SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-K





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





For
      the fiscal year ended August 31,
2009


or





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





For
      the transition period from _________ to
  _________





Commission
file number:  001-32046





Simulations
Plus, Inc.


(Name of
small business issuer in its charter)





California
              (State
      or other jurisdiction)
            95-4595609
              (I.R.S.
      Employer Identification No.)42505
      Tenth Street West
              Lancaster,
      CA 93534-7059
              (Address
      of principal executive offices including zip code)
            (661)
      723-7723
              (Issuer’s
      telephone number, including area code)





SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE ACT:


COMMON
STOCK, PAR VALUE $0.001 PER SHARE





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes [_]  No [X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes [_]  No [X]





Indicate
by check mark whether the registrant (1) 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 filings requirements for
the past 90 days. Yes
[X]  No [_]




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   Yes
[_]   No [_]




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405)  is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]












Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):




[_]  Large
      accelerated filer
            [_]  Accelerated
      filer[_]  Non-accelerated
      filer (Do not check if a smaller reporting company)
            [X]  
      Smaller reporting company




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




The
aggregate market value of the registrant's common stock held by non-affiliates
of the registrant as of November 17, 2009, based upon the closing price of the
common stock as reported by The Nasdaq on such date, was approximately
$12,000,000. This calculation does not reflect a determination that persons are
affiliates for any other purposes.




As of
November 17, 2009, 15,596,093 shares of the registrant’s common stock, par value
$0.001 per share, and no shares of preferred stock were
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Certain
portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the 2010 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.




ii


Simulations
Plus, Inc.


FORM
10-K


For
the Fiscal Year Ended August 31, 2009





Table of
Contents





PagePART
      IItem
      1
            Description
      of Business
            1Item
      1A
            Risk
      Factors
            11Item
      2
            Description
      of Property
            12Item
      3
            Legal
      Proceedings
            12Item
      4
            Submission
      of Matters to a Vote of Security Holders
            12PART
      IIItem
      5
            Market
      for Registrant’s Common Equity and Related Stockholder
    Matters
            13Item
      6
            Selected
      Financial Data
            13Item
      7
            Management’s
      Discussion and Analysis or Plan of Operation
            14Item
      8
            Consolidated
      Financial Statements
            21Item
      9
            Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
            21Item
      9A(T)
            Controls
      and Procedures
            21Item
      9B
            Other
      Information
            22PART
      IIIItem
      10
            Directors
      and Executive Officers of the Registrant; Compliance with Section 16(a) of
      the Exchange Act
            23Item
      11
            Executive
      Compensation
            23Item
      12
            Security
      Ownership of Certain Beneficial Owners and Management
            23Item
      13
            Certain
      Relationships and Related Transactions
            23Item
      14
            Principal
      Accountant Fees and Services
            23PART
      IVItem
      15
            Exhibits
      and Financial Statement Schedules
            23








iii




Forward-Looking
Statements




This
document and the documents incorporated in this document by reference contain
forward-looking statements that are subject to risks and uncertainties. All
statements other than statements of historical fact contained in this document
and the materials accompanying this document are forward-looking
statements.




The
forward-looking statements are based on the beliefs of our management, as well
as assumptions made by and information currently available to our management.
Frequently, but not always, forward-looking statements are identified by the use
of the future tense and by words such as “believes,” expects,” “anticipates,”
“intends,” “will,” “may,” “could,” “would,” “projects,” “continues,” “estimates”
or similar expressions. Forward-looking statements are not guarantees of future
performance and actual results could differ materially from those indicated by
the forward-looking statements. Forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause our or our
industry’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking
statements.




The
forward-looking statements contained or incorporated by reference in this
document are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 (“Securities Act”) and Section 21E of the
Securities Exchange Act of 1934 (“Exchange Act”) and are subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. These
statements include declarations regarding our plans, intentions, beliefs or
current expectations.




Among
the important factors that could cause actual results to differ materially from
those indicated by forward-looking statements are the risks and uncertainties
described under “Risk Factors” and elsewhere in this document and in our other
filings with the SEC.




Forward-looking
statements are expressly qualified in their entirety by this cautionary
statement. The forward-looking statements included in this document are made as
of the date of this document and we do not undertake any obligation to update
forward-looking statements to reflect new information, subsequent events or
otherwise.








PART I





ITEM
1 – DESCRIPTION OF BUSINESS





Overview
of the Company


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






1





Simulations
Plus





Products


We
currently offer four software products for pharmaceutical research: ADMET
PredictorTM, ClassPharmerTM, DDDPlusTM, and GastroPlusTM.





ADMET
Predictor


Every
drug molecule that fails in clinical trials, and every approved drug that gets
withdrawn from the market, was bad from the time it was first drawn by a chemist
or generated by a computer. They don’t become bad later. Thus, the ability to
predict unsuitable characteristics of new molecules as early as possible offers
the promise of avoiding costly programs that end up in late-stage
failures.  Although not every failure mode can be predicted in this
manner, those that can provide a means to reduce the number of failures that
occur after years of work and millions of dollars (sometimes over $1 billion)
have been spent.





ADMET
(Absorption, Distribution, Metabolism, Excretion and Toxicity) Predictor
consists of a library of highly sophisticated and statistically significant
numerical models that predict various properties of chemical compounds from just
their molecular structures.  Our models are built using a machine
learning approaches that are based primarily on artificial neural network
ensembles (groups of artificial neural networks) thathave been demonstrated to
provide the most accurate prediction capabilities in any commercially available
software today.





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





The vast
majority of drug-like molecules are not suitable as medicines for various
reasons. Some have such low solubility that they will not dissolve well, some
have such low permeability through the intestinal wall that they will not be
absorbed well as an oral dose (about 80% of medications are dosed orally), some
degrade so quickly that they are not stable enough to have a useful shelf life,
some bind to proteins (like albumin) in blood to such a high extent that little
unbound drug is available to reach the target, and many will be toxic in various
ways. Identification of such properties in the computer enables researchers to
eliminate poor compounds without spending time and money to make them and run
experiments to identify their weaknesses. Today, many molecules can be
eliminated on the basis of computer predictions provided by ADMET
Predictor.





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








2





ADMET
Predictor includes ADMET ModelerTM. ADMET Modeler was first released in July of
2003 as a separate product, and was integrated into ADMET Predictor in 2006.
This powerful program automates the training of the predictive models used in
ADMET Predictor, so they are produced in a small fraction of the time once
required. For example, new toxicity models were developed in a matter of a few
hours once we completed the tedious effort of “cleaning up” the databases (which
often contain a significant number of errors). Prior to the availability of
ADMET Modeler, we would have needed as much as three months for each new model
after cleaning the databases to obtain similar results.





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





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





ClassPharmerTM


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





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





DDDPlus


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








3





GastroPlus


GastroPlus
continues to enjoy its “gold standard” status in the industry for its class of
simulation software. At the recent annual conference of the American Association
of Pharmaceutical Scientists in Los Angeles in November 2009, GastroPlus was
mentioned by every speaker in several different sessions. No other competitive
product received such recognition. GastroPlus is used from early drug discovery
through preclinical development and into early clinical trials.





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





The
information provided through GastroPlus simulations guides project decisions in
various ways. Among the kinds of knowledge gained through such simulations are:
(1) the best “first dose in human” for a new drug prior to Phase I trials, (2)
whether a potential new drug compound is likely to be absorbed at high enough
levels to achieve the desired blood concentrations needed for effective therapy,
(3) whether the absorption process is affected by certain enzymes and
transporter proteins in the intestinal tract that may cause the amount of drug
reaching the blood to be very different after absorption from one region of the
intestine to another, (4) when certain properties of a new compound are probably
adequately estimated through computer (“in silico”) predictions or
simple experiments rather than through more expensive and time-consuming in vitro or animal
experiments, (5) what the likely variations in blood and tissue concentration
levels of a new drug would be in a large population, in different age groups or
in different ethnic groups, and (6) whether a new formulation for an existing
approved drug is likely to demonstrate “bioequivalence” (equivalent blood
concentration versus time) to the currently marketed dosage form in a human
trial.





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





Our
marketing intelligence and reorder history indicate that GastroPlus continues to
dominate its market niche in the number of users worldwide. In addition to
virtually every major pharmaceutical company, licenses include government
agencies in the U.S and abroad, a growing number of smaller pharmaceutical and
biotech companies, generic drug companies, and drug delivery companies
(companies that design the tablet or capsule for a drug compound that was
developed by another company). Although these companies are smaller than the
pharmaceutical giants, they can also save considerable time and money through
simulation. We believe this part of the industry, which includes many hundreds
of companies, represents major growth potential for GastroPlus. Our experience
has been that the number of new companies adopting GastroPlus has been growing
steadily, adding to the base of annual licenses each year. In addition,
consolidation by larger companies has not affected our sales to date. In fact,
those companies have adopted in silico tools at
ever-greater levels, and our licenses have increased at renewal time even in the
face of such consolidation.








4





Contract Research and
Consulting Services


Our
recognized world-class expertise in oral absorption and pharmacokinetics is
evidenced by the fact that our staff members have been speakers or presenters at
over 50 prestigious scientific meetings worldwide in the past five years. We
frequently conduct contracted studies for customers who prefer to have studies
run by our scientists rather than to license our software and train someone to
use it. The demand for our consulting services has been increasing steadily, and
we expect this trend to continue. Long-term collaborations and shorter-term
consulting contracts serve both to showcase our technologies and as a way to
build and strengthen customer relationships.





Government-Funded
Research


We are
well along in our Phase II SBIR (Small Business Innovation Research) grant
awarded by the NIH (National Institutes of Health). This SBIR grant provides
funds that allow us to expand staff and grow the product line without adversely
affecting earnings, because the expenses associated with the efforts in the
grant study are funded largely through the grant with some company
support.





Pharmaceutical Simulations
Software Product Development


Although
all of our development work cannot be disclosed for competitive reasons, some of
our development efforts during this reporting period included:





(1) ADMET
Predictor/ADMET Modeler Upgrades


During
this reporting period, improvement of ADMET Predictor/Modeler has continued.
Under a funded collaboration with Pfizer, we added the capability for scientists
to run large molecular libraries through ADMET Predictor to generate the
predicted dose amount that would be required to achieve an effective
concentration level for each potential new drug.  This capability
requires the integration of the customer’s experimental data with predictions
when no experiments have been run, so that the effects of a wide variety of
properties that interact to result in a plasma concentration can be predicted.
This is accomplished by the integration of a small GastroPlus engine within
ADMET Predictor that runs the simulations needed to estimate plasma
concentrations.





(2)
ClassPharmer


Improvements
during the third and the fourth quarters were focused on incorporating more new
features requested by our users around the world, as well as adding other new
capabilities identified in-house. We released ClassPharmer 4.7 in October 2009
after the end of this reporting period.  This new version incorporates
a new “scaffold hopping” feature among many others. This feature enables
chemists to substitute the core (scaffold) portion of a molecule while retaining
other atoms around the periphery.  In previous versions, ClassPharmer
had only the inverse capability – to replace the atoms surrounding the
core.  Scaffold hopping has been a technique with growing interest
among chemists, and we expect that added to ClassPharmer already best-in-class
performance, this new capability will attract additional ClassPharmer
users.





(3)
DDDPlus


We have
continued to improve DDDPlus by adding capabilities and features requested by
our customers and potential customers, as well as capabilities and features
identified in-house.







5




(4)
GastroPlus
 Recent
improvements to GastroPlus have been many and complex. Most of these
developments were funded through our funded collaborations with three of the top
five pharmaceutical companies in the world.  We are adding ocular
delivery of drugs under one collaboration, nasal/pulmonary delivery under
another, and drug-drug interaction analysis under a third. These capabilities
will further extend the commanding lead GastroPlus enjoys in the marketplace.
Our recent poster presentations at scientific meetings that have presented
analyses done with beta test versions have drawn considerable interest with
respect to the upcoming drug-drug interaction capabilities in
GastroPlus.


(5)
MembranePlusTM


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





This
development effort accelerated during fiscal year 2005 with the hiring of a new
Ph.D. scientist who focused on this program.  The simulation is
currently predicting the movement of drug molecules through the bulk fluid, into
the membranes at the surface of a cell layer, through the surface membrane,
through the interior of the cell, into the opposite surface membrane, and
through it to the bulk fluid on the opposite side of the cell
layer.  Although a few technical issues remain to be resolved, we are
optimistic that the simulation will become a unique tool for the analysis of
data from these experiments, and will enable researchers to more accurately
estimate human intestinal permeability from these in vitroexperiments.





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





Marketing and
Distribution


We market
our pharmaceutical software and consulting services through attendance and
presentations at scientific meetings, exhibits at trade shows, seminars at
pharmaceutical companies and government agencies, through our web pages on the
Internet, and using various communication media to our compiled database of
prospect and customer names.  Our scientific team is also a key part
of our sales and marketing team. We believe that this is more effective than a
completely separate sales team for several reasons: (1) customers appreciate
talking directly with developers who can answer a wide range of technical
questions about methods and features, (2) our scientists benefit from direct
customer contact by gaining an appreciation for the environment and problems of
the customer, and (3) the relationships we build through scientist-to-scientist
contact are stronger than through salesperson-to-scientist contacts. Recently
Mr. Ronal Creeley resigned from his position as vice president of marketing and
sales for personal reasons, and Mr. John DiBella was promoted to Manager,
Marketing and Sales. John was the original product manager and developer for
DDDPlus, and moved into marketing and sales several years ago.





