<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

       [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended November 30, 2006 or

       [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1937

                For the transition period from _________ to _________

                        Commission file number: 001-32046


                             SIMULATIONS PLUS, INC.
                             ----------------------
                 (Name of small business issuer in its charter)


            CALIFORNIA                                         95-4595609
  (State or other jurisdiction of                           (I.R.S. Employer
  Incorporation or Organization)                           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)

Check whether the issuer: (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  [ ]

The number of shares outstanding of the Issuer's common stock, par value $0.001
per share, as of January 15, 2007, was 7,479,548.

<PAGE>

<TABLE>
<S>     <C>
                                   SIMULATIONS PLUS, INC.
                                         FORM 10-QSB
                      FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2006

                                      Table of Contents


                                PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)                                               Page
                                                                                        ----

         Consolidated Balance Sheet at November 30, 2006 (unaudited)                     2

         Consolidated Statements of Operations for the three months
            ended November 30, 2006 and 2005 (unaudited)                                 4

         Consolidated Statements of Cash Flows for the three months
            ended November 30, 2006 and 2005 (unaudited)                                 5

         Notes to Consolidated Financial Statements (unaudited)                          7

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

         General                                                                        17

         Results of Operations                                                          22

         Liquidity and Capital Resources                                                24

Item 3.  Quantitative and Qualitative Disclosures about Market Risk                     25

Item 4.  Controls and Procedures                                                        25

                                 PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                              26

Item 2.  Changes in Securities                                                          26

Item 3.  Defaults upon Senior Securities                                                26

Item 4.  Submission of Matters to a Vote of Security Holders                            26

Item 5.  Other Information                                                              26

Item 6.  Exhibits and Reports on Form 8-K                                               26

Signature                                                                               27
Exhibit - Certifications


                                             1
<PAGE>

                                                    SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                               CONSOLIDATED BALANCE SHEET
                                                                              (UNAUDITED)
                                                                        NOVEMBER 30, 2006
-----------------------------------------------------------------------------------------

                                          ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                               $  2,102,782
     Accounts receivable, net of allowance for doubtful accounts
         and estimated contractual discounts of $32,711                         1,214,114
     Current portion of contracts receivable, net of discounts of $2,242          186,138
     Inventory                                                                    233,906
     Prepaid expenses and other current assets                                     56,897
     Current portion of deferred tax                                              190,034
                                                                             ------------

            Total current assets                                                3,983,871

CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
     net of accumulated amortization of $2,534,905                              1,400,231

PROPERTY AND EQUIPMENT, net (note 4)                                              102,278
CONTRACTS RECEIVABLE, net of discounts of $161                                     47,219
CUSTOMER RELATIONSHIPS, net of accumulated amortization of $36,156                 91,886
DEFERRED TAX                                                                      889,816
OTHER ASSETS                                                                       18,445
                                                                             ------------

                TOTAL ASSETS                                                 $  6,533,746
                                                                             ============


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

                                            2
<PAGE>

                                           SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                      CONSOLIDATED BALANCE SHEET
                                                                     (UNAUDITED)
                                                               NOVEMBER 30, 2006
-------------------------------------------------------------------------------


                             LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable                                              $    140,548
     Accrued payroll and other expenses                                 373,561
     Accrued bonuses to officers                                         10,430
     Accrued warranty and service costs                                  34,852
     Deferred revenue                                                   157,173
                                                                   ------------

         Total current liabilities                                      716,564

LONG TERM DEFERRED REVENUE                                               62,501
                                                                   ------------

            Total liabilities                                           779,065
                                                                   ------------

COMMITMENTS AND CONTINGENCIES (note 5)

SHAREHOLDERS' EQUITY (note 6)
     Preferred stock, $0.001 par value
         10,000,000 shares authorized
         no shares issued and outstanding                                    --
     Common stock, $0.001 par value
         20,000,000 shares authorized
         7,449,496 shares issued and outstanding                          3,802
     Additional paid-in capital                                       5,287,207
     Retained Earnings                                                  463,672
                                                                   ------------

            Total shareholders' equity                                5,754,681
                                                                   ------------

                TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $  6,533,746
                                                                   ============


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

                                        3
<PAGE>

                                                       SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                     FOR THE THREE MONTHS ENDED NOVEMBER 30,
                                                                                 (UNAUDITED)
--------------------------------------------------------------------------------------------

                                                                 2006               2005
                                                            -------------      -------------

NET SALES                                                   $   1,456,451      $     818,815

COST OF SALES                                                     441,440            331,597
                                                            -------------      -------------

GROSS PROFIT                                                    1,015,011            487,218
                                                            -------------      -------------

OPERATING EXPENSES
     Selling, general, and administrative                         756,777            628,756
     Research and development                                     183,627             97,222
                                                            -------------      -------------

        Total operating expenses                                  940,404            725,978
                                                            -------------      -------------

INCOME (LOSS) FROM OPERATIONS                                      74,607           (238,760)
                                                            -------------      -------------

OTHER INCOME (EXPENSE)
     Interest income                                               15,928              3,481
     Miscellaneous income                                             358                 50
     Gain (Loss) on currency exchange                               2,972             (5,302)
                                                            -------------      -------------

