<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 MARCH 31, 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 10,683,707 shares of common stock outstanding as of
April 30, 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 March 31, 1997 (Unaudited)                               3

               Consolidated Statements of Operations (Unaudited) -
               Three Months Ended March 31, 1996 and 1997                                     4

               Consolidated Statements of Cash Flows (Unaudited) -
               Three Months Ended March 31, 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                                            8


PART II.  OTHER INFORMATION

       Item 6. Exhibits and Reports on Form 8-K                                              15
</TABLE>

                                       2
<PAGE>   3

                         PART I - FINANCIAL INFORMATION

                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                DECEMBER 31,        MARCH 31,
                                                                     1996             1997
                                                               --------------    --------------
                                                                                   (UNAUDITED)
<S>                                                            <C>               <C>           
ASSETS

CURRENT ASSETS
    Cash and cash equivalents                                  $   26,320,519    $   19,380,625
    Accounts receivable, less allowance
        for doubtful accounts of $722,036 and
        $821,127 at December 31, 1996
        and March 31, 1997                                          8,981,299         8,898,527
    Unbilled accounts receivable                                    3,671,677         6,090,501
    Deferred income taxes                                           2,930,073         2,930,073
    Prepaid expenses and other current assets                         379,122           386,811
                                                               --------------    --------------
        Total current assets                                       42,282,690        37,686,537
LONG-TERM INSTALLMENTS RECEIVABLE, net of
    unamortized discount of $1,045,184
    and $1,385,078 at December 31, 1996
    and March 31, 1997                                              5,126,866         6,940,335
PROPERTY AND EQUIPMENT
    Computer equipment and programs                                 6,073,879         6,394,409
    Furniture and fixtures                                          3,885,485         3,977,004
                                                               --------------    --------------
                                                                    9,959,364        10,371,413
    Less accumulated depreciation                                  (5,914,287)       (6,317,387)
                                                               --------------    --------------
        Property and equipment, net                                 4,045,077         4,054,026
GOODWILL                                                                              1,165,205
OTHER ASSETS                                                        1,568,488         1,764,211
DEFERRED INCOME TAXES                                                 174,656           174,656
                                                               --------------    --------------
                                                               $   53,197,777    $   51,784,970
                                                               ==============    ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts payable                                           $    1,901,847    $    1,317,035
    Accrued vacation and bonus payable                              1,564,603         1,209,729
    Other accrued liabilities                                       3,732,078         4,048,121
    Income taxes payable                                            2,083,664         1,821,792
    Deferred revenue                                                5,096,380         4,337,494
                                                               --------------    --------------
        Total current liabilities                                  14,378,572        12,734,171
COMMITMENTS
STOCKHOLDERS' EQUITY
    Common stock -- $.001 par value; 30,000,000
        shares authorized; 9,987,340 and
        10,668,328 shares issued and outstanding at
        December 31, 1996 and March 31, 1997                            9,987            10,668
    Additional paid-in capital                                     32,552,964        36,507,875
    Retained earnings                                               6,256,254         2,532,256
                                                               --------------    --------------
        Total stockholders' equity                                 38,819,205        39,050,799
                                                               --------------    --------------
                                                               $   53,197,777    $   51,784,970
                                                               ==============    ==============
</TABLE>



          See accompanying notes to consolidated financial statements.


                                       3

<PAGE>   4

                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                    MARCH 31,
                                                        -------------------------------
                                                             1996             1997
                                                        --------------   --------------
Revenue
<S>                                                     <C>              <C>           
    Software license revenue                            $    8,941,932   $   12,697,119
    Services and other revenue                               1,085,997          938,175
                                                        --------------   --------------
       Total revenue                                        10,027,929       13,635,294
Cost of revenue
    Cost of software license revenue                         1,017,015          904,510
    Cost of services and other revenue                         872,961          846,457
                                                        --------------   --------------
       Total cost of revenue                                 1,889,976        1,750,967
                                                        --------------   --------------
Gross profit                                                 8,137,953       11,884,327
Operating expenses
    Sales and marketing                                      3,547,707        4,202,329
    Research and development                                 2,699,155        3,420,206
    General and administrative                               1,467,310        2,161,454
    In-process research and development                                       5,200,000
                                                        --------------   --------------
       Total operating expenses                              7,714,172       14,983,989
                                                        --------------   --------------
Income (loss) from operations                                  423,781       (3,099,662)
Interest and other income                                       28,167          444,494
                                                        --------------   --------------
Income (loss) before provision for income taxes                451,948       (2,655,168)
Provision for income taxes                                     185,408        1,068,830
                                                        --------------   --------------
Net income (loss)                                       $      266,540   $   (3,723,998)
                                                        ==============   ==============
Pro forma and net income (loss) per share               $         0.03   $        (0.35)
                                                        ==============   ==============
Pro forma and weighted average common shares                 7,764,970       10,506,939
                                                        ==============   ==============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4