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








6





Production


Our
pharmaceutical software products are designed and developed entirely by our
development team, with locations in Lancaster, Petaluma, and San Diego,
California. The principal materials and components used in the manufacture of
simulation software products include CD-ROMs and instruction manuals, which are
also produced in-house and through outside contractors. In-house graphic art and
engineering talent enable us to accomplish this production in a cost-efficient
manner.





Competition


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




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





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





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





We are
actively seeking acquisitions to expand the pharmaceutical software and services
business, and we are currently in discussions with other companies in this
regard. Earlier attempts to acquire other companies were not successful. We
believe the current discussions are with companies for which acceptable deal
structures are more likely to be realized; however, there can be no assurances
that any of these deals will take place.








7





WORDS+


Products
 Our
wholly owned subsidiary, Words+, Inc., has been an industry pioneer and
technology leader for over 28 years in introducing and improving augmentative
and alternative communication and computer access software and devices for
disabled persons. We intend to continue to be at the forefront of the
development of new products. We will continue to enhance our major software
products, E Z KeysTM and Say-it! SAMTM, as well as our growing line of hardware
products. We have also been pursuing acquisitions and other strategic alliances
that are complementary to our existing augmentative and alternative
communication and computer access business lines. In keeping with this strategy
we will begin processing orders for four new additions to our product line on
December 1, 2009. The introduction of NetTalk, DuraSAM, Allora, and Mind Express
were featured at two national conferences and three regional conferences
recently. The Allora (A type-and-talk device) and Mind Express (Augmentative
Communication Software) are manufactured by Jabbla, Inc. in Belgium, and are in
stock at the time of this writing, and demo units are out to distributors and
orders are processing. NetTalk (an in-house-designed communication device based
on small, light NetBook computers) and DuraSAM (a smaller, more durable,
handheld communication device) are in the production phase, and are expected to
be ready for delivery by December 7, 2009.  Both of these products
continue to expand the Say-it! SAM technologies acquired from SAM
Communications, LLC of San Diego in December 2003. SAM-based products continue
to account for a significant share of Words+ revenues. Allora and Mind Express
broaden our product line immediately at low development cost so we can dedicate
internal resources to other growth-oriented products and projects.
 Marketing and
Distribution
 We market
augmentative and alternative communication products through a network of
employee representatives and independent dealers and resellers. During the past
fiscal year we added remote sales and service via internet interaction,
including video support, to our marketing strategy.  Professional
webinar trainings are provided to customers and recommenders by a certified
speech language pathologist. This enables us to provide immediate live customer
interaction that used to require expensive, and time consuming,
travel.  Utilization of this technique is also improving the
productivity of our professionals. In one case a professional in the home office
provided evaluation assistance in Florida and interactive training in Hawaii,
during the same afternoon.
 
 At the
present time we have 39 sales representatives worldwide: 1 salaried sales
manager and 2 salaried sales employees in California, 11 independent
distributors and 6 independent resellers in the U.S., and 19 sales
representatives overseas – 4 in Australia, and 1 each in New Zealand, Canada,
England, Norway, Finland, The Netherlands, France, Ireland, Italy, Israel,
Japan, Korea, Mexico, Malaysia, and Taiwan.  We also have 2 inside
support persons, who answer e-mails and telephone inquiries on our toll-free
telephone line and who provide technical support. Additional outside sales
persons and independent dealers and resellers are being actively
recruited.
 
 We direct
our marketing efforts to speech pathologists, occupational therapists,
rehabilitation engineers, special education teachers, disabled persons and
relatives of disabled persons. We maintain a mailing list of over 10,000 people
made up of these professionals, consumers and relatives, and we mail various
marketing materials to this list.  These materials include our catalog
of products and announcements regarding new and enhanced products.
 
 We
participate in industry conferences held worldwide that are attended by speech
pathologists, occupational and physical therapists, special education teachers,
parents and consumers.  We and others in the industry demonstrate our
products at these conferences and present technical papers that describe the
application of our technologies and research studies on the effectiveness of our
products.  We also advertise in selected publications of interest to
persons in this market.
  8
  We
estimate that for approximately 47% of our sales of augmentative and alternative
communication (“AAC”) software and hardware, purchases are funded primarily by
third parties such as Medicaid, Medicare and private insurance. School special
education budgets, vocational rehabilitation, other governmental programs,
private purchases and charitable assistance account for most of the other
purchases. Medicare provides coverage for augmentative communication
devices.
  Our
personnel provide advice and assistance to customers and prospective customers
on obtaining third-party financial assistance for purchasing our products.
Third-party funding grew slowly for the first 20 years of operation; however,
the addition of Medicare coverage for AAC devices in 2001 resulted in
significant increases in third-party funding in recent years. Our
Medicare/Medicaid and other third-party-funded sales have grown, with the
majority of total sales are now funded by a third
party.  Medicare/Medicaid sales are subject to funding caps that limit
the amounts paid for our products, and payment by some agencies can be slow,
making this market segment somewhat more difficult than others. Collection of
accounts receivable has been a significant problem from certain state Medicaid
agencies, Medicaid, and private insurance. Our financial reporting includes
allowances for bad debts that are based on assumptions that we will collect a
historical percentage of accounts receivable that fall in different aging
categories: less than 6 months, 6-12 months, 12-24 months, and over 24 months.
Although we do not give up on any of the invoices that are included in the
allowances for bad debts, we recognize that responsible financial reporting
requires us to be conservative in these estimates. In order to reduce or
eliminate such allowances going forward, we have recently (at the time of this
writing in late November 2009) implemented new funding and billing software to
streamline this process.
 
 Production
 Disability
software products are either loaded onto computer hard disk drives by our
employees or copied to diskettes, CD-ROM, or memory cards, which is performed
in-house.  Most software customers also buy their notebook personal
computers from us, which we purchase at wholesale prices and resell at a
markup.  We purchase microprocessors that are part of dedicated
devices such as MessageMatesTM.  We design our cases, printed circuit
boards, labels and other components of products such as Sam communicators,
MessageMates,, MicroCommPacsTM and our new ConversaTM Sound Pack.  We
outsource the extrusion, machining and manufacturing of certain
components.  All final assembly and testing operations are done by our
employees at our facility.
 
 Our
products are shipped from our Lancaster, California facility either directly to
the customer or to the salesperson, dealer or reseller.  Historically
for major products, the outside salesperson, dealer or reseller either delivers
the product or visits the customer after delivery to provide training. In our
new remote interaction sales and delivery model more deliveries are being
completed utilizing internet with video support for setup, and webinars plus
individual live video interaction for training.
 
 Competition
 The AAC
industry in which we operate is highly competitive and some of our competitors
have greater financial and personnel resources than ours.  The
industry is made up of about six major competitors including Words+, and a
number of smaller ones.  Based on personal conversations with our
outside dealers and customers, we believe that the other major competitors each
have revenues ranging from $3 million to under $30 million, so that there are no
large companies in this industry.  We believe that acquisition of
additional products that complement our current catalogue will provide faster
growth than merely developing new products in-house, and we are actively working
to complete such acquisitions and alliances.
 
 We
believe that the competition in this industry is based primarily on the quality
of products, quality of customer training and technical support, and quality and
size of sales forces.  Price is a competitive factor but we believe
price is not as important to the customer as obtaining the product most suited
to the customer’s needs, along with strong after-sale support.  We
believe that we are a leader in the industry in developing and producing some of
the most technologically advanced products and in providing quality customer
training and technical support.  We believe that the potential exists
for significant increases in the sales of our disability products; however,
there are few barriers to entry in the form of proprietary or patented
technology or trade secrets in this industry.  While we believe that
cost of product development and the need for specialized knowledge and
experience in this industry would present some barrier to entry for new
competition, other companies may enter this industry, including companies with
substantially greater financial resources than ours.  Furthermore,
companies already in this industry may increase their market share through
increased technology development and marketing efforts.
  9
 TRAINING
AND TECHNICAL SUPPORT
 
 Customer
training and technical support are important factors in customer satisfaction
for both our pharmaceutical and disability products, and we believe we are an
industry leader in providing customer training and technical support in both of
our business areas. For pharmaceutical software, we provide in-house seminars at
customers’ sites. These seminars often serve as initial training in the event
the potential customer decides to license or evaluate our
software.  Technical support is provided after the sale in the form of
on-site training (at customer’s expense), web meeting, telephone, fax, and
e-mail assistance to users during the customer's license period.  We
have used Internet meetings extensively to provide demonstrations and customer
assistance, resulting in rapid response to requests worldwide and reducing our
travel time and expenses.
 
 For
Disability Products, our salesperson, dealer or reseller provides initial
training to the customer for major systems -- typically two to four
hours.  This training is typically provided not only to the user of
the product but also to speech pathologists, occupational therapists,
rehabilitation engineers, teachers, parents and others who will assist the
user.  This initial training for the purchase of full systems is often
provided as a part of the price of the product.  Additional training
and service calls are available for a fee.
 
 Technical
support for both pharmaceutical software and disability products is provided by
our life sciences team and our inside sales and support staff based at our
headquarters facilities in Lancaster, California.  We provide free
telephone support offering unlimited toll-free numbers in the U.S. and Canada,
and e-mail and web-based support for all of our pharmaceutical software and
disability products worldwide. Technical support for pharmaceutical software
products is minimal, averaging a few person-hours per month. Technical support
for Words+ products varies from none for most customers to as much as several
hours for others. Words+ dealers usually train new customers at the customer's
location, which significantly reduces technical support demands on our
staff.





10





EMPLOYEES





As of
August 31, 2009, we employed 38 full-time and 2 part-time employees, including
18 in research and development, 9 in marketing and sales, 7 in administration
and accounting and 6 in production. Currently 13 employees hold Ph.D.’s and 1 is
a Ph.D. candidate in their respective science or engineering disciplines.
Additionally, 4 employees hold one or more Master’s degrees.  Most of
the senior management team and Board of Directors hold graduate degrees. We
believe that our future success will depend, in part, on our ability to continue
to attract, hire and retain qualified personnel.  The competition for
such personnel in the pharmaceutical industry and in the augmentative and
alternative communication device and computer software industry is
intense.  None of our employees is represented by a labor union, and
we have never experienced a work stoppage.  We believe that our
relations with our employees are good.





PATENTS





We own
two patents that were acquired as part of our 2005 acquisition of certain assets
of Bioreason, Inc. and we are applying for a patent related to a product
development that is under way by our Words+ subsidiary. We primarily protect our
intellectual property through copyrights and trade secrecy. Our intellectual
property consists primarily of source code for computer programs and data files
for various applications of those programs in both the pharmaceutical software
and the disability products businesses. In the disability products business,
electronic device schematics, mechanical drawings, and design details are also
intellectual property. The expertise of our technical staff is a considerable
asset closely related to intellectual property, and attracting and retaining
highly qualified scientists and engineers is essential to our
business.





EFFECT OF GOVERNMENT
REGULATIONS





Our
pharmaceutical software products are tools used in research and development and
are neither approved nor approvable by the Food and Drug Administration or other
government agency.  At the recent meeting of the American Association
of Pharmaceutical Scientists in Los Angeles in November 2009, one of the major
pharmaceutical companies stated in a presentation that as a result of GastroPlus
simulations, the FDA waived the requirement for additional human trials in one
of their projects.  This is an important development as it shows that
the cost of the software can be recouped many times over via the cost and time
savings that can be achieved with proper simulations.





Most of
our products for the disabled are funded by Medicare or Medicaid, schools, the
Veteran’s Administration, and other insurance programs. Changes in government
regulations regarding the allowability of augmentative communication aids and
other assistive technology under such funding could affect our
business.





ITEM
1A – RISK FACTORS










11







ITEM
2 – DESCRIPTION OF PROPERTY





We lease
approximately 13,500 square feet of space under a five-year term with two (2),
three-(3) year options to extend the lease in Lancaster,
California.  The base rent started at the rate of $18,445 per month
plus common area maintenance fees.  The base rental rate increases at
4% annually, and currently it is $20,748 plus Common Area Maintenance
fees.  We believe that this new facility is sufficient for our current
needs and growth for the near future.





ITEM
3 – LEGAL PROCEEDINGS





On April
6, 2006 we received notice from a liquidator for the former French subsidiary of
Bioreason (Bioreason SARL), saying that the liquidator had initiated legal
action against Simulations Plus in the French courts with respect to
ClassPharmer distribution rights to European customers, and is claiming
commissions and legal fees with respect to European customers. We filed a
counterclaim for our rights and lost sales against Bioreason SARL's assets by
sending a debt recovery declaration to the liquidator on June 15,
2006.





On April
9, 2008, we received the approval of the settlement agreement from the
commercial division of French Ordinary Court.  This means that the
settlement agreement is now enforceable, and this case is finally
closed.  Both parties dropped all claims and we are not liable for any
amounts.





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





No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal year 2009.