        Total other income (expense)                               19,258             (1,771)
                                                            -------------      -------------

INCOME (LOSS) BEFORE INCOME TAXES                                  93,865           (240,531)

BENEFIT FROM (PROVISION FOR) INCOME TAXES
     Benefit from (provision for) income tax                      (20,650)            42,000
                                                            -------------      -------------

        Total benefit from (provision for) income taxes           (20,650)            42,000
                                                            -------------      -------------

NET INCOME (LOSS)                                           $      73,215      $    (198,531)
                                                            =============      =============

BASIC EARNINGS (LOSS) PER SHARE                             $        0.01      $       (0.03)
                                                            =============      =============

Diluted earnings (loss) per share                           $        0.01      $       (0.03)
                                                            =============      =============

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING*
     BASIC                                                      7,444,551          7,298,668
                                                            =============      =============

     DILUTED                                                    8,548,560          7,298,668
                                                            =============      =============

  *   The number of shares at November 30, 2005 have been retroactively restated to reflect
      a 2-for-1 stock split that occurred on August 14, 2006.


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

                                              4
<PAGE>

                                                          SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                        FOR THE THREE MONTHS ENDED NOVEMBER 30,
                                                                                    (UNAUDITED)
-----------------------------------------------------------------------------------------------

                                                                   2006                2005
                                                              -------------       -------------
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income (loss)                                         $      73,215       $    (198,531)
    Adjustments to reconcile net income to net cash
      provided by operating activities
         Depreciation and amortization of property and
           equipment                                                 11,604              11,860
         Amortization of customer relationships                       8,478                  --
         Amortization of capitalized software development
           costs                                                    107,178              45,709
         Stock-based compensation                                     6,451                  --
         Contribution of Equipment at book value                        774                  --

         (Increase) decrease in
           Accounts receivable                                      372,475             442,031
           Inventory                                                  3,142             (31,890)
           Deferred tax                                              20,650             (42,000)
           Other assets                                              24,399             (23,316)
         Increase (decrease) in
           Accounts payable                                         (74,870)             33,408
           Accrued payroll and other expenses                         8,649             (17,127)
           Accrued bonuses to officers                              (88,323)                 --
           Accrued income taxes                                      (1,600)             (1,600)
           Accrued warranty and service costs                           100               4,278
           Deferred revenue                                          90,213             (69,854)
                                                              -------------       -------------

             Net cash provided by operating activities              562,535             152,968
                                                              -------------       -------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of property and equipment                             (18,272)            (10,656)
    Purchases of Bioreason's assets                                      --            (826,192)
    Proceeds from sale of assets                                         --               2,218
    Capitalized computer software development costs                (132,967)           (142,539)
                                                              -------------       -------------

             Net cash used in investing activities                 (151,239)           (977,169)
                                                              -------------       -------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from the exercise of stock options                       6,450               1,955
                                                              -------------       -------------

             Net cash provided by financing activities                6,450               1,955
                                                              -------------       -------------

                Net increase (decrease) in cash and cash
                  equivalents                                 $     417,746       $    (822,246)


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

                                               5
<PAGE>

                                              SIMULATIONS PLUS, INC. AND SUBSIDIARY
                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            FOR THE THREE MONTHS ENDED NOVEMBER 30,
                                                                        (UNAUDITED)
-----------------------------------------------------------------------------------

                                                          2006             2005
                                                      ------------     ------------

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR             1,685,036        1,754,042
                                                      ------------     ------------

CASH AND CASH EQUIVALENTS, END OF PERIODS             $  2,102,782     $    931,796
                                                      ============     ============


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    INTEREST PAID                                     $         --     $         --
                                                      ============     ============

    INCOME TAXES PAID                                 $      1,600     $      1,600
                                                      ============     ============


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

                                         6
</TABLE>
<PAGE>

                             SIMULATIONS PLUS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)


Note 1: GENERAL

As contemplated by the Securities and Exchange Commission under Item 310(b) of
Regulation S-B, 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 include 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. Critical accounting policies for us include revenue
recognition, accounting for capitalized 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
-------------------
We recognize 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." Product
revenue is recorded at the time of unlocking the software on the customer's
computer(s), net of estimated allowances and returns. 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 by-product of ongoing improvements and upgrades for our software, some
modifications are provided to customers who have already licensed software 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.


                                       7
<PAGE>

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 now unlock and invoice software one year
at a time for multi-year licenses. Therefore, revenue is now recognized one year
at a time. This eliminates the extreme variability in our reported revenues and
earnings that we experienced in the past caused by booking multi-year license
revenues up front.

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 uncollectability 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.

Our long-term receivables are discounted at the present value. The discount is
amortized over the life of the receivable and recognized as interest income. The
balance as of November 30, 2006 represents receivables which we purchased as a
part of Bioreason's assets.

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 $107,178 and $45,709 for the three months ended
November 30, 2006 and 2005, 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. As a result, we have written off $1,763
during this fiscal quarter.


