --------      -----
Income (loss) before provision for income taxes               2,792       8.3    (8,837)     (20.0)
Provision for income taxes                                    1,173       3.5     2,393        5.5
                                                           --------     -----  --------      -----
Net income (loss)                                          $  1,619       4.8% $(11,230)     (25.5)%
                                                           ========     =====  ========      =====
</TABLE>


    Total Revenue. Total revenue increased 30% to $44.1 million for the nine
months ended September 30, 1997 from $33.9 million for the nine months ended
September 30, 1996. Software license revenue, which includes revenue from
software licenses, maintenance and support fees, increased 34% to $41.9 million
for the nine months ended September 30, 1997 from $31.3 million for the nine
months ended September 30, 1996. The increase in software license revenue was
primarily attributable to the effect of the change in contract terms, renewals
of licenses for higher fees, addition of new products and services to renewing
contracts and licenses to new customers. Services and other revenue, which
includes integration, ROM, consulting and training services, decreased 16% to
$2.2 million from $2.6 million for the nine months ended September 30, 1997 and
1996, respectively. The decrease in services and other revenue primarily relates
to a decrease in ROM projects.

    Total Cost of Revenue. Total cost of revenue decreased 5% to $4.6 million
for the nine months ended September 30, 1997 from $4.9 million for the nine
months ended September 30, 1996. Cost of software license revenue, which
includes costs of production and distribution, customer support and maintenance,
and royalties, was $2.6 and $2.9 million for the nine months ended September 30,
1997 and 1996, respectively. Cost of software license revenue as a percentage of
software license revenue was 6% and 9% in the nine months ended September 30,
1997 and 1996, respectively. The decrease as a percentage of software license
revenues was due primarily to the increase in software license revenues. Cost of
services and other revenue, which includes costs of personnel involved in
project execution and training, as well as travel, third-party professional fees
and related administrative costs, was $2.0 million and $1.9 million for the nine
months ended September 30, 1997 and 1996, respectively. Cost of services and
other revenue as a percentage of services and other revenue increased to 92%
from 74% for the nine months ended September 30, 1997 and 1996, respectively,
primarily due to the decrease in services and other revenue during the period
and underutilization of services personnel and other resources.



                                       12


<PAGE>   13
    Sales and Marketing. Sales and marketing expenses increased 11% to $13.2
million for the nine months ended September 30, 1997 from $11.9 million for the
nine months ended September 30, 1996. Sales and marketing expenses as a
percentage of total revenue were 30% and 35% for the nine months ended September
30, 1997 and 1996, respectively. The increase in sales and marketing expenses in
dollars was due primarily to an increase in the number of sales and marketing
professionals and related expenses. The Company anticipates that sales and
marketing expenses will increase in dollars and may fluctuate as a percentage
of total revenue in the future.*

    Research and Development. Research and development expenses increased 23% to
$11.8 million for the nine months ended September 30, 1997 from $9.6 million for
the nine months ended September 30, 1996. Research and development expenses as a
percentage of total revenue were 27% and 28% for the nine months ended September
30, 1997 and 1996, respectively. The dollar increase in research and development
expenses was primarily due to an increase in the number of technical
professionals, including support staff, as well as personnel hired in connection
with acquisitions. The Company expects to continue to devote substantial
resources to its research and development efforts to continue to develop and
support the Company's highly complex software products.* Accordingly, the
Company anticipates that research and development expenses will increase in
dollars and may fluctuate as a percentage of total revenue in the future.*

    General and Administrative. General and administrative expenses increased
44% to $7.2 million for the nine months ended September 30, 1997 from $5.0
million for the nine months ended September 30, 1996. General and administrative
expenses as a percentage of total revenue were 16% and 15% in the nine months
ended September 30, 1997 and 1996, respectively. The increase in general and
administrative expenses in dollars was primarily due to the costs associated
with being a publicly held company, personnel related costs, costs associated
with the Company's tax planning program, and consulting and legal expenses. The
Company anticipates that its general and administrative expenses will increase
in dollars and may fluctuate as a percentage of total revenue in the future.*

