UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-20900

COMPUWARE CORPORATION

(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)		38-2007430 (IRS Employer Identification No.)

One Campus Martius, Detroit, MI 48226-5099
(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (313) 227-7300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

Large accelerated filer þ		Accelerated filero		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date:

As of July 31, 2009, there were outstanding 237,536,867 shares of Common Stock, par value $.01, of the registrant.

 

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2009 and March 31, 2009			3
Condensed Consolidated Statements of Operations for the three months ended June 30, 2009 and 2008			4
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2009 and 2008			5
Notes to Condensed Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
PART II. OTHER INFORMATION
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 6. Exhibits			40
SIGNATURES			41
EX-15
EX-31.1
EX-31.2
EX-32

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)

		June 30,				March 31,
		2009				2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	390,680			$	278,112
Accounts receivable, net			379,771				472,011
Deferred tax asset, net			41,231				37,359
Income taxes refundable			3,793				2,578
Prepaid expenses and other current assets			27,203				41,350
Assets held for sale							27,354
Total current assets			842,678				858,764
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION			349,258				353,182
CAPITALIZED SOFTWARE, LESS ACCUMULATED AMORTIZATION			36,114				35,763
OTHER:
Accounts receivable			217,207				224,681
Deferred tax asset, net			32,493				30,851
Goodwill			341,841				339,134
Other			32,960				32,475
Total other assets			624,501				627,141
TOTAL ASSETS		$	1,852,551			$	1,874,850
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	24,101			$	13,796
Accrued expenses			74,193				87,205
Income taxes payable			39,927				24,646
Deferred revenue			398,624				409,410
Liabilities held for sale							26,470
Total current liabilities			536,845				561,527
DEFERRED REVENUE			351,006				378,094
ACCRUED EXPENSES			28,214				30,111
DEFERRED TAX LIABILITY, NET			28,361				24,470
Total liabilities			944,426				994,202
SHAREHOLDERS’ EQUITY:
Common stock			2,378				2,418
Additional paid-in capital			626,421				628,955
Retained earnings			279,951				249,897
Accumulated other comprehensive loss			(625	)			(622	)
Total shareholders’ equity			908,125				880,648
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,852,551			$	1,874,850

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
(Unaudited)

		Three Months Ended
		June 30,
		2009				2008
REVENUES:
Software license fees		$	40,546			$	61,442
Maintenance fees			111,127				126,527
Professional services fees			62,715				110,619
Total revenues			214,388				298,588
OPERATING EXPENSES:
Cost of software license fees			3,949				6,090
Cost of maintenance fees			8,956				11,994
Cost of professional services			58,901				103,822
Technology development and support			21,482				22,570
Sales and marketing			53,148				61,327
Administrative and general			40,130				41,144
Restructuring costs			2,490				682
Gain on divestiture of product lines			(52,351	)
Total operating expenses			136,705				247,629
INCOME FROM OPERATIONS			77,683				50,959
OTHER INCOME, NET			1,420				3,221
INCOME BEFORE INCOME TAXES			79,103				54,180
INCOME TAX PROVISION			28,056				19,448
NET INCOME		$	51,047			$	34,732
Basic earnings per share		$	0.21			$	0.13
Diluted earnings per share		$	0.21			$	0.13

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)

		Three Months Ended
		June 30,
		2009				2008
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	51,047			$	34,732
Adjustments to reconcile net income to net cash provided by operations:
Gain on divestiture of product lines			(52,351	)
Depreciation and amortization			10,378				13,463
Property and equipment impairment							662
Acquisition tax benefits			880				1,311
Stock award compensation			5,637				2,326
Deferred income taxes			1,017				1,751
Other			(10	)			295
Net change in assets and liabilities, net of effects from the divestiture and currency fluctuations:
Accounts receivable			119,957				34,044
Prepaid expenses and other current assets			14,521				12,212
Other assets			(2,339	)			1,851
Accounts payable and accrued expenses			(23,061	)			(42,527	)
Deferred revenue			(64,745	)			(22,649	)
Income taxes			13,972				10,365
Net cash provided by operating activities			74,903				47,836
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchase of:
Property and equipment			(1,674	)			(2,384	)
Capitalized software			(4,034	)			(2,788	)
Net proceeds from divestiture of product lines			64,992
Investment proceeds							13,856
Net cash provided by investing activities			59,284				8,684
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from exercise of stock options including excess tax benefits			1,628				1,397
Contribution to stock purchase plans			579				934
Repurchase of common stock			(32,305	)			(58,891	)
Net cash used in financing activities			(30,098	)			(56,560	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			8,479				554
NET INCREASE IN CASH AND CASH EQUIVALENTS			112,568				514
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			278,112				215,943
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	390,680			$	216,457

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Compuware Corporation and its wholly owned subsidiaries (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing at June 30, 2009, final amounts may differ from these estimates.

In the opinion of management of the Company, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and notes thereto for the year ended March 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet at March 31, 2009 has been derived from the audited financial statements at that date but does not include all information and footnotes required by U.S. GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years.

For purposes of this interim financial information, August 6, 2009 is the date through which subsequent events have been evaluated and represents the date the financial statements were issued.

Revenue Recognition — The Company earns revenue from licensing software products, providing maintenance and support for those products and rendering professional services. The Company’s revenue recognition policies are in accordance with U.S. GAAP, including Statements of Position 97-2 “Software Revenue Recognition” and 98-9 “Modification of SOP 97-2, ‘Software Revenue Recognition,’ With Respect to Certain Transactions”, Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 104 and Emerging Issues Task Force Issue 00-21 “Revenue Arrangements with Multiple Deliverables”. Accordingly, in order to be eligible for revenue recognition, the following criteria must be met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured.

Software license fees — The Company’s software license agreements provide its customers with a right to use its software perpetually (perpetual licenses) or during a defined term (term licenses).

Perpetual license fee revenue is recognized using the residual method, under which the fair value, based on vendor specific objective evidence (“VSOE”), of all undelivered elements of the agreement (i.e., maintenance and professional services) is deferred. VSOE is based on rates charged for maintenance and professional services when sold separately. The remaining portion of the fee is recognized as license fee revenue upon delivery of the products, provided that no significant obligations remain and collection of the related receivable is reasonably assured.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

For revenue arrangements where there is a lack of VSOE of fair value for any undelivered elements, license fee revenue is deferred and recognized upon delivery of those elements or when VSOE of fair value can be established. When maintenance or services are the only undelivered elements, the license fee revenue is recognized on a ratable basis over the longer of the maintenance term or over the period in which the services are expected to be performed. Such transactions include term licenses as the Company does not sell maintenance for term licenses separately and therefore cannot establish VSOE for the undelivered elements in these arrangements. These arrangements do not qualify for separate recognition of the software license fees, maintenance fees and as applicable, professional services fees under SOP 97-2 as amended. However, to comply with SEC Regulation S-X, Rule 5-03(b), which requires product, services and other categories of revenue to be displayed separately on the income statement, the Company separates the license fee, maintenance fee and professional services fee revenue based on its determination of fair value. The Company applies its VSOE of fair value for maintenance related to perpetual license transactions and stand alone services arrangements as a reasonable and consistent approximation of fair value to separate license fee, maintenance fee and professional services fee revenue for income statement classification purposes.