                                       8
<PAGE>

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 years
                  Computer equipment                 3 to 7 years
                  Furniture and fixtures             5 to 7 years
                  Leasehold improvements                  5 years

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 $8,191 and
$9,000 for the three months ended November 30, 2006 and 2005, 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.

At the end of fiscal year 2006, we recorded $1,100,500 in deferred tax assets.
For the first quarter of fiscal year 2007 (FY07), we recorded a provision for
deferred taxes in the amount of $20,650, resulting in a deferred tax asset of
$1,079,850 at November 30, 2006. The evaluation of the deferred tax assets is
based on our history of generating taxable profits and our projections of future
profits as well as expected future tax rates to determine if the realization of
the deferred tax asset is more-likely-than-not. 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.


                                       9
<PAGE>

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.

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 66 months.
Amortization expense and accumulated amortization as of November 30, 2006
amounted to $8,478 and $36,156, 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 years ended
August 31, 2006 and 2005 were as follows (the number of shares reflects the
effect of a 2-for-1 stock split for comparison purpose):

<TABLE>
                                                                        2006                 2005
                                                                    -----------          -----------
<S>                                                                 <C>                  <C>
Numerator
          Net income (loss) attributable to common
                    shareholders                                    $    73,215          $  (198,531)

Denominator
          Weighted-average number of common shares
                    outstanding during the year                       7,444,551            7,298,668
          Dilutive effect of stock options                            1,104,009                  -0-

Common stock and common stock
          equivalents used for diluted earning per share              8,548,560            7,298,668
</TABLE>

Stock-Based Compensation
------------------------
Prior to September 1, 2006, we accounted for employee stock options grants in
accordance with APB No. 25, and adopted the disclosure-only provision of SFAS
No. 123, "Accounting for Stock-Based Compensation."

In December 2004, the FASB issued Statement of Accounting Standard No. 123R,
"Share-Based Payment", a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS 123R supersedes APB Opinion No. 25, and requires all
companies to measure compensation expense for all share-based payments,
including employee stock options, based upon the fair value of the stock-based
awards at the date of grant. SFAS 123R is effective for the Company for Fiscal
Year 2007, beginning September 1, 2006. Subsequent to the effective date, the
pro forma disclosures previously permitted under SFAS No. 123 are no longer an
alternative to financial statement recognition.


                                       10
<PAGE>

Effective September 1, 2006, we adopted SFAS No. 123R using the modified
prospective method. Under this method, compensation cost recognized during the
three months ended November 30, 2006 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. As a result of adopting SFAS No. 123R on September 1,
2006, our stock-based compensation was $6,451 for the three months ended
November 30, 2006, and included in the condensed consolidated statements of
operations as Research and development expense.

The table below represents our pro forma net income giving effect to the
estimated compensation expense related to stock options that would have been
reported if we had applied the fair value recognition provisions of SFAS No. 123
for the three months ended November 30, 2005.

<TABLE>
                                                                                       Three Months
                                                                                          Ended
                                                                                       November 30,
                                                                                          2005
                                                                                       -----------
<S>                                                                                    <C>
      Net income (loss)
             As reported                                                               $ (198,531)
                   Stock based employee compensation cost, net of
                      related tax effects, that would have been
                      included in the determination of net income
                      if the fair value method had been applied                           (36,888)
                                                                                       ----------

                        Pro forma net income (loss)                                    $ (235,419)
                                                                                       ===========

             Earnings (loss) per common share

                   Basic - as reported                                                    $ (0.05)
                   Basic - Pro forma                                                      $ (0.06)

                   Diluted - as reported                                                  $ (0.05)
                   Diluted - Pro forma                                                    $ (0.06)
</TABLE>

For the three months ended November 30, 2006, the stock-based employee
compensation expense using the fair value recognition method under SFAS No. 123R
is included in the condensed consolidated statements of operations. Therefore,
it is not presented in the pro forma table above.

Concentrations and Uncertainties
--------------------------------
International sales accounted for 29% and 24% of net sales for the three months
ended November 30, 2006 and 2005, respectively. For Simulations Plus, Inc., one
customer accounted for 22% of net sales during the three months ended November
30, 2006, and for Words+, Inc., one government agency accounted for 27.9% of net
sales during the three months ended November 30, 2006.

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.


                                       11
<PAGE>

For Simulations Plus, four customers comprised 41%, 13%, 11% and 10% of its
accounts receivable at November 30, 2006. Four customers comprised 27%, 23%, 20%
and 20% of its accounts receivable at November 30, 2005. For Words+, one
government agency comprised 30% and 26% of accounts receivable at November 30,
2006 and 2005, respectively.

The Company's subsidiary, Words+, Inc., purchases components for its 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.

Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2006, the Financial Accounting Standards Board ("FSAB) 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 are
effective for the Company on September 1, 2007, with the cumulative effect of
the change in accounting principle, if any, recorded as an adjustment to opening
retained earnings. We are currently evaluating the impact of adopting FIN 48;
however we believe that adoption of FIN 48 will not have a material impact on
our consolidated financial statement.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R), ("SFAS 158"), which requires the
recognition of the overfunded or underfunded status of a defined benefit
postretirement plan in a company's balance sheet. This portion of the new
guidance is effective on December 31, 2006. Additionally, the pronouncement
eliminates the option for companies to use a measurement date prior to their
fiscal year-end effective December 31, 2008. Since we do not have any defined
benefit pension or postretirement plans that are subject to SFAS 158, we do not
expect the pronouncement to have a material impact on our consolidated financial
statements.