12





PART
II





ITEM
5 – MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





Our
Common Stock is currently traded on the NASDAQ Stock Market (NASDAQ) under the
symbol “SLP”.  According to records of our transfer agent, we had
about 58 shareholders of record and approximately 1,550 beneficial owners as of
August 31, 2009.  The following table sets forth the low and high sale
prices for the Common Stock as listed on the AMEX for the last two fiscal
years.  The Board of directors declared a 2-for-1 stock split in
August 2006 and another 2-for-1 split in October 2007, and our common stock has
been trading at the post-split price since October 2, 2007.  The
prices in the table below reflect the post-split price.  We have not
paid cash dividends on our Common Stock.  We currently intend to
retain our earnings for future growth, and therefore do not anticipate paying
cash dividends in the foreseeable future.  Any further determination
as to the payment of dividends will be at the discretion of our Board of
Directors and will depend among other things, on our financial condition,
results of operations, capital requirements and such other factors as the Board
of Directors deems relevant.





On
October 23, 2008, the board of directors authorized a share repurchase program
enabling the buyback of up to $2.5 million in shares during a 12-month period
beginning Monday, October 27, 2008.  The actual repurchase started on
December 2, 2008; therefore the board of directors extended it through December
1, 2009 in order to have a full 12-month period.  The Company has
opened an account with Morgan Stanley Smith Barney for the purchase of such
securities. Funds for any stock purchases will be drawn from the Company’s cash
reserves. At the time of this writing, the Company has repurchased 1,008,631
shares at an average price of $1.3215 per share, for a total of
$1,326,365.





All
numbers in the table below have been adjusted for the split that was effective
on October 1, 2007.





Low Sales
      Price
            
            High Sales
      PriceFY09:Quarter
      ended August 31, 2009
            1.20
            
            
            1.86Quarter
      ended May 31, 2009
            0.90
            
            
            1.25Quarter
      ended February 28, 2009 .
            0.87
            
            
            1.12Quarter
      ended November 30, 2008
            1.01
            
            
            1.90FY08:Quarter
      ended August 31, 2008 .
            1.40
            
            
            2.18Quarter
      ended May 31, 2008 .
            1.55
            
            
            2.40Quarter
      ended February 28, 2008 .
            2.75
            
            
            4.97Quarter
      ended November 30, 2007  .
            4.45
            
            
            8.39





ITEM 6 – SELECTED
FINANCIAL DATA







13





ITEM
7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere in this
Report.





Results
of Operations





The
following sets forth selected items from our statements of operations (in
thousands) and the percentages that such items bear to net sales for the fiscal
years ended August 31, 2009 (“FY09”) and August 31, 2008 (“FY08”).




FY09
            
            
            FY08Net
      sales
            
            $
            9,143
            
            
            
            100.0%
            
            
            $
            8,968
            
            
            
            100.0%Cost
      of sales
            
            
            2,321
            
            
            
            25.4
            
            
            
            2,100
            
            
            
            23.4Gross
      profit
            
            
            6,822
            
            
            
            74.6
            
            
            
            6,868
            
            
            
            76.6Selling,
      general, and administrative
            
            
            3,896
            
            
            
            42.6
            
            
            
            3,699
            
            
            
            41.3Research
      and development
            
            
            1,114
            
            
            
            12.2
            
            
            
            991
            
            
            
            11.1Total
      operating expenses
            
            
            5,010
            
            
            
            54.8
            
            
            
            4,690
            
            
            
            52.3Income
      from operations
            
            
            1,812
            
            
            
            19.9
            
            
            
            2,178
            
            
            
            24.3Interest
      income
            
            
            94
            
            
            
            1.0
            
            
            
            185
            
            
            
            2.1Miscellaneous
      Income
            
            
            1
            
            
            
            0.0
            
            
            
            -
            
            
            
            -Gain
      on sale of assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Gain
      on currency exchange
            
            
            120
            
            
            
            1.3
            
            
            
            83
            
            
            
            0.9Total
      other income
            
            
            215
            
            
            
            2.4
            
            
            
            268
            
            
            
            3.0Net
      income before taxes
            
            
            2,027
            
            
            
            22.2
            
            
            
            2,446
            
            
            
            27.3Provision
      for income taxes
            
            
            (615
            )
            
            
            (6.7
            )
            
            
            (721
            )
            
            
            (8.0
            )Net
      income
            
            $
            1,412
            
            
            
            15.4%
            
            
            $
            1,725
            
            
            
            19.2%




FY09 COMPARED WITH
FY08





Net
Sales


Consolidated
net sales increased $175,000, or 2.0%, to $9,143,000 in FY09 from $8,968,000 in
FY08.  Sales from pharmaceutical software and services increased
approximately $246,000, or 4.1%; however, our Words+, Inc. subsidiary’s sales
decreased approximately $71,000, or 2.4%, for the year. We attribute the
increase in pharmaceutical software sales and services primarily to increases in
contract studies and collaborations.





We
attribute the decrease in Words+ sales primarily to decreases in sales of
“Freedom” and “TuffTalker Plus” which were discontinued in FY08, and hardware
products such as MessageMates and other input devices.  Those declines
in sales outweighed increased sales of our “Say-it SAM!” and “Conversa”
products.








14





Cost of
Sales


Consolidated
cost of sales increased $221,000, or 10.5%, to $2,321,000 in FY09 from
$2,100,000 in FY08, and as a percentage of revenue, cost of sales increased
2.4%.  For pharmaceutical software and services, cost of sales
increased $275,000, or 34.4%, and as a percentage of revenue, cost of sales
increased to 17.0% in FY09 from 13.2% in FY08.  A significant portion
of cost of sales for pharmaceutical software products is the systematic
amortization of capitalized software development costs, which is an independent
fixed cost rather than a variable cost related to sales.  This
amortization cost increased approximately $50,000, or 11.7%, in FY09 compared
with FY08.  Royalty expense, another significant portion of cost of
sales, increased approximately $38,000, or 10.1%, in FY09 compared with
FY08.  We pay a royalty on GastroPlus basic software sales but not on
its modules or other software sales.  We also pay royalties on the
Enslein Metabolism Module in our ADMET Predictor software in accordance with our
agreement with Enslein Research, Inc.  The cost of contract studies,
which are mainly salaries for Scientists, increased as our revenue from study
contracts increased, because these activities are not capitalizable software
development activities.





For
Words+, cost of sales decreased $54,000, or 4.1%, and as a percentage of
revenue, cost of sales were almost the same with a slight decrease of 0.8% to
43.9% in FY09 from 44.7% in FY08.


­­­­­


Gross
Profit


Consolidated
gross profit decreased $46,000, or 0.7%, to $6,822,000 in FY 09 from $6,868,000
in FY08.  We attribute this decrease to the increase in cost of sales
in pharmaceutical software and services and the decrease in gross profit from
Words+ operations, which outweighed increases in revenue from pharmaceutical
software and services.





Selling, General and
Administrative Expenses


Selling,
general and administrative (“SG&A”) expenses for FY09 increased by $197,000,
or 5.3%, to $3,896,000, compared to $3,699,000 for FY08.  For
Simulations Plus, SG&A expenses increased $124,000, or 5.6%.  The
major increases in expenses were trade show and travel expenses due to attending
more trade shows, increased air fares, and increased personal vehicle mileage
allowances.  Increases in salaries and payroll-related expenses, such
as health insurance, 401(K) and payroll taxes, and consultant fees are also
added to SG&A. During FY08, we had one-time expenses such as fees paid for
tax credit research fees, valuation service fees, and fees paid to the American
Stock Exchange for stock splits, while no such expenses were incurred in FY09,
resulting in some decreases in SG&A.  However, those decreases did
not offset the increases in other expenses mentioned above.





For
Words+, expenses increased by $73,000, or 4.9%.  There was a shift in
expense from one category to another from FY08 to FY09.  In March 08,
we hired a marketing consultant who became an employed sales manager of Words+,
increasing salaries and travel expenses while reducing consultant
fees.  The other increases were website developing fees, payroll, and
payroll-related expenses, such as health insurance, 401(K) and payroll
taxes.  Those increases outweighed decreases in commissions and
depreciation.





Research and
Development


We
incurred approximately $1,975,000 of research and development (“R&D”) costs
for both companies during FY09.  Of this amount, $674,000 was
capitalized and $1,114,000 was expensed as R&D and $187,000 was expensed as
cost of sales.  During FY08 we incurred approximately $1,719,000 of
research and development costs, of which approximately $728,000 was capitalized
and approximately $991,000 was expensed.  The 14.9% increase in
research and development expenditure from FY08 to FY09 was due primarily to
increases in salary expenses due to expanding the staff in the Life Sciences
Department, as well as salary increases for existing staff in both companies,
which was reduced by the amount recorded as a cost of sales for contract
studies.








15





Income from
operations


During
FY09, we generated income from operations of $1,812,000, as compared to
$2,178,000 for FY08, a decrease of 16.8%.  We attribute this decrease
to increases in cost of goods sold, SG&A expenses, and R&D costs, which
outweighed the increased revenue generated by sales of pharmaceutical software
and study contract services, in addition to a decrease in income from Words+
operations. Our heavier investment in R&D and marketing and sales activities
is expected to result in increased sales in the coming quarters.





Other Income and
(Expense)


The net
of other income over other expense for FY09 decreased by $53,000, or 19.8%, to
$215,000, compared to $268,000 for FY08.  This is due primarily to
decreased interest income on Money Market accounts, which outweighed gains on
currency exchange.





Provision for Income
Taxes


Provision
for income taxes for FY09 decreased by $106,000, or 14.7%, to $615,000, compared
to $721,000 for FY08.  In FY08, we hired a tax credit specialist
company, Tax Projects Group, to identify potential unused tax
credits.  As a result of several months of research covering the
previous 3 tax years (2006, 2005, and 2004), they discovered an additional
$276,000 of unused R&D tax credits.  This increase in R&D tax
credits allowed us to reduce our income tax provision to as low as 29% in
FY08.  In FY09, we had such a credit for the current year’s expenses
only. Details are provided in the notes to the financial
statements.





Net
Income


Net
income for FY09 decreased by $313,000, or 18.2%, to $1,412,000, compared to
$1,725,000 for FY08.  We attribute this decrease in net income
primarily to increased cost of goods sold, SG&A expenses, and higher R&D
costs, which outweighed the increased revenues from pharmaceutical software
sales and services.





SEASONALITY





Sales of
our pharmaceutical products exhibit minimal seasonal fluctuation, with the first
fiscal quarter almost always below average for all quarters, except FY 2005,for
the last 12 years.  This unaudited net sales information has been
prepared on the same basis as the annual information presented elsewhere in this
Annual Report on Form 10-K and, in the opinion of management, reflects all
adjustments (consisting of normal recurring entries) necessary for a fair
presentation of the information presented.  Net sales for any quarter
are not necessarily indicative of sales for any future period.




Net
      Simulations Plus Sales (in thousands)FY
              
              First
                Quarter
              
              
              Second
                Quarter
              
              
              Third
                Quarter
              
              
              Fourth
                Quarter
              
              
              Total2009
              
              
              1,430
              
              
              
              1,779
              
              
              
              1,985
              
              
              
              1,107
              
              
              
              6,3012008
              
              
              1,438
              
              
              
              1,550
              
              
              
              1,975
              
              
              
              1,092
              
              
              
              6,0552007
              
              
              824
              
              
              
              1,808
              
              
              
              1,659
              
              
              
              1,465
              
              
              
              5,7562006
              
              
              199
              
              
              
              884
              
              
              
              1,096
              
              
              
              1,007
              
              
              
              3,1862005
              
              
              524
              
              
              
              410
              
              
              
              662
              
              
              
              473
              
              
              
              2,0692004
              
              
              642
              
              
              
              742
              
              
              
              603
              
              
              
              869
              
              
              
              2,8562003
              
              
              507
              
              
              
              582
              
              
              
              614
              
              
              
              1,403
              
              
              
              3,1062002
              
              
              390
              
              
              
              554
              
              
              
              504
              
              
              
              595
              
              
              
              2,0432001
              
              
              221
              
              
              
              373
              
              
              
              305
              
              
              
              282
              
              
              
              1,1812000
              
              
              151
              
              
              
              467
              
              
              
              143
              
              
              
              174
              
              
              
              9351999
              
              
              87
              
              
              
              93
              
              
              
              117
              
              
              
              164
              
              
              
              4611998
              
              
              11
              
              
              
              11
              
              
              
              13
              
              
              
              27
              
              
              
              62




16





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





Net
      Words+ Sales (in thousands)FY
              
              First
                Quarter
              
              
              Second
                Quarter
              
              
              Third
                Quarter
              
              
              Fourth
                Quarter
              
              
              Total2009
              
              
              704
              
              
              
              678
              
              
              
              728
              
              
              
              732
              
              
              
              2,8422008
              
              
              545
              
              
              
              630
              
              
              
              994
              
              
              
              744
              
              
              
              2,9132007
              
              
              632
              
              
              
              726
              
              
              
              972
              
              
              
              772
              
              
              
              3,1022006
              
              
              620
              
              
              
              598
              
              
              
              692
              
              
              
              759
              
              
              
              2,6692005
              
              
              543
              
              
              
              622
              
              
              
              762
              
              
              
              757
              
              
              
              2,6842004
              
              
              497
              
              
              
              626
              
              
              
              630
              
              
              
              598
              
              
              
              2,3512003
              
              
              571
              
              
              
              538
              
              
              
              646
              
              
              
              624
              
              
              
              2,379





LIQUIDITY AND CAPITAL
RESOURCES





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





INFLATION





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





RECENTLY ISSUED ACCOUNTING
STANDARDS





In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 09-3,
“Applicability of AICPA Statement of Position 94-2 to Certain Arrangements That
Include Software Elements” (“EITF 09-3”). EITF 09-3 amends Statement of Position
(“SOP”) 97-2, “Software Revenue Recognition”, to exclude tangible products
containing software components and non-software components that function
together to deliver the products’ essential functionality. EITF 09-3 applies to
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early application permitted with EITF
08-1. The company expects to adopt this standard in the first quarter of fiscal
2011. The company is currently evaluating the impact EITF 09-3 will have on the
consolidated financial statements.
 