     In-process Research and Development and Other Costs. In-process research
and development expense of $16.2 million for the nine months ended September 30,
1997 was due to the allocation of a portion of the purchase price of technology
acquired. The amounts allocated to in-process research and development were
based on management's assumptions. Other costs of $1.3 million was due to the
write off of amounts paid in previous years in connection with certain
technology acquired from Shell Oil Products Company. (See Note 5 of Notes to
Unaudited Consolidated Financial Statements - Acquisitions.)

     Interest and Other Income, Net. Interest and other income, net increased
$1.1 million to $1.4 million for the nine months ended September 30, 1997 from
$0.3 million for the nine months ended September 30, 1996. The increase was
primarily attributable to interest income associated with the proceeds received
in the Company's initial public offering in the fourth quarter of 1996 and an
increase in interest income from the effect of the change in contract terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview."

    Provision for Income Taxes. The Company's effective tax rate on pre-tax
income, excluding the in-process research and development and other costs,
decreased to 40% from 42% for the nine months ended September 30, 1997 and 1996,
respectively, due to the Company's implementation of a tax planning program.

    Net Income (loss). Net loss was $11.2 million for the nine months ended
September 30, 1997 compared to net income of $1.6 million for the nine months
ended September 30, 1996. Excluding the $17.5 million in charges for in-process
research and development and other costs, net income for the nine months ended
September 30, 1997 would have been $5.2 million.

* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."


                                       13


<PAGE>   14
LIQUIDITY AND CAPITAL RESOURCES

    During the past three years, the Company has satisfied its cash needs
principally through cash generated from operations, if any, existing cash
resources and net proceeds from the Company's initial public offering in October
1996. Cash used in operating activities for the nine months ended September 30,
1997 was $10.6 million, which was primarily attributable to increases in
long-term installments receivable, unbilled accounts receivable and deferred
revenue, partially offset by income (net of the $17.5 million for the charge for
in-process research and development and other costs).

    Cash used in investing activities during the nine months ended September 30,
1997 was $8.6 million, which was primarily attributable to the acquisition of
certain assets (see "Notes to Unaudited Consolidated Financial Statements - 
Acquisition") and the purchase of property and equipment.

    Cash provided by financing activities of $1.4 million for the nine months
ended September 30, 1997 was due to the purchase of shares of the Company's
Common Stock in connection with stock plans.

     Available sources of funds at September 30, 1997 consisted of $8.6 million
in cash and cash equivalents and a $2.7 million revolving line of credit, net of
$0.3 million in outstanding letters of credit, with a commercial bank. The
revolving line of credit provides for an unsecured line of credit up to $3.0
million at the bank's prime rate, contains certain financial and other
covenants, and expires March 31, 1999. At September 30, 1997, the Company was
not in compliance with certain financial covenants. However, there are currently
no outstanding borrowings under the agreement as of September 30, 1997. The
Company is currently exploring various alternatives to increase its cash
reserves, which include, but are not limited to, its current discussions with
its bank to increase the existing credit facility and to obtain waivers for the
Company's current noncompliance.

    The Company currently does not anticipate that capital expenditures in the
foreseeable future will vary materially from amounts incurred in previous years,
except that the Company may relocate one or more of its offices in 1998.

    The Company believes that existing cash resources, the existing line of
credit, cash flow from operations, if any, together with the Company's borrowing
capacity will be sufficient to fund the Company's operations during the next 12
months.*

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

    Sentences denoted by an asterisk (*) in this Report contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth below and
elsewhere in this document.