The Company offers flexibility to customers purchasing licenses for its products and related maintenance. Terms of these transactions range from standard perpetual license sales that include one year of maintenance to large multi-year (generally two to five years), multi-product contracts. The Company allows deferred payment terms on contracts, with installments collectible over the term of the contract. Based on the Company’s successful collection history for deferred payments, license fees (net of any finance fees) are generally recognized as revenue as discussed above. In certain transactions where it cannot be concluded that the fee is fixed or determinable due to the nature of the deferred payment terms, the Company recognizes revenue as payments become due. Financing fees are recognized as interest income over the term of the receivable.

Maintenance fees — The Company’s maintenance agreements provide for technical support and advice, including problem resolution services and assistance in product installation, error corrections and any product enhancements released during the maintenance period. The first year of maintenance is included with all license agreements. Maintenance revenue is recognized ratably over the term of the maintenance arrangements, which generally range from one to five years.

Professional services fees — Professional services fees are generally based on hourly or daily rates. Revenues from professional services are recognized in the period the services are performed provided that collection of the related receivable is reasonably assured. For development services rendered under fixed-price contracts, revenues are recognized using the percentage of completion method and if determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent. Certain professional services contracts include a project and on-going operations for the project. Revenue associated with these contracts is recognized over the expected service period as the customer derives value from the services, consistent with the proportional performance method.

Deferred revenue — Deferred revenue consists primarily of billed and unbilled maintenance fees related to the remaining term of maintenance agreements in effect at those dates. Deferred license fees and services fees are also included in deferred revenue for those arrangements

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

that are being recognized on a ratable basis. Commission costs associated with deferred revenue are also deferred and recorded as current or non-current other assets, as applicable, in the Condensed Consolidated Balance Sheet.

Capitalized Software — Capitalized software includes the costs of purchased and internally developed software products and is stated at the lower of unamortized cost or net realizable value.

For development costs related to the Company’s mainframe and distributed products, the Company follows the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”. As such, capitalization of internally developed software products begins when technological feasibility of the product is established. Technology development and support includes primarily the costs of programming personnel associated with product development and support net of amounts capitalized.

The Company also capitalizes development costs associated with its software-as-a-service platform (application services).

The amortization for both internally developed and purchased software products is computed on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio of current gross revenues compared with the total of current and anticipated future revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product, including the period being reported on. Amortization begins when the product is generally available to customers. The amortization period for capitalized software is generally five years.

Capitalized software is reviewed for impairment each balance sheet date or when events and circumstances indicate such asset may be impaired. Asset impairment charges are recorded when estimated future undiscounted cash flows are not sufficient to recover the carrying value of the capitalized software. The impairment charge is the amount by which the present value of future cash flows is less than the carrying value of these assets.

Goodwill and Other Intangibles — Goodwill for each business segment and those intangible assets with indefinite lives are tested for impairment annually and/or when events or circumstances indicate their fair value may have been reduced below carrying value. The Company evaluated its goodwill and indefinite lived intangibles as of March 31, 2009 and determined there was no impairment.

Income Taxes — The Company accounts for income taxes under the asset and liability method, 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. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. These deferred tax assets are subject to periodic assessments as to recoverability and if it is determined that it is more likely than not that the benefits will not be realized, valuation allowances are recorded which would increase the provision for income taxes. In making such determination, the Company considers all available positive and negative

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

Interest and penalties related to uncertain tax positions are included in the income tax provision.

Derivatives and Fair Value Measurement

The Company is exposed to foreign exchange rate risks associated with foreign currency transactions. The Company enters into derivative contracts to sell or buy currencies with the intent of mitigating foreign exchange rate risks related to current balances due to or from the Company’s foreign subsidiaries. The Company does not use foreign exchange contracts to hedge anticipated transactions.

During the first three months of fiscal 2010 and 2009, the Company did not designate its foreign exchange derivatives as hedges under SFAS No. 133. Accordingly, all foreign exchange derivatives are recognized on the Condensed Consolidated Balance Sheets at fair value.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2009 and March 31, 2009 consistent with the fair value hierarchy provisions of SFAS No. 157 (in thousands):

Estimated

Quoted Prices in

Fair Value

Active Markets for

Significant Other

as of

Identical Assets

Observable Inputs

June 30, 2009

(Level 1)

(Level 2)

Assets:

Money market funds (1)

$

302,665

$

302,665

Liabilities:

Foreign exchange derivatives (2)

$

38

$

38

Estimated

Quoted Prices in

Fair Value

Active Markets for

Significant Other

as of

Identical Assets

Observable Inputs

March 31, 2009

(Level 1)

(Level 2)

Assets:

Money market funds (1)

$

201,952

$

201,952

Liabilities:

Foreign exchange derivatives (2)

$

30

$

30

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Hedging transaction gain (loss) recognized from foreign exchange derivative contracts is recorded to “Administrative and general” in the Company’s Consolidated Statement of Operations and totaled $(559,000) and $587,000, respectively, for the three months ended June 30, 2009 and 2008.

Recently Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168 “FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this statement will not have an impact on the Company’s Consolidated Financial Statements but will result in a revision to our references to GAAP in our future filings.

In May 2009, the FASB issued SFAS No. 165 “Subsequent Events” which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This statement is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Note 2 — Divestiture of Product Lines

In May 2009, the Company sold its Quality and DevPartner distributed product lines to Micro Focus International PLC (“Micro Focus”) for $80 million, less certain adjustments relating to cash collected or invoiced for future maintenance and professional services obligations assumed by Micro Focus as discussed below.

The sale included the following assets: (1) all rights to the proprietary software products and other technologies associated with the Quality and DevPartner distributed product lines (other than File-AID/CS), including trade names, trade secrets, copyrights, patents, related client relationships and contracts, software and documentation; (2) the right to offer employment to approximately 290 personnel related to the sales, sales support, development, maintenance and delivery of the Quality and DevPartner product lines and (3) personal property associated with the job requirements of the Company’s personnel that are hired by Micro Focus and other assets primarily used in connection with the products being sold.

Effective upon the closing date of the sale, Micro Focus assumed the obligation to perform future maintenance and professional services related to the Quality and DevPartner product lines.

The Company recorded a gain on divestiture of $52.4 million to operating expenses during the first quarter of fiscal 2010 (in thousands):

Sales price		$	80,000
Credit issued to Micro Focus (1)			(15,008	)
Net proceeds from divestiture of product lines			64,992
Assets and liabilities:
Capitalized software			(17,589	)
Goodwill (2)			(9,733	)
Accounts receivable (1)			(9,098	)
Deferred revenue (1)			25,458
Other			(1,679	)
Gain on divestiture of product lines		$	52,351

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

The Quality and DevPartner product lines represent a portion of the products segment. The Company’s products segment does not account for operating expenses on a product-by-product basis, as such, operating expenses cannot be directly associated with specific product lines. Therefore, the Quality and DevPartner product lines were not reported as a discontinued operation in the Consolidated Financial Statements.

