Edgar Filing: SIMULATIONS PLUS INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-KSB

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

For the fiscal year ended August 31, 2006
or

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

For the transition period from _________ to _________

Commission file number: 001-32046

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

CALIFORNIA 95-4595609
(State or other jurisdiction) (I.R.S. Employer Identification No.)

42505 TENTH STREET WEST
LANCASTER, CA 93534-7059 (661) 723-7723
(Address of principal executive (Issuer's telephone number,
offices including zip code) including area code)

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

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

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

The issuer had revenues of approximately $5,855,000 for the fiscal year ended
August 31, 2006.

As of November 21, 2006, the aggregate market value of the common equity held by
non-affiliates of the issuer (3,366,226 shares) was approximately $10,266,989
based upon the November 21, 2006 closing price ($3.05) of one share on such
date.

As of November 21, 2006, the issuer had outstanding 7,368,226 shares of common
stock and no shares of preferred stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the 2007
Annual Meeting of Shareholders are incorporated herein by reference into Part
III.

SIMULATIONS PLUS, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED AUGUST 31, 2006

Table of Contents
Page
----

PART I
------

Item 1. Description of Business 1
Item 2. Description of Property 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10

PART II
-------

Item 5. Market for Common Equity and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis or Plan of Operation 12
Item 7. Financial Statements 18
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 18
Item 8A. Controls and Procedures 18
Item 8B. Other Information 18

PART III
--------

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 19
Item 10. Executive Compensation 19
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 19
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits 19
Item 14. Principal Accounting Fees and Services 22

Signatures 23
Financial Statements F-1
Exhibits

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

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-KSB, 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 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 SHAREHOLDERS 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.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

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 reasonable estimates of these properties, even though the molecule has
never 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.

During the 4th quarter, we continued the integration of ADMET Predictor and
ADMET Modeler into a single program for greater user convenience. The two
programs were designed to work together from the start, but this integration
will make it even easier to use the model-building capabilities of ADMET
Modeler. In addition, we believe that integration of the two into a single
package will enhance the competitive posture of ADMET Predictor. The new ADMET
Predictor 2.0 with integrated ADMET Modeler was released in September 2006
shortly after the end of the 4th quarter.

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.

During the 4th quarter, in addition to integrating ADMET Modeler into ADMET
Predictor, we 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 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 a few months before 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.

We completed the integration of ChemTK and ClassPharmer 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. The market for this tool includes hundreds of drug delivery
companies as well as all pharmaceutical and 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 have been received and incorporated into Version 2.1,
which is now shipping. Although no DDDPlus licenses were sold during the 4th
quarter, two have been sold during the 1st quarter of FY 2007 at the time of
this writing, and approximately 35 companies have recently requested evaluation
copies. We are arranging on-line demonstrations for these companies to ensure
that they understand the capabilities and features of the product during their
evaluations.

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 standard laboratory animals.
This sophisticated simulation has equations for the movement of the drug through
the gastrointestinal tract, how fast it dissolves or precipitates along the way,
whether it is converted to a different molecular form (i.e., degraded) in the
gastrointestinal tract prior to absorption, and how fast it is absorbed through
various regions of the intestinal wall into the blood stream. With additional
inputs, it also simulates the concentration of drug in the blood plasma versus
time. With the optional PBPKPlus(TM) Module, concentrations in a variety of
tissues and organs can also be predicted. With the optional PDPlus(TM) module,
the program can also simulate how a drug affects the body, such as reducing
pain, reducing blood pressure, reducing depression, and causing adverse side
effects.

We believe GastroPlus is the "gold standard" in the industry for its class of
simulation software. It is used from early drug discovery through 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) 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, (2) 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, (3) when certain
properties of a new compound can be adequately estimated through computer ("in
silico") predictions or simple experiments rather than through more expensive
and time-consuming IN VITRO or animal experiments, (4) 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 (5)
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 the fourth quarter, we continued development of version 5.2, which adds a
significant number of user convenience features as well as expanded simulation.

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. Version 5.0 with the new PBPKPlus(TM) module, released in December
2005, further extended the utility of GastroPlus. Version 5.1 added additional
functionality and user convenience, and we are now working on version 5.2, which
expands the program's utility further in response to customer requests for added
features. During the fourth quarter, we were awarded a two-year contract by one
of the pharmaceutical giants to further expand the capabilities of GastroPlus,
most of which we expect will be available to all of our users.

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.

CONTRACT RESEARCH SERVICES
--------------------------
In addition to our software products, we also offer contract research services
to the pharmaceutical industry in the area of gastrointestinal absorption,
pharmacokinetics, structure-property model building, and related technologies.
These studies provide us an additional source of revenue, as well as a means to
introduce our software products to new customers. Such studies are also
beneficial to us to validate and enhance our products by studying actual data in
the pharmaceutical industry. The business of contracted studies is growing, and
we believe it could contribute significantly to our revenues and earnings;
however, we plan to control growth in this area such that it does not adversely
impact our product development stream. We are also adding scientific staff to
increase our ability to meet the growing demand for consulting services.

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.

(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.

MARKETING AND DISTRIBUTION
--------------------------
We market our pharmaceutical software and consulting services through attendance
and presentations at scientific meetings, exhibits at trade shows, seminars at
pharmaceutical companies and government agencies, through our web pages on the
Internet, and using various communication media to our compiled database of
prospect and customer names. Until recently, our scientific team has also been
our only sales and marketing team. We believe that this was more effective than
a separate sales team for several reasons: (1) customers appreciate talking
directly with developers who can answer a wide range of technical questions
about methods and features, (2) our scientists benefit from direct customer
contact through gaining an appreciation for the environment and problems of the
customer, and (3) the relationships we build through scientist-to-scientist
contact are stronger than through salesperson-to-scientist contacts. One of our
scientists recently moved to the marketing and sales department and is now a

full-time field sales representative. His strong familiarity with our product
line after over two years as a product scientist and software developer prepared
him well for his new role. In addition, we added an in-house support person
during the fiscal year to improve our ability to follow up on leads generated at
scientist meetings, through our web site, and through our other communication
media.

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

PRODUCTION
----------
Our pharmaceutical software products are designed and developed entirely by our
development team at our Lancaster, California facility as well as our Chief
Scientist, Dr. Michael Bolger, in Petaluma, California. The principal materials
and components used in the manufacture of simulation software products include
CD-ROMs and instruction manuals, which are also produced in-house. Robotic CD
burner technology along with in-house graphic art and engineering talent enable
us to accomplish this production in a cost-efficient manner.

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

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

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

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

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.

MARKETING AND DISTRIBUTION
--------------------------
We market augmentative and alternative communication products through a network
of employee representatives and independent dealers and resellers.

At the present time we have 37 sales representatives worldwide: 1
salary/commission salesperson in California, 14 independent distributors and 6
independent resellers in the U.S., and 16 sales representatives overseas - 4 in
Australia, and 1 each in New Zealand, Canada, England, Norway, Finland, The
Netherlands, France, Italy, Israel, Japan, Korea, Mexico and Malaysia. We also
have 3 inside sales/support persons, who answer e-mails and telephone inquiries
on our toll-free telephone line and who provide technical support. Additional
outside sales persons and independent dealers and resellers are being actively
recruited.

We direct our marketing efforts to speech pathologists, occupational therapists,
rehabilitation engineers, special education teachers, disabled persons and
relatives of disabled persons. We maintain a mailing list of over 10,000 people
made up of these professionals, consumers and relatives, and we mail various
marketing materials to this list. These materials include our catalog of
products and announcements regarding new and enhanced products.

We participate in industry conferences held worldwide that are attended by
speech pathologists, occupational and physical therapists, special education
teachers, parents and consumers. We and others in the industry demonstrate our
products at these conferences and present technical papers that describe the
application of our technologies and research studies on the effectiveness of our
products. We also advertise in selected publications of interest to persons in
this market.

We estimate that for approximately 50% of our sales of augmentative and
alternative communication ("AAC") software and hardware, some or all of the
purchases are funded by third parties such as Medicaid, Medicare, school special
education budgets, private insurance or other governmental or charitable
assistance. Medicare provides coverage of augmentative communication devices.

