(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

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

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

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 October 31, 2008, there were outstanding 246,494,673 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 September 30, 2008 and March 31, 2008			3
Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2008 and 2007			4
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2008 and 2007			5
Notes to Condensed Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			37
PART II. OTHER INFORMATION
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information			40
Item 6. Exhibits			41
SIGNATURES			42
EX-10.110
EXHIBIT 15
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

COMPUWARE CORPORATION AND SUBSIDIARIES

		September 30,				March 31,
		2008				2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	161,323			$	215,943
Investments			10,813				70,474
Accounts receivable, net			424,718				535,094
Deferred tax asset, net			35,355				44,374
Income taxes refundable			3,472				3,746
Prepaid expenses and other current assets			29,376				49,285
Total current assets			665,057				918,916
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION			355,978				365,691
CAPITALIZED SOFTWARE, LESS ACCUMULATED AMORTIZATION			55,770				61,653
OTHER:
Accounts receivable			267,389				244,388
Deferred tax asset, net			33,789				35,851
Goodwill			353,393				356,267
Other			34,435				35,791
Total other assets			689,006				672,297
TOTAL ASSETS		$	1,765,811			$	2,018,557
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	22,499			$	18,772
Accrued expenses			102,529				148,268
Income taxes payable			2,145				4,976
Deferred revenue			405,622				472,864
Total current liabilities			532,795				644,880
DEFERRED REVENUE			371,220				399,548
ACCRUED EXPENSES			19,758				19,513
DEFERRED TAX LIABILITY, NET			20,992				27,585
Total liabilities			944,765				1,091,526
SHAREHOLDERS’ EQUITY:
Common stock			2,465				2,616
Additional paid-in capital			625,316				643,544
Retained earnings			182,547				261,754
Accumulated other comprehensive income			10,718				19,117
Total shareholders’ equity			821,046				927,031
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,765,811			$	2,018,557

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
REVENUES:
Software license fees		$	42,251			$	70,016			$	103,693			$	117,287
Maintenance fees			124,717				116,296				251,244				230,037
Professional services fees			102,877				115,659				213,496				234,036
Total revenues			269,845				301,971				568,433				581,360
OPERATING EXPENSES:
Cost of software license fees			6,253				6,609				12,343				16,975
Cost of maintenance fees			11,332				10,206				23,326				21,658
Cost of professional services			98,973				101,970				202,795				206,047
Technology development and support			22,938				24,170				45,508				53,498
Sales and marketing			58,353				65,456				119,680				130,188
Administrative and general			42,474				42,874				83,618				88,254
Restructuring costs			2,231				18,731				2,913				34,751
Total operating expenses			242,554				270,016				490,183				551,371
INCOME FROM OPERATIONS			27,291				31,955				78,250				29,989
OTHER INCOME, NET			3,046				5,427				6,267				11,086
INCOME BEFORE INCOME TAXES			30,337				37,382				84,517				41,075
INCOME TAX PROVISION (BENEFIT)			8,755				(34	)			28,203				3,470
NET INCOME		$	21,582			$	37,416			$	56,314			$	37,605
Basic earnings per share		$	0.09			$	0.13			$	0.22			$	0.13
Diluted earnings per share		$	0.08			$	0.13			$	0.22			$	0.13

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

		Six Months Ended
		September 30,
		2008				2007
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	56,314			$	37,605
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			27,072				27,554
Property and equipment impairment			662				3,079
Capitalized software impairment							3,873
Acquisition tax benefits			2,622				2,621
Stock option compensation			7,900				7,183
Deferred income taxes			2,597				(3,634	)
Other			410				815
Net change in assets and liabilities, net of effects from acquisitions and currency fluctuations:
Accounts receivable			54,314				39,425
Prepaid expenses and other current assets			18,214				12,762
Other assets			(3,992	)			3,652
Accounts payable and accrued expenses			(35,600	)			(24,657	)
Deferred revenue			(61,346	)			(53,760	)
Income taxes			(2,701	)			(4,045	)
Net cash provided by operating activities			66,466				52,473
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchase of:
Property and equipment			(4,922	)			(6,691	)
Capitalized software			(6,090	)			(7,889	)
Investment proceeds			59,402				71,375
Net cash provided by investing activities			48,390				56,795
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from exercise of stock options including excess tax benefits			11,163				64,379
Contribution to stock purchase plans			1,674				2,230
Repurchase of common stock			(174,186	)			(227,695	)
Net cash used in financing activities			(161,349	)			(161,086	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(8,127	)			6,791
NET DECREASE IN CASH AND CASH EQUIVALENTS			(54,620	)			(45,027	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			215,943				260,681
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	161,323			$	215,654

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

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 September 30, 2008, 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, 2008 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, 2008 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.