 In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 08-1,
“Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”). EITF 08-1
amends EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, to require
an entity to use an estimated selling price when vendor-specific objective
evidence or acceptable third-party evidence does not exist for any products or
services included in a multiple element arrangement. The arrangement
consideration should be allocated among the products and services based upon
their relative selling prices, thus eliminating the use of the residual method
of allocation. EITF 08-1 also requires expanded qualitative and quantitative
disclosures regarding significant judgments made and changes in applying the
guidance. EITF 08-1 applies to fiscal years beginning after June 15, 2010, with
early application permitted. The company expects to adopt the standard in the
first quarter of fiscal 2011. The company is currently evaluating the impact
EITF 08-1 will have on the financial statements.





In June
2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162 (“FAS 168”). This statement
provides for the FASB Accounting Standards Codification to become the single
official source of authoritative, nongovernmental generally accepted accounting
principles in the United States. FAS 168 does not change GAAP but reorganizes
the literature. This statement is effective for interim and annual periods
ending after September 15, 2009.








17





In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS
No. 165”), which provides guidance on events that occur after the balance
sheet date but prior to the issuance of the financial statements. SFAS
No. 165 distinguishes events requiring recognition in the financial
statements and those that may require disclosure in the financial statements.
Furthermore, SFAS No. 165 requires disclosure of the date through which
subsequent events were evaluated. SFAS No. 165 is effective for interim and
annual periods after June 15, 2009. The Company adopted SFAS No. 165
for the annual reporting period ended August 31, 2009.





In April
2008, the FASB issued FSP-FAS No. 142-3, Determination of the Useful Life of
Intangible Assets (“FAS 142-3”). FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (“SFAS 142”). The objective of the Staff
Position is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141 (Revised 2007):
Business Combinations (“SFAS 141R”) and other GAAP. FAS 142-3 is effective
for fiscal years beginning after December 15, 2008. Management is currently
evaluating the effect on the Company’s consolidated financial positions, results
of operations and cash flows.  The Company believes adoption will not
have a material impact on the Company’s consolidated financial
statements.





In April
2009, the FASB issued FSP-FAS No. 107-1 and APB 28-1, Disclosures about Fair Value of
Financial Instruments (“FAS No. 107-1/APB 28-1”). This FSP extends
to interim periods certain disclosures about fair value of financial instruments
for publicly traded companies and amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. This FSP is effective for interim
reporting periods ending after June 15, 2009. The Company’s adoption of FAS
No. 107-1/APB 28-1 is not expected to have a material effect on the
Company’s consolidated financial statements.





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





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





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








18





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





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





CRITICAL ACCOUNTING
POLICIES





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





Revenue
Recognition


We
recognize revenue related to software licenses and software maintenance in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statements of Position (SOP) No. 97-2, "Software Revenue
Recognition."  Product revenue is recorded when the following
conditions are met: 1) evidence of arrangement exists, such as signed Purchase
Orders from customers or executed contracts, 2) delivery has been made, such as
unlocking the software on the customer’s computer(s), 3) the amount is fixed,
and 4) it is collectible.  Post-contract customer support ("PCS")
obligations are insignificant; therefore, revenue for PCS is recognized at the
same time, and the costs of providing such support services are accrued and
amortized over the obligation period.





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





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


We
recognize contract study revenue either equally over the term of the contract or
using the percentage of completion method, depending upon how the contract
studies are engaged, in accordance with AICPA SOP 81-1.  To recognize
revenue using the percentage of completion method, we must determine whether we
meet the following criteria:  1) there is a long-term, legally
enforceable contract and 2) it is possible to reasonably estimate the total
project costs, and 3) it is possible to reasonably estimate the extent of
progress toward completion.





19





Capitalized Computer
Software Development Costs


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





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





Amortization
of capitalized software development costs is provided on a product-by-product
basis on the straight-line method over the estimated economic life of the
products (not to exceed five years).  Amortization of software
development costs amounted to $519,415 and $466,735 for the fiscal years ended
August 31, 2009 and 2008, respectively.  We expect future amortization
expense to vary due to increases in capitalized computer software development
costs.





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





Income
Taxes


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





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





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








20





Stock-Based
Compensation


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





Principles of
Consolidation


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





Estimates


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




ITEM
8 - FINANCIAL STATEMENTS





The
responses to this item are included elsewhere in this Form 10-K (see pages F1 –
F27) and incorporated herein by reference.





ITEM
9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





None.





ITEM
9A(T) – CONTROLS AND PROCEDURES





We
maintain disclosure controls and procedures designed to ensure that material
information related to our company is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms.





As of the
end of the period covered by this report, we carried out an evaluation under the
supervision and with the participation of our Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon
that evaluation, our CEO and CFO concluded, as of the date of such evaluation,
that our disclosure controls and procedures were effective.








21





Management's Report on
Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
controls over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Our internal controls over financial reporting are designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in
accordance with generally accepted accounting principles.





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the
framework established by the Committee of Sponsoring Organizations for the
Treadway Commission. Based on our evaluation under the framework, including the
completion and review of internal review assessment forms and the completion and
review of financial reporting information systems and controls checklists in the
framework, our management concluded that our internal control over financial
reporting was effective as of August 31, 2009.





This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal controls over financial
reporting. Our management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
SEC that permit us to provide only management's report in this annual
report.





No
changes were made in our internal controls over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent
fiscal quarter that have materially affected or are reasonably likely to
materially affect, our internal controls over financial reporting.





Our
management, including our CEO and CFO, does not expect that our disclosure
controls or internal controls over financial reporting will prevent all errors
or all instances of fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within our company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple errors or mistakes. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and any design may not succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitation of a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.





ITEM
9B - OTHER INFORMATION





Not
applicable.





22





PART
III





ITEM
10 - DRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT





The
information required by Item 10 is incorporated by reference from the Company’s
definitive proxy statement (the “Proxy Statement”) for its 2009 Annual
Shareholders’ Meeting.





ITEM
11 – EXECUTIVE COMPENSATION





The
information required by Item 11 is incorporated by reference from the Company’s
Proxy Statement for its 2009 Annual Shareholders’ Meeting.





ITEM
12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
information required by Item 12 is incorporated by reference from the Company’s
Proxy Statement for its 2009 Annual Shareholders’ Meeting.





ITEM
13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The
information required by Item 13 is incorporated by reference from the Company’s
Proxy Statement for its 2009 Annual Shareholders’ Meeting.





ITEM
14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
information required by Item 14 is incorporated by reference from the Company’s
Proxy Statement for its 2009 Annual Shareholders’ Meeting.








PART
IV





ITEM
15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





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





EXHIBITNUMBER
              DESCRIPTION3.1
              Articles
      of Incorporation of the Registrant (1)3.2
              Amended
      and Restated Bylaws of the Registrant (1)4.1
              Articles
      of Incorporation of the Registrant (incorporated by reference to Exhibit
      3.1 hereof) and Bylaws of the Registrant (incorporated by reference to
      Exhibit 3.2 hereof)4.2
              Form
      of Common Stock Certificate (1)4.3
              Share
      Exchange Agreement (1)10.1
              Simulations
      Plus, Inc. 1996 Stock Option Plan (the “Option Plan”) and terms of
      agreements relating thereto (1)+10.2
              Subscription
      Agreement with Patricia Ann O’Neil (1)10.3
              Security
      Agreement with Patricia Ann O’Neil (1)10.4
              Promissory
      Note made by the Registrant in favor of Patricia Ann O’Neil
      (1)   23
  10.5
              Warrants
      to purchase 150,000 shares of Common Stock of the Registrant issued to
      Patricia Ann O’Neil (1)10.6
              First
      Amendment to Agreement with Patricia Ann O’Neil (1)10.7
              Subscription
      Agreement with Fernando Zamudio (1)10.8
              Security
      Agreement with Fernando Zamudio (1)10.9
              Promissory
      Note made by the Registrant in favor of Fernando Zamudio
    (1)10.10
              Warrant
      to purchase 100,000 shares of Common Stock of the Registrant issued to
      Fernando Zamudio (1)10.11
              Employment
      Agreement by and between the Registrant and Walter S. Woltosz (1)
      +10.12
              Performance
      Warrant Agreement by and between the Registrant and Walter S. Woltosz +
      Virginia E. Woltosz (2) +10.13
              Software
      Acquisition Agreement by and Between the Registrant and Michael B. Bolger
      (1)10.14
              Sublease
      Agreement dated May 7, 1993 by and between the Registrant and Westholme
      Partners (along with Consent to Sublease and master lease agreement)
      (1)10.15
              Lease
      Agreements dated August 22, 1996 by and between Words+, Inc. and
      Abbey-Sierra LLC (1)10.16
              Form
      of 10% Amended and Restated Promissory Note issued in connection with the
      Registrant’s Private Placement (2)10.17
              Form
      of Subscription Agreement relative to the Registrant’s Private Placement
      (1)10.18
              Form
      of Lock-Up Agreement with Bridge Lenders (2)10.19
              Form
      of Indemnification Agreement (1)10.20
              Form
      of Lock-Up Agreement with the Woltosz’ (2)10.21
              Letter
      of Intent by and between the Registrant and Therapeutic Systems Research
      Laboratories (1)10.22
              Form
      of Representative’s Warrant to be issued by the Registrant in favor of the
      Representative (2)10.23
              Form
      of Warrant issued to Bridge Lenders (2)10.24
              License
      Agreement by and between the Registrant and Therapeutic Systems Research
      Laboratories (3)10.25
              Grant
      Award Letter from National Science Foundation (4)10.26
              Distribution
      Agreement with Teijin Systems Technology LTD. (4)10.27
              Lease
      Agreements by and between Simulations Plus, Inc. and Martin Properties,
      Inc. (4)10.28
              Software
      OEM Agreement for Assistive Market Developer by and between Words+, Inc.
      and Digital Equipment Corporation. (4)10.29
              Purchase
      Agreement by and between Words+, Inc. and Epson America,
      Inc.  (4)10.30
              License
      Agreement with Absorption Systems, LP. (5)10.31
              Service
      contract with The Kriegsman Group. (5)10.32
              Letter
      of Engagement with Banchik &
  Associates.  (5)10.33
              Letter
      of Intent for Cooperative Alliance with Absorption Systems,
      LP.  (5)10.34
              OEM/Remarketing
      Agreement between Words+, Inc. and Eloquent Technology, Inc.
      (6)10.35
              Lease
      Option Agreement by and between Simulations Plus, Inc. and Martin
      Properties, Inc. (8)10.36
              Auto
      Rental Lease Agreementby and between
      Simulations Plus, Inc. and Walter and Virginia Woltosz
  (8)10.37
              Registration
      Statement – 1,250,000 shares of the Company’s 1996 Stock Options.
      (9)10.38
              Employment
      Agreement by and between the Company and Walter S. Woltosz
      (10)10.39
              An
      addendum to Lease Agreement (11)10.40
              Business
      Lending Agreement with Wells Fargo Bank (11)10.41
              Technology
      Transfer Agreement with Sam Communications, LLC. (12)10.42
              Employment
      Agreement by and between the Company and Walter S. Woltosz
      (14)  24
  10.43
                Lease
      Agreement by and between Simulations Plus, Inc. and Venture Freeway, LLC.
      (15)10.44
                Employment
      Agreement by and between the Company and Walter S. Woltosz
      (16)10.45
                Employment
      Agreement by and between the Company and Walter S. Woltosz
      (17)31.1
                Section
      302 – Certification of Chief Executive Officer (CEO).
  (17)31.2
                Section
      302 – Certification of Chief Financial Officer (CFO).
  (17)32
                Section
      906 – Certification of CEO and CFO. (17)
  (1)
              Incorporated
      by reference to the Company’s Registration Statement on Form SB-2
      (Registration No. 333-6680) filed on March 25, 1997 (the “Registration
      Statement”).(2)
              Incorporated
      by reference to Pre-Effective Amendment No. 1 to the Registration
      Statement filed on May 27, 1997.(3)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 1997.(4)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 1998.(5)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 1999.(6)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2000.(7)
              Incorporated
      by reference to the Company’s Form 8-K filed on March 1,
    2001.(8)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2001.(9)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-8
      (Registration No. 333-91592) filed on June 28, 2002 (the “Registration
      Statement”).(10)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2002.(11)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2003.(12)
              Incorporated
      by reference to the Company’s Form 8-K filed on December 29,
      2003.(13)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2004.(14)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2005.(15)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2006.(16)
              Incorporated
      by reference to the Company’s Form 10-KSB for the fiscal year ended August
      31, 2007(17)
              Filed
      herewith.




(b)
            Reports
      on Form 8-K





None.





25





SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
November 25, 2009.




SIMULATIONS
      PLUS, INC.Date
              By:
              /s/ Momoko A.
      BeranMomoko
      A. BeranChief
      Financial Officer


In
accordance with Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
indicated on November 25, 2009.