Our personnel provide advice and assistance to customers and prospective
customers on obtaining third-party financial assistance for purchasing our
products. Third party funding has grown slowly but continuously for 20 years.
The addition of Medicare coverage for AAC devices was the largest single

increase in third party funding in our history. Our Medicare/Medicaid sales have
grown, and approximately 35% of total sales are funded by Medicare/Medicaid.
Such sales are subject to funding caps that limit the amounts paid for our
products, and payment by some agencies can be slow, making this market segment
somewhat more difficult than others.

PRODUCTION
----------
Disability software products are either loaded onto computer hard disk drives by
our employees or copied to diskettes, CD-ROM, or memory cards, which is
performed in-house. Most software customers also buy their notebook personal
computers from us, which we purchase at wholesale prices and resell at a markup.
We purchase microprocessors that are part of dedicated devices such as
MessageMates(TM). We design our cases, printed circuit boards, labels and other
components of products such as MessageMates and MicroCommPacs(TM). We outsource
the extrusion, machining and manufacturing of certain components. All final
assembly and testing operations are done by our employees at our facility.

Our products are shipped from our Lancaster, California facility either directly
to the customer or to the salesperson, dealer or reseller. For major products,
the outside salesperson, dealer or reseller either delivers the product or
visits the customer after delivery to provide training.

COMPETITION
-----------
The AAC industry in which we operate is highly competitive and some of our
competitors have greater financial and personnel resources than ours. The
industry is made up of about six major competitors including Words+, and a
number of smaller ones. Based on personal conversations with our outside dealers
and customers, we believe that the other major competitors each have revenues
ranging from $3 million to under $30 million, so that there are no large
companies in this industry.

We believe that the competition in this industry is based primarily on the
quality of products, quality of customer training and technical support, and
quality and size of sales forces. Price is a competitive factor but we believe
price is not as important to the customer as obtaining the product most suited
to the customer's needs, along with strong after-sale support. We believe that
we are a leader in the industry in developing and producing some of the most
technologically advanced products and in providing quality customer training and
technical support. We believe that the potential exists for significant
increases in the sales of our disability products; however, there are few
barriers to entry in the form of proprietary or patented technology or trade
secrets in this industry. While we believe that cost of product development and
the need for specialized knowledge and experience in this industry would present
some barrier to entry for new competition, other companies may enter this
industry, including companies with substantially greater financial resources
than ours. Furthermore, companies already in this industry may increase their
market share through increased technology development and marketing efforts.

TRAINING AND TECHNICAL SUPPORT
------------------------------

We believe customer training and technical support are important factors in
customer satisfaction for both our pharmaceutical and disability products, and
we believe we are an industry leader in providing customer training and
technical support in both of our business areas. For pharmaceutical software, we
provide in-house seminars at customers' sites. These seminars often serve as
initial training in the event the potential customer decides to license or
evaluate our software. Technical support is provided after the sale in the form
of on-site training (at customer's expense), telephone, fax, and e-mail
assistance to users, as well as software upgrades, if any, that may be released
during the customer's license period. We have also used Internet meetings
extensively to provide demonstrations and customer assistance, resulting in
rapid response to requests worldwide and reducing our travel time and expenses.

For Disability Products, our salesperson, dealer or reseller provides initial
training to the customer for major systems -- typically two to four hours. This
training is typically provided not only to the user of the product but also to
the person's speech pathologists, teachers, parents and others who will be
assisting the user. This initial training for the purchase of full systems is
often provided as a part of the price of the product. We and our dealers charge
a fee for additional training and service calls.

Technical support for both pharmaceutical software and disability products is
provided by our life sciences team and our inside sales and support staff based
at our headquarters facilities in Lancaster, California. We provide free
telephone support offering unlimited toll-free numbers in the U.S. and Canada,
and e-mail support for all of our pharmaceutical software and disability
products worldwide. Technical support for pharmaceutical software products is
minimal, averaging a few person-hours per month. Technical support for Words+
products varies from none for most customers to as much as several hours for
others. Words+ dealers usually train new customers at the customer's location,
which significantly reduces technical support demands on our staff.

RESEARCH AND DEVELOPMENT
------------------------

We believe that our ability to grow and remain competitive in our markets is
strongly dependent on significant investment into research and development
("R&D"). R&D activities include both enhancement of existing products and
development of new products. Development of new products and adding
functionality to existing products are capitalized in accordance with Financial
Accounting Standards No. 86 and AICPA Statement of Position 98-1. R&D
expenditures were approximately $1,170,000 during fiscal year 2006, of which
$445,000 was capitalized. R&D expenditures during fiscal year 2005 were
approximately $1,049,000, of which $725,000 was capitalized. R&D expenditures
include the purchase of ClassPharmer in fiscal year 2006, and the assets of Sage
in fiscal year 2005.

Our pharmaceutical business R&D activities during fiscal year 2006 were focused
on improving our ClassPharmer, GastroPlus, ADMET Predictor/ADMET Modeler, and
DDDPlus products.

Our R&D activities for our Words+ subsidiary were focused on improvement of our
E Z Keys(TM) and Say-it! SAM(TM) product lines by offering these software
packages on more platforms, including the Freedom LITE(TM) Convertible and the
Say-it! SAM Tablet XP1, as well as developing language support for Spanish and
French.

EMPLOYEES
---------

As of November 28, 2006, we employed 33 full-time and two part-time employees,
including 15 in research and development, seven in marketing and sales, six in
administration and accounting, six in production and one in IT/repairs. Nine
current employees hold Ph.D.'s and one is a Ph.D. candidate in their respective
science or engineering disciplines. Four additional employees hold one or more
Master's degrees. All but two of the senior management team and Board of
Directors hold graduate degrees. We believe that our future success will depend,
in part, on our ability to continue to attract, hire and retain qualified
personnel. The competition for such personnel in the pharmaceutical industry and
in the augmentative and alternative communication device and computer software
industry is intense. None of our employees is represented by a labor union, and
we have never experienced a work stoppage. We believe that our relations with
our employees are good.

PATENTS
-------

During fiscal year 2006, we owned two patents that were acquired as part of our
acquisition of certain assets of Bioreason, Inc. We primarily protect our
intellectual property through copyrights and trade secrecy. Our intellectual
property consists primarily of source code for computer programs and data files
for various applications of those programs in both the pharmaceutical software
and the disability products businesses. In the disability products business,
electronic device schematics, mechanical drawings, and design details are also
intellectual property. The expertise of our technical staff is a considerable
asset closely related to intellectual property, and attracting and retaining
highly qualified scientists and engineers is essential to our business.

EFFECT OF GOVERNMENT REGULATIONS
--------------------------------

Our pharmaceutical software products are tools used in research and development
and are neither approved nor approvable by the Food and Drug Administration or
other government agency. Approximately 35% of our products for the disabled are
funded by Medicare or Medicaid programs. Changes in government regulations
regarding the allowability of augmentative communication aids and other
assistive technology under such funding could affect our business.

ITEM 2. DESCRIPTION OF PROPERTIES

In early February of 2006, we moved to a new location. At this new location, we
lease approximately 13,500 square feet of space under a five-year term with two
(2), three-(3) year options to extend the lease. The base rent starts at the
rate of $18,445 per month plus common area maintenance fees. The base rental
rate will increase at 4% annually. We believe that this new facility is
sufficient for our current needs and growth in the near future.

ITEM 3. LEGAL PROCEEDINGS

On April 6, 2006 we received notice from a liquidator for the former French
subsidiary of Bioreason (Bioreason SARL), saying that the liquidator had
initiated legal action against Simulations Plus in the French courts with
respect to ClassPharmer distribution rights to European customers, and is
claiming commissions and legal fees with respect to European customers. We 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2006.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is currently traded on the American Stock Exchange (AMEX) under
the symbol "SLP". According to records of our transfer agent, we had about 64
stockholders of record and approximately 450 beneficial owners as of August 31,
2006. The following table sets forth the low and high sale prices for the Common
Stock as listed on the AMEX for the last two fiscal years. The Board of
directors declared a 2-for-1 stock split, and the company's common stock has
been trading at the post-split price since August 14, 2006. The prices in the
table below reflect the post-split price. We have not paid cash dividends on our
Common Stock. We currently intend to retain our earnings for future growth, and
therefore do not anticipate paying cash dividends in the foreseeable future. Any
further determination as to the payment of dividends will be at the discretion
of our Board of Directors and will depend among other things, on our financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant.