<PAGE>   5

                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                                                               MARCH 31,
                                                                   --------------------------------
                                                                        1996              1997
                                                                   --------------    --------------
<S>                                                                <C>               <C>            
Cash flows from operating activities:
     Net income (loss)                                             $      266,540    $   (3,723,998)
     Adjustments to reconcile net income (loss) to net cash
       used in operating activities:
        Depreciation and amortization                                     173,225           403,100
        Provision for doubtful accounts                                   147,791           100,000
        In-process research and development                                               5,200,000
        Change in operating assets and liabilities,
          net of the effect of acquisitions:
            Accounts receivable                                           205,337           103,958
            Unbilled accounts receivable                                 (104,135)       (2,418,824)
            Income taxes receivable                                       555,634                  
            Prepaid expenses and other current assets                    (245,116)           (7,689)
            Other assets                                               (1,127,709)          (67,723)
            Long-term installments receivable                          (1,116,104)       (1,813,469)
            Accounts payable                                             (560,399)         (584,812)
            Accrued vacation and bonus payable                           (234,172)         (354,874)
            Other accrued liabilities                                     464,844           316,043
            Income taxes payable                                          (76,831)         (261,872)
            Deferred revenue                                             (327,510)         (758,886)
                                                                   --------------    --------------
               Net cash used in operating activities                   (1,978,605)       (3,869,046)

Cash flow from investing activities:
     Purchases of property and equipment                                 (596,310)         (360,940)
     Acquisition of certain assets                                                       (2,755,500)
                                                                   --------------    --------------
               Net cash used in investing activities                     (596,310)       (3,116,440)

Cash flow from financing activities:
     Proceeds from stock option exercises                                                    45,592
                                                                   --------------    --------------
               Net cash provided by financing activities                       --            45,592
                                                                   --------------    --------------

               Net decrease in cash and cash equivalents               (2,574,915)       (6,939,894)
Cash and cash equivalents at beginning of period                        5,442,283        26,320,519
                                                                   --------------    --------------
Cash and cash equivalents at end of period                         $    2,867,368    $   19,380,625
                                                                   ==============    ==============

Supplemental disclosures of cash flow information:
     Cash paid during the period for:
        Income taxes                                               $      120,109    $      969,760
                                                                   ==============    ==============

Supplemental disclosures related to acquisitions:
     In March 1997, the Company acquired certain
     assets of other companies as described in
     Note 4. These acquisitions are summarized
     as follows:
        In-process research and development                                          $    5,200,000
        Fair value of assets acquired                                                       300,295
        Goodwill                                                                          1,165,205
        Common stock issued                                                               3,910,000
        Cash paid                                                                         2,755,500
</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

        The consolidated balance sheet as of March 31, 1997 and the related
consolidated statements of operations and cash flows for the three month periods
ended March 31, 1997 and 1996 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 financial statements and notes are presented as permitted by Form
10-Q, and do not contain certain information included in the Company's audited
financial statements and notes for the year ended December 31, 1996.

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

    Pro forma net income (loss) per share is computed by dividing net income
by the weighted average number of common and 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 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.

    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. It is not expected
that the adoption of SFAS No. 128 will have a material impact on earnings per
share for the periods presented.

3.  STOCK PLANS

        Stock Option Plans - The following table summarizes stock option
activity under the 1994 and 1996 Stock Option Plans for the three months ended
March 31, 1997:

<TABLE>
<CAPTION>
                                                                   NUMBER OF
                             NUMBER OF           PRICE              OPTIONS
                              SHARES           PER SHARE          EXERCISABLE
                           -----------     ------------------    ------------
<S>                          <C>             <C>                 <C>    
Balance, January 1, 1997     1,464,812       $ 2.67 - $10.38          193,137
     Granted                    28,000        11.75 -  16.25
     Exercised                 (16,765)        2.67 -   2.73
     Canceled                  (25,599)        2.67 -  16.25
                           -----------     -----------------     
Balance, March 31, 1997      1,450,448         2.67 - $16.25          332,598
                           ===========     =================                 
</TABLE>

        As of March 31, 1997, there was no activity under the 1996 Director
Plan.