Signature
            
            Title/s/
      Walter S.
      Woltosz
            
            Chairman
      of the Board of DirectorsWalter
      S. Woltosz
            
            and
      Chief Executive Officer/s/
      Virginia E.
      WoltoszVirginia
      E. Woltosz
            
            Secretary
      and Director of the Company/s/
      Dr. David Z.
      D’ArgenioDr.
      David Z. D’Argenio
            
            Director­/s/Dr. Richard R.
      WeissDr.
      Richard R. Weiss
            
            Director­/s/Harold W.
      RosenbergerHarold
      W. Rosenberger
            
            Director/s/
      Momoko A.
      BeranMomoko
      A. Beran
            
            Chief
      Financial Officer of the Company





26




SIMULATIONS PLUS,
INC. AND SUBSIDIARY
 CONTENTS
 August
31, 2009 and 2008




PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              F2CONSOLIDATED
      FINANCIAL STATEMENTSConsolidated
      Balance Sheets
              F3Consolidated
      Statements of Operations
              F4Consolidated
      Statements of Shareholders’ Equity
              F5Consolidated
      Statements of Cash Flows
              F6Notes
      to Consolidated Financial Statements
              F7
      – F25






F-1




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To the
Board of Directors and Shareholders of
 Simulations
Plus, Inc.
 Lancaster,
California
 
 We have
audited the accompanying consolidated balance sheets of Simulations Plus, Inc.
(a California corporation) and Subsidiary as of August 31, 2009 and 2008 and the
related consolidated statements of operations, shareholders’ equity and cash
flows for the years then ended.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards established by the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Simulation
Plus, Inc. and Subsidiary as of August 31, 2009 and 2008, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
 
 
 
 Rose,
Snyder & Jacobs
 A
Corporation of Certified Public Accountants
 
 Encino,
California
 
 November
24, 2009






F-2


SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED BALANCE
SHEETS
 FOR THE YEARS ENDED




ASSETSAugust
      31,2009
              
              
              2008Current
      assetsCash
      and cash equivalents
              
              $
              7,473,485
              
              
              $
              5,889,601Accounts
      receivable, net of allowance for doubtful accounts and estimated
      contractual discounts of $447,073 and $319,609
              
              
              1,888,904
              
              
              
              2,105,074Contracts
      receivable
              
              
              79,565
              
              
              
              -Inventory
              
              
              325,926
              
              
              
              342,051Prepaid
      expenses and other current assets
              
              
              158,738
              
              
              
              195,330Deferred
      income taxes
              
              
              338,516
              
              
              
              318,400Total
      current assets
              
              
              10,265,134
              
              
              
              8,850,456Investment
              
              
              -
              
              
              
              750,000Capitalized computer software
      development costs,net
      of accumulated amortization of $3,843,743 and $3,324,328
              
              
              1,942,893
              
              
              
              1,788,756Property and equipment,
      net
              
              
              53,220
              
              
              
              102,633Customer relationships,net of accumulated amortization of $104,728 and
    $85,029
              
              
              23,314
              
              
              
              43,013Other
      assets
              
              
              18,445
              
              
              
              18,445Total
      assets
              
              $
              12,303,006
              
              
              $
              11,553,303LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
              
              $
              199,218
              
              
              $
              181,230Accrued
      payroll and other expenses
              
              
              552,431
              
              
              
              537,363Accrued
      bonuses to officer
              
              
              60,000
              
              
              
              60,000Accrued
      warranty and service costs
              
              
              43,236
              
              
              
              33,899Deferred
      revenue
              
              
              82,190
              
              
              
              83,333Total
      current liabilities
              
              
              937,075
              
              
              
              895,825Long-term
      liabilitiesDeferred
      income taxes
              
              
              795,140
              
              
              
              742,400Total
      liabilities
              
              
              1,732,215
              
              
              
              1,638,225Commitments
      and contingencies (note 6)Shareholders'
      equityPreferred
      stock, $0.001 par value10,000,000
      shares authorizedno
      shares issued and outstanding
              
              
              -
              
              
              
              -Common
      stock, $0.001 par value50,000,000
      shares authorized15,700,382
      and 16,297,400 shares issued and outstanding
              
              
              4,172
              
              
              
              4,769Additional
      paid-in capital
              
              
              5,572,411
              
              
              
              6,328,185Retained
      earnings
              
              
              4,994,208
              
              
              
              3,582,124Total
      shareholders' equity
              
              
              10,570,791
              
              
              
              9,915,078Total
      liabilities and shareholders' equity
              
              $
              12,303,006
              
              
              $
              11,553,303




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




F-3




SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED
 
 
 August
      31,2009
              
              
              2008Net
      sales
              
              $
              9,143,271
              
              
              $
              8,967,970Cost
      of sales
              
              
              2,321,592
              
              
              
              2,100,055Gross
      profit
              
              
              6,821,679
              
              
              
              6,867,915Operating
      expensesSelling,
      general, and administrative
              
              
              3,895,995
              
              
              
              3,699,273Research
      and development
              
              
              1,113,855
              
              
              
              990,491Total
      operating expenses
              
              
              5,009,850
              
              
              
              4,689,764Income
      from operations
              
              
              1,811,829
              
              
              
              2,178,151Other
      income (expense)Interest
      income
              
              
              93,874
              
              
              
              185,399Miscellaneous
      income
              
              
              607
              
              
              
              36Gain
      on currency exchange
              
              
              120,350
              
              
              
              82,659Interest
      expense
              
              
              -
              
              
              
              (68
              )Total
      other income (expense)
              
              
              214,831
              
              
              
              268,026Income
      before income taxes
              
              
              2,026,660
              
              
              
              2,446,177Provision
      for income taxesDeferred
      income taxes
              
              
              (32,628
              )
              
              
              (437,400
              )Current
      Income taxes
              
              
              (581,948
              )
              
              
              (283,208
              )Net
      income
              
              $
              1,412,084
              
              
              $
              1,725,569Basic
      earnings per share
              
              $
              0.09
              
              
              $
              0.11Diluted
      earnings per share
              
              $
              0.08
              
              
              $
              0.10Weighted-average
      commonshares
      outstandingBasic
              
              
              16,126,471
              
              
              
              16,133,822Diluted
              
              
              17,187,547
              
              
              
              18,141,287
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4




SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR THE YEARS ENDED AUGUST
31,




AdditionalCommon
      Stock
              
              
              Paid-InShares
              
              
              Amount
              
              
              Capital
              
              
              Retained
      Earnings
              
              
              TotalBalance,
      August 31, 2007
              
              
              15,761,400
              
              
              $
              4,233
              
              
              $
              5,803,820
              
              
              $
              1,856,555
              
              
              $
              7,664,608Exercise
      of stock options
              
              
              536,000
              
              
              
              536
              
              
              
              434,157
              
              
              
              -
              
              
              
              434,693Stock-based
      Compensation
              
              
              -
              
              
              
              -
              
              
              
              90,208
              
              
              
              -
              
              
              
              90,208Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,725,569
              
              
              
              1,725,569Balance,
      August 31, 2008
              
              
              16,297,400
              
              
              
              4,769
              
              
              
              6,328,185
              
              
              
              3,582,124
              
              
              
              9,915,078Exercise
      of stock options
              
              
              249,824
              
              
              
              250
              
              
              
              124,514
              
              
              
              -
              
              
              
              124,764Stock-based
      Compensation
              
              
              -
              
              
              
              -
              
              
              
              183,294
              
              
              
              -
              
              
              
              183,294Stock
      Repurchases
              
              
              (846,842
              )
              
              
              (847
              )
              
              
              (1,063,582
              )
              
              
              -
              
              
              
              (1,064,429
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,412,084
              
              
              
              1,412,084Balance,
      August 31, 2009
              
              
              15,700,382
              
              
              $
              4,172
              
              
              $
              5,572,411
              
              
              $
              4,994,208
              
              
              $
              10,570,791




The
accompanying notes are an integral part of these consolidated financial
statements.
   F-5




SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED




August
      31,2009
              
              
              2008Cash
      flows from operating activitiesNet
      income
              
              $
              1,412,084
              
              
              $
              1,725,564Adjustments
      to reconcile net income to net cashprovided by operating
      activitiesDepreciation
      and amortization of property and equipment
              
              
              21,893
              
              
              
              50,997Amortization
      of customer relationships
              
              
              19,699
              
              
              
              25,683Amortization
      of capitalized computer software development costs
              
              
              519,415
              
              
              
              466,735Bad
      debts
              
              
              219,998
              
              
              
              62,947Stock-based
      compensation
              
              
              183,294
              
              
              
              90,208Deferred
      income taxes
              
              
              32,628
              
              
              
              437,400(Increase)
      decrease inAccounts
      receivable
              
              
              (83,397
              )
              
              
              (60,349
              )Inventory
              
              
              88,205
              
              
              
              (92,924
              )Other
      assets
              
              
              36,592
              
              
              
              (121,661
              )Increase
      (decrease) inAccounts
      payable
              
              
              17,988
              
              
              
              (20,016
              )Accrued
      payroll and other expenses
              
              
              15,068
              
              
              
              45,751Accrued
      bonuses to officers
              
              
              -
              
              
              
              (141,289
              )Accrued
      income taxes
              
              
              -
              
              
              
              (71,300
              )Accrued
      warranty and service costs
              
              
              9,337
              
              
              
              (4,269
              )Deferred
      revenue
              
              
              (1,143
              )
              
              
              83,333Net
      cash provided by operating activities
              
              
              2,491,661
              
              
              
              2,476,815Cash
      flows from investing activitiesPurchases
      of property and equipment
              
              
              (44,560
              )
              
              
              (81,940
              )Investment
      in securities
              
              
              -
              
              
              
              (750,000
              )Proceeds
      from sale of investments
              
              
              750,000
              
              
              
              -Capitalized
      computer software development costs
              
              
              (673,552
              )
              
              
              (727,681
              )Net
      cash provided by (used in) investing activities
              
              
              31,888
              
              
              
              (1,559,621
              )Cash
      flows from financing activitiesRepurchase
      of common stock
              
              
              (1,064,429
              )
              
              
              -Proceeds
      from the exercise of stock options
              
              
              124,764
              
              
              
              434,693Net
      cash provided by (used in) financing activities
              
              
              (939,665
              )
              
              
              434,693Net
      increase in cash and cash equivalents
              
              $
              1,583,884
              
              
              $
              1,351,887Cash
      and cash equivalents, beginning of year
              
              
              5,889,601
              
              
              
              4,537,714Cash
      and cash equivalents, end of period
              
              $
              7,473,485
              
              
              $
              5,889,601Supplemental
      disclosures of cash flow informationInterest
      paid
              
              $
              -
              
              
              $
              68Income
      taxes paid
              
              $
              549,122
              
              
              $
              450,000
 The
accompanying notes are an integral part of these consolidated financial
statements.




F-6




SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008




NOTE
1 - ORGANIZATION AND LINES OF BUSINESS
 
 Organization
 Simulations
Plus, Inc. was incorporated on July 17, 1996. On August 29, 1996, the
shareholders of Words+, Inc. exchanged their 2,000 shares of Words+, Inc. common
stock for 2,200,000 (Pre-split) shares of Simulations Plus, Inc. common stock,
and Words+, Inc. became a wholly owned subsidiary of Simulations Plus, Inc.
(collectively, the "Company").
 
 Lines of
Business
 The
Company designs and develops pharmaceutical simulation software to promote
cost-effective solutions to a number of problems in pharmaceutical research and
in the education of pharmacy and medical students.  The Company also
develops and sells interactive, educational software programs that simulate
science experiments conducted in middle school, high school, and junior college
science classes as well as a productivity software program called Abbreviate!
that was moved from the Words+ subsidiary to Simulations Plus. In addition, the
Company’s subsidiary designs and develops computer software and manufactures
augmentative communication devices and computer access products that provide a
voice for those who cannot speak and allow physically disabled persons to
operate a standard computer.
  NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Use of
Estimates
 Our
consolidated financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of
America.  Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses.  These estimates and assumptions
are affected by management’s application of accounting
policies.  Actual results could differ from those
estimates.
 
 Principles of
Consolidation
 The
consolidated financial statements include the accounts of Simulations Plus, Inc.
and its wholly owned subsidiary, Words+, Inc.  All significant
intercompany accounts and transactions are eliminated in
consolidation.
 
 Revenue
Recognition
 The
Company recognizes revenues related to software licenses and software
maintenance in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statements of Position (“SOP”) No. 97-2, "Software Revenue
Recognition."  Software products revenue is recorded when the
following conditions are met: 1) evidence of arrangement exists, 2) delivery has
been made, 3) the amount is fixed, and 4) collectibility is
probable.  Post-contract customer support ("PCS") obligations are
insignificant; therefore, revenue for PCS is recognized at the same time as the
licensing fee, and the costs of providing such support services are accrued and
amortized over the obligation period.  For Words+ products, the
revenue is recorded at the time of shipment, net of estimated allowances and
returns.
   F-7
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 As a
byproduct of ongoing improvements and upgrades for the new programs and new
modules of software, some modifications are provided to customers who have
already purchased software at no additional charge. Other software modifications
result in new, additional cost modules that expand the functionality of the
software. These are licensed separately. We consider the modifications that are
provided without charge to be minimal, as they do not significantly change the
basic functionality or utility of the software, but rather add convenience, such
as being able to plot some additional variable on a graph in addition to the
numerous variables that had been available before, or adding some additional
calculations to supplement the information provided from running the software.
Such software modifications for any single product have typically occurred once
or twice per year, sometimes more, sometimes less. Thus, they are
infrequent.  The Company provides, for a fee, additional training and
service calls to its customers and recognizes revenue at the time the training
or service call is provided.
 
