SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q





x
            Quarterly
      Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of
      1934 for the quarterly period ended November 30,
      2008





o
            Transmission
      Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of
      1937 for the transition period from ______ to
  ______





Commission
      file number:  001-32046





Simulations
Plus, Inc.


(Name of
registrant as specified in its charter)




California
            
            95-4595609(State
      or other jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer
              Identification
      No.)




42505
10th
Street West


Lancaster,
CA  93534-7059


(Address
of principal executive offices including zip code)





(661)
723-7723


(Issuer’s
telephone number, including area code)





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 past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x  No o





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.






Large accelerated
      filer   o
            Non-accelerated
      filer   o
            Smaller reporting
      company   x





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





The
number of shares outstanding of the Issuer’s common stock, par value $0.001 per
share, as of January 9, 2009, was 16,051,491.





Simulations
Plus, Inc.


FORM
10-Q


For
the Quarterly Period Ended November 30, 2008





Table of
Contents





PART
I.    FINANCIAL INFORMATION





Item
      1.  Financial Statements (Unaudited)
            PageConsolidated
      Balance Sheet at November 30, 2008 (unaudited) and August 31, 2008
      (audited)
            2Consolidated
      Statements of Operations for the three months ended November 30, 2008 and
      2007 (unaudited)
            3Consolidated
      Statements of Cash Flows for the three months ended November 30, 2008 and
      2007 (unaudited)
            4Notes
      to Consolidated Financial Statements (unaudited)
            5Item
      2.  Management’s Discussion and Analysis or Plan of
      OperationsGeneral
            15Results
      of Operations
            20Liquidity
      and Capital Resources
            22Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risk
            22Item
      4.  Controls and Procedures
            22PART
      II.    OTHER INFORMATIONItem
      1.  Legal Proceedings
            23Item
      2.  Changes in Securities
            23Item
      3.  Defaults upon Senior Securities
            23Item
      4.  Submission of Matters to a Vote of Security
      Holders
            23Item
      5.  Other Information
            23Item
      6.  Exhibits and Reports on Form 8-K
            23Signature
            24





Exhibit –
Certifications







PART
I.    FINANCIAL INFORMATION


Item
1.  Financial Statements (Unaudited)


SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEET
 November
30, 2008 (Unaudited) and August 31, 2008 (Audited)
 
 ASSETSNovember
      30,
                    2008
                  
                  
                  August
      31,
                    2008Current
      assetsCash
      and cash equivalents
                  
                  $
                  6,063,754
                  
                  
                  $
                  5,889,601Accounts
      receivable, net of allowance for doubtful accountsand
      estimated contractual discounts of $388,125 and $319,609
                  
                  
                  2,474,455
                  
                  
                  
                  2,105,074Inventory
                  
                  
                  337,259
                  
                  
                  
                  342,051Prepaid
      expenses and other current assets
                  
                  
                  125,334
                  
                  
                  
                  195,330Deferred
      income taxes
                  
                  
                  340,600
                  
                  
                  
                  318,400Total
      current assets
                  
                  
                  9,341,402
                  
                  
                  
                  8,850,456Investment(note
      8)
                  
                  
                  750,000
                  
                  
                  
                  750,000Capitalized computer software
      development costs,net
      of accumulated amortization of $3,448,159 and $3,324,328
                  
                  
                  1,866,574
                  
                  
                  
                  1,788,756Property and equipment,
      net (note 3)
                  
                  
                  94,373
                  
                  
                  
                  102,633Customer relationships,net of accumulated amortization of $90,515 and
    $85,029
                  
                  
                  37,527
                  
                  
                  
                  43,013Other
      assets
                  
                  
                  18,445
                  
                  
                  
                  18,445Total
      assets
                  
                  $
                  12,108,321
                  
                  
                  $
                  11,553,303LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  165,454
                  
                  
                  $
                  181,230Accrued
      payroll and other expenses
                  
                  
                  563,607
                  
                  
                  
                  537,363Accrued
      bonuses to officer
                  
                  
                  83,845
                  
                  
                  
                  60,000Accrued
      warranty and service costs
                  
                  
                  41,145
                  
                  
                  
                  33,899Accrued
      income tax
                  
                  
                  128,633
                  
                  
                  
                  -Deferred
      revenue
                  
                  
                  33,333
                  
                  
                  
                  83,333Total
      current liabilities
                  
                  
                  1,016,017
                  
                  
                  