LOW SALES PRICE HIGH SALES PRICE
--------------- ----------------
FY06:
Quarter ended August 31, 2006 . . . . . . . . . . . 1.90 2.95

Quarter ended May 31, 2006 . . . . . . . . . . . . . 1.79 2.58

Quarter ended February 28, 2006 . . . . . . . . . . 1.73 2.63

Quarter ended November 30, 2005 . . . . . . . . . . 1.43 2.00

FY05:
Quarter ended August 31, 2005 . . . . . . . . . . . 1.66 2.25

Quarter ended May 31, 2005 . . . . . . . . . . . . . 1.63 2.40

Quarter ended February 28, 2005 . . . . . . . . . . 2.08 3.35

Quarter ended November 30, 2004 . . . . . . . . . . 1.61 2.60

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS
REPORT.

RESULTS OF OPERATIONS

The following sets forth selected items from our statements of operations (in
thousands) and the percentages that such items bear to net sales for the fiscal
years ended August 31, 2006 ("FY06") and August 31, 2005 ("FY05").

FY06 FY05
----------------------------------------------------

Net sales $5,855 100.0% $4,752 100.0%
Cost of sales 1,604 27.4 1,508 31.7
----------------------------------------------------
Gross profit 4,251 72.6 3,244 68.3
----------------------------------------------------
Selling, general, and administrative 2,972 50.8 2,423 51.0
Research and development 445 7.6 525 11.0
----------------------------------------------------
Total operating expenses 3,417 58.4 2,948 62.0
----------------------------------------------------
Income from operations 834 14.2 296 6.2
----------------------------------------------------
Interest income 21 0.4 44 0.9
Interest expense, net - - (1) -
Gain on sale of assets 11 0.2 15 0.3
Gain (Loss) on currency exchange 23 0.4 (6) (0.1)
----------------------------------------------------
Total other income 55 0.9 52 1.1
----------------------------------------------------
Net income before taxes 889 15.2 348 7.3
----------------------------------------------------
Provision for income taxes (213) (3.6) (86) (1.8)
----------------------------------------------------
Net income 676 11.6% 262 5.5%
----------------------------------------------------

FY06 COMPARED WITH FY05
-----------------------

NET SALES
---------
Consolidated net sales increased $1,103,000, or 23.2%, to $5,855,000 in fiscal
year 2006 (FY06) from $4,752,000 in fiscal year 2005 (FY05). Sales from
pharmaceutical software and services increased approximately $1,118,000, or
54.0%; and our Words+, Inc. subsidiary's sales decreased approximately $15,000,
or 0.6%, for the year. We attribute the increase in sales of pharmaceutical
software and services to increased licenses for our GastroPlus and ADMET
Predictor software, as well as licenses of our ClassPharmer software acquired in
November 2005. We attribute the small decrease in Words+ sales primarily to a
decrease in sales of "TuffTalker" and "Freedom" products which outweighed
increases in sales of "Say-it-SAM!" and "TuffTalker Plus" products.

COST OF SALES
-------------
Our consolidated cost of sales for FY06 increased $96,000, or 6.4%, to
$1,604,000 from $1,508,000 in FY05. As a percentage of sales, cost of sales was
27.4% for FY06, compared to 31.7% for FY05, a 4.3% decrease. For Simulations
Plus, absolute cost of sales increased $179,000, or 75.2%. As a percentage of
sales, cost of sales increased to 13.1% in FY06 from 11.5% in FY05. A
significant portion of cost of sales is the systematic amortization of
capitalized software development costs, which is an independent fixed cost
rather than a variable cost related to sales. This amortization cost increased
approximately $122,000, or 184.5%, in FY06 compared with the same period in
FY05.

For Words+, cost of sales decreased $83,000, or 6.5%. As a percentage of sales,
cost of sales decreased 2.8% between FY06 and FY05. We attribute the percentage
decrease in cost of sales for Words+ primarily to the ability to obtain purchase
discounts through volume purchases of computers and PDAs, which are main
components of the systems we sell.

GROSS PROFIT
------------
Consolidated gross profit increased $1,007,000, or 31.0%, to $4,251,000 in FY 06
from $3,244,000 in FY05. We attribute this increase to the increase in sales of
pharmaceutical software in addition to an increase in gross margin on Words+
products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative ("SG&A") expenses for FY06 increased by
$549,000, or 22.7%, to $2,972,000, compared to $2,423,000 for FY05. For
Simulations Plus, SG&A expenses increased $533,000, or 40.6%. The major
increases in expenses were in the categories of selling expenses such as
commissions and trade shows, 10% of the Company's net income before bonuses and
taxes payable to the Company's President, Walter Woltosz and Corporate
Secretary, Virginia Woltosz as annual bonuses, increases in the stipend paid to
the outside members of the board of directors for the first time since the
Company incorporated, recruitment expense increases as we have added staff,
legal and accounting fees, and salary increases along with payroll-related
expenses such as health insurance, payroll taxes and 401(k) matching
contributions. These increases outweighed decreases in investor relations and
repairs.

For Words+, expenses increased $16,000, or 1.4%, due primarily to increases in
advertising, travel, salary and salary related expenses, and contract labor.
These increases outweighed decreases in commissions, trade shows, insurances,
and repairs.

RESEARCH AND DEVELOPMENT
------------------------
We incurred approximately $1,170,000 of research and development costs for both
companies during FY06. Of this amount, $725,000 was capitalized and $445,000 was
expensed. For FY05, we incurred approximately $1,049,000 of research and
development costs, of which approximately $524,000 was capitalized and
approximately $525,000 was expensed. The 11.5% increase in research and
development expenditure from FY05 to FY06 was due primarily to our purchase of
the ClassPharmer(TM) software product from the creditors of Bioreason, as well
as increased R&D staff and increases in salaries and bonuses.

INCOME FROM OPERATIONS
----------------------
During FY06, we generated income from operations of $834,000, as compared to
$296,000 for FY05, an increase of 181.8%. We attribute this increase to the
increased sales of pharmaceutical software and services from the previous year
in addition to an increase in income from Words+ operations.

OTHER INCOME AND (EXPENSE)
--------------------------
The net of other income over other expense for FY06 increased by $3,000, or
5.8%, to $55,000, compared to $52,000 for FY05. Interest income decreased by
$23,000, or 52.3%, due primarily to a decrease in the amortization of present
value discount on long-term receivables to $9,000 in FY06 from $32,000 in FY05,
which outweighed an increase in interest income on bank accounts. The interest
expenses incurred in FY06 and FY05 were almost the same. We recognized a gain of
$11,000 on sale of equipment in FY06 compared with $15,000 in FY05, and a gain
of $23,000 on currency exchange in FY06, while this item was a loss of $6,000 in
FY05.

PROVISION OF INCOME TAXES
-------------------------
For FY06 as well as FY05, because of our net operating loss ("NOL") carry
forward applicable to Federal tax, and multiple tax credits applicable to both
Federal and State, we accrued only the minimum Franchise tax of $1,600 in the
state of California for the two companies. Based on the reconciliation of the
expected income tax, we made a provision of $213,000 for income taxes in FY06
compared with $86,000 in FY05. Please refer to the notes to the financial
statements for the details.

NET INCOME
----------
Net income for FY06 increased by $414,000, or 158.2%, to $676,000, compared to
$262,000 for FY05. We attribute this increase in profit primarily to increased
sales of pharmaceutical software licenses in addition to an increase in profit
margin on Words+ products, which outweighed increases in operating expenses and
income taxes. Shareholders' equity grew by 16.6%, from $4.862 million to $5.669
million during FY06.

SEASONALITY
-----------

Sales of our pharmaceutical and disability products exhibit minimal seasonal
fluctuation. In the last two years, the highest quarters were in the 3rd and 4th
quarters, and the lowest quarters were in the 1st and 2nd quarters. This
unaudited net sales information has been prepared on the same basis as the
annual information presented elsewhere in this Annual Report on Form 10-KSB and,
in the opinion of management, reflects all adjustments (consisting of normal
recurring entries) necessary for a fair presentation of the information
presented. Net sales for any quarter are not necessarily indicative of sales for
any future period.