 Generally,
we enter into one-year license agreements with customers for the use of our
pharmaceutical software products.  We recognize revenue on these
contracts when all the criteria under SOP 97-2 are met.
 
 Most
license agreements have a term of one year; however, from time to time, we enter
into multi-year license agreements.We generally unlock and
invoice software one year at a time for multi-year licenses. Therefore, revenue
is recognized one year at a time.
 We
recognize contract study revenue either equally over the term of the contract or
using the percentage of completion method, depending upon how the contract
studies are engaged, in accordance with AICPA SOP 81-1.  To recognize
revenue using the percentage of completion method, we must determine whether we
meet the following criteria:  1) there is a long-term, legally
enforceable contract and 2) it is possible to reasonably estimate the total
project costs, and 3) it is possible to reasonably estimate the extent of
progress toward completion.
 
 Cash and Cash
Equivalents
 For
purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
  Accounts
Receivable
 The
Company maintains an allowance for doubtful accounts for estimated losses that
may arise if any of its customers are unable to make required
payments.  Management specifically analyzes the age of customer
balances, historical bad debt experience, customer credit-worthiness, and
changes in customer payment terms when making estimates of the collectibility of
the Company’s trade accounts receivable balances.  If the Company
determines that the financial conditions of any of its customers deteriorated,
whether due to customer-specific or general economic issues, an increase in the
allowance may be made.  Accounts receivable are written off when all
collection attempts have failed.  The Company also estimates the
contractual discount obligation for third party funding such as Medicare,
Medicaid, and private insurance companies.  Those estimated discounts
are reflected in the allowance for doubtful accounts and contractual
discounts.
 
 Inventory
 Inventory
is stated at the lower of cost (first-in, first-out basis) or market and
consists primarily of computers and peripheral computer equipment.
 
 Capitalized Computer
Software Development Costs
 Software
development costs are capitalized in accordance with SFAS No. 86, "Accounting
for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed."  Capitalization of software development costs begins upon
the establishment of technological feasibility and is discontinued when the
product is available for sale.
   F-8
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 The
establishment of technological feasibility and the ongoing assessment for
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life, and changes in software and hardware technologies.
Capitalized computer software development costs are comprised primarily of
salaries and direct payroll-related costs and the purchase of existing software
to be used in the Company's software products.
 
 Amortization
of capitalized computer software development costs is provided on a
product-by-product basis on the straight-line method over the estimated economic
life of the products (not to exceed five years).  Amortization of
software development costs amounted to $519,415 and $466,735 for the years ended
August 31, 2009 and 2008, respectively.  We expect future amortization
expense to vary due to increases in capitalized computer software development
costs.
 
 Management
tests capitalized computer software development costs for recoverability
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
 
 Property and
Equipment
 Property
and equipment are recorded at cost, less accumulated depreciation and
amortization.  Depreciation and amortization are provided using the
straight-line method over the estimated useful lives as follows:
 
 Equipment
                5
      yearsComputer
      equipment
                3
      to 7 yearsFurniture
      and fixtures
                5
      to 7 yearsLeasehold
      improvements
                Shorter
      of life of asset or lease
 Maintenance
and minor replacements are charged to expense as incurred.  Gains and
losses on disposals are included in the results of operations.
 
 Fair Value of Financial
Instruments
 For
certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued payroll and other
expenses, accrued bonuses to officers, and accrued warranty and service costs,
the carrying amounts approximate fair value due to their short
maturities.
 
 Effective
September 1, 2008, we adopted SFAS 157, Fair Value Measurements. SFAS
157 does not require any new fair value measurements; rather, it defines fair
value, establishes a framework for measuring fair value in accordance with
existing GAAP and expands disclosures about fair value measurements. In February
2008, FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement
No. 157 was issued, which delays the effective date of SFAS 157
to fiscal years and interim periods within those fiscal years beginning after
November 15, 2008 for non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We elected to defer the
adoption of the Standard for these non-financial assets and liabilities and are
currently evaluating the impact, if any, that the deferred provisions of the
Standard will have on our consolidated financial statements. In October 2008,
FSP FAS 157-3, Fair Value
Measurements, was issued, which clarifies the application of SFAS 157 in
an inactive market and provides an example to demonstrate how the fair value of
a financial asset is determined when the market for that financial asset is
inactive. FSP FAS 157-3 was effective upon issuance, including prior periods for
which financial statements had not been issued. The adoption of SFAS 157 for our
financial assets and liabilities and FSP FAS 157-3 did not have an impact on our
financial position or operating results. Beginning September 1, 2008,
assets and liabilities recorded at fair value in the Consolidated Balance Sheets
are categorized based upon the level of judgment associated with the inputs used
to measure their fair value. The categories, as defined by SFAS 157, are as
follows:
  F-9
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 Level Input:
              
              Input
      Definition:Level
      I
              
              Inputs
      are unadjusted, quoted prices for identical assets or liabilities in
      active markets at the measurement date.Level
      II
              
              Inputs,
      other than quoted prices included in Level I, that are observable for the
      asset or liability through corroboration with market data at the
      measurement date.Level
      III
              
              Unobservable
      inputs that reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement
      date.
 
 The
following table summarizes fair value measurements by level at August 31, 2009
for assets and liabilities measured at fair value on a recurring
basis:
 
 Level
      I
              
              
              Level
      II
              
              
              Level
      III
              
              
              TotalCash
      and cash equivalents
              
              $
              7,473,485
              
              
              $
              -
              
              
              $
              -
              
              
              $
              7,473,485Total
      assets
              
              $
              7,473,485
              
              
              $
              -
              
              
              $
              
              
              
              $
              7,473,485
  Advertising
 The
Company expenses advertising costs as incurred.  Advertising costs for
the years ended August 31, 2009 and 2008 were $34,000 and $10,000,
respectively.
 
 Shipping and
Handling
 Shipping
and handling costs are recorded as cost of sales and amounted to $103,000 and
$107,000 for the years ended August 31, 2009 and 2008,
respectively.
 
 Research and Development
Costs
 Research
and development costs are charged to expense as incurred until technological
feasibility has been established. These costs consist primarily of salaries and
direct payroll-related costs.  It also includes purchased software
which was developed by other companies and incorporated into, or used in the
development of, our final products.
 
 Income
Taxes
 The
Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns.
   F-10
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.  Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.  The provision for income taxes represents
the tax payable for the period and the change during the period in deferred tax
assets and liabilities.
 
 
 Earnings per
Share
 The
Company reports earnings per share in accordance with SFAS No. 128, "Loss per
Share."  Basic earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common shares
available.  Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive.  The components of basic and diluted earnings per share for
the years ended August 31, 2009 and 2008 were as follows:
 
 2009
                
                
                2008NumeratorNet
      income attributable to common shareholders
                
                $
                1,412,084
                
                
                $
                1,725,569DenominatorWeighted-average
      number of common sharesoutstanding
      during the year
                
                
                16,126,471
                
                
                
                16,133,822Dilutive
      effect of stock options
                
                
                1,061,076
                
                
                
                2,007,465Common
      stock and common stockequivalents
      used for diluted earnings per share
                
                
                17,187,547
                
                
                
                18,141,287
 Stock-Based
Compensation
 The
Company accounts for stock options using the modified prospective method in
accordance with SFAS No. 123R.  Under this method, compensation costs
include: (1) compensation cost for all share-based payments granted prior to,
but not yet vested as of September 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123 amortized
over the options’ vesting period, and (2) compensation cost for all share-based
payments granted subsequent to September 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS No. 123R, amortized on
a straight-line basis over the options’ vesting period.  Stock-based
compensation was $183,294 and $90,208 for the years ended August 31, 2009 and
2008, respectively, and are included in the consolidated statements of
operations as Consulting, Salaries, and Research and development
expense.
 
 F-11
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 Concentrations and
Uncertainties
 Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash, cash equivalents and trade accounts
receivable.  The Company holds cash and cash equivalents at banks
located in California, with balances that often exceed FDIC insured
limits.  Historically, the Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.  However, considering the current banking
environment, the Company is looking in to alternative ways to minimize our
exposure to such risks.  While the Company may be exposed to credit
losses due to the nonperformance of its counterparties, the Company does not
expect the settlement of these transactions to have a material effect on its
results of operations, cash flows or financial condition.
  International
sales accounted for 32% and 38% of net sales for the years ended August 31, 2009
and 2008, respectively.  For Simulations Plus, Inc., two customers
(one is a dealer account representing various end users) accounted for 13% each
and the third customer accounted for 12% of net sales for the year ended August
31, 2009.  For the year ended August 31, 2008, the same two customers
accounted for 16% (one is a dealer account) and the third customer accounted for
14% of net sales.  For Words+, Inc., one government agency accounted
for 21% and 21% of net sales during the years ended August 31, 2009 and 2008,
respectively.
 
 The
Company operates in the computer software industry, which is highly competitive
and changes rapidly.  The Company's operating results could be
significantly affected by its ability to develop new products and find new
distribution channels for new and existing products.
 
 For
Simulations Plus, two customers comprised of 39%, and 14% of accounts receivable
at August 31, 2009.  Three customers comprised 25%, 17% and 17% of
accounts receivable at August 31, 2008.  For Words+, one government
agency comprised 25% and 34% of accounts receivable at August 31, 2009 and 2008,
respectively.
 
 The
Company’s subsidiary, Words+, Inc., purchases components for the main computer
products from three manufacturers. Words+, Inc. also uses a number of
pictographic symbols that are used in its software products which are licensed
from a third party. The inability of the Company to obtain computers used in its
products or to renew its licensing agreement to use pictographic symbols could
negatively impact the Company's financial position, results of operations, and
cash flows.
   F-12
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 Recently Issued Accounting
Standards
 
 In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 09-3,
“Applicability of AICPA Statement of Position 94-2 to Certain Arrangements That
Include Software Elements” (“EITF 09-3”). EITF 09-3 amends Statement of Position
(“SOP”) 97-2, “Software Revenue Recognition”, to exclude tangible products
containing software components and non-software components that function
together to deliver the products’ essential functionality. EITF 09-3 applies to
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early application permitted with EITF
08-1. The company expects to adopt this standard in the first quarter of fiscal
2011. The company is currently evaluating the impact EITF 09-3 will have on the
consolidated financial statements.
 
 In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 08-1,
“Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”). EITF 08-1
amends EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, to require
an entity to use an estimated selling price when vendor-specific objective
evidence or acceptable third-party evidence does not exist for any products or
services included in a multiple element arrangement. The arrangement
consideration should be allocated among the products and services based upon
their relative selling prices, thus eliminating the use of the residual method
of allocation. EITF 08-1 also requires expanded qualitative and quantitative
disclosures regarding significant judgments made and changes in applying the
guidance. EITF 08-1 applies to fiscal years beginning after June 15, 2010, with
early application permitted. The company expects to adopt the standard in the
first quarter of fiscal 2011. The company is currently evaluating the impact
EITF 08-1 will have on the financial statements.
 In June
2009, the FASB issued Statement No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162 (“FAS 168”). This statement
provides for the FASB Accounting Standards Codification to become the single
official source of authoritative, nongovernmental generally accepted accounting
principles in the United States. FAS 168 does not change GAAP but reorganizes
the literature. This statement is effective for interim and annual periods
ending after September 15, 2009.
 
 In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS
No. 165”), which provides guidance on events that occur after the balance
sheet date but prior to the issuance of the financial statements. SFAS
No. 165 distinguishes events requiring recognition in the financial
statements and those that may require disclosure in the financial statements.
Furthermore, SFAS No. 165 requires disclosure of the date through which
subsequent events were evaluated. SFAS No. 165 is effective for interim and
annual periods after June 15, 2009. The Company adopted SFAS No. 165
for the annual reporting period ended August 31, 2009.
 
 In April
2008, the FASB issued FSP-FAS No. 142-3, Determination of the Useful Life of
Intangible Assets (“FAS 142-3”). FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (“SFAS 142”). The objective of the Staff
Position is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141 (Revised 2007):
Business Combinations (“SFAS 141R”) and other GAAP. FAS 142-3 is effective
for fiscal years beginning after December 15, 2008. Management is currently
evaluating the effect on the Company’s consolidated financial positions, results
of operations and cash flows.  The Company believes the adoption of
SFAS 159 will not have a material impact on the Company’s consolidated
financial statements.
 