                  895,825Long-Term
      liabilitiesDeferred
      income taxes
                  
                  
                  777,300
                  
                  
                  
                  742,400Total
      liabilities
                  
                  
                  1,793,317
                  
                  
                  
                  1,638,225Commitments and
      contingencies (note 4)Shareholders' equity
      (note 5)Preferred
      stock, $0.001 par value10,000,000
      shares authorizedno
      shares issued and outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, $0.001 par value50,000,000
      shares authorized16,406,400
      and 16,297,400 shares issued and outstanding
                  
                  
                  4,878
                  
                  
                  
                  4,769Additional
      paid-in capital
                  
                  
                  6,416,280
                  
                  
                  
                  6,328,185Retained
      Earnings
                  
                  
                  3,893,846
                  
                  
                  
                  3,582,124Total
      shareholders' equity
                  
                  
                  10,315,004
                  
                  
                  
                  9,915,078Total
      liabilities and shareholders' equity
                  
                  $
                  12,108,321
                  
                  
                  $
                  11,553,303
 
 The
accompanying notes are an integral part of these financial
statements.
  2
  SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the Three Months Ended November 30,
 (Unaudited)
 2008
                  
                  
                  
                  2007Net
      sales
                  
                  $
                  2,133,250
                  
                  
                  $
                  1,983,809Cost
      of sales
                  
                  
                  526,413
                  
                  
                  
                  485,940Gross
      profit
                  
                  
                  1,606,837
                  
                  
                  
                  1,497,869Operating
      expensesSelling,
      general, and administrative
                  
                  
                  903,690
                  
                  
                  
                  930,291Research
      and development
                  
                  
                  301,398
                  
                  
                  
                  225,951Total
      operating expenses
                  
                  
                  1,205,088
                  
                  
                  
                  1,156,242Income
      from operations
                  
                  
                  401,749
                  
                  
                  
                  341,627Other
      income (expense)Interest
      income
                  
                  
                  33,387
                  
                  
                  
                  45,147Miscellaneous
      income
                  
                  
                  43
                  
                  
                  
                  25Gain
      (Loss) on currency exchange
                  
                  
                  17,876
                  
                  
                  
                  18,635Total
      other income (expense)
                  
                  
                  51,306
                  
                  
                  
                  63,807Income
      before income taxes
                  
                  
                  453,055
                  
                  
                  
                  405,434Provision
      for income taxes
                  
                  
                  (141,333
                  )
                  
                  
                  (162,174
                  )Net
      income
                  
                  $
                  311,722
                  
                  
                  $
                  243,260Basic
      earnings per share
                  
                  $
                  0.02
                  
                  
                  $
                  0.02Diluted
      earnings per share
                  
                  $
                  0.02
                  
                  
                  $
                  0.01Weighted-average
      common shares outstandingBasic
                  
                  
                  16,348,818
                  
                  
                  
                  15,911,312Diluted
                  
                  
                  17,516,583
                  
                  
                  
                  18,429,743
  The
accompanying notes are an integral part of these financial
statements.
  3
  SIMULATIONS
PLUS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Three Months Ended November 30,
 (Unaudited)
 2008
                  
                  
                  2007Cash
      flows from operating activitiesNet
      income
                  
                  $
                  311,722
                  
                  
                  $
                  243,260Adjustments
      to reconcile net income to net cashprovided
      by operating activitiesDepreciation
      and amortization of property and equipment
                  
                  
                  12,383
                  
                  
                  
                  12,900Amortization
      of customer relationships
                  
                  
                  5,486
                  
                  
                  
                  6,982Amortization
      of capitalized computer software development costs
                  
                  
                  123,831
                  
                  
                  
                  116,171Bad
      debts
                  
                  
                  56,418
                  
                  
                  
                  62,947Stock-based
      compensation
                  
                  
                  39,398
                  
                  
                  
                  5,185Deferred
      income taxes
                  
                  
                  12,700
                  
                  
                  
                  125,661(Increase)
      decrease inAccounts
      receivable
                  
                  
                  (425,799
                  )
                  
                  
                  (334,849
                  )Inventory
                  
                  
                  8,017
                  
                  
                  
                  (6,253
                  )Other
      assets
                  
                  
                  69,996
                  
                  
                  
                  4,590Increase
      (decrease) inAccounts
      payable
                  
                  
                  (15,776
                  )
                  
                  
                  23,904Accrued
      payroll and other expenses
                  
                  
                  26,244
                  
                  
                  
