The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Result of Operations appearing in our registration statement on Form S-1 (File No. 333-176019), filed with the SEC, which we refer to as the Registration Statement. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report under "Part II, Other Information - Item 1A, Risk Factors." Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipates," "believes," "could," "seeks," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Except as otherwise indicated, all share and per share information referenced in this report has been adjusted to reflect the 1-for-6.5 reverse split of our common stock effected on June 8, 2012.

As used herein, except as otherwise indicated by context, references to "we," "us," "our," or the "Company" refer to Exa Corporation.

Overview

We develop, sell and support simulation software and services that vehicle manufacturers use to enhance the performance of their products, reduce product development costs and improve the efficiency of their design and engineering processes. Our solutions enable engineers and designers to augment or replace conventional methods of evaluating design alternatives that rely on expensive and inefficient physical prototypes and test facilities, such as wind tunnels, with accurate digital simulations that are more useful and timely. Our simulation solutions enable our customers to gain crucial insights about design performance early in the design cycle, reducing the likelihood of expensive redesigns and late-stage engineering changes. As a result, our customers realize significant cost savings and fundamental improvements in their vehicle development process.

Simulation-driven design has enabled product and process improvements in many industries, and as a result, the process in which products are conceptualized and developed is undergoing a radical transformation. Digital simulation not only provides feedback earlier and in a more useful form than traditional approaches, but in many areas simulation has reached a level of accuracy and robustness that is sufficient to enable a manufacturer to rely solely on its results for design decisions, without prototype testing.

Global vehicle manufacturers face increasing pressure, from government mandates as well as from consumers, to improve the efficiency of their products and to reduce particulate and greenhouse gas emissions. This requires different powertrain choices (diesel, electric, hybrid), changes in the shape of the vehicle, and reductions in vehicle weight. Consumers also demand improved quality and durability, and equally important, innovative and emotionally expressive designs. In addition, manufacturers are offering a broader array of vehicles for different niche customer segments and geographies on a faster design refresh schedule than in the past. We believe these industry forces favor the adoption of simulation-driven design.

One of the most critical challenges for our customers in their vehicle development processes is measuring or predicting how a vehicle feature or a mechanical system will interact with air, water or other fluids. For example, developing vehicles with reduced aerodynamic drag is critical to achieving the improvements in fuel efficiency that are increasingly desired by customers and mandated by government regulations. Our core product, PowerFLOW, is an innovative software solution for simulating complex fluid flow problems, including aerodynamics, thermal management, and aeroacoustics, or wind noise. PowerFLOW relies upon a proprietary technology that we refer to as Digital Physics, based on algorithms known as the lattice Boltzmann method. Our proprietary technology enables PowerFLOW to predict complex fluid flows with a level of reliability comparable to or better than physical testing. The combination of PowerFLOW's accuracy and timeliness provides results that are superior to those of alternative computational fluid dynamics, or CFD, methods.

We currently focus primarily on the ground transportation market, including manufacturers in the passenger vehicle, highway truck, off-highway vehicle and train markets, as well as their suppliers. Over 90 manufacturers currently utilize our products and services, including 13 of the global top 15 passenger vehicle manufacturer groups such as BMW, Ford, Hyundai, Jaguar Land Rover, Nissan, Porsche, Renault, Toyota and Volkswagen; truck and off-highway vehicle manufacturers such as AGCO, Hyundai, Kenworth, Kobelco, MAN, Peterbilt, Scania and Volvo Truck; and suppliers to these manufacturers, such as Cummins, Denso and Magna Steyr. We are also beginning to explore other markets in which we believe the capabilities of PowerFLOW have broad application, such as the aerospace, oil and gas production, chemical processing, architecture, engineering and construction, power generation, biomedical and electronics industries.

We derive our revenue primarily from the sale of our simulation software, using an annual capacity-based licensing model. Customers usually purchase PowerFLOW simulation capacity under one-year licenses. Simulation capacity may be purchased as software-only, to be run on the customer's own computer hardware, or provided in the form of software-as-a-service, via our hosted PowerFLOW OnDemand offering. To introduce new customers to our simulation solutions, we typically perform fixed-price projects that include simulation services accessed via our OnDemand facilities, along with engineering and consulting services. Customers typically license our products for one application, such as aerodynamics, and over time expand to other applications such as thermal management or aeroacoustics.