Prior to FY05, we believed sales of its Words+ products to schools were slightly
seasonal, with greater sales to schools during our third and fourth fiscal
quarter (March-May and June-August), as shown in the table below.

-------------------------------------------------------------------------------------------------------------

Net Words+ Sales

First Second Third Fourth
FY Quarter Quarter Quarter Quarter Total
(in thousands)
------------------------------------ ------------- ------------ ------------- ------------- ------------
2006 . . . . . . . . . . . . . . 620 598 692 759 2,669
2005 . . . . . . . . . . . . . . 543 622 762 757 2,684
-------------------------------------------------------------------------------------------------------------

Sales of pharmaceutical software, which began in the first quarter of FY99, are
not expected to show significant seasonal behavior. Although a significant
portion of the pharmaceutical industry receives extended summer holidays, the
fourth quarter was the strongest quarter for fiscal year 2004, 2003 and 2002,
but was the second lowest in FY05 and the lowest in FY01. Although no consistent
seasonal trend is observed or expected, management believes that sales may show
quarterly spikes when large orders are received.

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.

INFLATION
---------

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

RECENT ACCOUNTING ANNOUNCEMENTS
-------------------------------

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, "Accounting for Stock
Issued to Employees." SFAS 123R requires all companies to measure compensation
expense for all share-based payments (including employee stock options and
options issued pursuant to employee stock purchase plans) based upon the fair
value of the stock-based awards at the date of grant, and is effective for the
Company for the fiscal year beginning after December 15, 2005. The impact of
adoption of Statement 123R cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future.

In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principles and requires retrospective application to prior periods' financial
statements of changes in accounting principles, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Earlier application is permitted for accounting changes
and errors made occurring in fiscal year beginning after May 31, 2005. The
adoption of SFAS No. 154 did not have a material impact on the Company's
financial position or result of operations

In November 2005, the FASB issued FASB Staff Position (FSP) No. FAS 115-1, "THE
MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS." This FSP establishes the steps required in determining when an
investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. Under this FSP, the
assessment for impairment shall be performed at the individual security level in
each reporting period. When impairment has been determined to be other than
temporary, an impairment loss will be recognized on an impairment loss equal to
the difference between the investment's cost and its fair value. The provisions
of FSP 115-1 shall be effective for reporting periods beginning after December
15, 2005. The adoption of FSP 115-1 did not have a material impact on the
Company's financial position or results of operations.

CRITICAL ACCOUNTING POLICIES
----------------------------

revenue, and expenses. These estimates and assumptions are affected by
management's application of accounting policies. Critical accounting policies
for us include revenue recognition, accounting for capitalized software
development costs, and accounting for income taxes.

Revenue Recognition
-------------------
We recognize 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
such revenues at the time the training or service call is provided.

Generally, we enter into one-year license agreements with our customers for the
use of our software products. We recognize revenue on these contracts when all
the criteria under SOP 97-2 are met.

From time to time, we enter into multi-year license agreements. We believe our
history of collection with these customers is sufficient to overcome the
presumption that revenue should be recognized in time with the expected cash
collections, and we have in the past therefore recognized the entire license
fees, net of an applicable discount, at the time of the software's release and
acceptance by the customer. Beginning with the current fiscal year, however, we
have advised investors through our press releases and conference calls that we
now unlock and invoice software one year at a time for multi-year licenses. This
eliminates the extreme variability in our reported revenues and earnings that
we've experienced in the past.

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.

Management tests capitalized computer software costs for recoverability whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. No such events or changes in circumstances occurred during year

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

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

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.

Comprehensive Income
--------------------
We utilize Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in our
financial statements since we did not have any items of comprehensive income in
any period presented.

Concentrations and Uncertainties
--------------------------------
International sales accounted for 35% and 25% of net sales for FY06 and FY05,
respectively. For Simulations Plus, Inc., three customers accounted for 24%, 9%,
and 9% of net sales for FY06, and for Words+, Inc., one government agency
accounted for 18% and one customer accounted for 10% of net sales during FY06.

We operate in the computer software industry, which is highly competitive and
changes rapidly. Our operating results could be significantly affected by our
ability to develop new products and find new distribution channels for new and
existing products.

For consolidated accounts receivable, four customers comprised 14%, 7%, 7%, and
7% of accounts receivable at August 31, 2006, and one government agency
accounted for 12% of total receivables. For Simulations Plus, four customers
comprised 25%, 13%, 12%, and 12% of accounts receivable at August 31, 2006,
compared with four customers comprising 31%, 13%, 11% and 10% of accounts
receivable at August 31, 2005. For Words+, one government agency accounted for
21% of accounts receivable at August 31, 2006 compared with 25% at August 31,
2005.

ITEM 7. FINANCIAL STATEMENTS

The responses to this item are included elsewhere in this Form 10-KSB (see pages
F1 - F23) and incorporated herein by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 8A. CONTROLS AND PROCEDURES.

Our management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of August 31, 2006. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information we are required to disclose in the reports we file under the
Securities Exchange Act of 1934, within the time periods specified in the
Commission's rules and forms. Such evaluation did not identify any change in the
year ended August 31, 2006 that has materially affected, or is reasonable likely
to materially affect, our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION.

Not applicable.

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT

The information required by Item 9 is incorporated by reference from the
Company's definitive proxy statement (the "Proxy Statement") for its 2007 annual
shareholders' meeting.

ITEM 10. EXECUTIVE COMPENSATION

The information required by Item 10 is incorporated by reference from the
Company's Proxy Statement for its 2007 annual shareholders' meeting.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 11 is incorporated by reference from the
Company's Proxy Statement for its 2007 annual shareholders' meeting.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 12 is incorporated by reference from the
Company's Proxy Statement for its 2007 annual shareholders' meeting.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

EXHIBIT
NUMBER DESCRIPTION
------ -----------

3.1 Articles of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
4.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 hereof) and Bylaws of the Registrant
(incorporated by reference to Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate (1)
4.3 Share Exchange Agreement (1)
10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan")
and terms of agreements relating thereto (1)+
10.2 Subscription Agreement with Patricia Ann O'Neil (1)
10.3 Security Agreement with Patricia Ann O'Neil (1)
10.4 Promissory Note made by the Registrant in favor of Patricia Ann
O'Neil (1)
10.5 Warrants to purchase 150,000 shares of Common Stock of the
Registrant issued to Patricia Ann O'Neil (1)
10.6 First Amendment to Agreement with Patricia Ann O'Neil (1)
10.7 Subscription Agreement with Fernando Zamudio (1)
10.8 Security Agreement with Fernando Zamudio (1)
10.9 Promissory Note made by the Registrant in favor of Fernando Zamudio
(1)
10.10 Warrant to purchase 100,000 shares of Common Stock of the Registrant
issued to Fernando Zamudio (1)
10.11 Employment Agreement by and between the Registrant and Walter S.
Woltosz (1) +