                  16,233Accrued
      bonuses to officers
                  
                  
                  23,845
                  
                  
                  
                  (179,950
                  )Accrued
      income taxes
                  
                  
                  128,633
                  
                  
                  
                  (34,787
                  )Accrued
      warranty and service costs
                  
                  
                  7,246
                  
                  
                  
                  (3,164
                  )Deferred
      revenue
                  
                  
                  (50,000
                  )
                  
                  
                  -Net
      cash provided by operating activities
                  
                  
                  334,344
                  
                  
                  
                  58,830Cash
      flows from investing activitiesPurchases
      of property and equipment
                  
                  
                  (7,348
                  )
                  
                  
                  -Capitalized
      computer software development costs
                  
                  
                  (201,649
                  )
                  
                  
                  (173,971
                  )Net
      cash used in investing activities
                  
                  
                  (208,997
                  )
                  
                  
                  (173,971
                  )Cash
      flows from financing activitiesProceeds
      from the exercise of stock options
                  
                  
                  48,806
                  
                  
                  
                  161,740Net
      cash provided by financing activities
                  
                  
                  48,806
                  
                  
                  
                  161,740Net
      increase (decrease) in cash and cash equivalents
                  
                  $
                  174,153
                  
                  
                  $
                  46,599Cash
      and cash equivalents, beginning of year
                  
                  
                  5,889,601
                  
                  
                  
                  4,537,714Cash
      and cash equivalents, end of period
                  
                  $
                  6,063,754
                  
                  
                  $
                  4,584,313Supplemental
      disclosures of cash flow informationInterest
      paid
                  
                  $
                  -
                  
                  
                  $
                  -Income
      taxes paid
                  
                  $
                  -
                  
                  
                  $
                  80,000
  The
accompanying notes are an integral part of these financial
statements.


4




Simulations
Plus, Inc.





NOTES
TO CONDENSED FINANCIAL STATEMENTS


(Unaudited)




Note 1:
GENERAL





This
report on Form 10-Q for the quarter ended November 30, 2008, should be read in
conjunction with the Company's annual report on Form 10-KSB for the year ended
August 31, 2008, filed with the SEC on November 26, 2008. As contemplated by the
Securities and Exchange Commission under Article 10 of Regulation S-X, the
accompanying financial statements and footnotes have been condensed and
therefore do not contain all disclosures required by generally accepted
accounting principles. The interim financial data are unaudited; however, in the
opinion of Simulations Plus, Inc. ("we", "our", "us"), the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of the results for the interim periods. Results for interim
periods are not necessarily indicative of those to be expected for the full
year.





Note 2:
SIGNIFICANT ACCOUNTING POLICIES





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 computer software development costs, and
accounting for income taxes.





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.





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.




5




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.





Cash and Cash
Equivalents


For
purposes of the statements of cash flows, we consider all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.





Accounts
Receivable


We
maintain an allowance for doubtful accounts for estimated losses that may arise
if any of our customers are unable to make required payments.  We
specifically analyze 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 our trade accounts receivable
balances.  If we determine that the financial conditions of any of our
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.





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.





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 $123,831 and $116,171 for the three months ended
November 30, 2008 and 2007, respectively.  We expect future
amortization expense to vary due to increases in capitalized computer software
development costs.




6




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.





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 our 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.





Shipping and
Handling


Shipping
and handling costs, recorded as cost of sales, amounted to $26,241 and $22,507
for the three months ended November 30, 2008 and 2007,
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 expected future tax
consequences of events that have been included in the financial statements or
tax returns.





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.





In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting for uncertainty in income tax positions.  The provisions of
FIN 48 were effective for the Company on September 1, 2007.  After
evaluating the adoption of FIN 48, we believe that the adoption did not have a
material impact on our consolidated financial statements.




7




At the
end of fiscal year 2008, we recorded $424,000 in deferred income tax
liability.  For our first fiscal quarter 2009, we recorded a provision
for income taxes in the amount of $141,333, resulting in a net deferred tax
liability of $436,700 at November 30, 2008.  The evaluation of the
deferred income tax assets is based on our history of generating taxable profits
and our projections of future profits, as well as expected future tax
rates.  As of November 30, 2008, we have determined that it is more
likely than not that the deferred tax assets will be realized.  As
such, no valuation allowance was recorded against the deferred tax
assets.  Significant judgment is required in these evaluations, and
differences in future results from our estimates could result in material
differences in the realization of these assets.