Note 3 — Computation of Earnings per Common Share

Earnings per common share data were computed as follows (in thousands, except for per share data):

		Three Months Ended
		June 30,
		2009				2008
BASIC EARNINGS PER SHARE:
Numerator: Net income		$	51,047			$	34,732
Denominator:
Weighted-average common shares outstanding			240,784				259,694
Basic earnings per share		$	0.21			$	0.13
DILUTED EARNINGS PER SHARE:
Numerator: Net income		$	51,047			$	34,732
Denominator:
Weighted-average common shares outstanding			240,784				259,694
Dilutive effect of stock options			1,764				1,399
Total shares			242,548				261,093
Diluted earnings per share		$	0.21			$	0.13

During the three months ended June 30, 2009 and 2008, stock options to purchase a total of approximately 20,403,000 and 19,968,000 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

Note 4 — Comprehensive Income

Other comprehensive income includes foreign currency translation adjustments that have been excluded from net income and reflected in equity. Total comprehensive income is summarized as follows (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Net income		$	51,047			$	34,732
Foreign currency translation adjustment, net of tax			(3	)			924
Total comprehensive income		$	51,044			$	35,656

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Note 5 — Stock Benefit Plans and Stock-Based Compensation

The Company has the following stock benefit plans: (1) the 2007 Long Term Incentive Plan (“LTIP”) allows the Company’s Compensation Committee the ability to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or stock awards and annual cash incentive awards to employees and directors of the Company; (2) the Employee Stock Purchase Plan allows participating U.S. and Canadian employees the right to have up to 10% of their compensation withheld to purchase Company common stock at a 5% discount; and (3) the Employee Stock Ownership Plan (“ESOP”) and Trust allows the Company to make contributions to the ESOP for the benefit of substantially all U.S. employees.

Stock Options

A summary of option activity under the Company’s stock-based compensation plans as of June 30, 2009, and changes during the three months then ended is presented below (shares and intrinsic value in thousands):

		Three Months Ended
		June 30, 2009
										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Options				Price				Term in Years				Value
Options outstanding as of March 31, 2009			34,245			$	9.59
Granted			250				7.22
Exercised			(243	)			6.61							$	192
Forfeited			(297	)			8.92
Cancelled/expired			(4,480	)			16.83
Options outstanding as of June 30, 2009			29,475			$	8.51				4.75			$	1,794
Options vested and expected to vest, net of estimated forfeitures, as of June 30, 2009			28,099			$	8.52				4.56			$	1,777
Options exercisable as of June 30, 2009			19,901			$	8.77				2.97			$	1,638

SFAS No. 123 (revised 2004), “Share-Based Payment” requires the use of a valuation model to calculate the fair value of stock option awards. The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. The expected volatility assumption is based on historical volatility of the Company’s common stock over the most recent period commensurate with the expected life of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the stock option awarded. The expected life of the stock option is based on either historical exercise data if available or the simplified method as described in SAB No. 107 and SAB No. 110. Dividend yields were not a factor in determining fair value of stock options granted as the Company has never issued cash dividends and does not anticipate issuing cash dividends in the future.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

The weighted average fair value of stock options granted during the periods and the assumptions used to estimate those values using a Black-Scholes option pricing model were as follows:

		Three Months Ended
		June 30,
		2009				2008
Expected volatility			45.98	%			54.21	%
Risk-free interest rate			2.27	%			3.23	%
Expected lives at date of grant (in years)			6.1				6.3
Weighted-average fair value of the options granted		$	3.37			$	4.16

The fair value of equity awards vested during the three months ending June 30, 2009 was $4.21 per share.

Restricted Stock Units

The Company’s nonvested restricted stock units as of June 30, 2009, and the activity during the year then ended is summarized as follows (shares in thousands):

		Three Months Ended
		June 30, 2009
						Weighted
						Average
						Grant-Date
		Shares				Fair Value
Nonvested restricted stock units as of March 31, 2009			950			$	6.58
Granted			800				7.33
Vested
Forfeited
Nonvested restricted stock units as of June 30, 2009			1,750			$	6.92

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Stock Award Compensation

Stock award compensation expense was allocated as follows (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Stock-based compensation classified as:
Cost of maintenance fees		$	105			$	65
Cost of professional services			278				386
Technology development and support			251				123
Sales and marketing			1,946				718
Administrative and general			3,057				1,034
Total stock-based compensation expense before income taxes			5,637				2,326
Income tax benefit			(2,012	)			(849	)
Total stock-based compensation expense after income taxes		$	3,625			$	1,477

As of June 30, 2009, $30.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested equity awards is expected to be recognized over a weighted-average period of approximately 2.75 years.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Note 6 — Intangible Assets and Goodwill

The components of the Company’s intangible assets were as follows (in thousands):

		June 30, 2009
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Unamortized intangible assets:
Trademarks (1)		$	5,857							$	5,857
Amortized intangible assets:
Capitalized software (2)		$	295,578			$	(259,464	)		$	36,114
Customer relationship agreements (3)			12,029				(9,764	)			2,265
Non-compete agreements (3)			2,377				(2,372	)			5
Other (4)			6,506				(6,395	)			111
Total amortized intangible assets		$	316,490			$	(277,995	)		$	38,495

		March 31, 2009
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Unamortized intangible assets:
Trademarks (1)		$	5,784							$	5,784
Amortized intangible assets:
Capitalized software (2)		$	317,569			$	(281,806	)		$	35,763
Customer relationship agreements (3)			13,218				(10,751	)			2,467
Non-compete agreements (3)			2,561				(2,516	)			45
Other (4)			6,849				(6,684	)			165
Total amortized intangible assets		$	340,197			$	(301,757	)		$	38,440

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Changes in the carrying amounts of goodwill are summarized as follows (in thousands):

						Professional				Application
Goodwill		Products				Services				Services				Total
Balance at March 31, 2009, net		$	187,166			$	140,436			$	11,532			$	339,134
Effect of foreign currency translation			2,007				700								2,707
Balance at June 30, 2009, net		$	189,173			$	141,136			$	11,532			$	341,841

The Company evaluated its goodwill and other intangible assets for all reporting segments as of March 31, 2009 and determined there was no impairment. The Company determined the fair value of each segment using a discounted cash flow analysis supported by market multiples of revenue.

Since the second half of fiscal 2009, the Company has been restructuring its professional services segment. For the first quarter of fiscal 2010, the professional services segment expense reductions were consistent with management’s internal plan. However, if the professional services segment’s profitability assumptions used in the March 31, 2009 goodwill impairment analysis are not attained, an impairment of some or all of the $141.1 million of goodwill related to the professional services segment at June 30, 2009 could be recorded in the future as a non-cash charge to earnings.

The portion of capitalized software and goodwill that relates to the Quality and DevPartner product lines were reclassified to “Assets held for sale” in the Consolidated Balance Sheet as of March 31, 2009 due to the pending sale of these product lines to Micro Focus which occurred in May 2009 (see Note 2 for more details).

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Note 7 — Segment Information

The Company operates in three business segments in the technology industry: products, professional services and application services. The Company provides software products, professional services and application services to information technology (“IT”) organizations that help IT professionals efficiently develop, implement and support the applications that run their businesses.