    Fluctuations in Future Operating Results. The Company's operating results
have fluctuated in the past and may fluctuate significantly from quarter to
quarter or on an annual basis in the future as a result of a number of factors,
including, but not limited to: the size and timing of customer orders; changes
in license renewal rates, timing of renewals or failure of existing customers to
renew their licenses with the Company when their current licenses expire; the
length of the Company's sales cycle; the timing and structure of future
acquisitions, if any; level of services and other activity; timing of new
product announcements and introductions by the Company and its competitors; the
Company's ability to develop, introduce and market new products and product
enhancements or service offerings; market acceptance of the Company's products;
deferrals of customer orders in anticipation of new products or product
enhancements or service offerings;  market success of the Company's service
offerings; changes in contract terms (including terms affecting the timing of
recognition of license revenue) and the rate at which such changes are made; the
Company's ability to control costs, including the need for and degree of use of,
third-party contractors and the hiring of new employees; political instability
in, or trade embargoes with respect to, foreign markets; changes in the
Company's management team; and fluctuating economic conditions.*


* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."


                                       14


<PAGE>   15

    The Company's services revenue is typically dependent on a small number of
relatively large projects, and therefore, the number, size and timing of
services projects may have a significant effect on services revenue in any
quarter.* In 1994, the Company experienced delays in the completion of ROM
projects that resulted in a material adverse effect on the Company's operating
results, and no assurance can be given that the Company will not experience
significant fluctuations in the level of services and other activity or delays
with respect to ROM or any of its products or services in the future, or that
any such fluctuation or delay would not have a material adverse effect on the
Company's business, operating results and financial condition.

    Product Concentration. The Company derives a substantial portion of its
total revenue from sales of its PRO/II simulation product. The Company currently
expects PRO/II, individually or integrated with other products, to account for a
significant portion of the Company's total revenue in the future.* Accordingly,
factors adversely affecting the pricing of or demand for PRO/II, including
products and pricing terms offered by competitors or the demand for simulation
software in general, could have a material adverse effect on the Company's
business, operating results and financial condition.*

    Concentration of Revenue in the Petroleum Industry. The Company derives a
substantial majority of its total revenue from software licenses and services to
companies in the highly cyclical petroleum industry. Accordingly, the Company's
future success is dependent upon the continued demand for process engineering
software by companies in the petroleum industry. In addition, companies in the
petroleum industry are experiencing growing pressures to consolidate in response
to the increasing need to reduce costs to remain competitive. There can be no
assurance that consolidation in the petroleum industry will not result in a loss
of customers or revenue or will not otherwise have a material adverse effect on
the Company's business, operating results or financial condition.

    Dependence on Contract Renewals. The Company derives a significant portion
of its total revenue from the renewal of license agreements with existing
customers. Since the Company's planned expense levels are based in part on
management's expectations regarding renewal rates and future revenue, if
renewals and revenue are below expectations in any quarter, the adverse effect
may be magnified by the Company's inability to adjust spending in a timely
manner to compensate for the revenue shortfall, which could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company expects contract renewals to account for an increasing
portion of the Company's total revenue in the future as the Company increases
the number of contracts for renewing customers that result in the recognition of
license revenue upon shipment.* There can be no assurance that the Company will
be able to maintain its historical renewal rates, and any significant or ongoing
decline in renewal rates could have a material adverse effect on the Company's
business, operating results and financial condition.



                                       15


<PAGE>   16
     Risks Associated with Past and Future Acquisitions. In recent periods, the
Company completed several acquisitions of assets, licenses or technology and the
related hiring of numerous employees. The integration of the acquired assets,
licenses and technology will involve the assimilation of operations and
products, which could divert the attention of the Company's management team and
may have a material adverse effect on the Company's operating results in future
quarters. The Company's strategy includes consideration of additional
acquisitions in the future, although there can be no assurance that suitable
companies, technologies or products will be available for acquisition.* Such
acquisitions entail numerous risks, including an inability to assimilate
acquired operations and products successfully, diversion of management's
attention, difficulties and uncertainties in transitioning the business
relationships from the acquired entity to the Company, difficulty in integrating
new employees, and loss of key employees of acquired companies. In addition,
future acquisitions by the Company may result in dilutive issuances of equity
securities, the incurrence of debt, large one-time expenses, and the creation of
goodwill or other intangible assets that could result in significant
amortization expense. Any one or more of these factors could have a material
adverse effect on the Company's business, operating results and financial
condition.