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
three months ended as of November 30, 2008 and 2007 amounted to $5,486 and
$6,982, respectively.  Accumulated amortization as of November 30,
2008 and 2007 were $90,515 and $66,328, respectively.





Earnings per
Share


The
Company reports earnings per share in accordance with SFAS No. 128, "Earnings
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 three months ended November 30, 2008 and 2007 were as follows:





11/30/2008
            
            
            11/30/2007Numerator
              Net
      income attributable to common shareholders
            
            $
            311,722
            
            
            $
            243,260Denominator
              Weighted-average
      number of common sharesoutstanding
      during the year
              Dilutive
      effect of stock options
            
            
            16,348,818
      1,167,765
            
            
            
            15,911,312
      2,518,431Common
      stock and common stockequivalents
      used for diluted earning per share
            
            
            17,516,583
            
            
            
            18,429,743





Stock-Based
Compensation


Compensation
costs related to stock options are determined in accordance with SFAS No. 123R
using the modified prospective method.  Under this method,
compensation cost recognized during the three months ended November 30, 2008
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.  Stock-based
compensation was $39,398 and $5,185 for the three months ended November 30, 2008
and 2007, respectively, and is included in the condensed consolidated statements
of operations as Consulting, and Research and Development expense.




8




Concentrations and
Uncertainties


International
sales accounted for 22% and 30% of net sales for the three months ended November
30, 2008 and 2007, respectively.  For Simulations Plus, Inc., three
customers accounted for 41%, 10%, and 7% of net sales during the three months
ended November 30, 2008, compared with three customers accounting for 41%, 8%,
and 7% of net sales during the three months ended November 30,
2007.  For Words+, Inc., three government agencies accounted for 24%,
8%, and 7% of net sales during the three months ended November 30, 2008,
compared with two government agencies accounted for 22% and 7% of net sales
during the three months ended November 30, 2007.





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, three customers comprised 48%, 15%, and 8% of its accounts
receivable at November 30, 2008, and three customers comprised 50%, 7%, and 6%
of accounts receivable at November 30, 2007.   For Words+, three
government agencies comprised 30%, 10%, and 9% of its accounts receivable at
November 30, 2008, and two government agencies comprised 35% and 10%, and one
insurance agency comprised 9% of its accounts receivable at November 30,
2007.





The
Company’s subsidiary, Words+, Inc., purchases components for its main computer
products from four 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.





Recently Issued Accounting
Pronouncements




On March
19, 2008, the Financial Accounting Standards Board (FASB) announced the issuance
of Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS No. 161”). SFAS No. 161 amends
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS No. 133”) and was issued in
response to concerns and criticisms about the lack of adequate disclosure of
derivative instruments and hedging activities. SFAS No. 161 is focused on
requiring enhanced disclosure on 1) how and why an entity uses derivative
instruments and hedging activities; 2) how derivative instruments and related
hedging activities are accounted for under SFAS No. 133; and 3) how derivative
instruments and related hedging activities affect an entity’s cash flows,
financial position and performance.




To
accomplish the three objectives listed above, SFAS No. 161 requires: 1)
qualitative disclosures regarding the objectives and strategies for using
derivative instruments and engaging in hedging activities in the context of an
entity’s overall risk exposure; 2) quantitative disclosures in tabular format of
the fair values of derivative instruments and their gains and losses; and 3)
disclosures about credit-risk related contingent features in derivative
instruments.




SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008.  The adoption of SFAS No. 161 is
not expected to have a material impact on our consolidated financial
statements.




9




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 was effective
for the Company in the first fiscal quarter of 2009. As permitted by
FSP-FAS 157-2, SFAS 157 was 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
did 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
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 the
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.





Note
3:  PROPERTY AND EQUIPMENT





Property
and equipment as of November 30, 2008 consisted of the following:





Equipment
              
              $
              179,289Computer
      equipment
              
              
              339,468Furniture
      and fixtures
              
              
              61,498Automobile
              
              
              21,769Leasehold
      improvements
              
              
              53,898Sub
      total
              
              
              655,922Less:
      Accumulated depreciation and amortization
              
              
              (561,549
              )Net
      Book Value
              
              
              94,373





Note
4:  COMMITMENTS AND CONTINGENCIES





Employee
Agreement


On August
9, 2007, the Company entered into an employment agreement with its
President/Chief Executive Officer that expires in August 2009.  The
employment agreement provides for an annual salary of $250,000.  At
the CEO’s request, this new agreement does not include an annual bonus, which
has ranged up to $150,000 in all previous agreements.  Thus, a savings
to the Company of up to $75,000 per year may be realized as a result of this new
agreement.  The agreement also provides that 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.