In September 2006, The Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on the SEC's
views on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 will be effective for the Company for the fiscal year
ended August 2007. We are currently evaluating the impact of applying SAB 108;
however, we believe that the application of SAB 108 will not have a material
effect on our consolidated financial statements.

Note 3:  CASH AND CASH EQUIVALENTS

The Company maintains cash deposits at banks located in California. Deposits at
each bank are insured by the Federal Deposit Insurance Corporation up to
$100,000 per company. At November 30, 2006, the uninsured portions aggregated to
$1,729,000. 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.


                                       12
<PAGE>

Note 4:  PROPERTY AND EQUIPMENT

Furniture and equipment as of November 30, 2006 consisted of the following:


         Equipment                                           $     165,409
         Computer equipment                                        319,540
         Furniture and fixtures                                     61,928
         Automobile                                                 21,769
         Leasehold improvements                                     53,898
                                                             -------------
              Sub total                                            622,544
         Less: Accumulated depreciation and amortization          (520,266)
                                                             -------------
              Net Book Value                                       102,278
                                                             =============

Note 5:  COMMITMENTS AND CONTINGENCIES

Employee Agreement
------------------
On August 9, 2005, the Company entered into an employment agreement with its
President/CEO that expires in August 2007. The employment agreement provides for
an annual salary of $172,000 and an annual bonus equal to 5% of the Company's
net income before taxes, not to exceed $150,000. 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.

Note 6: STOCKHOLDERS' 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 additional 250,000 shares, resulting
to 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 Option Plan
terminated in September 2006 by its term.

All of the following numbers of options are based on numbers of options after
the two-for-one stock split on August 14, 2006. On August 18, 2006, the Company
accelerated the vesting of stock options previously awarded for which the
underlying shares are registered, excluding 500,000 options for shares of
unregistered stock. As a result, Options to purchase approximately 505,000
shares of common stock were accelerated, representing approximately 25% of all
outstanding options. The Company's decision for this acceleration was to
eliminate future compensation expense that the Company would otherwise recognize
with respect to these options following the Company's adoption of SFAS 123(R),
Share-Based Payment. The Company adopted FAS No. 123(R) on September 1, 2006,
which is the beginning of the Company's 2007 fiscal year.

                                       13
<PAGE>

<TABLE>
<S>     <C>
The following summarized the stock option transactions.

                                                                     Weighted-Average
                                                   Number of          Exercise Price
                                                    Options             Per Share
                                                 --------------       --------------

         Outstanding, August 31, 2006                 2,040,072       $         1.33
                            Granted                     100,000       $         2.15
                            Exercised                    (8,000)      $         0.81
                            Expired/Canceled             (1,000)      $         2.25

         Outstanding, November 30, 2006               2,131,072       $         1.37
                                                 --------------       --------------

         Exercisable, November 30, 2006               1,951,072       $         1.37
                                                 ==============       ==============


                              Options Outstanding & Unvested at November 30, 2006
                              ---------------------------------------------------
                                                                     Remaining              Weighted
                                                   Number         Contractual Life          Average
                                                 Outstanding         (in years)          Exercise Price
                                                 -----------      ----------------       --------------
         Non Vested before 9/1/2006                100,000                                 $  1.6950
              Granted                              100,000                                 $  2.1500
              Forfeited                              1,000                                 $  2.2500
              Vested                                20,000                                 $  1.6950
         Non Vested at 11/30/2006                  180,000              9.29               $  1.9500
</TABLE>

The fair value of the options granted during the three months ended November 30,
2006 is estimated at $81,860. 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 three months ended November 30,
2006: dividend yield of 0%, expected volatility of 11%, risk-free interest rate
of 4.72%, and expected life of ten years. The weighted-average fair value of
options granted during the first fiscal quarter of FY07 was $0.82, and the
weighted-average exercise price was $2.15.

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.


                                       14
<PAGE>

The weighted-average remaining contractual life of options outstanding issued
under the Plan was 5.1 years at November 30, 2006. The exercise prices for the
options outstanding at November 30, 2006 ranged from $0.53 to $2.48, and the
information relating to these options is as follows:

<TABLE>
                                                               Weighted-Average       Weighted-Average    Weighted-Average
                                                                   Remaining             Exercise            Exercise
                                                               Contractual Life          Price of            Price of
                       Stock Options       Stock Options          of Options             Options             Options
 Exercise Price         Outstanding         Exercisable           Outstanding          Outstanding         Outstanding
------------------    ----------------    ----------------    --------------------    ---------------     ---------------
<S>                         <C>                 <C>                <C>                       <C>                 <C>
$0.53 - 1.00                  789,672             789,672          3.5 years                 $  0.73             $  0.73
$1.00 - 1.50                  668,400             668,400          3.2 years                 $  1.33             $  1.33
$1.50 - 2.50                  673,000             493,000          9.0 years                 $  2.16             $  2.24
                      ----------------    ----------------
                            2,131,072           1,951,072
                      ================    ================
</TABLE>

Other Stock Options
-------------------
As of November 30, 2006, the independent members of the Board of Directors hold
options to purchase 22,412 shares of common stock at exercise prices ranging
from $0.60 to $2.63, which options were granted on or before August 31, 2006.