 In April
2009, the FASB issued FSP-FAS No. 107-1 and APB 28-1, Disclosures about Fair Value of
Financial Instruments (“FAS No. 107-1/APB 28-1”). This FSP extends
to interim periods certain disclosures about fair value of financial instruments
for publicly traded companies and amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. This FSP is effective for interim
reporting periods ending after June 15, 2009. The Company’s adoption of FAS
No. 107-1/APB 28-1 is not expected to have a material effect on the
Company’s consolidated financial statements.
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. For financial assets and liabilities, SFAS 157 will be
effective for the Company in the first fiscal quarter of 2009. As permitted by
FSP-FAS 157-2, SFAS 157 is effective for nonfinancial assets and
liabilities for the Company during the first fiscal quarter of 2010. Management
believes the adoption of SFAS 157 for its financial assets and liabilities
will not have a material impact on the Company’s consolidated financial
statements and continues to evaluate the potential impact of the adoption of
SFAS 157 related to its nonfinancial assets and liabilities.
   F-13
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159
permits companies to choose to measure many financial instruments and certain
other items at fair value. SFAS 159 will be effective for the Company in
the first fiscal quarter of 2009. The Company believes the adoption of
SFAS 159 will not have a material impact on the Company’s consolidated
financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”), which replaces SFAS 141. SFAS 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any resulting goodwill, and any noncontrolling interest in
the acquiree. SFAS 141R also provides for disclosures to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141R will be effective for the Company in first
fiscal quarter of 2010 and must be applied prospectively to business
combinations completed on or after that date.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin No. 51” (“SFAS 160”), which establishes accounting and
reporting standards for noncontrolling interests (“minority interests”) in
subsidiaries. SFAS 160 clarifies that a noncontrolling interest in a
subsidiary should be accounted for as a component of equity separate from the
parent’s equity. SFAS 160 will be effective for the Company in the first
fiscal quarter of 2010 and must be applied prospectively, except for the
presentation and disclosure requirements, which will apply retrospectively. The
Company is currently evaluating the potential impact that adoption of
SFAS 160 may have on its consolidated financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS 161”), which requires enhanced disclosures about an
entity’s derivative and hedging activities. SFAS 161 will be effective for
The Company second fiscal quarter of 2009.
 
  F-14
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 NOTE
3 – INVESTMENT
 
 The
Company owned Auction Rated Securities (“ARS”) through UBS Financial Services
Inc.  On August 8, 2008, UBS announced a comprehensive settlement, in
principle, to all who hold ARS, that they will buy back ARS, at par, from most
clients during a two-year time period beginning January 2, 2009.  On
January 2, 2009, UBS bought back all of our ARS, and we no longer hold such an
investment.
 
 NOTE
4 – PROPERTY AND EQUIPMENT
 
 Property
and equipment at August 31, 2009 consisted of the following:
  Automobile
                
                $
                21,769Equipment
                
                
                80,830Computer
      equipment
                
                
                376,680Furniture
      and fixtures
                
                
                61,498Leasehold
      improvements
                
                
                53,898594,675Less
      accumulated depreciation and amortization
                
                
                541,455Total
                
                $
                53,220
 Depreciation
expense was $21,893 and $50,997 for the years ended August 31, 2009 and 2008,
respectively.
 
 NOTE
5 - COMMITMENTS AND CONTINGENCIES
 
 Leases
 We lease
approximately 13,500 square feet of space under a five-year term with two (2),
three (3)-year options to extend the lease.  The base rent is $18,445
per month plus common area maintenance fees.  The base rental rate
increases at 4% annually.  Rent expense, including common area
maintenance fees, was $271,748 and $266,189 for the years ended August 31, 2009
and 2008, respectively.  The lease will be matured on February 1, 2011
with an option to extend.
 
 On
October 30, 2006, the Company entered into an equipment lease
agreement.  In this agreement, the Company leased a Ricoh
Copier/Printer for 36 months with the option of earlier termination with a
60-day written notice.  On October 30, 2009, we renewed the same
agreement for another 36 months with an increment of 1 cent on color printing
which reflects their material cost.
 Future
minimum lease payments under non-cancelable operating leases with remaining
terms of one year or more at August 31, 2009 were as follows:
 
 Years
      Ending
                  August 31,2010
                
                
                254,7872011
                
                
                107,890$
                362,677
  F-15
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
  Employment
Agreement
 On August
31, 2009, the Company entered into an employment agreement with its
President/Chief Executive Officer that expires in August 2011.  The
employment agreement provides for an annual base salary of $275,000 per year,
and a performance bonus in an amount not to exceed 10% of Employee’s salary, or
$27,500 per year, at the end of each fiscal year.  The specific amount
of the bonus to be awarded will be determined by the Compensation Committee of
the Board of Directors, based on the financial performance and achievements of
the Company for the previous fiscal year.  The agreement also provides
Employee stock options, exercisable for five years, to purchase fifty (50)
shares of Common Stock for each one thousand dollars ($1,000) of net income
before taxes at the end of each fiscal year up to a maximum of 120,000 options
over the term of the agreement.  The Company may terminate the
agreement upon 30 days' written notice if termination is without
cause.  The Company's only obligation would be to pay its President
the greater of a) 12 months salary or b) the remainder of the term of the
employment agreement from the date of notice of termination.
 
 License
Agreement
 In 1997,
the Company entered into an agreement with Therapeutic Systems Research
Laboratory ("TSRL") to jointly develop a computer simulation software program of
the absorption of drug compounds in the gastrointestinal tract.  Upon
execution of a definitive License Agreement on July 9, 1997, TSRL received an
initial payment of $75,000, and thereafter, the Company is obligated to pay a
royalty of 20% of the net sales of the basic GastroPlus software without
additional modules.
 
 In
September 2007, the Company entered into an agreement with Enslein Research,
Inc. (“Enslein”) to jointly create a new metabolism module as part of ADMET
Predictor.  The fee for the exclusive license to the Enslein Data, in
the form of a royalty, is 50% of the gross sales revenues of the ADMET
Metabolism Module, and a $50,000 bonus at the time the sale of ADMET Metabolism
module reaches 25 annual licenses.
 
 For the
years ended August 31, 2009 and 2008, Simulations Plus, Inc. incurred royalties
of approximately $413,000 and $375,000, respectively.
 
 The
Company’s subsidiary, Words+, Inc., entered into royalty agreements with several
vendors to apply their software & technologies into the finished goods to be
sold.  For the years ended August 31, 2009 and 2008, Words+ incurred
royalties of $31,925 and $42,775, respectively.
 
 Legal
Matters
 On April
6, 2006 we received notice from a liquidator for the former French subsidiary of
Bioreason (Bioreason SARL), saying that the liquidator had initiated legal
action against Simulations Plus in the French courts with respect to
ClassPharmer distribution rights to European customers, and is claiming
commissions and legal fees with respect to European customers. We filed a
counterclaim for our rights and lost sales against Bioreason SARL's assets by
sending a debt recovery declaration to the liquidator on June 15,
2006.
   F-16
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 On April
9, 2008, we received the approval of the settlement agreement from the
commercial division of French Ordinary Court.  This means that the
settlement agreement is now enforceable, and this case is finally
closed.  Both parties dropped all claims and we are not liable for any
amounts.
 
 NOTE
6 - SHAREHOLDERS' EQUITY
 
 Stock
Repurchase
 On
October 23, 2008, the board of directors authorized a share repurchase program
enabling the buyback of up to $2.5 million in shares during a 12-month period
beginning Monday, October 27, 2008.  The actual repurchase started on
December 2, 2008; therefore the board of directors extended it through December
1, 2009 in order to have a full 12-month period.  The Company has
opened an account with Morgan Stanley Smith Barney for the purchase of such
securities. Funds for any stock purchases will be drawn from the Company’s cash
reserves.
 
 The
details of repurchases made during the nine months ended August 31, 2009 are
listed in the following table:
 
 Period
              
              Total
      Number of Shares Purchased
              
              Average
      Price Paid per Share
              
              Remaining
      Funds Available Under the Share Repurchase Plan (including broker’s
      fees)12/01/08
      to 12/31/08
              
              90,632
              
              
              $0.9764
              
              
              $2,409,63101/01/09
      to 01/31/09
              
              105,752
              
              
              $1.0352
              
              
              $2,296,80702/01/09
      to 02/28/09
              
              73,118
              
              
              $1.0086
              
              
              $2,221,12403/01/09
      to 03/31/09
              
              73,315
              
              
              $0.9575
              
              
              $2,149,16804/01/09
      to 04/30/09
              
              55,580
              
              
              $1.0045
              
              
              $2,091,89605/01/09
      to 05/31/09
              
              44,083
              
              
              $1.1360
              
              
              $2,041,64906/01/09
      to 06/30/09
              
              171,740*
              
              
              $1.3885
              
              
              $1,799,55007/01/09
      to 07/31/09
              
              131,308
              
              
              $1.5321
              
              
              $1,596,48608/01/09
      to 08/31/09
              
              101,314
              
              
              $1.7467
              
              
              $1,416,478As
      of 08/31/09
              
              846,842
              
              
              $1.2569
 
 *
Includes repurchase of 50,000 shares at $1.24 on June 5, 2009 from Walter
Woltosz, CEO of the Company.
   F-17
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 Stock Option
Plan
 In
September 1996, the Board of Directors adopted, and the shareholders approved,
the 1996 Stock Option Plan (the "Option Plan") under which a total of 1,000,000
shares of common stock had been reserved for issuance.  In March 1999,
the shareholders approved an increase in the number of shares that may be
granted under the Option Plan to 2,000,000.  In February 2000, the
shareholders approved an increase in the number of shares that may be granted
under the Option Plan to 4,000,000.  In December 2000, the
shareholders approved an increase in the number of shares that may be granted
under the Option Plan to 5,000,000.  Furthermore, in February 2005,
the shareholders approved an additional 1,000,000 shares, resulting in the total
number of shares that may be granted under the Option Plan to
6,000,000.  The 1996 Stock Option Plan terminated in September 2006 by
its term.
 
 On
February 23, 2007, the Board of Directors adopted and the shareholders approved
the 2007 Stock Option Plan under which a total of 1,000,000 shares of common
stock had been reserved for issuance.
 
 The
number of shares described above are adjusted reflecting the two-for-one stock
splits on August 14, 2006 and October 1, 2007,
 
 The
following table summarizes the stock option transactions.
 
 TRANSACTIONS
IN FY 2009 AND 2008
 
 Transactions
      in FY08
              
              Number
      of Options
              
              
              Weighted-Average
      Exercise Price
                Per ShareOutstanding,
      August 31, 2007
              
              
              3,209,736
              
              
              $
              0.69Granted
              
              
              287,000
              
              
              $
              3.01Exercised
              
              
              (536,000
              )
              
              $
              0.81Expired/Canceled
              
              
              (246,200
              )
              
              $
              0.64Outstanding,
      August 31, 2008
              
              
              2,714,536
              
              
              $
              0.91Exercisable,
      August 31, 2008
              
              
              2,300,536
              
              
              $
              0.66
   Transactions
      in FY09
              
              Number
      of Options
              
              
              Weighted-Average
                Exercise
      Price
                Per Share
              
              
              
              Weighted-Average
                Remaining
                Contractual
                LifeOutstanding,
      August 31, 2008
              
              
              2,714,536
              
              
              $
              0.91Granted
              
              
              392,000
              
              
              $
              1.09Exercised
              
              
              (237,000
              )
              
              $
              0.51Canceled/Forfeited
              
              
              (3,000
              )
              
              $
              3.02Expired
              
              
              (4,000
              )
              
              $
              0.38Outstanding,
      August 31, 2009
              
              
              2,862,536
              
              
              $
              0.97
              
              
              
              3.927Exercisable,
      August 31, 2009
              
              
              2,158,136
              
              
              $
              0.74
              
              
              
              2.346
 
 F-18
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 OPTIONS
OUTSTANDING & UNVESTED AT AUGUST 31, 2008 AND 2009
 Options
Outstanding & Unvested at August 31, 2008
 Number
      Outstanding
                
                
                Weighted
      Average Fair
                  Market
      PriceNon
      Vested at 8/31/2007
                
                
                170,000
                
                
                $
                0.32Granted
                
                
                287,000
                
                
                $
                2.23Vested
                
                
                (42,000
                )
                
                $
                0.32Cancelled
                
                
                (1,000
                )
                
                $
                2.27Non
      Vested at 8/31/2008
                
                
                414,000
                
                
                $
                1.64
   Options Outstanding & Unvested at August 31,
2009
 Number
      Outstanding
                
                
                Weighted
      Average Fair Market
      PriceNon
      Vested at 8/31/2008
                
                
                414,000
                
                
                $
                1.64Granted
                
                
                392,000
                
                
                $
                0.77Vested
                
                
                (98,600
                )
                
                $
                1.41Cancelled
                
                
                (3,000
                )
                
                $
                2.27Non
      Vested at 8/31/2009
                
                
                704,400
                
                
                $
                1.04
  The fair
value of the options granted during FY09 is estimated at
$307,571.  The fair value of these options was estimated at the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the fiscal year ended August 31, 2009: dividend
yield of 0%, expected volatility of 67.78% to 81.34%, risk-free interest rate of
2.67% to 3.17%, and expected life of 7 to 7.7 years. The weighted-average fair
values of options granted during FY09 and FY08 were $0.78 and $2.22,
respectively.  The weighted-average exercise prices of options granted
during FY09 and FY08 were $1.09, and $3.01, respectively.  The total
fair value of non-vested stock options as of August 31, 2009 was $734,825 and is
amortizable over a weighted average period of 2.37 years.
   F-19
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which do not have vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
 
 The
weighted-average remaining contractual life of options outstanding issued under
the Plan was 3.9 years at August 31, 2009.  The exercise prices for
the options outstanding at August 31, 2009 ranged from $0.26 to $3.03, and the
information relating to these options is as follows:
 