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, the Company recognizes revenue when all of the following criteria are 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 September 30, 2008
(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 multi-year 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 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 primarily 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, revenue is 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.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

Deferred revenue - Deferred revenue consists primarily of 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 that are being recognized on a ratable basis. Commission costs associated with deferred revenue are also deferred.

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 in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”.

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 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 available for general release 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 that their fair value may have been reduced below carrying value. The Company evaluated its goodwill and indefinite lived intangibles as of March 31, 2008 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 evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

Interest and penalties related to income tax liabilities are included in income tax expense.

Recently Issued Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133” (“SFAS No. 161”). This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for fiscal years and interim periods beginning after November 15, 2008. Because SFAS No. 161 applies only to financial statement disclosures, it will not have any impact on the Company’s consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”, which replaces Statement of Financial Accounting Standards No. 141, “Business Combinations”. This Statement requires assets and liabilities acquired in a business combination, contingent consideration and certain acquired contingencies, to be measured at their fair value as of the date of acquisition. This Statement also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. This Statement is effective for fiscal years beginning after December 15, 2008 and will be effective for business combinations entered into after January 1, 2009. Its effects on future periods will depend on the nature and significance of any acquisitions subject to this Statement.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115,” which permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. This Statement was adopted on April 1, 2008 and did not have a material effect on the Company’s financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157–2, “Effective Date of FASB Statement No. 157” (“SFAS No. 157”), which provides a one year deferral of the effective date of SFAS 157 for non–financial assets and non–financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

	•	Level 2 –	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	•	Level 3 –	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of SFAS No. 157 did not have a material impact on the Company’s consolidated results of operations and financial condition.

The Company measures the following two financial liabilities at fair value on a recurring basis in accordance with SFAS No. 157 as of September 30, 2008: (1) the director phantom stock plan liability of $6.7 million using level 1 inputs and (2) forward foreign exchange contract liabilities of $488,000 using level 2 inputs.

Employee Transition Agreement – In the first quarter of fiscal 2009, the Company transitioned the employment of 170 of its professional services staff to a customer for $6.5 million resulting in the Company recording a one-time $5.6 million net gain against “administrative and general” expense in the Condensed Consolidated Statements of Operations. The $6.5 million was fully collected as of September 30, 2008.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

Note 2 — 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								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
BASIC EARNINGS PER SHARE:
Numerator: Net income		$	21,582			$	37,416			$	56,314			$	37,605
Denominator:
Weighted-average common shares outstanding			252,394				294,321				256,024				298,122
Basic earnings per share		$	0.09			$	0.13			$	0.22			$	0.13
DILUTED EARNINGS PER SHARE:
Numerator: Net income		$	21,582			$	37,416			$	56,314			$	37,605
Denominator:
Weighted-average common shares outstanding			252,394				294,321				256,024				298,122
Dilutive effect of stock options			5,221				1,116				4,428				2,239
Total shares			257,615				295,437				260,452				300,361
Diluted earnings per share		$	0.08			$	0.13			$	0.22			$	0.13

During the three and six months ended September 30, 2008, stock options to purchase a total of approximately 5,951,000 and 6,162,000 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. During the three and six months ended September 30, 2007, stock options to purchase a total of approximately 26,829,000 and 13,259,000 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

Note 3 — Comprehensive Income

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

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income		$	21,582			$	37,416			$	56,314			$	37,605
Foreign currency translation adjustment, net of tax			(9,323	)			5,724				(8,399	)			9,198
Total comprehensive income		$	12,259			$	43,140			$	47,915			$	46,803

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

Note 4 – Stock Benefit Plans and Stock-Based Compensation

The Company has the following stock benefit plans: (1) the 2007 Long Term Incentive Plan 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.