                                        Number of        Weighted average
                                         Options          exercise price
                                        ---------         --------------

       Options Outstanding                22,412             $ 1.44
       Options exercisable                18,412             $ 1.28


Note 7:  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, 2006 and 2005:

<TABLE>
<S>     <C>
                                             November 30, 2006
-------------------------------------------------------------------------------------------------------------
                                                Simulations
                                                 Plus, Inc      Words +, Inc.    Eliminations       Total
--------------------------------------------- ---------------- ---------------- --------------- -------------
Net Sales                                             824,303          632,148                     1,456,451
--------------------------------------------- ---------------- ---------------- --------------- -------------
Income (loss) from operations                         109,089          (34,482)                       74,607
--------------------------------------------- ---------------- ---------------- --------------- -------------
Identifiable assets                                 6,515,286        1,793,374      (1,774,914)    6,533,746
--------------------------------------------- ---------------- ---------------- --------------- -------------
Capital expenditures                                    5,874           12,398                        18,272
--------------------------------------------- ---------------- ---------------- --------------- -------------
Depreciation and Amortization                           4,598            7,544                        12,142
--------------------------------------------- ---------------- ---------------- --------------- -------------

                                             November 30, 2005
-------------------------------------------------------------------------------------------------------------
                                                Simulations
                                                 Plus, Inc      Words +, Inc.    Eliminations       Total
--------------------------------------------- ---------------- ---------------- --------------- -------------
Net Sales                                             198,889          619,926                       818,815
--------------------------------------------- ---------------- ---------------- --------------- -------------
Income (loss) from operations                        (253,284)          14,524                      (238,760)
--------------------------------------------- ---------------- ---------------- --------------- -------------
Identifiable assets                                 5,601,917        1,468,626      (1,757,154)    5,313,389
--------------------------------------------- ---------------- ---------------- --------------- -------------
Capital expenditures                                    9,446            6,211                        15,657
--------------------------------------------- ---------------- ---------------- --------------- -------------
Depreciation and Amortization                           3,357            8,507                        11,860
--------------------------------------------- ---------------- ---------------- --------------- -------------


                                                     15
<PAGE>

In addition, the Company allocates revenues to geographic areas based on the
locations of its customers. Geographical revenues for the nine months ended
November 30, 2006 and 2005 were as follows (in thousands):

                                             November 30, 2006
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
                                    North                                                South
                                   America        Europe        Asia        Oceania      America      Total
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Simulations Plus, Inc.                    471          173          180          -0-          -0-        824
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Words+, Inc.                              563           49           18          -0-            2        632
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Total                                   1,034          222          198          -0-            2      1,456
------------------------------ =============== ============ ============ ============ ============ ==========

                                             November 30, 2005
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
                                    North                                                South
                                   America        Europe        Asia        Oceania      America      Total
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Simulations Plus, Inc.                     74            8          117          -0-          -0-        199
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Words+, Inc.                              551           47           10           10            2        620
------------------------------ --------------- ------------ ------------ ------------ ------------ ----------
Total                                     625           55          127           10            2        819
------------------------------ =============== ============ ============ ============ ============ ==========
</TABLE>


Note 8:  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 $14,703 and
$11,765 for the three months ended November 30, 2006 and 2005, respectively.

Note 9:  SUBSEQUENT EVENT

Since December 1, 2006, an additional 30,052 stock options to purchase shares
have been exercised by employees.


                                       16
<PAGE>

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

FORWARD-LOOKING STATEMENTS
--------------------------

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB, 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, as well as a personal productivity software program
called Abbreviate! for the retail market. For the purposes of this document, we
sometimes refer to the two businesses as "Simulations Plus" when referring to
the business that is primarily pharmaceutical software and services, and
"Words+" when referring to the business that is primarily assistive technologies
for persons with disabilities.


Simulations Plus
----------------

PRODUCTS
--------
We currently offer four software products for pharmaceutical research: ADMET
Predictor(TM)/ ADMET Modeler(TM), ClassPharmer(TM), DDDPlus(TM), and
GastroPlus(TM).

ADMET PREDICTOR/ADMET MODELER
-----------------------------
ADMET (Absorption, Distribution, Metabolism and 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


                                       17
<PAGE>

existed. Drug companies search through millions of such "virtual" molecular
structures as they attempt to find new drugs. The vast majority of these
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, 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 some will be toxic in various ways.
Identification of such properties as early as possible enables researchers to
eliminate poor compounds without spending time and money to make them and then
run experiments to identify these weaknesses. Today, many molecules can be
eliminated on the basis of computer predictions, such as those provided by ADMET
Predictor.

ADMET Predictor 2.0 with integrated ADMET Modeler was released at the beginning
of this reporting period. The two programs are now combined into a single
offering for greater user convenience and to enhance the ADMET Predictor product
in a very competitive market.