 Exercise
      Price
              
              Awards
      Outstanding
              
              Awards
      ExercisableLow
              High
              
              Quantity
              Weighted
      Average Remaining Contractual Life
              Weighted
      Average
                Exercise
      Price
              
              Quantity
              Weighted
      Average Remaining
                Contractual
      Life
              Weighted
      Average
                Exercise
      Price$0.26
              
              $0.50
              
              
              771,436
              
              1.5
      years
              
              $0.37
              
              
              771,436
              
              1.5
      years
              
              $0.37$0.51
              
              $0.75
              
              
              789,000
              
              0.4
      years
              
              $0.66
              
              
              789,000
              
              0.4
      years
              
              $0.66$0.76
              
              $1.25
              
              
              969,100
              
              7.1
      years
              
              $1.06
              
              
              541,100
              
              5.7
      years
              
              $1.14$1.26
              
              $3.03
              
              
              333,000
              
              8.5
      years
              
              $2.83
              
              
              56,600
              
              8.5
      years
              
              $3.032,862,536
              
              
              
              
              
              
              2,158,136
 
 Intrinsic
Value of options outstanding and options exercisable
 
 Intrinsic
      Value of Options Outstanding
              
              
              Intrinsic
      Value of Options Exercisable
              
              
              Intrinsic
      Value of Options ExercisedFY09
              
              $
              2,713,395
              
              
              $
              2,354,206
              
              
              $
              191,400FY08
              
              $
              2,436,621
              
              
              $
              2,685,289
              
              
              $
              2,108,540
 
 
 F-20
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 Other Stock
Options
 As of
August 31, 2009, the Board of Directors holds options to purchase 51,000 shares
of common stock at exercise prices ranging from $0.30 to $6.68, which were
granted prior to August 31, 2009.
  Transactions
      in FY09
              
              Number
      of Options
              
              
              Weighted-Average
      Exercise Price
                Per ShareOutstanding,
      August 31, 2008
              
              
              58,324
              
              
              $
              1.58Granted
              
              
              5,500
              
              
              $
              1.78Exercised
              
              
              (12,824
              )
              
              $
              0.42Outstanding,
      August 31, 2009
              
              
              51,000
              
              
              $
              1.89Exercisable,
      August 31, 2009
              
              
              39,800
              
              
              $
              1.62
  
 NOTE
7 - INCOME TAXES
 
 The
components of the income tax provision for the years ended August 31, 2009 and
2008 were as follows:
 2009
                
                
                2008CurrentFederal
                
                $
                (491,258
                )
                
                $
                (271,908
                )State
                
                
                (90,690
                )
                
                
                (11,300
                )(581,948
                )
                
                
                (283,208
                )DeferredFederal
                
                
                (14,912
                )
                
                
                (443,000
                )State
                
                
                (17,716
                )
                
                
                5,600Total
                
                $
                (614,576
                )
                
                $
                (720,608
                )
 A
reconciliation of the expected income tax (benefit) computed using the federal
statutory income tax rate to the Company's effective income tax rate is as
follows for the years ended August 31, 2009 and 2008:




2009
              
              
              2008Income
      tax computed at federal statutory tax rate
              
              
              34.0%
              
              
              
              34.0%State
      taxes, net of federal benefit
              
              
              6.1
              
              
              
              5.9Meals
      & Entertainment
              
              
              0.6
              
              
              
              0.4Other
      permanent differences
              
              
              (1.8
              )
              
              
              -Research
      and development credit
              
              
              (9.4
              )
              
              
              (7.8
              )Change
      in prior year estimated taxes
              
              
              1.9
              
              
              
              (0.8
              )Other
              
              
              (1.1
              )
              
              
              (2.2
              )Total
              
              
              30.3%
              
              
              
              29.5%


F-21
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 Significant
components of the Company's deferred tax assets and liabilities for income taxes
for the years ended August 31, 2009 and 2008 are as follows:
 
 2009
                
                
                2008Deferred
      tax assetsAccrued
      payroll and other expenses
                
                $
                90,795
                
                
                $
                316,300Accrued
      warranty and service costs
                
                
                18,522
                
                
                
                14,500Bad
      debt allowance
                
                
                191,525
                
                
                
                -Deferred
      revenue
                
                
                27,945
                
                
                
                -State
      taxes
                
                
                69,723
                
                
                
                43,700Total
      deferred tax assets
                
                
                398,510
                
                
                
                374,500Less:  Valuation
      allowance
                
                
                -
                
                
                
                -398,510
                
                
                
                374,500Deferred
      tax liabilitiesProperty
      and equipment
                
                
                (22,799
                )
                
                
                (32,100
                )Capitalized
      computer software development costs
                
                
                (832,335
                )
                
                
                (766,400
                )Total
      deferred tax liabilities
                
                
                (855,135
                )
                
                
                (798,500
                )Net
      deferred tax assets or (liabilities)
                
                $
                (456,624
                )
                
                $
                (424,000
                )
 
 The
Company has adopted Financial Accounting Standards Board (“FASB”) Interpretation
No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”.FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement 109, "Accounting for Income Taxes", and prescribes a recognition
threshold of more likely than not and a measurement process for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. In making this assessment, a company must determine
whether it is more likely than not that a tax position will be sustained upon
examination, based solely on the technical merits of the position and must
assume that the tax position will be examined by taxing authorities. Our policy
is to include interest and penalties related to unrecognized tax benefits in
income tax expense. Interest and penalties totaled $0 for the years ended August
31, 2009 and 2008, respectively. The Company files income tax returns with the
Internal Revenue Service (“IRS”) and the state of California. For jurisdictions
in which tax filings are prepared, the Company is no longer subject to
income tax examinations by state tax authorities for years through 2003, and by
the IRS for years through 2004. Our review of prior year tax positions using the
criteria and provisions presented in FIN 48 did not result in a material impact
on the Company’s financial position or results of operations.
  NOTE
8 - RELATED PARTY TRANSACTIONS
 
 As of
August 31, 2009, included in accrued bonuses to officers was $60,000, which
represented 5% of the Company's net income before bonuses and taxes, not
exceeding $60,000, given to the Corporate Secretary, Virginia Woltosz, as an
annual bonus.
 
 The
repurchase of the Company’s stock includes 50,000 shares at $1.24 on June 5,
2009, which were purchased from Walter Woltosz, CEO of the Company.
 
 F-22
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 NOTE
9 - LINES OF BUSINESS
 
 For
internal reporting purposes, management segregates the Company into two
divisions.  The segment information is as follows for the years ended
August 31, 2009 and 2008:
 
 August
      31, 2009SimulationsPlus,
      Inc.
              
              
              Words+,
      Inc.
              
              
              Eliminations
              
              
              TotalNet
      sales
              
              $
              6,301,355
              
              
              $
              2,841,916
              
              
              $
              -
              
              
              $
              9,143,271Income
      from operations
              
              $
              1,899,260
              
              
              $
              (87,431
              )
              
              $
              -
              
              
              $
              1,811,829Identifiable
      assets
              
              $
              11,973,864
              
              
              $
              1,966,042
              
              
              $
              (1,636,900
              )
              
              $
              12,267,006Capital
      expenditures
              
              $
              23,106
              
              
              $
              21,454
              
              
              $
              -
              
              
              $
              44,560Depreciation/Amortization
              
              $
              508,629
              
              
              $
              52,378
              
              
              $
              -
              
              
              $
              561,007Stock-based
      compensation
              
              $
              157,169
              
              
              $
              26,125
              
              
              $
              -
              
              
              $
              183,294Interest
      Income
              
              $
              93,769
              
              
              $
              105
              
              
              $
              -
              
              
              $
              93,874Income
      tax expense
              
              $
              614,576
              
              
              $
              -
              
              
              $
              -
              
              
              $
              614,576
 
 August
      31, 2008SimulationsPlus,
      Inc.
                
                
                Words+,
      Inc.
                
                
                Eliminations
                
                
                TotalNet
      sales
                
                $
                6,055,097
                
                
                $
                2,912,873
                
                
                $
                -
                
                
                $
                8,967,970Income
      from operations
                
                $
                2,154,164
                
                
                $
                23,987
                
                
                $
                -
                
                
                $
                2,178,151Identifiable
      assets
                
                $
                11,131,350
                
                
                $
                1,892,891
                
                
                $
                (1,470,938
                )
                
                $
                11,553,303Capital
      expenditures
                
                $
                4,863
                
                
                $
                77,077
                
                
                $
                -
                
                
                $
                81,940Depreciation/Amortization
                
                $
                465,804
                
                
                $
                77,611
                
                
                $
                -
                
                
                $
                543,415Stock-based
      compensation
                
                $
                82,558
                
                
                $
                7,650
                
                
                $
                -
                
                
                $
                90,208Interest
      Income
                
                $
                179,978
                
                
                $
                5,421
                
                
                $
                -
                
                
                $
                185,399Income
      tax expense
                
                $
                720,608
                
                
                $
                -
                
                
                $
                -
                
                
                $
                720,608
 Most
corporate expenses, such as legal and accounting expenses, public relations
expenses, and bonuses to the President and Secretary are included in Simulations
Plus, Inc.
 
 F-23
 SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 NOTE
10 - GEOGRAPHIC REPORTING
 
 The
Company allocates revenues to geographic areas based on the locations of its
customers.  Geographical revenues were as follows for the fiscal years
ended August 31, 2009 and 2008:
 
 August
      31, 2009(in
      ‘000)
              
              North
      America
              
              
              Europe
              
              
              Asia
              
              
              Oceania
              
              
              South
      America
              
              
              TotalSimulations
      Plus, Inc.
              
              
              3,505
              
              
              
              1,822
              
              
              
              974
              
              
              
              -
              
              
              
              -
              
              
              
              6,301Words+,
      Inc.
              
              
              2,723
              
              
              
              50
              
              
              
              17
              
              
              
              50
              
              
              
              2
              
              
              
              2,842Total
              
              
              6,228
              
              
              
              1,872
              
              
              
              991
              
              
              
              50
              
              
              
              2
              
              
              
              9,143
 
 
 August
      31, 2008(in
      ‘000)
              
              North
      America
              
              
              Europe
              
              
              Asia
              
              
              Oceania
              
              
              South
      America
              
              
              TotalSimulations
      Plus, Inc.
              
              
              3,040
              
              
              
              1,939
              
              
              
              1,076
              
              
              
              -
              
              
              
              -
              
              
              
              6,055Words+,
      Inc.
              
              
              2,488
              
              
              
              351
              
              
              
              24
              
              
              
              45
              
              
              
              5
              
              
              
              2,913Total
              
              
              5,528
              
              
              
              2,290
              
              
              
              1,100
              
              
              
              45
              
              
              
              5
              
              
              
              8,968
  NOTE
11 – CUSTOMER RELATIONSHIPS
 
 The
Company purchased customer relationships as a part of the acquisition of certain
assets of Bioreason, Inc. in November 2005.  Customer relationships
was recorded at a cost of $128,042, and is being amortized over 78 months under
the sum-of-the-years’-digits method.  Amortization expense for the
years ended August 31, 2009 and 2008 amounted to $19,699 and $25,683,
respectively.  Accumulated amortization was $104,723 as of August 31,
2009.
 
 NOTE
12 - EMPLOYEE BENEFIT PLAN
 
 We
maintain a 401(k) Plan for all eligible employees.  We make matching
contributions equal to 100% of the employee’s elective deferral, not to exceed
4% of the total employee compensation.  We can also elect to make a
profit-sharing contribution.  Contributions by the Company to this
Plan amounted to $79,787 and $69,896 for the years ended August 31, 2009 and
2008, respectively.
  F-24
  SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 August
31, 2009 and 2008
 NOTE
13 - SUBSEQUENT EVENTS
 
 Our
former vice president of marketing and sales, Mr. Ronald Creeley, has submitted
his resignation effective October 31 for full-time employment and is remaining
as a part-time employee through December. Mr. John DiBella has been promoted to
Manager, Marketing and Sales reporting to Dr. Michael Pelekis, Director,
Business Development, Marketing, and Sales.
 
 Dr. John
Crison resigned on October 23 as Dir, Life Sciences for personal reasons. Dr.
Michael Bolger, Scientist and former Dir. Life Sciences, has assumed the duties
of Acting Dir, Life Sciences until a replacement can be
found.
 
 The
details of repurchases made since August 31, 2009 are listed in the following
table.  Thus, adding these shares to those described above through
August 31, the total number of shares repurchased through November 16, 2009 was
1,008,632.
 
 Period
              
              Total
      Number of Shares Purchased
              
              Average
      Price Paid per Share
              
              Remaining
      Funds Available Under the Share Repurchase Plan (including
      broker’s fees)09/01/09
      to 09/30/09
              
              82,631
              
              
              $1.6989
              
              
              $1,274,15510/01/09
      to 10/31/09
              
              52,364
              
              
              $1.5685
              
              
              $1,190,38611/01/09
      to 11/16/09
              
              26,795
              
              
              $1.4711
              
              
              $1,151,189As
      of 11/16/09
              
              161,790
              
              
              $1.6190
  From
September 1, 2009 to November 16, 2009, an additional 57,500 stock options to
purchase shares have been exercised by employees that generated $43,744 in
cash.
 
 We have
evaluated subsequent events through November 24 2009, the date the financial
statements were available to be issued.
    
 F-25