10




Litigation


The
Company is not a party to any litigation at this time and is not aware of any
pending litigation of any kind.





Note 5:
SHAREHOLDERS’ EQUITY





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 250,000
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 500,000.  In February 2000, the
shareholders approved an increase in the number of shares that may be granted
under the Option Plan to 1,000,000.  In December 2000, the
shareholders approved an increase in the number of shares that may be granted
under the Option Plan to 1,250,000.  Furthermore, in February 2005,
the shareholders approved an additional 250,000 shares, resulting in the total
number of shares that may be granted under the Option Plan to 1,500,000. All of
the preceding numbers of options are based on numbers of options prior to the
two-for-one stock split on August 14, 2006. 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 500,000 shares (1,000,000
shares after a 2-for-1stock split on October 1, 2007) of common stock had been
reserved for issuance.





Number
      of Options
              
              
              Weighted-Average
                Exercise
      Price
                Per
      ShareOutstanding,
      August 31, 2008
              
              
              2,714,536
              
              
              $
              0.92Granted
              
              
              50,000
              
              
              $
              1.73Exercised
              
              
              (109,000
              )
              
              $
              0.45Expired/Cancelled
              
              
              (3,000
              )
              
              $
              3.02Outstanding,
      November 30, 2008
              
              
              2,652,536
              
              
              $
              0.95Exercisable,
      November 30, 2008
              
              
              2,233,536
              
              
              $
              0.67





Options Outstanding
      & Unvested at November 30, 2008Number
                Outstanding
              
              Weighted
      Average
                Vesting
      Period
                (in years)
              
              Weighted
      Average
                Fair Market PriceNon
      Vested before 9/1/2008
              
              
              414,000
              
              
              
              $
              1.64Granted
              
              
              50,000
              
              
              
              $
              1.34Vested
              
              
              (42,000
              )
              
              
              $
              0.32Cancelled
              
              
              (3,000
              )
              
              
              $
              2.27Non
      Vested at 11/30/2008
              
              
              419,000
              
              2.57
              
              $
              1.73




11




The fair
value of the options granted during the first fiscal quarter of 2009 is
estimated at $67,190.  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 quarter ended November 30,
2008: dividend yield of 0%, expected volatility of 86.93%, risk-free interest
rate of 3.26%, and expected life of 7 years. The weighted-average fair values of
options granted during the first fiscal quarter of 2009 was $1.34, and the
weighted-average exercise prices of options granted during the first fiscal
quarter of 2009 was $1.73.  The total fair value of non-vested stock
options as of November 30, 2008 was $619,381 and is amortizable over a weighted
average period of 2.57 years.





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 3.8 years at November 30, 2008.  The exercise prices for
the options outstanding at November 30, 2008 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
              
              
              
              856,936
              
              2.0
      years
              
              $
              0.37
              
              
              
              856,936
              
              2.0
      years
              
              $
              0.37$
              0.51
              
              
              $
              0.75
              
              
              
              795,500
              
              1.1
      years
              
              $
              0.66
              
              
              
              795,500
              
              1.1
      years
              
              $
              0.66$
              0.76
              
              
              $
              1.25
              
              
              
              667,100
              
              6.5
      years
              
              $
              1.09
              
              
              
              581,100
              
              6.4
      years
              
              $
              1.12$
              1.26
              
              
              $
              3.03
              
              
              
              333,000
              
              9.2
      years
              
              $
              2.83
              
              
              
              02,652,536
              
              3.8
      years
              
              $
              0.95
              
              
              
              2,233,536
              
              2.9
      years
              
              $
              0.67




Other Stock
Options


As of
November 30, 2008, the independent members of the Board of Directors hold
options to purchase 63,824 shares of common stock at exercise prices ranging
from $0.30 to $6.68, which options were granted on or before November 30,
2008.




Number of Options
              
              
              Weighted average exercise
    priceOptions
      Outstanding
              
              
              63,824
              
              
              $
              1.59Options
      exercisable
              
              
              45,624
              
              
              $
              1.04





12




Note
6:  SEGMENT AND GEOGRAPHIC REPORTING





We
account for segments and geographic revenues in accordance with SFAS No. 131,
“Disclosure about Segments of an Enterprise and Related
Information.”  Our reportable segments are strategic business units
that offer different products and services.  Results for each segment
and consolidated results are as follows for the three months ended November 30,
2008 and 2007 (in thousands):




November
      30, 2008Simulations
                Plus,
      Inc
              
              
              Words
      +,
                Inc.
              