A summary of option activity under the Company’s stock-based compensation plans as of September 30, 2008, and changes during the six months then ended is presented below (shares and intrinsic value in thousands):

		Six Months Ended
		September 30, 2008
										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Options				Price				Term in Years				Value
Options outstanding as of March 31, 2008			34,289			$	12.69
Granted			9,710				7.75
Exercised			(1,335	)			7.87
Forfeited			(307	)			8.19
Cancelled/expired			(6,182	)			23.94
Options outstanding as of September 30, 2008			36,175			$	9.71				5.06			$	45,247
Options vested and expected to vest, net of estimated forfeitures, as of September 30, 2008			33,459			$	9.84				4.72			$	40,362
Options exercisable as of September 30, 2008			21,830			$	10.90				2.49			$	18,079

The total fair value of shares vested and the total intrinsic value of options exercised were as follows (intrinsic values in thousands):

		Six Months Ended
		September 30,
		2008				2007
Fair value of shares vested		$	3.88			$	5.12
Intrinsic value of options exercised			3,903				16,192

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 volatility is based on historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on either historical exercise data if available or the simplified method as described in Staff Accounting Bulletins No. 107 and No. 110. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our awards. The dividend yield assumption is based on the Company’s history and expectation regarding dividend payouts.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(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:

		Six Months Ended
		September 30,
		2008				2007
Expected volatility			54.39	%			59.21	%
Risk-free interest rate			3.25	%			4.79	%
Expected lives at date of grant (in years)			6.4				6.7
Weighted-average fair value of the options granted		$	4.30			$	6.84

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.

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

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Stock-based compensation classified as:
Cost of software license fees														$	1
Cost of maintenance fees		$	121			$	71			$	187				139
Cost of professional services			1,598				336				1,984				672
Technology development and support			244				168				366				342
Sales and marketing			1,527				690				2,245				1,132
Administrative and general			1,178				350				2,212				780
Restructuring costs			906				3,995				906				4,117
Total stock-based compensation expense before income taxes			5,574				5,610				7,900				7,183
Income tax benefit			(2,018	)			(1,953	)			(2,867	)			(2,489	)
Total stock-based compensation expense after income taxes		$	3,556			$	3,657			$	5,033			$	4,694

As of September 30, 2008, $39.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options is expected to be recognized over a weighted-average period of approximately 3.34 years.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

Note 5 – Goodwill and Intangible Assets

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

		September 30, 2008
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Unamortized intangible assets:
Trademarks (1)		$	5,946							$	5,946
Amortized intangible assets:
Capitalized software (2)		$	346,491			$	(290,721	)		$	55,770
Customer relationship agreements (3)			13,925				(9,766	)			4,159
Non-compete agreements (3)			2,602				(2,493	)			109
Other (4)			6,875				(6,517	)			358
Total amortized intangible assets		$	369,893			$	(309,497	)		$	60,396

		March 31, 2008
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Unamortized intangible assets:
Trademarks (1)		$	5,984							$	5,984
Amortized intangible assets:
Capitalized software (2)		$	341,127			$	(279,474	)		$	61,653
Customer relationship agreements (3)			14,270				(8,482	)			5,788
Non-compete agreements (3)			2,948				(2,660	)			288
Other (4)			6,891				(6,396	)			495
Total amortized intangible assets		$	365,236			$	(297,012	)		$	68,224

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

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

						Professional				Application
		Products				Services				Services				Total
Goodwill
Balance at March 31, 2008, net		$	202,502			$	142,294			$	11,471			$	356,267
Adjustments to previously recorded purchase price (1)			(371	)							61				(310	)
Effect of foreign currency translation			(2,012	)			(552	)							(2,564	)
Balance at September 30, 2008, net		$	200,119			$	141,742			$	11,532			$	353,393