We sell our products and project services primarily through our direct sales force, including sales executives and applications engineering teams deployed near our customers in the United States, United Kingdom, France, Germany, Italy, Japan, Korea and China and through a distributor in India and through a sales agent in Brazil. In our customer engagement model, our applications management teams engage with our customers in long-term relationships focused on identifying problems that we can help them solve, demonstrating the value of our solutions and ensuring that the customer achieves maximum benefit from them. In this process we interact continuously with our customers to improve our software and services and add new solutions, and at the same time deepen our knowledge of their industry.

We were founded in 1991 and had 221 employees worldwide at July 31, 2012. Our corporate headquarters, including our principal administrative, marketing, technical support, research and product development facilities, are located in Burlington, Massachusetts.

Critical Accounting Policies

The preparation of the unaudited financial statements requires that we make estimates that affect the reported accounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

During the three and six months ended July 31, 2012, there were no significant changes in our critical accounting policies or estimates.

For a description of those of our accounting policies that, in our opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgments or estimates were made, materially affect our reported results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Registration Statement.

Restatement

The Company has restated its financial statements for the three and six months ended July 31, 2011 as described below.

Fiscal year 2012 interim financial statements (unaudited)

On January 28, 2011 the Company issued warrants for preferred stock which were inappropriately classified as equity awards rather than liability awards and were not marked to market at April 30, 2011 and July 31, 2011. As a result the Company recorded $65 and $452 of additional expense during the three months ended April 30, 2011 and July 31, 2011, respectively, which had not previously been recorded. In addition, the Company corrected a number of other errors relating to the fiscal year 2012 interim financial statements as follows:
recorded $124 and $144 of net revenue adjustments due to errors in recognizing revenue over the appropriate term during each of the three months ended April 30, 2011 and July 31, 2011, respectively, reclassified $38 of deferred financing costs from operating costs into interest expense during the three months ended July 31, 2011, recorded $38 of state tax expense due to previously unidentified sales tax expense in certain states where the Company did not collect and remit sales tax during each of the three months ended April 30, 2011 and July 31, 2011, and expensed $12 of previously capitalized costs, which did not qualify for capitalization in connection with the Company's initial public offering of its common stock in the three months ended July 31, 2011.

The effects of the restatement on the Company's unaudited consolidated statement of operations for the three months ended July 31, 2011 are as follows:

                                                Three Months Ended July 31, 2011
                                              Previously
(in thousands)                                 Reported                  Adjustments          Restated
Total revenues                             $          10,961            $        (144 )       $  10,817
General and administrative expense                     1,870                        9             1,879
Total operating expenses                               9,508                        9             9,517
Income from operations                                 1,453                     (153 )           1,300
Foreign exchange gain                                     92                       (1 )              91
Interest expense, net                                   (217 )                    (43 )            (260 )
Other income (expense), net                              148                     (452 )            (304 )
Provision for income taxes                                85                      260               345
Net income                                 $           1,391            $        (909 )       $     482

The effects of the restatement on the Company's unaudited consolidated statement of operations for the six months ended July 31, 2011 are as follows:

                                                 Six Months Ended July 31, 2011
                                               Previously
(in thousands)                                  Reported              Adjustments          Restated
Total revenues                               $       21,305          $         (268 )      $  21,037
General and administrative expense                    3,501                      16            3,517
Total operating expenses                             18,425                      16           18,441
Income from operations                                2,879                    (283 )          2,596
Foreign exchange loss                                  (372 )                    -              (372 )
Interest expense, net                                  (459 )                   (72 )           (531 )
Other income (expense), net                             279                    (517 )           (238 )
Net income                                   $        2,192          $       (1,472 )      $     720

Results of Operations

The following table sets forth, for the periods indicated, our results of
operations:



                                                  Three Months Ended July 31,
   (in thousands)                                  2012                 2011
   License revenue                            $       10,188       $        9,552
   Project revenue                                     1,618                1,265

   Total revenue                                      11,806               10,817


   Operating expenses: (1)
   Cost of revenues                                    3,112                2,765
   Sales and marketing                                 1,709                1,310
   Research and development                            4,157                3,563
   General and administrative                          1,910                1,879

   Total operating expenses                           10,888                9,517


   Income from operations                                918                1,300
   Foreign exchange gain                                 326                   91
   Interest and other income (expense), net               36                 (564 )