ADMET MODELER
-------------
ADMET Modeler was first released in July of 2003. This powerful program is used
to generate the predictive models used in ADMET Predictor in a small fraction of
the time once required to build these models. For example, the new toxicity
models were developed in a matter of a few hours once we completed the tedious
effort of "cleaning up" the databases (which seem to always contain a number of
errors). Prior to the availability of ADMET Modeler, we would have needed as
much as three months after cleaning the databases for each new model 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 that required a
specialist. With ADMET Modeler, scientists without model-building experience can
now use their own experimental data to quickly create high quality predictive
models.

In addition to the recent integration of ADMET Modeler into ADMET Predictor, we
have also added a number of important improvements to ADMET Modeler, including:
(1) a new, state-of-the-art modeling method known as Kernel Partial Least
Squares (KPLS); (2) an advanced method for selecting the best model among a
matrix of models that each use different numbers of inputs and different model
architectures; (3) improved methods for the sensitivity analysis that helps to
select the most important inputs for a particular model, and (4) an integrated
Model Editor that allows users to easily hide or display models, as well as to
change the "tooltips" (helpful hints) that appear when the mouse is paused over
any model column.

CLASSPHARMER(TM)
----------------
In November 2005, we acquired certain secured assets of Bioreason, Inc. from its
former creditors, including two patents governing classification algorithms, a
proprietary database curated from the literature of over 5,000 compounds with
measured mutagenicity in various strains of Salmonella (the experiment for this
is known as the "Ames test" in the industry), and a software package called
ClassPharmer. ClassPharmer is a molecule classification software program,
similar in nature to ChemTK(TM), which we had acquired from Sage Informatics,
LLC in August 2005, but with more sophisticated proprietary classification
algorithms and various additional convenience features. The Bioreason version of
ClassPharmer was programmed in a combination of programming languages that made
it run much more slowly than ChemTK, and certain elements of the ChemTK user
interface were more user-friendly and visually pleasing than ClassPharmer.


                                       18
<PAGE>

We integrated ChemTK and ClassPharmer into a single program and released
ClassPharmer 4.0 in March 2006. Additional improvements based on customer
feedback were incorporated into Version 4.1, which was released just after the
end of the 4th quarter. As announced in our press release of October 9, 2006,
monies received from ClassPharmer sales and acquired accounts payable had
exceeded one million dollars at that time, this exceeding the original
acquisition costs in only 11 months.

DDDPLUS
-------
DDDPlus (Dose Disintegration and Dissolution Plus) was first released in
February 2005. DDDPlus simulates how different tablets and capsules disintegrate
and dissolve during IN VITRO (laboratory) dissolution experiments. The program
also simulates the effects of changing formulation excipients (additives that
are not the active drug), and changing the experimental apparatus and fluids
used in the experiment. We believe this tool will be a valuable asset for
formulation scientists as they search for optimum formulations that provide
desirable properties at minimum cost, as well as optimum experimental conditions
under which to measure disintegration and dissolution to best predict what will
happen in human. We believe the market for this tool includes hundreds of drug
delivery companies as well as all pharmaceutical and most biotech companies.

Over 60 companies evaluated Version 1.0 of DDDPlus. This was an indication of
the strong interest and business potential in this area. Through the evaluation
process, we received valuable feedback about what would be required for various
customers to license the software, and we have now incorporated those
improvements. We have also added significant new functionality by enabling
formulation scientists to optimize experimental conditions to achieve a desired
dissolution-time profile, and to handle polymer matrix formulations that are
often used in controlled release formulations. Version 2.0 was released in the
3rd quarter and was evaluated at several potential customer sites. A number of
additional suggestions were received and incorporated into Version 2.1, which is
now shipping. Sales of DDDPlus began to increase following the release of
Version 2.0, along with the number of potential new customers evaluating the
program.

We continue to remain confident that significant sales of DDDPlus licenses will
take place. The initial release served us well to stimulate interest in this
first-of-its-kind software and to get formulation scientists thinking about how
to use such a capability in their work. Because such scientists have never used
software like DDDPlus before, this is an educational process to show them how
such a tool can actually save time and money, similar to the process we had with
GastroPlus ten years ago.

GASTROPLUS
----------
GastroPlus simulates the absorption and pharmacokinetics of drugs in the human
gastrointestinal tract as well as in a number of animals. This sophisticated
simulation has equations for the movement of the drug through the
gastrointestinal tract, dissolution and precipitation along the way, degradation
by chemical or metabolic processes in the gastrointestinal tract prior to
absorption, and rate of absorption through various regions of the intestinal
wall into the blood stream. After absorption for oral administration, or direct
injection into the blood via intravenous administration, the program simulates
the concentration of drug in the blood plasma versus time, accounting for the
distribution of the drug into various tissues and its elimination by various
routes (pharmacokinetics). The program also enables fitting models for and
simulating how a drug affects the body (pharmacodynamics), such as reducing
pain, reducing blood pressure, reducing depression, and causing adverse side
effects.