Financial information for the Company’s business segments is as follows (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Revenues:
Products:
Mainframe		$	99,585			$	122,458
Distributed systems			52,088				65,511
Total product revenue			151,673				187,969
Professional services			53,045				101,832
Application services			9,670				8,787
Total revenues		$	214,388			$	298,588
Income (loss) from operations:
Products (1)		$	116,489			$	85,988
Professional services			2,930				8,322
Application services			884				(1,525	)
Subtotal			120,303				92,785
Administrative and general			(40,130	)			(41,144	)
Restructuring costs			(2,490	)			(682	)
Income from operations			77,683				50,959
Other income, net			1,420				3,221
Income before income taxes		$	79,103			$	54,180

Financial information regarding geographic operations is presented in the table below (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Revenues:
United States		$	133,700			$	189,219
Europe and Africa			56,028				79,288
Other international operations			24,660				30,081
Total revenues		$	214,388			$	298,588

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Note 8 — Restructuring Accrual

In recent years, the Company has incurred restructuring charges associated with the following initiatives: (1) aligning the professional services segment headcount and operating expenses after initiating a plan during the second half of fiscal 2009 to exit low-margin engagements and (2) management’s evaluation of the product segment and general and administrative business processes to identify operating efficiencies with the goal of reducing operating expenses.

In the first quarter of fiscal 2010, the Company incurred a restructuring charge of $2.5 million of which $2.4 million related to employee termination benefits. The Company terminated 192 employees within the professional services segment to align operating expenses with revenues as the Company continued to exit engagements considered low-margin during the first quarter of fiscal 2010. The Company also terminated approximately 38 employees from various other functions of the organization, primarily within technology development and support.

Management continues to review the Company’s costs and will, based on future results of operations, determine if additional restructuring actions are needed. The total amount of any potential future charges for such actions will depend upon the nature, timing and extent of those actions.

The following table summarizes the restructuring accrual as of March 31, 2009, and changes to the accrual during the first three months of fiscal 2010 (in thousands):

						Expensed				Paid
		Accrual				During the Three				During the Three				Accrual
		Balance at				Months Ended				Months Ended				Balance at
		March 31,				June 30,				June 30,				June 30,
		2009				2009				2009				2009
Employee termination benefits		$	1,274			$	2,388			$	(2,900	)		$	762
Facilities costs (primarily lease abandonments)			2,271				51				(252	)			2,070
Other			13				51				(56	)			8
Total		$	3,558			$	2,490			$	(3,208	)		$	2,840

As of June 30, 2009, $1.7 million of the restructuring accrual is recorded in current “accrued expenses”. The remaining balance of $1.1 million is recorded to long-term “accrued expenses” in the Condensed Consolidated Balance Sheets and primarily relates to facility costs.

The accruals for employee termination benefits at June 30, 2009 primarily represent cash payments to be paid to employees that have been terminated as a result of initiatives described above.

The accruals for facilities costs at June 30, 2009 represent the remaining fair value of lease obligations for exited and demised locations, as determined at the cease-use dates of those facilities, net of estimated sublease income that could be reasonably obtained in the future, and will be paid out over the remaining lease terms, the last of which ends in fiscal 2013. Projected sublease income is based on management’s estimates, which are subject to change.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended June 30, 2009
(Unaudited)

Note 9 — Debt

The Company has no long term debt.

The Company has an unsecured revolving credit agreement (the “credit facility”) with Comerica Bank and other lenders. The credit facility provides for a revolving line of credit in the amount of $150 million and expires on November 1, 2012. The credit facility also permits the Company to increase the revolving line of credit by up to an additional $150 million subject to receiving further commitments from lenders and certain other conditions.

The credit facility contains various covenant requirements, including limitations on liens; indebtedness; mergers, consolidations and acquisitions; asset sales; dividends; investments, loans and advances from the Company; transactions with affiliates and limits additional borrowing outside of the facility to $250 million. The credit facility is also subject to maximum total debt to EBITDA and minimum fixed charge coverage financial covenants. The Company is in compliance with the covenants under the credit facility.

Any borrowings under the credit facility bear interest at the prime rate or the Eurodollar rate plus the applicable margin (based on the level of maximum total debt to EBITDA ratio), at the Company’s option. The Company pays a quarterly facility fee on the credit facility based on the applicable margin grid. The Company has never used the credit facility.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Compuware Corporation
Detroit, Michigan

We have reviewed the accompanying condensed consolidated balance sheet of Compuware Corporation and subsidiaries (the “Company”) as of June 30, 2009, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended June 30, 2009 and 2008. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Compuware Corporation and subsidiaries as of March 31, 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 27, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan
August 6, 2009

COMPUWARE CORPORATION AND SUBSIDIARIES

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

The following discussion contains certain forward-looking statements within the meaning of the federal securities laws. When we use words such as “may”, “might”, “will”, “should”, “believe”, “expect”, “anticipate”, “estimate”, “continue”, “predict”, “forecast”, “projected”, “intend” or similar expressions, or make statements regarding our future plans, objectives or expectations, we are making forward-looking statements. Numerous important factors, risks and uncertainties affect our operating results and could cause actual results to differ materially from the results implied by these or any other forward-looking statements made by us, or on our behalf.

The material risks and uncertainties that we believe affect us are summarized below (see Item 1A Risk Factors in our 2009 Form 10-K). These risks and uncertainties are not the only ones we face. Additional risks and uncertainties discussed elsewhere in the reports we file with the Securities and Exchange Commission, as well as other risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial, may also impair business operations. This report is qualified in its entirety by these risk factors and those listed below. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment.

There can be no assurance that future results will meet expectations. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by applicable law, we do not undertake any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this report.

	•		The majority of our software products revenue is dependent on our customers’ continued use of International Business Machines Corp. (“IBM”) and IBM-compatible products.
	•		Our software product revenue is dependent on the acceptance of our pricing structure for software licenses and maintenance.
	•		Our strategy of packaging distributed products and services as a single offering may not be accepted by our customers, negatively impacting our revenue.
	•		We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other factors. If we fail to meet the expectations of analysts or investors, our stock price could decline substantially.
	•		Our quarterly financial results vary and may be adversely affected by a number of unpredictable factors.
	•		The continuing weakening in the United States and global economies may reduce demand for our software products, professional services and application services, which may negatively affect our revenues and operating results.
	•		If we are not successful in implementing our professional services strategy, our operating margins may decline.
	•		The continuation of the decline in the U.S. domestic automotive manufacturing business could adversely affect our professional services and application services businesses.

COMPUWARE CORPORATION AND SUBSIDIARIES

	•		If the fair value of our long-lived assets deteriorated below their carrying value, recognition of an impairment loss would be required, which would adversely affect our financial results.
	•		Our software and technology may infringe the proprietary rights of others.
	•		Our results could be adversely affected if our operating margin or operating margin percentage decline.
	•		Our results could be adversely affected by increased competition, pricing pressures and technological changes.
	•		The market for professional services is highly competitive, fragmented and characterized by low barriers to entry.
	•		The market for application services is in its early stages with emerging competitors. As the market matures, competition may increase and could have a negative impact on our results of operations.
	•		We must develop or acquire product enhancements and new products to succeed.
	•		Acquisitions may be difficult to integrate, disrupt our business or divert the attention of our management and may result in financial results that are different than expected.
	•		The divestiture of our Quality and DevPartner product lines may cause a reduction in customer satisfaction, which could adversely affect our revenues and results of operations.
	•		We are exposed to exchange rate risks on foreign currencies and to other international risks that may adversely affect our business and results of operations.
	•		Current laws may not adequately protect our proprietary rights.
	•		The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business.
	•		Maintenance revenue could decline.
	•		Unanticipated changes in our operating results or effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.
	•		Our stock repurchase plan may be suspended or terminated at any time, which may result in a decrease in our stock price.
	•		Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers, which could adversely affect our business, financial condition and operating results.
	•		Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law may have an anti-takeover effect.