     Need to Achieve Greater Market Penetration. The success of the Company's
strategy is dependent upon increased market acceptance of commercial simulation
software in general, and of the Company's software products and services in
particular, in the process industries. In recent periods, the Company has
increased sales and marketing expenditures and expects to continue to increase
such expenditures in future periods in an effort to achieve greater market
penetration in the process industries.* In addition to SimSci's traditional
emphasis on petroleum and petrochemical process industries, the Company is
increasing its marketing and product targeting efforts in the industrial
chemical, pharmaceutical and fine chemical industries. If the Company fails to
increase market acceptance of its products, or if the Company's sales and
marketing efforts do not result in a corresponding increase in total revenue
through greater market penetration, the Company's operating margins and
opportunity for future growth would be substantially restricted and therefore
could have a material adverse effect on the Company's business, operating
results and financial condition.

    Competition. The market for commercial simulation software used in the
petroleum, chemical and other process industries is intensely competitive and is
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and rapidly changing customer requirements.
There can be no assurance that the Company will be successful in developing and
marketing enhancements that respond to technological change, evolving industry
standards or customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements or that such enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.

* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."

                                       16
<PAGE>   17

    The Company experiences its primary competition from potential customers'
decisions to develop their own software internally rather than purchasing
commercial software products such as those offered by the Company. As a result,
the Company must continuously educate existing and prospective customers about
the advantages of purchasing the Company's products and services. There can be
no assurance that these customers or other potential customers will perceive
sufficient value in the Company's products and services to justify purchasing
them. The Company has experienced and expects to continue to experience
competition from current and future competitors, some of which have
significantly greater financial, technical, marketing and other resources than
the Company.* The Company's current direct competitors include, among others,
Aspen Technology, Inc., Hyprotech, Ltd. and Chemstations, Inc., and, with
respect to the Company's technology and consulting services, the Hi-Spec
division of Honeywell, Inc., the Advanced Control and Optimization Division of
Aspen Technology, Inc. and ABB Simcon Inc. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, and the failure to do so would have a material adverse effect upon
the Company's business, operating results and financial condition.

    Risks Associated with International Operations. A significant portion of the
Company's total revenue is derived from customers outside the United States, and
the Company anticipates that international revenue will continue to be
significant in the future. The Company's international operations are subject to
risks inherent in the conduct of international business, including unexpected
changes in regulatory requirements, exchange rates, export license requirements,
tariffs and other barriers, political and economic instability, limited
intellectual property protection, difficulties in collecting payments due from
sales agents or customers, difficulties in managing distributors or
representatives, difficulties in staffing and managing foreign subsidiary
operations, and potentially adverse tax consequences.

    Dependence on Strategic Relationships. The Company is dependent in part on a
number of strategic alliances for the joint development or marketing of its
products. For example, the Company has entered into a number of strategic
alliances with respect to its new products and product enhancements, including a
development arrangement with Mobil Oil Corporation with respect to NETOPT; a
joint development arrangement with Shell Oil Products Company, a subsidiary of
Shell Oil Company, with respect to ROMeo; and a development and marketing
agreement with IFP, ELF and TOTAL with respect to PIPEPHASE-TACITE, a general
cooperation agreement with Bayer AG with respect to Simulation Manager, and a
marketing agreement with Japan National Oil Corporation ("JNOC") with respect
to the integration of PIPEPHASE with JNOC's well simulation program. The Company
also has entered into cooperation agreements with Fluor Daniel, IBM and SAP AG.
Failure of one or more of the Company's strategic alliances to achieve
commercial success, or the termination of one or more of such alliances, could
result in delay or termination of product development projects, reduction in
market penetration, decreased ability to win new customers or loss of confidence
by current or potential customers, any of which could have a material adverse
effect on the Company's business, results of operations or financial condition.


* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."


                                       17


<PAGE>   18
    Dependence Upon Product Development; Need to Develop New and Acquired
Technologies. The software market in which the Company competes is subject to
rapid technological change, frequent introductions of new products, changes in
customer demand and evolving industry standards which can render existing
products obsolete and unmarketable. In addition, an important part of the
Company's product development strategy is to acquire or obtain rights to new
technologies from third parties to enhance the Company's existing products or to
develop into new products. In this regard, during the first nine months of 1997,
the Company completed eight acquisitions of assets, licenses and technology,
including technology that will require significant additional development before
release in commercial products. There can be no assurance that the Company will
be successful in acquiring, developing and marketing products or enhancements to
existing products or new products that respond to technological change, evolving
industry standards or customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful acquisition,
development, introduction and sale of such enhancements or new products, or that
such enhancements or new products will adequately meet the requirements of the
marketplace and achieve market acceptance, and the failure to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.

    Management of Growth. The Company's business is currently experiencing a
period of growth that has placed and is expected to continue to place a
significant strain on the Company's personnel and resources.* The Company's
recent growth is attributable in part to recent acquisitions of businesses,
products and technologies, and the related hiring of officers and employees of
such acquired businesses. The Company's ability to manage future growth, if any,
will depend on its ability to continue to implement and improve operational,
financial and management information and controls systems on a timely basis,
together with maintaining effective cost controls, and any failure to do so
could have a material adverse effect on the Company's business, operating
results and financial condition.*

    Limited Protection of Proprietary Rights. The Company relies upon a
combination of copyright, trade secret and trademark laws to protect its
proprietary technology. The Company enters into confidentiality agreements with
its employees, developers, distributors and customers and limits access to and
distribution of the source code to its software and other proprietary
information. However, policing unauthorized use of the Company's products is
difficult. There can be no assurance that the steps taken by the Company in this
regard will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. 

    Certain technology used in the Company's current products and products under
development is licensed from third parties. These licenses may require the
Company to pay royalties and to fulfill confidentiality obligations. The
termination of any such licenses, or the failure of the third party licensors to
adequately maintain or update their products, could result in a material adverse
effect on the Company's business, operating results and financial condition by
delaying the Company's ability to ship products.*

    From time to time third parties may assert patent, trademark, copyright and
other intellectual property rights to technologies that are important to the
Company. In such an event, the Company may be required to incur significant
costs in litigating a resolution to the asserted claims.* There can be no
assurance that such a resolution would not require that the Company pay damages
or obtain a license of a third party's proprietary rights.

    Dependence on Contract Developers. The Company currently subcontracts
certain aspects of its research and development to outside contractors. There
can be no assurance that the Company will be able to manage its contract
developers effectively or that these developers will meet the Company's future
requirements for timely delivery of high-quality products.

    Year 2000 Compliance. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than three
years, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Although the Company
believes that its products and internal systems are Year 2000 compliant, the
Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance.* These expenditures may result in reduced funds available
to purchase software products such as 



* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."


                                       18
<PAGE>   19
those offered by the Company, which could result in a material adverse effect on
the Company's business, operating results and financial condition.

    Volatility of Stock Price. The market price for the Company's Common Stock
has in the past been and in the future could be subject to significant
fluctuations as a result of a number of factors, including the announcement of
new products, product enhancements or new services by the Company or its
competitors, quarterly variations in the Company's results of operations or the
results of operations of the Company's competitors, changes in earnings
estimates or recommendations by securities analysts, developments in the
Company's industry, general market conditions and other factors, including
factors unrelated to the operating performance of the Company or its
competitors. In addition, stock prices for many companies, including SimSci,
have been adversely affected by recent world financial market events, including
significant market volatility in late October 1997. Stock prices for many
companies in the technology and emerging growth sectors have experienced wide
fluctuations that have often been unrelated to the operating performance of such
companies. Such factors and fluctuations may adversely affect the market price
of the Company's Common Stock. See "Price Range of Common Stock."

    Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective as a result of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, the sale and support of its
simulation and optimization software may entail the risk of such claims.* A
successful product liability claim brought against the Company in excess of its
insurance coverage or outside the scope of such coverage could have a material
adverse effect upon the Company's business, operating results and financial
condition.

    Potential for Software Defects. Complex software products such as those
offered by the Company may contain undetected errors or failures commonly
referred to as "bugs." There can be no assurance that, despite significant
testing by the Company and by current and potential customers, errors will not
be found in new products or enhancements to existing products after commencement
of commercial shipments.

    Dependence on Key Personnel. The Company's future business results depend in
significant part on the Company's Chief Executive Officer and other senior
management and key employees, including certain technical, managerial and
marketing personnel. The loss of the services of any of these individuals or
groups of individuals could have a material adverse effect on the Company's
business, operating results and financial condition.*

    Risks Associated With Facilities Moves. The Company has recently
entered into a new lease for an approximately 45,000 square foot facility in
the Houston, Texas area and intends to consolidate its Houston-area operations
by relocating them to this facility in the near future. In addition, the Company
is currently seeking alternate space near its Brea, California headquarters and
could also move its Brea operations in the near future. Each move of Company
facilities involves coordination of complex events in order to avoid or minimize
disruption or delay of the Company's operations, including potential delays in
product development or shipment of products. If any of the anticipated facility
moves were to result in significant delays in product development or other
disruption of operations, the Company's business, operating results and
financial condition could be materially adversely affected.

    Anti-takeover Effects of the Company's Charter, Bylaws and Delaware Law. The
Company's Board of Directors has the authority to issue up to 5,000,000 shares
of Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, without any further vote or action by the
stockholders. The rights of the holders of any Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock could
have the effect of delaying, deferring or preventing a change in control of the
Company. In addition, the Company has a Stockholders Rights Agreement that could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. The Company is also afforded the protections of the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law
("Section 203"). The protections of the Company's Stockholder Rights Agreement
and Section 203 together with certain other provisions of the Company's charter
and bylaws, may have the effect of discouraging, delaying or preventing a
merger, tender offer or proxy contest, which could adversely affect the market
price of the Company's Common Stock.



* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."


                                       19
<PAGE>   20
competitors. In addition, stock prices for many companies in the technology
and emerging growth sectors have experienced wide fluctuations that have often
been unrelated to the operating performance of such companies. Such factors and 
fluctuations may adversely affect the market price of the Company's Common 
Stock.*


* Denotes forward looking statement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results of Operations."


                                       20

<PAGE>   21
                           PART II - OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

        (a)    Exhibits

               27.1  Financial Data Schedule

               99.1  Lease Agreement dated September 2, 1997 between Registrant
                     and The Prudential Insurance Company of America

        (b)    A report on Form 8-K was filed on September 30, 1997 in
               connection with the acquisition of certain technology from Shell
               Oil Products Company.


                                       21


<PAGE>   22
                                   SIGNATURES


    Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                              Simulation Sciences Inc.
                                                   (Registrant)

Date:  October 29, 1997                 /s/      CHARLES R. HARRIS
                                       -------------------------------------
                                                 Charles R. Harris
                                       President and Chief Executive Officer

Date:  October 29, 1997                 /s/       ROBERT E. GRICE
                                       -------------------------------------
                                                  Robert E. Grice
                                        Executive Vice President of Finance
                                            and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)


                                       22


<PAGE>   23

                                 Exhibit Index

        27.1           Financial Data Schedule

        99.1           Lease Agreement dated September 2, 1997 between
                       Registrant and The Prudential Insurance Company
                       of America