                                       19
<PAGE>

We believe GastroPlus is the "gold standard" in the industry for its class of
simulation software. It is used from early drug discovery through preclinical
development and into early clinical trials. 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 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.

Our marketing intelligence indicates that GastroPlus enjoys a dominant position
in the number of users worldwide. In addition to virtually every major
pharmaceutical company, licenses include 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 hundreds of
companies, represents major growth potential for GastroPlus. Our experience has
been that the number of new companies adopting GastroPlus shows steady growth,
adding to the base of annual licenses each year.

During this reporting period, we released version 5.2, adding several new user
convenience features as well as additional simulation capabilities.

We are aware that other companies have developed competitive software; however,
based on customer feedback, we believe that the competitive threat to GastroPlus
is limited. We continue working on improving GastroPlus under the two-year (one
full-time equivalent) contract we announced on August 31, 2006, as well as our
own internal product improvement efforts.

CONTRACT RESEARCH 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 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. Consulting contracts serve both to showcase our
technologies and as a way to build relationships with new customers, as well as
strengthening relationships with our existing customers.

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
------------------------------------------
The initial toxicity predictions in ADMET Predictor were released during fiscal
year 2005, and we have continued to add new toxicity models steadily. At this
time, we are working on additional such models, but we are not revealing their
nature for competitive reasons. We are also working on other improvements to
ADMET Predictor/ADMET Modeler that will be announced in the coming months.


                                       20
<PAGE>

(2) DDDPlus
-----------
We have continued to improve DDDPlus by adding capabilities and features
requested by our customers and potential customers who have been conducting beta
testing, as well as capabilities and features identified in-house.

(3) MembranePlus(TM)
--------------------
MembranePlus is a computer program that simulates IN VITRO experiments 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 human intestinal permeability from these IN VITRO
experiments. We are not aware of any other effort to produce a product of this
nature.

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 will work on MembranePlus under Dr. Lukacova's direction.

WORDS+
------

PRODUCTS
--------
Our wholly owned subsidiary, Words+, Inc. has been an industry pioneer and
technology leader for over 25 years in introducing and improving augmentative
and alternative communication and computer access software and devices for
disabled persons. We intend to continue to be at the forefront of the
development of new products. We will continue to enhance our major software
products, E Z Keys and Say-it! SAM, as well as our growing line of hardware
products. We will also consider acquisitions of other products, businesses and
companies that are complementary to our existing augmentative and alternative
communication and computer access business lines. We purchased 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 has 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 our growing
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.


                                       21
<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED NOVEMBER 30, 2006 AND 2005.

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

<TABLE>
                                                    ------------------------------------------------------------
                                                                          Three Months Ended
                                                    ------------------------------------------------------------
                                                                 11/30/06                     11/30/05
                                                    ------------------------------- ----------------------------
<S>                                                       <C>                <C>       <C>              <C>
Net sales                                                 $   1,456          100%      $    819           100%
Cost of sales                                                   441          30.3           332           40.5
                                                    ---------------- -------------- ------------ ---------------
Gross profit                                                  1,015          69.7           487           59.5
                                                    ---------------- -------------- ------------ ---------------
Selling, general and administrative                             757          52.0           629           76.8
Research and development                                        183          12.6            97           11.8
                                                    ---------------- -------------- ------------ ---------------
Total operating expenses                                        940          64.6           726           88.6
                                                    ---------------- -------------- ------------ ---------------
Income (loss) from operations                                    75           5.2          (239)         (29.2)
                                                    ---------------- -------------- ------------ ---------------
Other income (expense)                                           19           1.3            (1)           0.0
                                                    ---------------- -------------- ------------ ---------------
Net income (loss) before taxes                                   94           6.5          (240)         (29.3)
                                                    ---------------- -------------- ------------ ---------------
Benefit from (provision for) income taxes                       (21)         (1.4)%          42            5.1%
                                                    ---------------- -------------- ------------ ---------------
Net income (loss)                                         $      73           5.0%      $  (198)         (24.2)%
                                                    ================ ============== ============ ===============
</TABLE>

NET SALES

Consolidated net sales increased $637,000, or 77.8%, to $1,456,000 in the first
fiscal quarter of 2007 (1QFY07) from $819,000 in the first fiscal quarter of
2006 (1QFY06). Our sales from pharmaceutical and educational software increased
approximately $625,000, or 314.5%; and our Words+, Inc. subsidiary's sales
increased approximately $12,000, or 2.0%, for the quarter. We attribute the
increase in pharmaceutical software sales primarily to increased licenses, both
to new customers and for new modules and additional licenses to renewal
customers.

We attribute the increase in Words+ sales primarily to an increase in sales of
"Say-it! SAM", "MessageMates" and "Freedom" products. Some declines in software
sales and "TuffTalker Plus" products were offset by these increases.

COST OF SALES

Consolidated cost of sales increased $109,000, or 32.8%, to $441,000 in the
first fiscal quarter of FY07 from $332,000 in the first fiscal quarter of FY06.
The percentage of cost of sales in the first fiscal quarter of FY07 decreased
10.2% from the first fiscal quarter of FY06. For Simulations Plus, cost of sales
increased $86,000, or 286.9%. However, as a percentage of revenues, cost of
sales decreased to 14.2% in 1QFY07 from 15.2% in 1QFY06. 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. Thus, we attribute the
decrease in the percentage of cost of sales primarily to the increase in sales.