10.12 Performance Warrant Agreement by and between the Registrant and
Walter S. Woltosz + Virginia E. Woltosz (2) +
10.13 Software Acquisition Agreement by and Between the Registrant and
Michael B. Bolger (1)
10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant
and Westholme Partners (along with Consent to Sublease and master
lease agreement) (1)
10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc.
and Abbey-Sierra LLC (1)
10.16 Form of 10% Amended and Restated Promissory Note issued in
connection with the Registrant's Private Placement (2)
10.17 Form of Subscription Agreement relative to the Registrant's Private
Placement (1)
10.18 Form of Lock-Up Agreement with Bridge Lenders (2)
10.19 Form of Indemnification Agreement (1)
10.20 Form of Lock-Up Agreement with the Woltosz' (2)
10.21 Letter of Intent by and between the Registrant and Therapeutic
Systems Research Laboratories (1)
10.22 Form of Representative's Warrant to be issued by the Registrant in
favor of the Representative (2)
10.23 Form of Warrant issued to Bridge Lenders (2)
10.24 License Agreement by and between the Registrant and Therapeutic
Systems Research Laboratories (3)
10.25 Grant Award Letter from National Science Foundation (4)
10.26 Distribution Agreement with Teijin Systems Technology LTD. (4)
10.27 Lease Agreements by and between Simulations Plus, Inc. and Martin
Properties, Inc. (4)
10.28 Software OEM Agreement for Assistive Market Developer by and between
Words+, Inc. and Digital Equipment Corporation. (4)
10.29 Purchase Agreement by and between Words+, Inc. and Epson America,
Inc. (4)
10.30 License Agreement with Absorption Systems, LP. (5)
10.31 Service contract with The Kriegsman Group. (5)
10.32 Letter of Engagement with Banchik & Associates. (5)
10.33 Letter of Intent for Cooperative Alliance with Absorption Systems,
LP. (5)
10.34 OEM/Remarketing Agreement between Words+, Inc. and Eloquent
Technology, Inc. (6)
10.35 Lease Option Agreement by and between Simulations Plus, Inc. and
Martin Properties, Inc. (8)
10.36 Auto Rental Lease Agreement by and between Simulations Plus, Inc.
and Walter and Virginia Woltosz (8)
10.37 Registration Statement - 1,250,000 shares of the Company's 1966
Stock Options. (9)
10.38 Employment Agreement by and between the Company and Walter S.
Woltosz (10)
10.39 An addendum to Lease Agreement (11)
10.40 Business Lending Agreement with Wells Fargo Bank (11)
10.41 Technology Transfer Agreement with Sam Communications, LLC. (12)
10.42 Employment Agreement by and between the Company and Walter S.
Woltosz (14)
10.43 Lease Agreement by and between Simulations Plus, Inc. and Venture
Freeway, LLC. (15)
31.1 Section 302 - Certification of Chief Executive Officer. (15)
31.2 Section 302 - Certification of Chief Financial Officer. (15)
32 Section 906 - Certification of Chief Executive Officer and Chief
Financial Officer. (15)

--------------------------------------------------------------------------------

(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 333-6680) filed on
March 25, 1997 (the "Registration Statement").
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
the Registration Statement filed on May 27, 1997.
(3) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 1997.
(4) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 1998.
(5) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 1999.
(6) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2000.
(7) Incorporated by reference to the Company's Form 8-K filed on
March 1, 2001.
(8) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2001.
(9) Incorporated by reference to the Company's Registration
Statement on Form S-8 (Registration No. 333-91592) filed on
June 28, 2002 (the "Registration Statement").
(10) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2002.
(11) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2003.
(12) Incorporated by reference to the Company's Form 8-K filed on
December 29, 2003.
(13) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2004.
(14) Incorporated by reference to the Company's Form 10-KSB for the
fiscal year ended August 31, 2005.
(15) Filed herewith.

(b) Reports on Form 8-K

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The Company incurred the following fees to Rose, Snyder & Jacobs, CPAs for
services rendered during the fiscal year ended August 31, 2005:

Fee Category FY06 Fees FY05 Fees
------------ --------- ---------

Audit fees $ 60,295 $ 55,803
Audit-related fees -- --
Tax fees 8,000 13,467
All other fees 1,120 --
----------- -----------
Total fees $ 69,415 $ 69,270
----------- -----------

AUDIT FEES - Consists of fees incurred for professional services
rendered for the audit of Simulations Plus, Inc.'s consolidated
financial statements and for reviews of the interim consolidated
financial statements included in our quarterly reports on Form 10-QSB
and consents for filings with the SEC.

AUDIT-RELATED FEES - Consists of fees billed for professional services
that are reasonably related to the performance of the audit or review
of Simulations Plus, Inc.'s consolidated financial statements, but are
not reported under "Audit fees."

TAX FEES - Consists of fees billed for professional services relating
to tax compliance, tax reporting, and tax advice.

ALL OTHER FEES - Consists of fees billed for all other services.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lancaster, State of California, on
November 22, 2006.

SIMULATIONS PLUS, INC.

By: /s/ MOMOKO A. BERAN
----------------------------
Momoko A. Beran
Chief Financial Officer

In accordance with Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
indicated on November 22, 2006.

SIGNATURE TITLE

/s/ WALTER S. WOLTOSZ Chairman of the Board of Directors
----------------------------------- and Chief Executive Officer
Walter S. Woltosz

/s/ VIRGINIA E. WOLTOSZ
-----------------------------------
Virginia E. Woltosz Secretary and Director of the Company

/s/ DR. DAVID Z. D'ARGENIO
-----------------------------------
Dr. David Z. D'Argenio Director

DR. RICHARD R. WEISS
-----------------------------------
Dr. Richard R. Weiss Director

/s/ MOMOKO A. BERAN
-----------------------------------
Momoko A. Beran Chief Financial Officer of the Company

SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONTENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

Page
----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet F-3 - F-4

Consolidated Statements of Operations F-5

Consolidated Statements of Shareholders' Equity F-6

Consolidated Statements of Cash Flows F-7 - F-8

Notes to Consolidated Financial Statements F-9 - F-24

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Simulations Plus, Inc.
Lancaster, California

We have audited the accompanying consolidated balance sheet of
simulations Plus, Inc (a California corporation) and Subsidiary as of August 31,
2006 and the related consolidated statements of operations, shareholders' equity
and cash flows for the years ended August 31, 2006 and 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards established by
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Simulation Plus and Subsidiary as of August 31, 2006, and the consolidated
results of their operations and their cash flows for the years ended August 31,
2006 and 2005 in conformity with accounting principles generally accepted in the
United States of America.

Rose, Snyder & Jacobs
A Corporation of Certified Public Accountants

Encino, California

October 26, 2006

F-2

SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2006
-----------------------------------------------------------------------------------

ASSETS

CURRENT ASSETS
Cash and cash equivalents (note 3) $ 1,685,036
Accounts receivable, net of allowance for doubtful accounts
and estimated contractual discounts of $26,982 (note 4) 1,588,583
Contracts receivable, net of discounts of $4,397 194,183
Inventory (note 5) 237,048
Prepaid expenses and other current assets 81,295
Current portion of deferred tax 109,034
--------------

Total current assets 3,895,179

CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS,
net of accumulated amortization of $2,427,726 1,374,442

PROPERTY AND EQUIPMENT, net (note 6) 96,384
CONTRACTS RECEIVABLE 37,180
CUSTOMER RELATIONSHIPS (note 13) 100,364
DEFERRED TAX 991,466
OTHER ASSETS 18,446
--------------

TOTAL ASSETS $ 6,513,461
==============

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

F-3

SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2006
--------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable $ 215,418
Accrued payroll and other expenses 364,457
Accrued bonuses to officers 98,753
Accrued income taxes 1,600
Accrued warranty and service costs 34,752
Deferred revenue 129,461
Other current liabilities 455
------------

Total current liabilities 844,896

LONG TERM LIABILITIES --
------------

Total liabilities 844,896
------------

COMMITMENTS AND CONTINGENCIES (note 7)

SHAREHOLDERS' EQUITY (note 8)
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
7,441,496 shares issued and outstanding 3,794
Additional paid-in capital 5,274,314
Retained Earnings 390,457
------------

Total shareholders' equity 5,668,565
------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,513,461
============

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

F-4

SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended August 31,
----------------------------------------------------------------------------------------

2006 2005
---- ----

NET SALES $ 5,855,204 $ 4,752,641

COST OF SALES 1,604,519 1,508,185
----------- -----------

GROSS PROFIT 4,250,685 3,244,456
----------- -----------

OPERATING EXPENSES
Selling, general, and administrative 2,972,298 2,423,467
Research and development 445,252 524,561
----------- -----------

Total operating expenses 3,417,550 2,948,028
----------- -----------

INCOME FROM OPERATIONS 833,135 296,428
----------- -----------

OTHER INCOME (EXPENSE)
Interest income 21,435 43,462
Interest expense (50) (712)
Miscellaneous income 520 --
Gain on sale of assets 10,774 15,491
Gain on currency exchange 22,961 (6,551)
----------- -----------

Total other income 55,640 51,690
----------- -----------

INCOME BEFORE INCOME TAXES 888,775 348,118

BENEFIT FROM (PROVISION FOR) INCOME TAXES
Benefit from (provision for) income tax (212,900) (85,800)
Release of valuation allowance -- --
----------- -----------

Total benefit from (provision for) income taxes (212,900) (85,800)
----------- -----------

NET INCOME $ 675,875 $ 262,318
=========== ===========

BASIC EARNINGS PER SHARE $ 0.09 $ 0.04
=========== ===========

Diluted earnings per share $ 0.08 $ 0.03
=========== ===========

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING*
BASIC 7,362,226 7,221,068
=========== ===========

DILUTED 8,144,065 7,961,036
=========== ===========

* The number of shares at August 31, 2005 reflects 2-for-1 stock split effect
for comparison purpose.