                                       6

<PAGE>   7

                    SIMULATION SCIENCES INC. AND SUBSIDIARIES

       NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

        Employee Stock Purchase Plans - As of March 31, 1997, no shares of
common stock have been purchased under the Company's 1996 Employee Stock
Purchase Plans. At March 31, 1997, the Company had a liability of $439,606
recorded in connection with the future purchase of common stock under the plan.

4.  ACQUISITIONS

        In March 1997 the Company purchased 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. is a privately held Texas corporation providing commercial
simulation 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 to in-process research and development, goodwill,
purchased technology, accounts receivable and computer equipment. The purchase
price allocated to in-process research and development was charged to the
Company's operations, resulting in a one-time expense of $5.2 million.

        In addition, 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. is 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 to goodwill and
computer equipment.



                                       7

<PAGE>   8

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

    Simulation Sciences Inc. is a leading provider of commercial simulation
software and related services to the petroleum, petrochemical and industrial
chemical process industries as well as the engineering and construction firms
that support those industries. The Company's Windows-based graphical user
interface and simulation software products are designed to increase
profitability by reducing capital investment costs, improving yields and
enhancing management decision making.

    The Company generally licenses its software pursuant to non-cancelable, one-
to five-year term licenses. The Company receives approximately 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 other products and
engineering 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, in 1996,
began increasing the number of 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 Company intends to convert the substantial majority of its
contracts to License Revenue terms as new and renewal contracts are executed.*
For this reason, the Company does not believe that revenue and results of
operations for prior periods will be directly comparable to results for 1996 and
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 that period are directly
comparable to the results for the quarter ended March 31, 1997. Revenue
recognition on certain service offerings is based on percentage of completion
and on attainment of project milestones.

-------------------
* 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."



                                       8

<PAGE>   9

A.  RESULTS OF OPERATIONS

        Three Months Ended March 31, 1997 and March 31, 1996

        The following table sets forth certain items in the Company's
Consolidated Statements of Operations in absolute dollars and as a percentage of
total revenue for the three months ended March 31, 1996 and 1997.

<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED MARCH 31,
                                                            ---------------------------------------------------
                                                                     1996                        1997
                                                            -----------------------    ------------------------
                                                              AMOUNT         %           AMOUNT           %
                                                            ----------   ----------    ----------    ----------
                                                                               (in thousands)
<S>                                                         <C>          <C>            <C>          <C>  
Revenue:
     Software license revenue ...........................   $    8,942         89.2%   $   12,697          93.1%
     Services and other revenue .........................        1,086         10.8           938           6.9
                                                            ----------   ----------    ----------    ----------
        Total revenue ...................................       10,028        100.0        13,635         100.0
Cost of revenue:
     Cost of software license revenue ...................        1,017         10.1           905           6.6
     Cost of services and other revenue .................          873          8.7           846           6.2
                                                            ----------   ----------    ----------    ----------
        Total cost of revenue ...........................        1,890         18.8         1,751          12.8
                                                            ----------   ----------    ----------    ----------
Gross profit ............................................        8,138         81.2        11,884          87.2
Operating expenses:
     Sales and marketing ................................        3,548         35.4         4,202          30.8
     Research and development ...........................        2,699         26.9         3,420          25.1
     General and administrative .........................        1,467         14.7         2,162          15.9
     In-process research and development ................                       0.0         5,200          38.1
                                                            ----------   ----------    ----------    ----------
        Total operating expenses ........................        7,714         77.0        14,984         109.9
                                                            ----------   ----------    ----------    ----------
Income (loss) from operations ...........................          424          4.2        (3,100)        (22.7)
Interest and other income ...............................           28          0.3           445           3.2
                                                            ----------   ----------    ----------    ----------
Income (loss) before provision (benefit) for income taxes          452          4.5        (2,655)        (19.5)
Provision (benefit) for income taxes ....................          185          1.8         1,069           7.8
                                                            ----------   ----------    ----------    ----------
Net income (loss) .......................................   $      267          2.7%   $   (3,724)        (27.3)%
                                                            ==========   ==========    ==========    ==========
</TABLE>