                                       22
<PAGE>

For Words+, cost of sales increased $23,000, or 7.7%. As a percentage, cost of
sales increased 2.7% between the first fiscal quarter of FY06 and FY05. We
attribute the percentage increase in cost of sales for Words+ primarily to the
increased costs of computers and PDAs which are main parts for the systems we
sell. Last fiscal year, we were able to obtain purchase discounts by volume
purchases of computers and PDAs; however such discounts were not available to us
when the new models came on the market and the previous models were
discontinued.

GROSS PROFIT

Consolidated gross profit increased $528,000, or 108.4%, to $1,015,000 in the
first fiscal quarter of FY07 from $487,000 in the first fiscal quarter of FY06.
We attribute this increase to the increase in sales of pharmaceutical software
which outweighed a decrease in profit margin on Words+ products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Consolidated selling, general and administrative (SG&A) expenses increased
$128,000, or 20.4%, to $757,000 in the first fiscal quarter of FY07 from
$629,000 in the first fiscal quarter of FY06. For Simulations Plus, SG&A
increased $78,000, or 22.2%. As a percentage of sales, SG&A decreased from
approximately 177% in the first fiscal quarter of FY06 to approximately 53% in
the first fiscal quarter of FY07. The major increases in SG&A expenses were
selling expenses, such as commissions to dealers and trade shows, as well as
printer rental, salaries, and payroll-related expenses such as health insurance
and payroll taxes, which outweighed decreases in professional fees.

For Words+, SG&A expenses increased $40,000, or 14.2%, due primarily to
increases in commissions, catalogs, marketing consultant fees, telephone and
supplies. These increases outweighed decreases in depreciation, technical
service costs, and dues and subscriptions.

RESEARCH AND DEVELOPMENT

We incurred approximately $317,000 of research and development costs for both
companies during the first fiscal quarter of FY07. Of this amount, $133,000 was
capitalized and $184,000 was expensed. In the first fiscal quarter of FY06, we
incurred $460,000 of research and development costs, of which $363,000,
including an allocation of appraised value of $246,000 on ClassPharmer software,
was capitalized and $97,000 was expensed. The decrease of $143,000, or 31.1%, in
total research and development expenditures from the first fiscal quarter of
FY06 to the first fiscal quarter of FY07 was due primarily to the purchase of
ClassPharmer software in FY06, which outweighed increases in salaries because of
new hires and salary increases to existing staff since the first fiscal quarter
of FY06. The increase of $86,000 in expensed R&D from $97,000 to $183,000 is
primarily to staff additions in our Life Sciences department.

OTHER INCOME (EXPENSE)

Net other income (expense) in the first fiscal quarter of FY07 increased by
$20,000, from net expense of $1,000 to net income of $19,000. This is due
primarily to increased interest revenue from Money Market accounts, which
outweighed a loss on currency exchange.

BENEFIT FROM (PROVISION FOR) INCOME TAXES

We estimated a provision for income tax for $21,000 in the first fiscal quarter
of FY07, while there was a benefit of income tax for $42,000 in the first fiscal
quarter of FY06.


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<PAGE>

NET INCOME (LOSS)

Consolidated net income for the three months' operations increased by $271,000
to an income of $73,000 in the first quarter of FY07 compared to a loss of
$198,000 in the first quarter of FY06. We attribute this increase in profit
primarily to the increases in pharmaceutical software and other income, which
outweighed increases in cost of sales, selling, and general and administrative
expenses, research and development expenses, provision for income taxes, and a
loss from Words+ operations.

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.


                                       24
<PAGE>

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. As a result, we
experienced a small loss from currency exchange in the first three months of
FY07. 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.


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<PAGE>

                           PART II. OTHER INFORMATION

Item 1.           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 have been working through our U.S. attorneys and
                  a law firm in Paris. We have 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. We believe the documentation from our purchase of
                  certain secured assets of Bioreason clearly shows our rights
                  to the disputed accounts. Although we are pursuing our rights
                  aggressively, there can be no assurance that the outcome will
                  be favorable. We expect resolution of this issue in 2007.

Item 2.           Changes in Securities
                  ---------------------
                  None.

Item 3.           Defaults Upon Senior Securities
                  -------------------------------
                  None.

Item 4.           Submission of Matters to a Vote of Security Holders
                  ---------------------------------------------------
                  None.

Item 5.           Other Information
                  -----------------
                  None.

Item 6.           Exhibits and Reports on form 8-K
                  --------------------------------

                  (a)      Exhibits:

                  31.1  -2 Certification of Chief Executive Officer and
                           Chief Financial Officer
                  32       Certification pursuant to Sec. 906 of the
                           Sarbanes-Oxley Act of 2002


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<PAGE>

                                    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 15, 2007.

                                                     Simulations Plus, Inc.

Date:  January 15, 2007                     By:      /s/ MOMOKO BERAN
                                                     -----------------------
                                                     Momoko Beran
                                                     Chief Financial Officer


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