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

F-5

SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended August 31,
--------------------------------------------------------------------------------------------------------

Common Stock Additional Accumulated
------------ Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- ---------- ---------- ---------- ----------

BALANCE, AUGUST 31, 2004 7,128,886 $ 3,565 $4,990,122 $ (547,736) $4,445,951

SHARES ISSUED UPON
PURCHASING
SAGE INFORMATICS PRODUCT 29,410 15 49,982 -- 49,997

SHARES ISSUED UPON
EXERCISE OF STOCK
OPTIONS 139,400 70 103,822 -- 103,892

NET INCOME -- -- -- 262,318 262,318
---------- ---------- ---------- ---------- ----------

BALANCE, AUGUST 31, 2005 7,297,696 3,650 5,143,926 (285,418) 4,862,158

SHARES ISSUED UPON
EXERCISE OF STOCK
OPTIONS 143,800 144 130,388 -- 130,532

NET INCOME -- -- -- 675,875 675,875
---------- ---------- ---------- ---------- ----------

BALANCE, AUGUST 31, 2006 7,441,496 $ 3,794 $5,274,314 $ 390,457 $5,668,565
========== ========== ========== ========== ==========

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

F-6

SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31,
----------------------------------------------------------------------------------------------

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

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 675,875 $ 262,318
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property
and equipment 48,140 42,505
Amortization of customer relationships 27,678 --
Amortization of capitalized software
development costs 287,357 164,385
(Gain) on sale of assets (10,774) (15,491)

(Increase) decrease in
Accounts receivable (274,919) 607,502
Inventory 44,352 77,190
Deferred tax 211,300 84,200
Other assets (7,587) 35,040
Increase (decrease) in
Accounts payable 124,377 (61,845)
Accrued payroll and other expenses (33,745) 176,688
Accrued bonuses to officers 60,073 (38,946)
Accrued income taxes -- --
Accrued warranty and service costs 7,013 (4,757)
Deferred revenue (11,524) 109,584
------------- -------------

Net cash provided by operating activities 1,147,616 1,438,373
------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (61,980) (70,607)
Purchases of Bioreason's assets (826,192) --
Proceeds from sale of assets 20,549 22,641
Capitalized computer software development costs (479,531) (474,523)
------------- -------------

Net cash used in investing activities (1,347,154) (522,489)
------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the exercise of stock options 130,532 103,892
------------- -------------

Net cash provided by financing activities 130,532 103,892
------------- -------------

Net increase (decrease) in cash and
cash equivalents $ (69,006) $ 1,019,776

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,754,042 734,266
------------- -------------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,685,036 $ 1,754,042
============= =============

F-7

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

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

INTEREST PAID $ 50 $ 712
============= =============

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

SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS

On August 31, 2005, the Company purchased the assets of Sage Informatics
LLC., including the Chem TK (TM) product line, a chemistry software. The
partial payment was made by issuing 14,705 shares (Pre-Split) of
Simulations Plus restricted common stock at $3.40 per share (Pre-Split),
total of $49,997, equal to the closing price on the date when the
agreement was signed.

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

F-8

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND LINES OF BUSINESS

Organization
------------
Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29,
1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of
Words+, Inc. common stock for 2,200,000 (Pre-split) shares of
Simulations Plus, Inc. common stock, and Words+, Inc. became a wholly
owned subsidiary of Simulations Plus, Inc. (collectively, the
"Company").

Lines of Business
-----------------
The Company designs and develops pharmaceutical simulation software to
promote cost-effective solutions to a number of problems in
pharmaceutical research and in the education of pharmacy and medical
students. The Company also developed and sells interactive, educational
software programs that simulate science experiments conducted in middle
school, high school, and junior college science classes. In addition,
the Company's subsidiary designs and develops computer software and
manufactures augmentative communication devices and computer access
products that provide a voice for those who cannot speak and allow
physically disabled persons to operate a standard computer, as well as
Abbreviate!, a productivity software product for the commercial market.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our consolidated financial statements and accompanying notes are
prepared in accordance with accounting principles generally accepted in
the United States of America. Preparing financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. These estimates
and assumptions are affected by management's application of accounting
policies. 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
-------------------
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." Product revenue is recorded at
the time of shipment, net of estimated allowances and returns.
Post-contract customer support ("PCS") obligations are insignificant;
therefore, revenue for PCS is recognized at the time of shipment, and
the costs of providing such support services are accrued and amortized
over the obligation period.

F-9

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (Continued)
-------------------------------
As a by-product 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 are not significantly 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, or adding some additional calculations to supplement the
information provided from running the software. Such software
modifications for any single product have been typically once or twice
per year, sometimes more, sometimes less. Thus, they are infrequent.
The Company provides, for a fee, additional training and service calls
to its customers and recognizes revenue at the time the training or
service call is provided.

Generally, we enter into one-year license agreements with customers for
the use of our software products. We recognize revenue on these
contracts when all the criteria under SOP 97-2 are met.

From time to time, we enter into multi-year license agreements. We
believe our history of collection with these customers is sufficient to
overcome the presumption that revenue should be recognized in time with
the expected cash collections, and we have in the past therefore
recognized the entire license fees, net of an applicable discount, at
the time of the software's release and acceptance by the customer.
However, beginning with the current fiscal year (September 1, 2005
through August 31, 2006), we unlock and invoice software one year at a
time for multi-year licenses. Therefore, revenue is recognized one year
at the time. This will eliminate the extreme variability in our
reported revenues and earnings that we've experienced in the past that
was caused by booking multi-year license revenues up front.

Comprehensive Income
--------------------
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in
the Company's financial statements since the Company did not have any
of the items of comprehensive income in any period presented.

Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.

F-10

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 the Company's 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 $287,349 and $164,385 for the
years ended August 31, 2006 and 2005, respectively. We expect the
future amortization expense will vary due to increases in capitalized
computer software development costs.

Management tests capitalized computer software costs for recoverability
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. No such events or changes in
circumstances occurred during year

Property and Equipment
----------------------
Property and equipment, including equipment under capital leases, 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.

F-11

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued
payroll and other expenses, accrued bonuses to officers, and accrued
warranty and service costs, the carrying amounts approximate fair value
due to their short maturities.

Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs
for the years ended August 31, 2006 and 2005 were $13,000 and $11,000,
respectively.

Shipping and Handling
---------------------
Shipping and handling costs are recorded as cost of sales, amounted to
$93,000 and $83,000 for the years ended August 31, 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 the
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 2005, we recorded $1,311,800 in deferred tax
assets. For fiscal year 2006, we recorded a provision for deferred
taxes in the amount of $211,300, resulting in the deferred tax asset of
$1,100,500 at August 31, 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.

F-12

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Customer relationship
---------------------
The Company purchased customer relationship as a part of the
acquisition of certain assets of Bioreason Inc (see note 13). Customer
relationship was recorded at the cost of $128,042, being amortized over
66 months. Amortization expense and accumulated amortization amounted
to $27,678. We estimate the amortization expense for the next 5 years
will approximate $20,000 a year.