              
              Eliminations
              
              
              TotalNet
      Sales
              
              $
              1,430
              
              
              $
              703
              
              
              
              
              
              $
              2,133Income
      (loss) from operations
              
              
              423
              
              
              
              (21
              )
              
              
              
              
              
              402Identifiable
      assets
              
              
              11,657
              
              
              
              1,862
              
              
              $
              (1,433
              )
              
              
              12,086Capital
      expenditures
              
              
              -
              
              
              
              7
              
              
              
              
              
              
              
              7Depreciation
      and Amortization
              
              
              122
              
              
              
              20
              
              
              
              
              
              
              
              142








November
      30, 2007Simulations
                Plus,
      Inc
              
              
              Words
      +,
                Inc.
              
              
              Eliminations
              
              
              TotalNet
      Sales
              
              $
              1,439
              
              
              $
              545
              
              
              
              
              
              $
              1,984Income
      (loss) from operations
              
              
              490
              
              
              
              (148
              )
              
              
              
              
              
              342Identifiable
      assets
              
              
              8,964
              
              
              
              2,109
              
              
              $
              (1,859
              )
              
              
              9,214Capital
      expenditures
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              -Depreciation
      and Amortization
              
              
              118
              
              
              
              18
              
              
              
              
              
              
              
              136




In
addition, the Company allocates revenues to geographic areas based on the
locations of its customers.  Geographical revenues for the three
months ended November 30, 2007 and 2006 were as follows (in
thousands):




November
30, 2008


North
      America
              
              
              Europe
              
              
              Asia
              
              
              Oceania
              
              
              South
      America
              
              
              TotalSimulations
      Plus, Inc.
              
              $
              987
              
              
              $
              240
              
              
              $
              203
              
              
              $
              -0-
              
              
              $
              -0-
              
              
              $
              1,430Words+,
      Inc.
              
              
              678
              
              
              
              7
              
              
              
              5
              
              
              
              13
              
              
              
              -0-
              
              
              
              703Total
              
              
              1,665
              
              
              
              247
              
              
              
              208
              
              
              
              13
              
              
              
              -0-
              
              
              
              2,133





November
30, 2007


North
      America
              
              
              Europe
              
              
              Asia
              
              
              Oceania
              
              
              South
      America
              
              
              TotalSimulations
      Plus, Inc.
              
              $
              859
              
              
              $
              417
              
              
              $
              162
              
              
              $
              -0-
              
              
              $
              -0-
              
              
              $
              1,439Words+,
      Inc.
              
              
              519
              
              
              
              14
              
              
              
              11
              
              
              
              1
              
              
              
              -0-
              
              
              
              545Total
              
              
              1,379
              
              
              
              430
              
              
              
              173
              
              
              
              1
              
              
              
              -0-
              
              
              
              1,984





13





Note
7:  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 total employee compensation.  We can also elect to make a
profit-sharing contribution.  Contributions by the Company to this
Plan amounted to $19,376 and $18,037 for the three months ended November 30,
2008 and 2007, respectively.





Note
8:  SUBSEQUENT EVENT





Since
December 2008, the Company has been buying back its own shares, and plans to
continue its share repurchase in accordance with its share repurchase plan,
which authorizes up to $2.5 million for the repurchase program through October
2009.  The details of repurchase are listed in the following
table.





Period
              Total
      Number of
                Shares
      Purchased
              Average
      Price
                Paid
      per Share
              Remaining
      Funds Available
                Under
      the Share Repurchase Plan12/01/2008
                to  12/31/2008
              90,632
              $0.9764
              $2,411,50701/01/2009
                through
      01/09/2009
              19,277
              $0.9804
              $2,392,608Total
              109,909




On January 2, 2009, the Company
received a confirmation from UBS Financial Services, Inc. that all Auction Rated
Securities (ARS) were sold and payment was settled on January 5,
2009.  The ARS are presented as investments at November 30,
2008.  As a result, the par value of $750,000 plus accrued interest of $301
were available to the Company as cash on January 5, 2009.