    Total Revenue. Total revenue increased 36% to $13.6 million for the three
months ended March 31, 1997 from $10.0 million for the three months ended March
31, 1996. Software license revenue, which includes revenue from software
licenses, maintenance and support fees, increased 42% to $12.7 million for the
three months ended March 31, 1997 from $8.9 million for the three months ended
March 31, 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview" for a discussion of
the change in contract terms. Services and other revenue, which includes
integration, ROM, consulting and training services, was $0.9 million and $1.1
million for the three months ended March 31, 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 7% to $1.8 million
for the three months ended March 31, 1997 from $1.9 million for the three months
ended March 31, 1996. Cost of software license revenue, which includes costs of
production and distribution, customer support and maintenance, and royalties,
decreased 11% to $0.9 million from $1.0 million for the three months ended March
31, 1997 and 1996, respectively. Cost of software license revenue as a
percentage of software license revenue was 7% and 11% in the three months ended
March 31, 1997 and 1996, respectively. The decrease in cost of software license
revenues in dollars is primarily attributable to the elimination of certain
royalty expenses as a result of asset acquisitions concluded by the Company
during the quarter ended March 31, 1997. The decrease as a percentage of
software license revenues is due primarily to such decrease in dollars and the
increase in software license revenues. Cost of services and other revenue, which
includes costs of personnel involved in training and project execution, as well
as travel, third-party


                                       9

<PAGE>   10

professional fees and related administrative costs, decreased 3% to $0.8 million
from $0.9 million for the three months ended March 31, 1997 and 1996,
respectively. Cost of services and other revenue as a percentage of services and
other revenue increased to 90% from 80% for the three months ended March 31,
1997 and 1996, respectively, primarily due to the fixed nature of a portion of
these costs.

    Sales and Marketing. Sales and marketing expenses increased 18% to $4.2
million for the three months ended March 31, 1997 from $3.5 million for the
three months ended March 31, 1996. Sales and marketing expenses as a percentage
of total revenue were 31% and 35% for the three months ended March 31, 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 hiring expenses. The Company anticipates that sales and marketing
expenses will increase in dollars and will fluctuate as a percentage of total
revenue in the future.*

    Research and Development. Research and development expenses increased 27% to
$3.4 million for the three months ended March 31, 1997 from $2.7 million for the
three months ended March 31, 1996. Research and development expenses as a
percentage of total revenue were 25% and 27% for the three months ended March
31, 1997 and 1996, respectively. The increase in research and development
expenses in dollars was primarily due to an increase in the number of technical
professionals, including support staff, and related hiring expenses and
third-party contractors involved in the development of a number of planned
upgrades and new products. 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
47% to $2.2 million for the three months ended March 31, 1997 from $1.5 million
for the three months ended March 31, 1996. General and administrative expenses
as a percentage of total revenue were 16% and 15% in the three months ended
March 31, 1997 and 1996, respectively. The increase in general and
administrative expenses in dollars was primarily due to the addition of senior
management personnel. The Company believes that its general and administrative
expenses will increase in dollars in the future, and may fluctuate as a
percentage of total revenue, due in part to the Company's planned expansion in
staffing and costs associated with being a publicly held company.*

    In-process Research and Development. In-process research and development
expense of $5.2 million for the three months ended March 31, 1997 was related to
the acquiring of assets of Visual Solutions, Inc. (see "Notes to Unaudited
Consolidated Financial Statements - Note 4").

    Interest and Other Income. Interest and other income increased $417,000 to
$445,000 for the three months ended March 31, 1997 from $28,000 for the three
months ended March 31, 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 was 42% in each
of the three months ended March 31, 1997 and 1996, respectively. The $5.2
million in-process research and development charge was not tax deductible in the
current period.

    Net Income (Loss). Net loss was $3.7 million, or $0.35 per share, for the
three months ended March 31, 1997 compared to net income of $267,000, or $0.03
per share, for the three months ended March 31, 1996. Excluding the $5.2 million
charge for in-process research and development, net income for the three months
ended March 31, 1997 would have been $1.5 million, or $0.13 per share.

------------------
* 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."