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

Note 6 – 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								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenues:
Products:
Mainframe		$	108,801			$	110,484			$	231,290			$	213,721
Distributed systems			58,167				75,828				123,647				133,603
Total product revenue			166,968				186,312				354,937				347,324
Professional services			94,314				106,361				196,146				215,144
Application services			8,563				9,298				17,350				18,892
Total revenues		$	269,845			$	301,971			$	568,433			$	581,360
Income (loss) from operations:
Products		$	68,092			$	79,871			$	154,080			$	125,005
Professional services			4,854				13,804				13,176				27,693
Application services			(950	)			(115	)			(2,475	)			296
Subtotal			71,996				93,560				164,781				152,994
Corporate expenses			(42,474	)			(42,874	)			(83,618	)			(88,254	)
Restructuring costs			(2,231	)			(18,731	)			(2,913	)			(34,751	)
Income from operations			27,291				31,955				78,250				29,989
Other income, net			3,046				5,427				6,267				11,086
Income before income taxes		$	30,337			$	37,382			$	84,517			$	41,075

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

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenues:
United States		$	168,192			$	194,643			$	357,394			$	379,773
Europe and Africa			73,498				77,744				152,794				147,680
Other international operations			28,155				29,584				58,245				53,907
Total revenues		$	269,845			$	301,971			$	568,433			$	581,360

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended September 30, 2008
(Unaudited)

Note 7 — Restructuring Accrual

During fiscal 2008, we undertook various restructuring initiatives to improve the effectiveness and efficiency of a number of our critical business processes within the products segment. These initiatives included the realignment and centralization of certain product development activities leading to the full or partial closing of certain development labs and termination of approximately 325 employees, primarily programming personnel. We also terminated approximately 200 employees from various other functions of the organization, primarily within sales and marketing.

In the first six months of fiscal 2009, the Company incurred restructuring charges of $2.9 million primarily related to the professional services segment. Employee termination benefits accounted for $2.2 million of the charge as professional services management positions were eliminated and personnel were terminated. In addition, full or partial closing of four offices occurred resulting in a lease abandonment charge of $500,000. The remaining facilities charge primarily related to changes in sublease income assumptions associated with lease facilities that were abandoned in previous restructuring initiatives.

Management continues to evaluate the Company’s business processes to identify operating efficiencies with the goal of reducing operating expenses. As part of these efforts, during the last week of October 2008, the Company terminated or identified for termination approximately 300 employees primarily within our professional services, technology and corporate administrative functions. These actions will result in additional restructuring charges of approximately $5 million in the third quarter of fiscal 2009.

The following table summarizes the restructuring accrual as of March 31, 2008, and changes to the accrual during the first six months of fiscal 2009 (in thousands):

						Expensed				Paid
		Accrual				during the				during the				Accrual
		balance at				six months ended				six months ended				balance at
		March 31,				September 30,				September 30,				September 30,
		2008				2008				2008				2008
Employee termination benefits		$	2,655			$	2,160			$	(2,777	)		$	2,038
Facilities costs (primarily lease abandonments)			4,716				739				(2,240	)			3,215
Other			85				14				(82	)			17
Total		$	7,456			$	2,913			$	(5,099	)		$	5,270

As of September 30, 2008, $3.8 million of the restructuring accrual is recorded in current “accrued expenses” with the remaining balance of $1.5 million recorded in long-term “accrued expenses” in the Condensed Consolidated Balance Sheets.

The accruals for employee termination benefits at September 30, 2008 primarily represent the amounts to be paid to employees that have been terminated as a result of initiatives described above.

The accruals for facilities costs at September 30, 2008 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 2012. 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 September 30, 2008
(Unaudited)

Note 8 — 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.

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 September 30, 2008, and the related condensed consolidated statements of operations for the three-month and six-month periods ended September 30, 2008 and 2007, and of cash flows for the six-month periods ended September 30, 2008 and 2007. 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, 2008, 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 28, 2008 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, 2008, 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
November 5, 2008

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 and have not materially changed since the end of fiscal 2008 (see Item 1A Risk Factors in our 2008 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 to package products and services as a single offering may not be accepted by our customers, negatively impacting our revenue.
	•		The continuing uncertainty 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.
	•		We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other factors.
	•		If we fail to achieve the results we expect from our expense reduction program, our results of operations and financial condition may be adversely affected.
	•		Our software and technology may infringe the proprietary rights of others, which may require us to enter into royalty arrangements or result in costly litigation.
	•		Our results could be adversely affected if our operating margin or operating margin percentage decline.