COMPUWARE CORPORATION AND SUBSIDIARIES

OVERVIEW

In this section, we discuss our results of operations on a segment basis for each of our three business segments in the technology industry: products, professional services and application services. We evaluate segment performance based primarily on segment contribution before corporate expenses. References to years are to fiscal years ended March 31. This discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes included elsewhere in this report and our annual report on Form 10-K for the fiscal year ended March 31, 2009, particularly “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

We deliver value to businesses worldwide by providing software products, professional services and application services that improve the performance of IT organizations. Originally founded in 1973 as a professional services company, in the late 1970’s we began to offer mainframe productivity tools for fault diagnosis, file and data management, and application debugging.

In the 1990’s, IT moved toward distributed and web-based platforms. Our solutions portfolio grew in response, and we now market a comprehensive portfolio of IT solutions across the full range of enterprise computing platforms that help:

	•		Develop and deliver high quality, high performance enterprise business applications in a timely and cost-effective manner.
	•		Measure, manage and communicate application service in business terms, and maintain consistent, high levels of service delivery.
	•		Provide executive visibility, decision support and process automation across the entire IT organization to enable all available resources to be harnessed in alignment with business priorities.

Additionally, to be competitive in today’s global economy, enterprises must securely share applications, information and business processes. We address this market need through our application services, which are marketed under the brand name “Covisint”. Our application services offerings provide a software-as-a-service platform that enables industries and business communities to securely integrate vital information and processes across users, business partners, customers, vendors and suppliers.

COMPUWARE CORPORATION AND SUBSIDIARIES

Quarterly Update

The following occurred during the first quarter of 2010:

	•		Sold our Quality and DevPartner product lines to Micro Focus International PLC (“Micro Focus”) realizing a gain of $52.4 million to operating income (see Note 2 of the Condensed Consolidated Financial Statements included in this report).
	•		Experienced an increase in product contribution margin to 76.8% in the first quarter of 2010 from 45.7% in the first quarter of 2009, largely as a result of the gain on the sale to Micro Focus.
	•		Experienced a decline in professional services segment contribution margin to 5.5% in the first quarter of 2010 from 8.2% in the first quarter of 2009.
	•		Realized an increase in application services segment contribution margin to 9.1% in the first quarter of 2010 from a negative contribution margin of 17.4% in the first quarter of 2009.
	•		Experienced a decline in mainframe and distributed product revenue of 18.7% and 20.5%, respectively, compared to the first quarter of 2009.
	•		Experienced a charge of $2.5 million from restructuring actions to improve operating efficiencies.
	•		Released 4 mainframe and 7 distributed product updates designed to increase the productivity of the IT departments of our customers, including Vantage 11.

Our ability to achieve our strategies and objectives is subject to a number of risks and uncertainties, some of which we may not be able to control. See “Forward-Looking Statements”.

COMPUWARE CORPORATION AND SUBSIDIARIES

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain operational data from the Condensed Consolidated Statements of Operations as a percentage of total revenues and the percentage change in such items compared to the prior period:

		Percentage of
		Total Revenues
		Three Months Ended								Period-
		June 30, *								to-Period
		2009				2008				Change
Revenue:
Software license fees			18.9	%			20.6	%			(34.0	)%
Maintenance fees			51.8				42.4				(12.2	)
Professional services segment revenue			24.8				34.1				(47.9	)
Application services segment revenue			4.5				2.9				10.0
Total revenues			100.0				100.0				(28.2	)
Operating expenses:
Cost of software license fees			1.8				2.0				(35.2	)
Cost of maintenance fees			4.2				4.0				(25.3	)
Professional services segment expenses			23.4				31.3				(46.4	)
Application services segment expenses			4.1				3.5				(14.8	)
Technology development and support			10.0				7.6				(4.8	)
Sales and marketing			24.8				20.5				(13.3	)
Administrative and general			18.7				13.8				(2.5	)
Restructuring costs			1.2				0.2				265.1
Gain on divestiture of product lines			(24.4	)							n/a
Total operating expenses			63.8				82.9				(44.8	)
Income from operations			36.2				17.1				52.4
Other income, net			0.7				1.0				(55.9	)
Income before income taxes			36.9				18.1				46.0
Income tax provision			13.1				6.5				44.3
Net income			23.8	%			11.6	%			47.0	%

COMPUWARE CORPORATION AND SUBSIDIARIES

PRODUCTS SEGMENT

Financial information for the products segment is as follows (in thousands):

		Three Months Ended
		June 30,
		2009				2008
Revenue		$	151,673			$	187,969
Expenses			35,184				101,981
Products segment contribution		$	116,489			$	85,988

The products segment generated contribution margins of 76.8% and 45.7% during the first quarter of 2010 and 2009. The increase in margin for the first quarter of 2010 was primarily due to the $52.4 million gain on divestiture of our Quality and DevPartner product lines (see Note 2 of the Condensed Consolidated Financial Statements included in this report for more details).

Products Segment Revenue

Revenue for the products segment is as follows (in thousands):

		Three Months Ended
		June 30,
		2009				2008				Change
Software License Fees
Mainframe		$	19,193			$	33,934				(43.4	)%
Distributed			21,353				27,508				(22.4	)
Total Software License Fees			40,546				61,442				(34.0	)
Maintenance Fees
Mainframe			80,392				88,524				(9.2	)
Distributed			30,735				38,003				(19.1	)
Total Maintenance Fees			111,127				126,527				(12.2	)
Total Product Revenue
Mainframe			99,585				122,458				(18.7	)
Distributed			52,088				65,511				(20.5	)
Total Product Revenue		$	151,673			$	187,969				(19.3	)%

Products segment revenue by geographic location is presented in the table below (in thousands):

		Three Months Ended
		June 30,
		2009				2008
United States		$	80,608			$	99,328
Europe and Africa			49,077				61,654
Other international operations			21,988				26,987
Total products segment revenue		$	151,673			$	187,969

COMPUWARE CORPORATION AND SUBSIDIARIES

Our software products are designed to enhance the effectiveness of key disciplines throughout the IT organization from application development and delivery to service management and IT portfolio management supporting all major enterprise computing platforms. Product revenue, which consists of software license fees and maintenance fees, comprised 70.7% and 63.0% of total revenue during the first quarter of 2010 and 2009, respectively.

Software license fees

Software license fees (“license fees”) decreased $20.9 million or 34.0%, which included a negative impact from foreign currency fluctuations of $4.0 million, during the first quarter of 2010 to $40.5 million from $61.4 million during the first quarter of 2009.

Mainframe license fees for the first quarter of 2010 declined $14.7 million and distributed license fees for the first quarter of 2010 declined $6.2 million compared to the same period from the prior year.