14




Item 2. Management's Discussion and
Analysis or Plan of Operations




Forward-Looking
Statements





Certain
statements in this Quarterly Report on Form 10-Q, or the "Report," are
"forward-looking statements."  These forward-looking statements
include, but are not limited to, statements about the plans, objectives,
expectations and intentions of Simulations Plus, Inc., a California corporation
(referred to in this Report as the "Company") and other statements contained in
this Report that are not historical facts. Forward-looking statements in this
Report or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission, or the "Commission," reports to our
stockholders and other publicly available statements issued or released by us
involve known and unknown risks, uncertainties and other factors which could
cause our actual results, performance (financial or operating) or achievements
to differ from the future results, performance (financial or operating) or
achievements expressed or implied by such forward-looking
statements.  Such future results are based upon management's best
estimates based upon current conditions and the most recent results of
operations. When used in this Report, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate" and similar expressions are
generally intended to identify forward-looking statements, because these
forward-looking statements involve risks and uncertainties.  There are
important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors.




General





BUSINESS





Simulations
Plus, Inc. (the “Company” or “Simulations Plus”, or "we" or "our") and its
wholly owned subsidiary, Words+, Inc. (“Words+”) produce different types of
products: (1) Simulations Plus, incorporated in 1996, develops and produces
software for use in pharmaceutical research and for education, and also provides
contract research services to the pharmaceutical industry, and (2) Words+,
founded in 1981, produces computer software and specialized hardware for use by
persons with disabilities. For the purposes of this document, we sometimes refer
to the two businesses as “Simulations Plus” when referring to the business that
is primarily pharmaceutical software and services, and “Words+” when referring
to the business that is primarily assistive technologies for persons with
disabilities.




SIMULATIONS
PLUS





PRODUCTS


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





ADMET
Predictor


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




15




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





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





ADMET
Predictor includes ADMET 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.





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




16




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.





ClassPharmer


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





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





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





DDDPlus


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





GastroPlus


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




17




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





On May
19, 2008, we announced the release of GastroPlus version 6.0 – a major new
release that includes several important improvements to the program. We improved
the 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
enjoy a dominant position in the number of users worldwide. In addition to
virtually every major pharmaceutical company, licenses include government
agencies in the U.S and abroad, a growing number of smaller pharmaceutical and
biotech companies, generic drug companies, and drug delivery companies
(companies that design the tablet or capsule for a drug compound that was
developed by another company). Although these companies are smaller than the
pharmaceutical giants, they can also save considerable time and money through
simulation. We believe this part of the industry, which includes many hundreds
of companies, represents major growth potential for GastroPlus. Our experience
has been that the number of new companies adopting GastroPlus has been growing
steadily, adding to the base of annual licenses each year.





CONTRACT RESEARCH AND
CONSULTING SERVICES


Our
recognized expertise in oral absorption and pharmacokinetics is evidenced by the
fact that our staff members have been speakers or presenters at over 40
prestigious scientific meetings worldwide in the past three years. We frequently
conduct contracted studies for customers who prefer to have studies run by our
scientists rather than to license our software and train someone to use it. The
demand for our consulting services has been increasing steadily, and we expect
this trend to continue. Long-term collaborations and shorter-term consulting
contracts serve both to showcase our technologies and as a way to build and
strengthen customer relationships.




18




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





WORDS+
SUBSIDIARY





PRODUCTS


Our
wholly owned subsidiary, Words+, Inc., has been an industry pioneer and
technology leader for over 27 years in introducing and improving augmentative
and alternative communication and computer access software and devices for
disabled persons. We intend to continue to be at the forefront of the
development of new products. We will continue to enhance our major software
products, E Z KeysTM and Say-it! SAMTM, as well as our line of hardware products.
We are also considering acquisitions of other products, businesses and companies
that are complementary to our existing augmentative and alternative
communication and computer access business lines. We acquired the Say-it! SAM
technologies from SAM Communications, LLC of San Diego in December 2003. This
acquisition gave us our smallest, lightest augmentative communication system,
which is based on a Hewlett-Packard iPAQ personal digital assistant (PDA).
PDA-based communication devices have been very successful in the augmentative
communication market, and this technology purchase enabled us to move into this
market segment faster and at lower cost than developing the product ourselves.
SAM-based products now account for a significant share of Words+ revenues. Since
the acquisition of the Say-it! SAM technologies, we have continued to add new
functionality to the SAM software and to offer it on additional hardware
platforms.