COMPUWARE CORPORATION AND SUBSIDIARIES

	•		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.
	•		We are exposed to exchange rate risks on foreign currencies and to other international risks, which may adversely affect our business and results of operations.
	•		A further decline or consolidation in the U.S. domestic automotive manufacturing business could adversely affect our professional services and application services businesses.
	•		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 affect on our business.
	•		Our quarterly financial results vary and may be adversely affected by a number of unpredictable factors.
	•		Declines in our license commitments, increases in customer cancellations or currency fluctuations could lead to declines in our maintenance revenue.
	•		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.
	•		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.
	•		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 have anti-takeover effects that may deter hostile takeovers or delay or prevent changes in control or management, including transactions in which the stockholders of Compuware might otherwise receive a premium for their shares over the current market prices.

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, 2008, 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.

We earn revenue from licensing software products, providing maintenance and support for those products and rendering professional services. Our 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, revenue is recognized when all of the following criteria are 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.

See Note 1 of the Condensed Consolidated Financial Statements for additional details regarding our revenue recognition policy, including our policy and methodology regarding certain bundled revenue arrangements where there is a lack of VSOE of fair value for any undelivered elements.

COMPUWARE CORPORATION AND SUBSIDIARIES

Quarterly Update

The following occurred during the second quarter of 2009:

	•		Realized a decrease in product contribution margin to 40.8% in the second quarter of 2009 from 42.9% in the second quarter of 2008 primarily due to the decline in distributed product revenue.
	•		Realized a 23.3% decrease in distributed product revenue compared to the second quarter of 2008 primarily within our Vantage and Changepoint product lines.
	•		Realized a 1.5% decrease in mainframe product revenue compared to the second quarter of 2008.
	•		Repurchased approximately 10.7 million shares of our common stock at an average price of $11.09 per share.
	•		Temporarily suspended the repurchase of our common stock and terminated our Rule 10b5-1 repurchase plan due to the instability in the credit market that occurred near the end of the quarter.
	•		Released 3 mainframe and 7 distributed product updates designed to increase the productivity of the IT departments of our customers.

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												Percentage of
		Total Revenues												Total Revenues
		Three Months Ended								Period-				Six Months Ended								Period-
		September 30, *								to-Period				September 30, *								to-Period
		2008				2007				Change				2008				2007				Change
REVENUE:
Software license fees			15.7	%			23.2	%			(39.7	)%			18.2	%			20.2	%			(11.6	)%
Maintenance fees			46.2				38.5				7.2				44.2				39.6				9.2
Professional services segment revenue			34.9				35.2				(11.3	)			34.5				37.0				(8.8	)
Application services segment revenue			3.2				3.1				(7.9	)			3.1				3.2				(8.2	)
Total revenues			100.0				100.0				(10.6	)			100.0				100.0				(2.2	)
OPERATING EXPENSES:
Cost of software license fees			2.3				2.2				(5.4	)			2.2				2.9				(27.3	)
Cost of maintenance fees			4.2				3.4				11.0				4.1				3.7				7.7
Professional services segment expenses			33.2				30.7				(3.3	)			32.2				32.2				(2.4	)
Application services segment expenses			3.5				3.0				1.1				3.5				3.2				6.6
Technology development and support			8.5				8.0				(5.1	)			8.0				9.2				(14.9	)
Sales and marketing			21.6				21.7				(10.9	)			21.0				22.4				(8.1	)
Administrative and general			15.8				14.2				(0.9	)			14.7				15.2				(5.3	)
Restructuring cost			0.8				6.2				(88.1	)			0.5				6.0				(91.6	)
Total operating expenses			89.9				89.4				(10.2	)			86.2				94.8				(11.1	)
Income from operations			10.1				10.6				(14.6	)			13.8				5.2				160.9
Other income, net			1.1				1.8				(43.9	)			1.1				1.9				(43.5	)
Income before income taxes			11.2				12.4				(18.8	)			14.9				7.1				105.8
Income tax provision			3.2				0.0				n/a				5.0				0.6				712.8
Net income			8.0	%			12.4	%			(42.3	)%			9.9	%			6.5	%			49.8	%

COMPUWARE CORPORATION AND SUBSIDIARIES

PRODUCTS SEGMENT

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

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenue		$	166,968			$	186,312			$	354,937			$	347,324
Expenses			98,876				106,441				200,857				222,319
Product contribution		$	68,092			$	79,871			$	154,080			$	125,005

The products segment generated contribution margins of 40.8% and 42.9% during the second quarter of 2009 and 2008, respectively, and 43.4% and 36.0% for the first six months of 2009 and 2008, respectively. The decrease in margin for the second quarter of 2009 was primarily due to the decline in distributed product revenue. The increase in margin for the first six months of 2009 was due to both an increase in mainframe product revenue and a decrease in both technology development and support costs and sales and marketing expenses as described below.