Earnings per Share
------------------
The Company reports earnings per share in accordance with SFAS No. 128,
"Loss per Share." Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number
of common shares available. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. The components of
basic and diluted earnings per share for the years ended August 31,
2006 and 2005 were as follows (the number of shares reflects the effect
of a 2-for-1 stock split for comparison purpose):

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

Numerator
Net income attributable to common
shareholders $ 675,875 $ 262,318
=============== ================

Denominator
Weighted-average number of common shares
outstanding during the year 7,362,226 7,221,068
Dilutive effect of stock options 781,839 739,968
--------------- ----------------

COMMON STOCK AND COMMON STOCK
EQUIVALENTS USED FOR DILUTED EARNINGS
PER SHARE 8,144,065 7,961,036
=============== ================

Stock Options and Warrants
--------------------------
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,
"Accounting for Stock Issued to Employees," 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 will be effective for the
Company for the fiscal year 2007, beginning September 1, 2006. For
fiscal year 2006, we accounted for share-based payments to employees
using APB25's intrinsic value method as permitted; therefore it does
not recognize any compensation cost for employee stock options.
Entities electing to remain with the accounting method of APB 25 must
make pro forma disclosures of net income and earnings per share, as if
the fair value method of accounting defined in SFAS No. 123 had been
applied. The Company has elected to account for its stock-based
compensation to employees under APB 25. On August 18, 2006, the Company
announced to its employees that the Company will accelerate 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 520,000 shares of common
stock was accelerated, representing approximately 25% of all
outstanding options.

F-13

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.

Concentrations and Uncertainties
--------------------------------
International sales accounted for 35% and 25% of net sales for the
years ended August 31, 2006 and 2005, respectively. For Simulations
Plus, Inc., one customer accounted for 24% of net sales for the year
ended August 31, 2006, and for Words+, Inc., one government agency
accounted for 18% of net sales during the fiscal year 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.

For Simulations Plus, four customers comprised 25%, 13%, 12% and 12% of
accounts receivable at August 31, 2006. Four customers comprised 31%,
13%, 11% and 10% of accounts receivable at August 31, 2005. For Words+,
one customer comprised 21% of accounts receivable at August 31, 2006.
One government agency comprised 25% of accounts receivable at August
31, 2005.

The Company's subsidiary, Words+, Inc., purchases components for the
main computer products from three Manufactures. 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 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,
"Accounting for Stock Issued to Employees." SFAS 123R requires all
companies to measure compensation expense for all share-based payments
(including employee stock options and options issued pursuant to
employee stock purchase plans) based upon the fair value of the
stock-based awards at the date of grant, and is effective for the
Company for fiscal year 2007, which begins on September 1, 2006. The
impact of adoption of Statement 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the
future.

F-14

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------------------
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections." This statement applies to all voluntary changes in
accounting principles and requires retrospective application to prior
periods' financial statements of changes in accounting principles,
unless this would be impracticable. This statement also makes a
distinction between "retrospective application" of an accounting
principle and the "restatement" of financial statements to reflect the
correction of an error. This statement is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. Earlier application is permitted for accounting
changes and errors made occurring in fiscal year beginning after May
31, 2005. The adoption of SFAS No. 154 did not have a material impact
on the Company's financial position or result of operations

In November 2005, the FASB issued FASB Staff Position (FSP) No. FAS
115-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS
APPLICATION TO CERTAIN INVESTMENTS." This FSP establishes the steps
required in determining when an investment is considered impaired,
whether that impairment is other than temporary, and the measurement of
an impairment loss. Under this FSP, the assessment for impairment shall
be performed at the individual security level in each reporting period.
When impairment has been determined to be other than temporary, an
impairment loss will be recognized on an impairment loss equal to the
difference between the investment's cost and its fair value. The
provisions of FSP 115-1 shall be effective for reporting periods
beginning after December 15, 2005. The adoption of FSP 115-1 did not
have a material impact on the Company's financial position or results
of operations.

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 August 31, 2006, the
uninsured portions aggregated to $1,237,000. 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.

NOTE 4 - ACCOUNTS RECEIVABLE

The Company maintains an allowance for doubtful accounts for estimated
losses that may arise if any of its customers are unable to make
required payments. Management specifically analyzes the age of customer
balances, historical bad debt experience, customer credit-worthiness,
and changes in customer payment terms when making estimates of the
uncollectability of the Company's trade accounts receivable balances.
If the Company determines that the financial conditions of any of its
customers deteriorated, whether due to customer-specific or general
economic issues, an increase

F-15

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 4 - ACCOUNTS RECEIVABLE (CONTINUED)

in the allowance may be made. Accounts receivable are written off when
all collection attempts have failed. The Company also estimates the
contractual discount obligation for third party funding such as
Medicare, Medicaid, and private insurance companies. Those estimated
discounts are reflected in an allowance for doubtful accounts.

NOTE 5 - 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.

NOTE 6 - PROPERTY AND EQUIPMENT

Property and equipment at August 31, 2006 consisted of the following:

Automobile $ 21,769
Equipment 154,876
Computer equipment 317,889
Furniture and fixtures 57,705
Leasehold improvements 53,898
----------------
606,137
Less accumulated depreciation
and amortization 509,753
----------------
TOTAL $ 96,384
================

Depreciation and amortization expense was $48,140 and $42,505 for the
years ended August 31, 2006 and 2005, respectively.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

Leases
------
In early February 2006, we moved to a new location. At this new
location, we lease approximately 13,500 square feet of space under a
five-year term with two (2), three-(3) year options to extend the
lease. The base rent starts at the rate of $18,445 per month plus
common area maintenance fees. The base rental rate will increase at 4%
annually.

The Company also leases Ricoh copier/printer equipment under
non-cancelable operating lease arrangements that expire through October
2006. Future minimum lease payments under non-cancelable operating
leases with remaining terms of one year or more at August 31, 2006 were
as follows:

F-16

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

Years Ending Operating
August 31, Leases
------------ -------------
2007 $ 282,961
2008 287,610
2009 297,410
2010 125,650
2011 -
-------------
$ 993,631
=============

Rent expense was $252,972 and $211,252 for the years ended August 31,
2006 and 2005, respectively.

Employee Agreement
------------------
On August 9, 2005, the Company entered into an employment agreement
with its President/Chief Executive Officer 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.

License Agreement
-----------------
In 1997, the Company entered into an agreement with Therapeutic Systems
Research Laboratory ("TSRL") to jointly develop a computer simulation
of the absorption of drug compounds in the gastrointestinal tract. Upon
execution of a definitive License Agreement on July 9, 1997, TSRL
received an initial payment of $75,000, and thereafter, the company is
obligated to pay a royalty of 20% of net sales of GastroPlus software.
For the years ended August 31, 2006 and 2005, the Company paid
royalties of $230,000 and $181,951, respectively.

The Company's subsidiary, Words+, Inc., entered into royalty agreements
with several vendors to apply their software & technologies into the
finished goods to be sold. For the years ended August 31, 2006 and
2005, Words+ incurred such royalties of $41,105 and $114,507,
respectively.

NOTE 8 - 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

F-17

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)

Stock Option Plan (Continued)
-----------------------------
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. The Option Plan
terminated in September 2006 by its term. As a result, 407,492 shares
available for issuance are no longer available.

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 520,000 shares of common
stock was 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
will adopt FAS No. 123(R) on September 1, 2006, which is the beginning
of the Company's 2007 fiscal year.

The following summarizes the stock option transactions (after giving
effects of the 2-for-1 split):

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

Outstanding, August 31, 2004 2,105,432 $ 1.09
Granted 144,000 $ 2.21
Exercised (139,400) $ 1.03
Expired/canceled (39,470) $ 1.28
-------------

Outstanding, August 31, 2005 2,070,562 $ 1.19

Granted 341,000 $ 2.11
Exercised (143,800) $ 0.92
Expired/canceled (227,690) $ 1.44
-------------

OUTSTANDING, AUGUST 31, 2006 2,040,072 $ 1.33
=============

EXERCISABLE, AUGUST 31, 2006 1,940,072 $ 1.31
=============

F-18

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)

Stock Option Plan (Continued)
-----------------------------
The fair value of the options granted during the year ended August 31,
2006 is estimated at $270,000. 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 year
ended August 31, 2006: dividend yield of 0%, expected volatility of
11%, risk-free interest rate of 4.46% - 4.88%, and expected life of ten
years. The weighted-average fair value of options granted during the
year ended August 31, 2006 was $0.79, and the weighted-average exercise
price was $2.11.