The decline in software license fees for the first quarter 2010 as compared to 2009 was a result of the economic slowdown experienced since the end of the first quarter of 2009 affecting the closure of license transactions across all product lines within mainframe and the Vantage and Changepoint distributed product lines.

During the first quarter of 2010, for software license transactions that are required to be recognized ratably, we deferred $10.7 million of license revenue relating to such transactions that closed during the period. We recognized as revenue $24.4 million of previously deferred license revenue relating to such transactions that closed and had been deferred prior to the beginning of the period, including $7.2 million related to our divested products.

Maintenance fees

Maintenance fees decreased $15.4 million or 12.2%, which included a negative impact from foreign currency fluctuations of $8.1 million, during the first quarter of 2010 to $111.1 million from $126.5 million during the first quarter of 2009.

Mainframe maintenance fees for the first quarter of 2010 declined $8.1 million and distributed maintenance fees for the first quarter of 2010 declined $7.3 million compared to the same period from the prior year.

The decrease in maintenance fees for the quarter was primarily due to the negative impact of foreign currency fluctuations of $8.1 million and having one less month of Quality and DevPartner maintenance of approximately $3.0 million as these product lines were divested at the end of May 2009 (see Note 2 of the Condensed Consolidated Financial Statements included in this report).

COMPUWARE CORPORATION AND SUBSIDIARIES

Products Segment Expenses

Products segment expenses include cost of software license fees, cost of maintenance fees, technology development and support costs, sales and marketing expenses and the gain on divestiture of our Quality and DevPartner product lines to Micro Focus. As part of this divestiture, approximately 250 personnel related to the sales, sales support, development, maintenance and delivery of the Quality and DevPartner product lines were transferred to Micro Focus as of June 1, 2009 which reduced the product segment’s compensation and benefit costs for the first quarter of 2010 compared to 2009. Changes to product segment expenses are discussed below.

Cost of software license fees includes amortization of capitalized software, the cost of duplicating and disseminating products to customers, including associated hardware costs, and the cost of author royalties. Cost of software license fees decreased $2.2 million or 35.2% during the first quarter of 2010 to $3.9 million from $6.1 million in the first quarter of 2009. The decrease was primarily due to a reduction in capitalized software amortization as $17.6 million of capitalized software was sold to Micro Focus as part of the Quality and DevPartner divestiture. This capitalized software was classified as held for sale at March 31, 2009, as a result, no amortization was recorded in the first quarter of 2010 (see Note 2 of the Condensed Consolidated Financial Statements included in this report).

As a percentage of software license fees, cost of software license fees were 9.7% and 9.9% in the first quarter of 2010 and 2009, respectively.

Cost of maintenance fees consists of the direct costs allocated to maintenance and product support such as helpdesk and technical support. Customers who subscribe to maintenance are also eligible to receive the benefit of new releases as well as technical support. Cost of maintenance fees decreased $3.0 million or 25.3% during the first quarter of 2010 to $9.0 million from $12.0 million in the first quarter of 2009. The decreases were primarily due to lower compensation and benefit costs resulting from employee headcount reductions as part of the restructuring actions taken during 2009 (see Note 8 of the Condensed Consolidated Financial Statements included in this report) and to a lesser extent the transfer of employees to Micro Focus as discussed above. As a percentage of maintenance fees, cost of maintenance fees were 8.1% and 9.5% in the first quarter of 2010 and 2009, respectively.

Technology development and support includes, primarily, the costs of programming personnel associated with product development and support less the amount of software development costs capitalized during the period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives. As a percentage of product revenue, costs of technology development and support were 14.2% and 12.0% in the first quarter of 2010 and 2009, respectively.

COMPUWARE CORPORATION AND SUBSIDIARIES

Capitalization of internally developed software products begins when technological feasibility of the product is established. Total technology development and support costs incurred internally and capitalized in the first quarter of 2010 and 2009 were as follows (in thousands):

		Three months ended
		June 30,
		2009				2008
Technology development and support costs incurred		$	24,376			$	25,059
Capitalized technology development and support costs			(2,894	)			(2,489	)
Technology development and support costs expensed		$	21,482			$	22,570

Before the capitalization of internally developed software products, total technology development and support costs decreased $700,000 or 2.7% during the first quarter of 2010 to $24.4 million from $25.1 million in the first quarter of 2009. The decrease in expenses was primarily due to lower compensation and benefit costs resulting from employee headcount reductions as part of the restructuring actions taken during 2009 (see Note 8 of the Condensed Consolidated Financial Statements included in this report) and to a lesser extent the transfer of employees to Micro Focus as discussed above.

Sales and marketing costs consist primarily of personnel related costs associated with product sales, sales support and marketing for our product offerings. Sales and marketing costs decreased $8.2 million or 13.3% during the first quarter of 2010 to $53.1 million from $61.3 million in the first quarter of 2009. The decrease in sales and marketing costs was primarily a result of the following: (1) a decrease in bonus and commission costs of $4.6 million due to the decline in software license sales in 2010 and (2) a decrease in compensation and benefit costs of $3.3 million resulting from employee headcount reductions as part of the restructuring actions taken during 2009 (see Note 8 of the Condensed Consolidated Financial Statements included in this report) and to a lesser extent the transfer of personnel to Micro Focus as discussed above.

As a percentage of product revenue, sales and marketing costs were 35.0% and 32.6% in the first quarter of 2010 and 2009.

Gain on divestiture of product lines relates to the sale of our Quality and DevPartner product lines to Micro Focus that occurred in May 2009. We recognized a gain of $52.4 million during the first quarter of 2010 relating to this transaction. See Note 2 of the Condensed Consolidated Financial Statements included in this report for more details.

COMPUWARE CORPORATION AND SUBSIDIARIES

PROFESSIONAL SERVICES SEGMENT

Financial information for the professional services segment is as follows (in thousands):

		Three Months Ended
		June 30, *
		2009				2008
Revenue		$	53,045			$	101,832
Expenses			50,115				93,510
Professional services segment contribution		$	2,930			$	8,322

Professional services segment revenue by geographic location is presented in the table below (in thousands):

		Three Months Ended
		June 30,
		2009				2008
United States		$	44,749			$	82,617
Europe and Africa			6,194				16,762
Other international operations			2,102				2,453
Total professional services segment revenue		$	53,045			$	101,832

During the first quarter of 2010 and 2009, the professional services segment generated a contribution margin of 5.5% and 8.2%, respectively. The decrease in contribution margin was primarily due to lower employee utilization rates within our Solutions Delivery Group resulting from a decline in license sales during the last two quarters and higher costs associated with certain fixed price projects.

2009 and 2010 Restructuring

During the second half of 2009 and the first quarter of 2010, management focused on improving the professional services segment’s margins by initiating a plan to exit engagements that were considered low-margin and by reducing headcount and operating costs resulting in restructuring charges.

As a result, professional services revenues are expected to decline by approximately 40% in 2010 compared to 2009 but we expect improvement in the operating margin percentage of the segment as we progress through 2010. Actions initiated to date have included exiting low margin accounts, including our largest professional services client in the automotive industry. We expect approximately 20% of our professional services segment revenue in 2010 to be concentrated in the automotive industry.