Macroeconomic developments toward the end of the second quarter of 2009 affected demand for our software products across all product lines. Although we believe a significant amount of sales were delayed into the third and fourth quarters of fiscal 2009, there can be no assurance when, if ever, such delayed sales will close.

Products Segment Revenue

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

		Three Months Ended												Six Months Ended
		September 30,												September 30,
		2008				2007				Change				2008				2007				Change
Software License Fees
Mainframe		$	21,431			$	28,322				(24.3	)%		$	55,369			$	50,457				9.7	%
Distributed			20,820				41,694				(50.1	)			48,324				66,830				(27.7	)
Total Software License Fees			42,251				70,016				(39.7	)			103,693				117,287				(11.6	)
Maintenance Fees
Mainframe			87,370				82,162				6.3				175,921				163,264				7.8
Distributed			37,347				34,134				9.4				75,323				66,773				12.8
Total Maintenance Fees			124,717				116,296				7.2				251,244				230,037				9.2
Total Product Revenue
Mainframe			108,801				110,484				(1.5	)			231,290				213,721				8.2
Distributed			58,167				75,828				(23.3	)			123,647				133,603				(7.5	)
Total Product Revenue		$	166,968			$	186,312				(10.4	)%		$	354,937			$	347,324				2.2	%

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 61.9% and 61.7% of total revenue during the second quarter of 2009 and 2008, respectively, and 62.4% and 59.8% of total revenue during the first six months of 2009 and 2008, respectively.

COMPUWARE CORPORATION AND SUBSIDIARIES

Software license fees

Software license fees (“license fees”) decreased $27.7 million or 39.7%, which included a positive impact from foreign currency fluctuations of $1.0 million, during the second quarter of 2009 to $42.3 million from $70.0 million during the second quarter of 2008 and decreased $13.6 million or 11.6%, which included a positive impact from foreign currency fluctuations of $3.7 million, during the first six months of 2009 to $103.7 million from $117.3 million during the first six months of 2008.

Distributed license fees for the second quarter and first six months of 2009 declined by $20.8 million and $18.5 million, respectively, and mainframe license fees for the second quarter of 2009 declined by $6.9 million and increased $4.9 million for the first six months of 2009.

The declines in software license fees for the second quarter and first six months of 2009 as compared to 2008 were primarily due to the late second quarter economic slowdown that impacted license transactions across all product lines. The first six months of 2009 declines were partially offset by increases in mainframe license fees resulting from existing customer capacity increases in the United States that occurred during the first quarter of 2009 and an increasing acceptance of our more flexible licensing options.

During the second quarter and first six months of 2009, for software license transactions (“transactions”) that are required to be recognized ratably, we deferred $14.6 million and $31.3 million, respectively, of license revenue relating to transactions that closed during the respective periods, and recognized $20.1 million and $44.0 million of previously deferred license revenue relating to transactions that closed and had been deferred prior to the beginning of the respective periods.

Maintenance fees

Maintenance fees increased $8.4 million or 7.2%, which included a positive impact from foreign currency fluctuations of $3.4 million, during the second quarter of 2009 to $124.7 million from $116.3 million during the second quarter of 2008, and increased $21.2 million or 9.2%, which included a positive impact from foreign currency fluctuations of $9.9 million, during the first six months of 2009 to $251.2 million from $230.0 million during the first six months of 2008. The increase relates primarily to the continued growth of our mainframe and distributed product base and maintaining a high rate of maintenance renewals.