   Income before income taxes                          1,280                  827
   Provision for income taxes                            382                  345


   Net income                                 $          898       $          482

(1) Amounts include stock-based compensation expense, as follows:

                                            Three Months Ended July 31,
           (in thousands)                   2012                  2011
           Cost of revenues             $          27         $          14
           Sales and marketing                     47                    23
           Research and development                76                    52
           General and administrative              84                    20

           Total                        $         234         $         109

The following table sets forth, for the periods indicated, our results of operations expressed as a percentage of revenues:

                                                  Three Months Ended July 31,
                                                  2012                  2011
   License revenue                                     86.3 %                88.3 %
   Project revenue                                     13.7                  11.7

   Total revenue                                        100                   100
   Operating expenses:
   Cost of revenues                                    26.4                  25.6
   Sales and marketing                                 14.5                  12.1
   Research and development                            35.2                  32.9
   General and administrative                          16.2                  17.4

   Total operating expenses                            92.3                  88.0
   Income from operations                               7.7                  12.0
   Foreign exchange gain                                2.8                   0.9
   Interest and other income (expense), net             0.3                  (5.2 )

   Income before income taxes                          10.8                   7.7
   Provision for income taxes                           3.2                   3.2

   Net income                                           7.6 %                 4.5 %

Three months ended July 31, 2012 compared to three months ended July 31, 2011

Revenues. License revenue increased 6.7%, to $10.2 million for the three months ended July 31, 2012 from $9.6 million for the three months ended July 31, 2011. Of this increase, $0.6 million was due to an increase in consumption of licensed simulation capacity by our existing customers, and $0.2 million was attributable to new customers. License revenue growth was impacted by the loss of one significant motorsports customer who contributed to revenue in the three months ended July 31, 2011, but has since closed their motorsports division. Project revenue increased 27.9%, to $1.6 million for the three months ended July 31, 2012 from $1.3 million for the three months ended July 31, 2011, due to increased project activity. Foreign exchange fluctuations, particularly the weakness of the Euro, negatively impacted total revenue by $0.5 million for the three months ended July 31, 2012 as compared to the three months ended July 31, 2011.

Cost of Revenues. Cost of revenues increased 12.6%, to $3.1 million for the three months ended July 31, 2012 from $2.8 million for the three months ended July 31, 2011, and also increased as a percentage of total revenue from 25.6% to 26.4%, respectively. Increases of $0.5 million in employee related costs due to increases in headcount in our application engineering organizations, $0.1 million in other employee related costs, which include travel expenses, 401(k) fees, and stock compensation expenses, were partially offset by decreases of $0.2 million in royalty costs, and $0.1 million in rent expense. The decrease in royalty costs was the result of our acquisition from science + computing AG in November 2011 of certain intellectual property assets related to our PowerVIZ product on which we had previously paid royalties.

Sales and Marketing Expenses. Sales and marketing expenses increased 30.5%, to $1.7 million, or 14.5% of total revenue, for the three months ended July 31, 2012 from $1.3 million, or 12.1% of total revenue, for the three months ended July 31, 2011. The increase in sales and marketing expenses was primarily due to increases of $0.3 million in employee-related costs, and $0.1 million in other employee related expenses, which include travel expenses, meal and entertainment expense, recruiting fees, and stock compensation expenses.

Research and Development Expenses. Research and development expenses increased 16.7%, to $4.2 million, or 35.2% of total revenue, for the three months ended July 31, 2012 from $3.6 million, or 32.9% of total revenue, for the three months ended July 31, 2011. The increase in research and development expenses was primarily due to increases of $0.6 million in salaries and wages due to additional staff, and $0.1 million in 401(k) administration expenses. Increases were partially offset by a decrease of $0.1 million between marketing expenses and depreciation expense.

General and Administrative Expenses. General and administrative expenses remained unchanged at $1.9 million for the three months ending July 31, 2012 and July 31, 2011, but decreased as a percentage of revenue to 16.2% from $17.4%, respectively. Increases of $0.2 million in accounting and audit fees related to tax engagements, and $0.1 million in depreciation expense, were completely offset by a decrease of $0.3 million in other business expenses, which primarily relates to the release of a sales tax reserve which, after a state-by-state customer review conducted in the second quarter, was determined to no longer be required.