If these actions do not improve the operating profit percentage of the professional services segment as currently projected, an impairment of some or all of the $141.1 million of goodwill related to the professional services segment at March 31, 2009 may be recorded in the future as a non-cash charge to earnings in the period in which the carrying value exceeds fair value.

COMPUWARE CORPORATION AND SUBSIDIARIES

Professional Services Segment Revenue

We offer a broad range of IT services to help businesses make the most of their IT assets. Some of these services include outsourcing and co-sourcing, application management, product solutions, project management, enterprise resource planning and customer relationship management services.

Professional services segment revenue decreased $48.8 million or 47.9%, which included a negative impact from foreign currency fluctuations of $1.9 million, during the first quarter of 2010 to $53.0 million compared to $101.8 million in the first quarter of 2009. The decrease in revenue was a result of the actions taken during 2009 and during first quarter 2010 to exit low-margin accounts as previously discussed.

Professional Services Segment Expenses

Professional services segment expenses consist primarily of personnel-related costs of providing services, including billable staff, subcontractors and sales personnel. Professional services segment expenses decreased $43.4 million or 46.4% during the first quarter of 2010 to $50.1 million from $93.5 million in the first quarter of 2009. The decrease in expenses was primarily attributable to lower compensation and benefit costs due to reductions in employee headcount and reductions in subcontractor costs resulting from the 2009 and 2010 restructuring program implemented to align operating costs with the decline in revenue (see “2009 and 2010 Restructuring” within this section).

APPLICATION SERVICES SEGMENT

Our application services, which are marketed under the brand name “Covisint”, provide a software-as-a-service platform that enables industries and business communities to securely integrate vital information and processes across users, business partners, customers, vendors and suppliers.

Financial information for the application services segment is as follows (in thousands):

		Three Months Ended
		June 30, *
		2009				2008
Revenue		$	9,670			$	8,787
Expenses			8,786				10,312
Application services segment contribution (loss)		$	884			$	(1,525	)

COMPUWARE CORPORATION AND SUBSIDIARIES

Application services segment revenue by geographic location is presented in the table below (in thousands):

		Three Months Ended
		June 30,
		2009				2008
United States		$	8,343			$	7,274
Europe and Africa			757				872
Other international operations			570				641
Total application services segment revenue		$	9,670			$	8,787

During the first quarter of 2010, the application services segment generated a contribution margin of 9.1%, compared to a negative contribution margin of 17.4% during the first quarter of 2009. The improvement in contribution for the first quarter of 2010 was primarily due to growth in revenue from the healthcare industry and reductions in expenses resulting from capitalization of software development costs, as described below.

Application Services Segment Revenue

Application services segment revenue increased $900,000 or 10.0% during the first quarter of 2010 to $9.7 million from $8.8 million in the first quarter of 2009. The increase in revenue during the first quarter of 2010 was due to our continued expansion into the healthcare industry.

Our application services segment generates a significant amount of revenue from the automotive industry. We anticipate approximately 50% of our application services segment revenue in 2010 will be derived from this industry.

Application Services Segment Expenses

Application services segment expenses consist primarily of personnel-related costs of providing services, including technical staff, subcontractors and sales personnel. Application services segment expenses decreased $1.5 million or 14.8% during the first quarter of 2010 to $8.8 million from $10.3 million in the first quarter of 2009. The decrease in expenses during the first quarter was primarily due to $850,000 in incremental cost deferrals associated with customer implementations for which corresponding revenue and expenses will be recognized in the future and the capitalization of $840,000 in software development costs related to the testing of product enhancements that have reached technological feasibility.

COMPUWARE CORPORATION AND SUBSIDIARIES

CORPORATE AND OTHER EXPENSES

Administrative and general expenses consist primarily of costs associated with the corporate executive, finance, human resources, administrative, legal, communications and investor relations departments. In addition, administrative and general expenses include all facility-related costs, such as rent, building depreciation, maintenance and utilities, associated with worldwide sales, professional services and software development offices. Administrative and general expenses decreased $1.0 million or 2.5% during the first quarter of 2010 to $40.1 million from $41.1 million during the first quarter of 2009.

The decrease in expense was primarily due to the following: (1) reductions in compensation and benefits and lower facility costs of $4.7 million primarily due to the headcount reductions and facility closures that took place as part of the 2009 restructuring program and (2) a decrease in director deferred compensation of $1.9 million. Prior to January 1, 2009, directors participated in a director phantom stock program that required liability accounting. Due to the increase in our stock price from April 1, 2008 to June 30, 2008, an expense of $1.9 million was recorded in the first quarter of 2009. Effective January 1, 2009, the Director Phantom Stock program was terminated with phantom shares being converted to restricted stock units eliminating the need for liability accounting.

The decreases in expense were offset by a net gain of $5.6 million that was recorded during the first quarter of 2009 associated with a transaction that transitioned the employment of 170 of our professional services staff to a customer.

Other income, net (“other income”) consists primarily of interest income realized from cash equivalents and investments (“investments”), interest earned on deferred customer receivables, and income generated from our investment in a partially owned company. Other income decreased $1.8 million or 55.9% during the first quarter of 2010 to $1.4 million from $3.2 million in the first quarter of 2009. The decrease in other income was primarily attributable to a decline in investment interest income resulting from lower interest rates during first quarter 2010 compared to 2009, partially offset by a higher average investment balance during first quarter of 2010 compared to 2009.

Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. The income tax provision was $28.1 million in the first quarter of 2010 compared to an income tax provision of $19.4 million in the first quarter of 2009 representing an effective tax rate of 35.5% and 36.0%, respectively.

RESTRUCTURING COSTS AND ACCRUAL

In the first quarter of 2010, we incurred a restructuring charge of $2.5 million (as discussed in Note 8 of the Condensed Consolidated Financial Statements included in this report). We will continue to evaluate our business processes to identify opportunities to streamline operations and reduce costs, which may result in additional restructuring charges.

COMPUWARE CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments 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 revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at June 30, 2009. However, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of our Annual Report on Form 10-K for the year ended March 31, 2009 are considered by management to be the most important to an understanding of the financial statements, because their application places the most significant demands on management’s judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in Note 1 of the Consolidated Financial Statements included in Item 8 of that report. There have been no material changes to that information since the end of fiscal 2009.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009, cash and cash equivalents totaled approximately $390.7 million, compared to $278.1 million at March 31, 2009.

Net cash provided by operating activities:

Net cash provided by operating activities during the first quarter of 2010 was $74.9 million, an increase of $27.1 million from the first quarter of 2009. The increase was due to the following: (1) reduction in disbursements for employee payroll and benefits of $42 million primarily resulting from savings achieved through our 2009 and 2010 restructuring initiatives; (2) reduction in bonus and commission payments of $23 million and (3) reduction in payments for subcontractors of $8 million primarily within the professional services segment resulting from our strategy to exit low-margin engagements. The increases to operating activities were partially offset by the following: (1) reduction in customer collections of $39 million due to our declines in revenue, primarily professional services and license fees; (2) increase in income taxes paid during 2010 compared to 2009 of $5 million and (3) decrease in investment interest received of $2 million.