COMPUWARE CORPORATION AND SUBSIDIARIES

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

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
United States		$	85,460			$	98,236			$	184,771			$	183,646
Europe and Africa			56,544				60,906				118,206				114,073
Other international operations			24,964				27,170				51,960				49,605
Total product revenue		$	166,968			$	186,312			$	354,937			$	347,324

Products Segment Expenses

Products segment expenses include cost of software license fees, cost of maintenance fees, technology development and support costs and sales and marketing expenses. These 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 $300,000 or 5.4% during the second quarter of 2009 to $6.3 million from $6.6 million in the second quarter of 2008 and for the first six months of 2009 decreased $4.7 million or 27.3% to $12.3 million from $17.0 million in the first six months of 2008. The decreases in cost of software license fees were due to a decline in hardware costs consistent with the decline in our Vantage product line license sales. The decline in the first six months of 2009 was further affected by a $3.9 million capitalized software impairment charge recorded during the first quarter of 2008 associated with the 2008 restructuring initiative. As a percentage of software license fees, cost of software license fees were 14.8% and 9.4% in the second quarter of 2009 and 2008, respectively, and 11.9% and 14.5% (including 3.3% from the impairment charge) in the first six months of 2009 and 2008, respectively. The increase for the second quarter of 2009 was primarily due to the decline in software license fees. The decline for the first six months of 2009 was primarily due to the capitalized software impairment charge as discussed above.

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 increased $1.1 million or 11.0% during the second quarter of 2009 to $11.3 million from $10.2 million in the second quarter of 2008 and for the first six months of 2009 increased $1.6 million or 7.7% to $23.3 million from $21.7 million in the first six months of 2008. The increase was primarily due to higher compensation and benefit costs associated with the increased customer support required for the growth in our international operations. As a percentage of maintenance fees, cost of maintenance fees were 9.1% and 8.8% in the second quarter of 2009 and 2008, respectively, and 9.3% and 9.4% in the first six months of 2009 and 2008, 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 13.7% and 13.0% in the second quarter of 2009 and 2008, respectively, and 12.8% and 15.4% in the first six months of 2009 and 2008, 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 second quarter and first six months of 2009 and 2008 were as follows (in thousands):

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Technology development and support costs incurred		$	25,650			$	27,767			$	50,709			$	60,815
Capitalized technology development and support costs			(2,712	)			(3,597	)			(5,201	)			(7,317	)
Technology development and support costs reported		$	22,938			$	24,170			$	45,508			$	53,498

Before the capitalization of internally developed software products, total technology development and support costs decreased $2.1 million or 7.6% during the second quarter of 2009 to $25.7 million from $27.8 million in the second quarter of 2008 and for the first six months of 2009 decreased $10.1 million or 16.6% to $50.7 million from $60.8 million in the first six months of 2008. The decrease in expense was primarily due to lower compensation and benefit costs resulting from employee headcount reductions as part of the restructuring program initiated during the first six months of 2008 (see Note 7 to the Condensed Consolidated Financial Statements).

Sales and marketing costs consist primarily of personnel related costs associated with product sales, sales support and marketing for all our product offerings. Sales and marketing costs decreased $7.1 million or 10.9% during the second quarter of 2009 to $58.4 million from $65.5 million in the second quarter of 2008 and for the first six months of fiscal 2009 decreased $10.5 million or 8.1% to $119.7 million from $130.2 million in the first six months of fiscal 2008. The decrease in sales and marketing costs was primarily attributable to a decrease in compensation and benefit costs resulting from employee headcount reductions as part of the restructuring program initiated during the first six months of 2008 (see Note 7 to the Condensed Consolidated Financial Statements) and a decrease in commission costs due to the decline in software license sales in 2009.

As a percentage of product revenue, sales and marketing costs were 34.9% and 35.1% in the second quarter of 2009 and 2008, respectively, and 33.7% and 37.5% in the first six months of 2009 and 2008, respectively. The declines in our percentage of product revenue primarily resulted from the expense reductions discussed above.

COMPUWARE CORPORATION AND SUBSIDIARIES

PROFESSIONAL SERVICES SEGMENT

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

		Three Months Ended								Six Months Ended
		September 30, *								September 30, *
		2008				2007				2008				2007
Revenue		$	94,314			$	106,361			$	196,146			$	215,144
Expenses			89,460				92,557				182,970				187,451
Professional services segment contribution		$	4,854			$	13,804			$	13,176			$	27,693