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 5.2 years at August 31, 2006. The exercise
prices for the options outstanding at August 31, 2006 ranged from $0.53
to $2.48, and the information relating to these options is as follows:

Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Stock Stock Contractual Price Price
Exercise Options Options Life of Options of Options of Options
Price Outstanding Exercisable Outstanding Outstanding Exercisable
---------------- ------------- -------------- --------------- ------------- -------------
$ 0.53 - 1.00 795,672 795,672 3.8 years $ 0.73 $ 0.73
$ 1.01 - 1.50 670,400 670,400 3.4 years $ 1.33 $ 1.33
$ 1.51 - 2.48 574,000 474,000 9.1 years $ 1.63 $ 1.62
------------- -------------
2,040,072 1,940,072
============= =============

The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties.

If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share would be reduced to the pro forma amounts
indicated below for the years ended August 31, 2006 and 2005:

F-19

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 8 - SHAREHOLDERS' EQUITY (CONTINUED)

Stock Option Plan (Continued)
-----------------------------

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

Net income
As reported $ 675,875 $ 262,318
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects $ (245,124) $ (201,096)
Pro forma $ 430,751 $ 61,222
Basic earnings per common share
As reported $ 0.09 $ 0.04
Pro forma $ 0.06 $ 0.01
Diluted earnings per common share
As reported $ 0.08 $ 0.03
Pro forma $ 0.05 $ 0.01

Other Stock Options
-------------------
As of August 31, 2006, the Board of Directors holds options to purchase
22,412 shares of common stock at exercise prices ranging from $0.60 to
$2.63, which options were granted prior to August 31, 2006.

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

Options outstanding 22,412 $ 1.45
Options exercisable 18,412 $ 1.28

F-20

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 9 - INCOME TAXES

The components of the income tax provision for the years ended August
31, 2006 and 2005 were as follows:

2006 2005
-------------- -------------
Current
Federal $ - $ -
State (1,600) (1,600)
-------------- -------------

(1,600) (1,600)
-------------- -------------
Deferred
Federal (151,000) (74,500)
State (60,300) (9,700)
-------------- -------------

(211,300) (84,200)
-------------- -------------

TOTAL $ (212,900) $ (85,800)
============== =============

A reconciliation of the expected income tax (benefit) computed using
the federal statutory income tax rate to the Company's effective income
tax rate is as follows for the years ended August 31, 2006 and 2005:

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

Income tax computed at federal statutory tax rate 34.0% 34.0%
State taxes, net of federal benefit 6.0 6.3
Meals & Entertainment 0.4 0.9
Extraterritorial income exclusion (9.0) (7.2)
Research and development credit (7.2) (19.9)
Change in prior year estimated taxes (1.6) 7.9
Other 1.4 2.6
--------------- ---------------
TOTAL 24.0% 24.6%
=============== ===============

F-21

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 9 - INCOME TAXES (CONTINUED)

Significant components of the Company's deferred tax assets and
liabilities for income taxes for the years ended August 31, 2006 and
2005 are as follows:

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

Deferred tax assets
Accrued payroll and other expenses $ 172,100 $ 137,200
Accrued warranty and service costs 14,900 11,900
Net operating loss carryforward 968,500 1,084,000
Tax Credits 624,400 567,800
Contributions 7,700 4,100
Property and equipment - 100
--------------- ----------------

Total deferred tax assets 1,787,600 1,805,100
Less: Valuation allowance - -
--------------- ----------------

1,787,600 1,805,100
--------------- ----------------

Deferred tax liabilities
State taxes (85,700) (92,100)
Property and equipment (12,600) -
Capitalized computer software development
costs (588,800) (401,200)
--------------- ----------------

Total deferred tax liabilities (687,100) (493,300)
---------------- -----------------

NET DEFERRED TAX ASSETS $ 1,100,500 $ 1,311,800
=============== ================

At August 31, 2006, the Company had federal net operating loss
carryforwards of approximately $2,673,000.
Federal net operating loss carry forwards expire through 2024. The
Company also has a tax credit, totaling approximately $385,000 and
$240,000 to offset future Federal and State income taxes, respectively.

NOTE 10 - RELATED PARTY TRANSACTIONS

As of August 31, 2006, included in accrued bonuses to officers was
$49,377, which represented 5% of the Company's net income before
bonuses and taxes given to the Company's President, Walter Woltosz, as
an annual bonus.

As of August 31, 2006, included in accrued bonuses to officers was
$49,376, which represented 5% of the Company's net income before
bonuses and taxes given to the Corporate Secretary, Virginia Woltosz,
as an annual bonus.

F-22

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 11 - LINES OF BUSINESS

For internal reporting purposes, management segregates the Company into
two divisions as follows for the years ended August 31, 2006 and 2005:

August 31, 2006
-------------------------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
--------------- --------------- --------------- ---------------

Net sales $ 3,186,419 $ 2,668,785 $ -- $ 5,855,204
Income (loss) from
operations $ 409,694 $ 266,181 $ -- $ 675,875
Identifiable assets $ 6,443,114 $ 1,788,766 $ (1,718,420) $ 6,513,460
Capital expenditures $ 39,691 $ 27,290 $ -- $ 66,981
Depreciation and
amortization $ 14,450 $ 32,624 $ -- $ 47,074
-------------------------------------------------------------------------

August 31, 2005
-------------------------------------------------------------------------
Simulations
Plus, Inc. Words+, Inc. Eliminations Total
--------------- --------------- --------------- ---------------

Net sales $ 2,068,789 $ 2,683,852 $ -- $ 4,752,641
Income (loss) from
operations $ 68,152 $ 228,276 $ -- $ 296,428
Identifiable assets $ 5,937,272 $ 1,576,215 $ (1,864,428) $ 5,560,859
Capital expenditures $ 10,093 $ 60,514 $ -- $ 70,607
Depreciation and
amortization $ 12,700 $ 29,805 $ -- $ 42,505
-------------------------------------------------------------------------

Most corporate expenses, such as legal and accounting expenses, public
relations expenses, and bonuses to President and Secretary are included
in Simulations Plus, Inc.

F-23

SIMULATIONS PLUS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2006
--------------------------------------------------------------------------------

NOTE 12 - GEOGRAPHIC REPORTING

The Company allocates revenues to geographic areas based on the
locations of its customers. Geographical revenues were as follows for
the fiscal years ended August 31, 2006 and 2005:

August 31, 2006
--------------------------------------------------------------------------------
North South
(in `000) America Europe Asia Oceania America Total
------------- ------------- ----------- ------------- ------------- ------------

Simulations Plus, Inc. 1,472 732 982 - - 3,186

Words+, Inc. 2,320 279 43 18 9 2,669
------------- ------------- ----------- ------------- ------------- ------------

Total 3,792 1,011 1,025 18 9 5,855
============= ============= =========== ============= ============= ============

August 31, 2005
--------------------------------------------------------------------------------
North South
(in `000) America Europe Asia Oceania America Total
------------- ------------- ----------- ------------- ------------- ------------

Simulations Plus, Inc. 1,137 456 475 - - 2,068

Words+, Inc. 2,415 196 54 19 - 2,684
------------- ------------- ----------- ------------- ------------- ------------

Total 3,552 652 529 19 - 4,752
============= ============= =========== ============= ============= ============

NOTE 13 - PURCHASE OF BIOREASON'S ASSETS

On November 4, 2005, we purchased certain secured assets of Bioreason,
Inc., a technology company, for $826,192. Since the appraised value was
greater than the actual purchase price, the remaining amount, after
allocation to the contracts receivable, was allocated proportionally to
the other assets purchased.

The purchase price was allocated as it follows.

Assets Allocated amounts
------ -----------------
Long-Term contracts receivable $ 447,496
Property and equipment 5,001
Software 245,653
Customer relationships 128,042
-----------------

Total $ 826,192
=================

NOTE 14 - EMPLOYEE BENEFIT PLAN

We maintain a 401(K) Plan for all eligible employees. We make matching
contributions equal to the 100% of the employee's elective deferral,
not to exceed 4% of the total employee compensation. We can also elect
to make a profit-sharing contribution. Contributions by the Company to
this Plan amounted to $49,000 and $31,000 for the years ended August
31, 2006 and 2005, respectively.

NOTE 15 - SUBSEQUENT EVENTS

Since September 1, 2006, an additional 6,000 stock options to purchase
shares have been exercised by employees.

On October 30, 2006, the Company entered into equipment lease
agreement. In this agreement, the Company leases Ricoh Copier/Printer
for 36 months with the option of earlier termination with a 60-day
written notice.

F-24