Foreign Exchange. The Company recorded $0.3 million in foreign currency gains for the three months ended July 31, 2012 as compared to $0.1 million in foreign currency gains for the three months ended July 31, 2011. The change relates to the monthly translation of our foreign operations from local currency to United States Dollars, and the settlement of our intercompany balances.

Interest, Net. Interest expense, net for the three months ended July 31, 2012 was $0.4 million, compared to $0.3 million for the three months ended July 31, 2011. Interest charges on borrowings under our Loan and Security Agreement and our line of credit plus increased debt financing costs account for the increase.

Other Income (Expense), Net. Other income (expense) for the three months ended July 31, 2012 was $0.4 million, compared to ($0.3) million for the three months ended July 31, 2011. The increase was related to a $0.6 million net change in the carrying value of the convertible preferred stock warrants and a $0.1 million change in the carrying value of the equity participation right.

Income Tax Expense. Income tax expense for the three months ended July 31, 2012 was $0.4 million, compared to $0.3 million for the three months ended July 31, 2011. Our effective income tax rate, including discrete items, was 43% and 72% for the three months ended July 31, 2012 and 2011, respectively. Our effective income tax rate is based upon estimated income for the year, the estimated composition of the income in different jurisdictions and discrete adjustments, if any, in the applicable quarterly periods and the resolution or identification of tax position uncertainties. The discrete items include the tax effect primarily from mark to market adjustments on our warrants and equity participation right offset by discrete taxable foreign exchange gains. For the three months ended July 31, 2012, the effective income tax rate deviated from the federal statutory tax rate mainly due to the effects of permanent tax adjustments, discrete items, state research and development credits, and state taxes. Additionally, the effective rate is impacted by the different tax rates for income in foreign jurisdictions.

Results of Operations

The following table sets forth, for the periods indicated, our results of
operations:



                                             Six Months Ended July 31,
           (in thousands)                     2012                2011
           License revenue                $     20,173        $     18,729
           Project revenue                       2,899               2,308

           Total revenue                        23,072              21,037


           Operating expenses: (1)
           Cost of revenues                      6,335               5,576
           Sales and marketing                   3,309               2,584
           Research and development              8,297               6,764
           General and administrative            3,940               3,517

           Total operating expenses             21,881              18,441


           Income from operations                1,191               2,596
           Foreign exchange gain (loss)            326                (372 )
           Other expense, net                     (310 )              (769 )

           Income before income taxes            1,207               1,455
           Income tax expense                      298                 735


           Net income                     $        909        $        720

(1) Amounts include stock-based compensation expense, as follows:

                                             Six Months Ended July 31,
            (in thousands)                   2012                 2011
            Cost of revenues             $         54         $         23
            Sales and marketing                    94                   25
            Research and development              157                   65
            General and administrative            170                   29

                                         $        475         $        142

The following table sets forth, for the periods indicated, our results of operations expressed as a percentage of revenues:

                                             Six Months Ended July 31,
                                             2012                2011
           License revenue                       87.4 %              89.0 %
           Project revenue                       12.6                11.0

           Total revenue                          100                 100
           Operating expenses:
           Cost of revenues                      27.5                26.5
           Sales and marketing                   14.3                12.3
           Research and development              36.0                32.2
           General and administrative            17.0                16.7

           Total operating expenses              94.8                87.7
           Income from operations                 5.2                12.3
           Foreign exchange gain (loss)           1.4                (1.8 )
           Other expense, net                    (1.4 )              (3.7 )

           Income before income taxes             5.2                 6.8
           Income tax expense                     1.3                 3.5

           Net income                             3.9 %               3.3 %

Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011

Revenues. Revenues for the six months ended July 31, 2012 were $23.1 million, an increase of $2.1 million, or 9.7%, over revenues of $21.0 million for the six months ended July 31, 2011. The increase was due to $0.3 million in sales of simulation capacity to new customers and a $1.8 million increase in consumption of simulation capacity by existing customers. License revenue growth was impacted by the loss of one significant motorsports customer who contributed to revenue in the six months ended July 31, 2011, but has since closed their motorsports division. Project revenue increased 25.6% over the six months ended July 31, 2011 due to increased project activity. Foreign exchange fluctuations, particularly the weakness of the Euro, negatively impacted total revenue for the six months ended July 31, 2012 by $0.7 million compared to the six months ended July 31, 2011.

. . .