The Condensed Consolidated Statements of Cash Flows included in this report compute net cash from operating activities using the indirect cash flow method. Therefore non-cash adjustments and net changes in assets and liabilities (net of the effects of the divestiture and currency fluctuations) are adjusted from net income to derive net cash from operating activities. Changes in accounts receivable and deferred revenue have typically had the largest impact on the reconciliation of net income to compute cash flows from operating activities as we allow for deferred payment terms on multi-year products contracts. The combined net change in accounts receivable and deferred revenue increased cash flow from operating activities by $43.8 million in the first quarter of 2010 as compared to the same period in 2009. The decline in revenue over the past year, primarily professional services and software license fees, has caused the accounts receivable and deferred revenue balances at June 30, 2009 to be lower compared to June 30, 2008.

The other significant changes in our reconciliation of net income to derive net cash from operating activities during the first quarter of 2010 as compared to the first quarter of 2009 were as follows:

COMPUWARE CORPORATION AND SUBSIDIARIES

(1)

Adjustment to net income of $52.4 million resulting from the gain on divestiture of our Quality and DevPartner product lines for which proceeds from sale were recorded to investing activities. See Note 2 of the Condensed Consolidated Financial Statements included in this report for more details.

(2)

The increase to cash flows from operating activities resulting from the net change in accounts payable and accrued expenses of $19.5 million was primarily due to lower commission and bonus accruals recorded at March 31, 2009 compared to March 31, 2008 causing a lesser cash outflow impact to operating activities from the changes in accruals during the first quarter of 2010 compared to 2009.

As of June 30, 2009, $2.8 million was accrued related to restructuring actions (see Note 8 of the Condensed Consolidated Financial Statements included in this report). We continue to evaluate our business processes to identify ways to reduce costs. Any further actions will likely result in additional restructuring charges. The amount of such charges will depend upon the nature, timing and extent of the restructuring actions taken.

We believe our existing cash resources and cash flow from operations will be sufficient to meet operating cash needs for the foreseeable future.

Net cash provided by investing activities:

Net cash provided by investing activities during the first quarter of 2010 was $59.3 million, an increase of $50.6 million from the first quarter of 2009. The increase was primarily due to $65 million of proceeds received from the sale of the Quality and DevPartner product lines to Micro Focus during the first quarter of 2010 (see Note 2 of the Condensed Consolidated Financial Statements for more details) offset by a decline in the amount of investments liquidated. In the first quarter of 2009, we received $13.9 million of proceeds from the liquidation of investments. There were no investments liquidated during the first quarter of 2010.

During the first quarter of 2010 and 2009, capital expenditures for property and equipment and capitalized research and software development totaled $5.7 million and $5.2 million, respectively, and were funded with cash flows from operations.

There were no business acquisitions in the first quarter of 2010 or 2009. However, we continue to evaluate business acquisition opportunities that fit our strategic plans.

Net cash used in financing activities:

Net cash used in financing activities during the first quarter of 2010 was $30.1 million, a decrease of $26.5 million from the first quarter of 2009.

The decrease was primarily due to reductions in the amount of common stock repurchased during first quarter of 2010 compared to 2009. We used $32.3 million in cash to repurchase common stock during the first quarter of 2010 compared to $58.9 million in 2009, a decline of $26.6 million.

Since May 2003, the Board of Directors has authorized the repurchase of a total of $1.7 billion of our common stock under a Discretionary Plan. Purchases of common stock under the Discretionary Plan may occur on the open market, or through negotiated or block transactions based upon market and business conditions, subject to applicable legal limitations.

COMPUWARE CORPORATION AND SUBSIDIARIES

During the first quarter of 2010, we repurchased approximately 4.3 million shares of our common stock at an average price of $7.52 per share for a total cost of $32.3 million. As of June 30, 2009, approximately $505 million remains authorized for future purchases under the Discretionary Plan.

We intend to continue repurchasing shares under the Discretionary Plan, funded primarily through our operating cash flow and, if needed, funds from our credit facility. Our long-term goal is to reduce our outstanding common share count to approximately 200 million shares. We reserve the right to change the timing and volume of our repurchases at any time without notice. The maximum amount of repurchase activity under the Discretionary Plan, excluding block purchases and negotiated transactions, continues to be limited on a daily basis to 25% of the average daily trading volume of our common stock during the previous four week period. In addition, no purchases are made during our self-imposed trading black-out periods in which the Company and our insiders are prohibited from trading in our common shares. Our standard quarterly black-out period commences 10 business days prior to the end of each quarter and terminates one full market day following the public release of our earnings.

The Company has a credit facility with Comerica Bank and other lenders to provide leverage for the Company if needed. The credit facility provides for a revolving line of credit in the amount of $150 million and expires on November 1, 2012. The credit facility also permits us to increase the facility by an additional $150 million, subject to receiving further commitments from lenders and certain other conditions. The credit facility also limits borrowing outside of the facility to $250 million. No borrowings have occurred under this credit facility.

Recently Issued Accounting Pronouncements

See Note 1 of the Condensed Consolidated Financial Statements included in this report for recently issued accounting pronouncements that could affect the Company.

CONTRACTUAL OBLIGATIONS

Our contractual obligations are described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended March 31, 2009. Except as described elsewhere in this report on Form 10-Q, there have been no material changes to those obligations or arrangements outside of the ordinary course of business since the end of fiscal 2009.

COMPUWARE CORPORATION AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed primarily to market risks associated with movements in interest rates and foreign currency exchange rates. There have been no material changes to our foreign exchange risk management strategy or our investment standards subsequent to March 31, 2009, therefore the market risks remain substantially unchanged since we filed the Annual Report on Form 10-K for the fiscal year ending March 31, 2009.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been detected.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, at the reasonable assurance level, to cause information required to be disclosed in the reports that we file or submit under the Exchange Act to be recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required financial disclosure.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

COMPUWARE CORPORATION AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the Risk Factors as previously disclosed in our Form 10-K for the fiscal year ended March 31, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth, the repurchases of common stock for the quarter ended June 30, 2009:

														Approximate dollar
														value of shares
										Total number of				that may yet be
						Average				shares purchased				purchased under
		Total number of				price paid				as part of publicly				the plan or
Period		shares purchased				per share				announced plans				program (1)
For the month ended April 30, 2009														$	536,861,000
For the month ended May 31, 2009			1,200,000			$	7.54				1,200,000				527,815,000
For the month ended June 30, 2009			3,094,000				7.52				3,094,000				504,555,000
Total			4,294,000			$	7.52				4,294,000

COMPUWARE CORPORATION AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit
Number		Description of Document
2.8		Asset Purchase Agreement between Compuware Corporation and Micro Focus Holdings Limited, dated as of May 5, 2009 (filed with the Company’s Form 8-K filed on May 11, 2009 and incorporated herein by reference)
10.122		Executive Incentive Plan — Corporate, as of June 10, 2009 (filed with the Company’s Form 8-K filed on June 12, 2009 and incorporated herein by reference)
10.123		Form of Restricted Stock Unit Award Agreement as of June 10, 2009 (filed with the Company’s Form 8-K filed on June 12, 2009 and incorporated herein by reference)
15		Independent Registered Public Accounting Firm’s Awareness Letter (1)
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. (1)
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. (1)
32		Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act. (1)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.