                                       10

<PAGE>   11

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 three months ended March 31,
1997 was $3.9 million, which was primarily attributable to increases in unbilled
accounts receivable and long-term installments receivable, decreases in deferred
revenue, accounts payable and other accrued liabilities, partially offset by
income (excluding the $5.2 million in-process research and development charge).

    Cash used in investing activities during the three months ended March 31,
1997 was $3.1 million, which was primarily attributable to the acquisition of
certain assets of Visual Solutions, Inc. and Salumunek & Assoc., Inc. (see
"Notes to Unaudited Consolidated Financial Statements - Note 4").

    Cash provided from financing activities of $46,000 was due to the exercise
of stock options.

    Available sources of funds at March 31, 1997 consisted of $19.4 million in
cash and cash equivalents and $3.0 million in an unused revolving line of credit
with a commercial bank. At March 31, 1997, the Company had a revolving line of
credit with a commercial bank, which expires March 31, 1999, provides for an
unsecured line of credit up to $3.0 million at the bank's prime rate, and
contains certain financial and other covenants.

    The Company believes that existing cash resources, cash flow from
operations, if any, together with the line of credit, 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, delays in 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; changes in contract terms (including terms
affecting the timing of recognition of license revenue) and the rate at which
such changes are made; the timing and structure of future acquisitions, if any;
level of services and other activity and market success of the Company's service
offerings; 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; market acceptance of the Company's products;
deferrals of customer orders in anticipation of new products or product
enhancements; 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;
the availability of components; political instability in, or trade embargoes
with respect to, foreign markets; changes in the Company's management team; and
fluctuating economic conditions.*

    The Company's services revenues are 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.

----------------
* 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

    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 petroleum industry, which is highly cyclical. Accordingly, the
Company's future success is dependent upon the continued demand for process
engineering software by companies in the petroleum industry.

    Dependence on Contract Renewals. The Company derives a significant portion
of its total revenue from the renewal of license agreements with existing
customers. 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 would 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 the Company expects to continue
to increase such expenditures in future periods, in an effort to achieve greater
market penetration in the process 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.

    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 Setpoint and DMCC divisions 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.

----------------
* 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."



                                       12

<PAGE>   13

    Past and Future Acquisitions. The Company in recent periods has concluded a
number of asset acquisitions. Although the Company does not anticipate that the
integration of the acquired assets will adversely affect its operating results,
such integration will involve the assimilation of conflicting operations and
products, which will 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 may make additional acquisitions in the future, although
there can be no assurance that suitable companies, divisions or products will be
available for acquisition.* Such acquisitions entail numerous risks, including
an inability to successfully assimilate acquired operations and products,
diversion of management's attention, difficulties and uncertainties in
transitioning the business relationships from the acquired entity to the Company
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.

    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 and marketing of its
products. For example, the Company has entered into a number of strategic
alliances with respect to its core products, new products and product
enhancements, including a development arrangement with Strategic Analysis and
Simulation Technology, Ltd. with respect to PROTISS; a development arrangement
with Mobil Oil Corporation with respect to NETOPT; a joint development
arrangement with Shell Oil Company with respect to ROMeo; and a development and
marketing agreement with IFP, ELF and TOTAL with respect to PIPEPHASE-TACITE.
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.

    Dependence Upon Product Development; Rapid Technological Change. 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. There can be no assurance that the Company will be successful in
developing and marketing 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 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.

    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.

----------------
* 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

    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
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.*

    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.*

    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.

    Certain technology used in the Company's current products and products under
development, including OpenYield, Visual Flare, NETOPT, PROTISS,
PIPEPHASE-TACITE and ROMeo, is licensed from third parties. These licenses
generally 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.

    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.

----------------
* 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
                           PART II - OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K

        (a)    Exhibits

               27.1   Financial Data Schedule

        (b)    No reports on Form 8-K were filed during the quarter ended 
               March 31, 1997.


                                       15

<PAGE>   16
                                   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:  May 5, 1997                  /s/        CHARLES R. HARRIS
                                    --------------------------------------
                                                Charles R. Harris
                                      President and Chief Executive Officer


Date:  May 5, 1997                  /s/          L. RONALD TREPP
                                    --------------------------------------
                                                 L. Ronald Trepp
                                          Vice President of Finance and 
                                             Chief Financial Officer
                                             (Principal Financial and 
                                                Accounting Officer)



                                       16