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





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


19


Results
of Operations





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





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




Three
      Months Ended11/30/08
              
              
              11/30/07Net
      sales
              
              $
              2,133
              
              
              
              100
              %
              
              $
              1,984
              
              
              
              100
              %Cost
      of sales
              
              
              526
              
              
              
              24.7
              
              
              
              486
              
              
              
              24.5Gross
      profit
              
              
              1,607
              
              
              
              75.3
              
              
              
              1,498
              
              
              
              75.5Selling,
      general and administrative
              
              
              904
              
              
              
              42.4
              
              
              
              930
              
              
              
              46.9Research
      and development
              
              
              301
              
              
              
              14.1
              
              
              
              226
              
              
              
              11.4Total
      operating expenses
              
              
              1,205
              
              
              
              56.5
              
              
              
              1,156
              
              
              
              58.3Income
      from operations
              
              
              402
              
              
              
              18.8
              
              
              
              342
              
              
              
              17.2Other
      income
              
              
              51
              
              
              
              2.4
              
              
              
              63
              
              
              
              3.2Net
      income before taxes
              
              
              453
              
              
              
              21.2
              
              
              
              405
              
              
              
              20.4(Provision
      for) income taxes
              
              
              (141
              )
              
              
              (6.6
              )
              
              
              (162
              )
              
              
              (8.2
              )Net
      income
              
              $
              312
              
              
              
              14.6
              %
              
              $
              243
              
              
              
              12.3
              %




Net
Sales


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





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





Cost of
Sales


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




20




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





Gross
Profit


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





Selling, General and
Administrative Expenses


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





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





Research and
Development


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





Other income
(expense)


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





Provision for Income
Taxes


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




21




Net
Income


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





Liquidity
and Capital Resources





Our
principal sources of capital have been cash flows from our
operations.  We have achieved continuous positive operating cash flow
in the last six fiscal years.  We believe that our existing capital
and anticipated funds from operations will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for the foreseeable
future.  Thereafter, if cash generated from operations is insufficient
to satisfy our capital requirements, we may open a revolving line of credit with
a bank, or we may have to sell additional equity or debt securities or obtain
expanded credit facilities.  In the event such financing is needed in
the future, there can be no assurance that such financing will be available to
us, or, if available, that it will be in amounts and on terms acceptable to us.
If cash flows from operations became insufficient to continue operations at the
current level, and if no additional financing was obtained, then management
would restructure the Company in a way to preserve its pharmaceutical and
disability businesses while maintaining expenses within operating cash flows. In
January 2009, the $750,000 in investments in Auction Rate Securities were
repurchased by UBS Financial Services, Inc., at par value plus
interest.





Item 3.
Quantitative and Qualitative Disclosures about Market Risk




Our risk
from exposure to financial markets is limited to foreign exchange variances and
fluctuations in interest rates. We may be subject to some foreign exchange
risks.  Most of our business transactions are in U.S. dollars,
although we generate significant revenues from customers
overseas.  The exception is that we were compensated in Japanese yen
by some Japanese customers and one European customer.  As a result, we
experienced a small gain from currency exchange in the first three months of
FY08.  In the future, if foreign currency transactions increase
significantly, then we may mitigate this effect through foreign currency forward
contracts whose market-to-market gains or losses are recorded in "Other Income
or expense" at the time of the transaction.  To date, exchange rate
exposure has not resulted in a material impact.




Item 4.
Controls and
Procedures




(a)
            Evaluation of
      disclosure controls and
procedures.


As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14.  Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company’s periodic SEC filings.




(b)
            Changes in
      internal controls over financial
  reporting.


There
were no changes in the Company’s internal controls over financial reporting
during the Company’s most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal controls
over financial reporting.


22


Part
II.  Other Information




Item
    1.
            Legal ProceedingsThe Company is not a
      party to any legal proceedings and is not aware of any pending legal
      proceedings of any kind.Item
    2.
            Changes
      in SecuritiesNone.Item
    3.
            Defaults Upon Senior
      SecuritiesNone.Item
    4.
            Submission of Matters to a Vote of
      Security HoldersNone.Item
    5.
            Other InformationNone.Item 6.
            Exhibits and Reports on form
      8-K(a)Exhibits:31.1–2 
      Certification of Chief Executive Officer and Chief Financial
      Officer32         Certification
      pursuant to Sec. 906 of the Sarbanes-Oxley Act of
2002




23


SIGNATURE





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
January 14, 2009.







Simulations Plus,
      Inc.Date:  January
      14, 2009
            By:
            /s/MOMOKO
      BERANMomoko
      Beran
              Chief
      Financial Officer








24