Edgar Filing: COMPUWARE CORP

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2011

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

For the transition period from to .

Commission file number 000-20900

COMPUWARE CORPORATION

(Exact name of registrant as specified in its charter)

Michigan		38-2007430
(State or other jurisdiction of incorporation or organization)		(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 x 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 x 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 x Accelerated filer o 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 x

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

As of February 6, 2012, there were outstanding 218,569,127 shares of Common Stock, par value $.01, of the registrant.

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of December 31, 2011 and March 31, 2011	3

	Condensed Consolidated Statements of Operations for the three months and nine months ended December 31, 2011 and 2010	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2011 and 2010	5

	Notes to Condensed Consolidated Financial Statements	6

	Report of Independent Registered Public Accounting Firm	30

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58

Item 4.	Controls and Procedures	58

PART II.	OTHER INFORMATION

Item 1A.	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 6.	Exhibits	60

SIGNATURES		61

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands)

(Unaudited)

	December 31,			March 31,
ASSETS	2011			2011

CURRENT ASSETS:
Cash and cash equivalents	$	82,201		$	180,244
Accounts receivable, net		470,724			474,479
Deferred tax asset, net		47,460			40,756
Income taxes refundable		4,634			6,815
Prepaid expenses and other current assets		32,283			40,446
Total current assets		637,302			742,740

PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION		326,099			333,166

CAPITALIZED SOFTWARE AND OTHER INTANGIBLE ASSETS, NET		117,175			83,001

ACCOUNTS RECEIVABLE		216,735			206,887

DEFERRED TAX ASSET, NET		40,789			35,754

GOODWILL		797,163			607,765

OTHER ASSETS		35,547			29,064

TOTAL ASSETS	$	2,170,810		$	2,038,377

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable	$	16,805		$	18,931
Current portion of long term debt		110,000
Accrued expenses		107,512			105,242
Income taxes payable		19,073			12,286
Deferred revenue		435,219			462,376
Total current liabilities		688,609			598,835

DEFERRED REVENUE		356,693			393,780

ACCRUED EXPENSES		27,908			28,016

DEFERRED TAX LIABILITY, NET		77,100			65,134
Total liabilities		1,150,310			1,085,765

SHAREHOLDERS' EQUITY:
Common stock		2,188			2,177
Additional paid-in capital		681,359			654,109
Retained earnings		355,650			297,067
Accumulated other comprehensive loss		(18,697	)		(741	)
Total shareholders' equity		1,020,500			952,612

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,170,810		$	2,038,377

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2011			2010		2011		2010
REVENUES:
Software license fees		$	57,121	$	60,152	$	152,958	$	139,095
Maintenance fees			106,843		106,321		322,908		314,159
Subscription fees			19,931		17,841		58,156		48,769
Professional services fees			50,575		48,332		157,403		139,576
Application services fees			18,587		14,379		52,302		37,780

Total revenues			253,057		247,025		743,727		679,379

OPERATING EXPENSES:
Cost of software license fees			4,844		3,745		13,150		10,428
Cost of maintenance fees			9,603		8,735		28,907		23,842
Cost of subscription fees			7,291		6,539		22,192		17,984
Cost of professional services			45,277		41,092		136,496		121,661
Cost of application services			17,265		12,719		53,934		34,159
Technology development and support			27,265		22,517		78,706		65,951
Sales and marketing			69,683		62,437		197,255		176,648
Administrative and general			39,236		39,760		122,717		115,977

Total operating expenses			220,464		197,544		653,357		566,650

INCOME FROM OPERATIONS			32,593		49,481		90,370		112,729

OTHER INCOME, NET			231		1,376		1,221		3,103

INCOME BEFORE INCOME TAXES			32,824		50,857		91,591		115,832

INCOME TAX PROVISION			11,236		16,858		30,339		43,196

NET INCOME		$	21,588	$	33,999	$	61,252	$	72,636

Basic earnings per share		$	0.10	$	0.16	$	0.28	$	0.33

Diluted earnings per share		$	0.10	$	0.15	$	0.28	$	0.32

See notes to condensed consolidated financial statements.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Nine Months Ended
	December 31,
	2011			2010
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income	$	61,252		$	72,636
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		44,706			37,300
Stock award compensation		17,555			13,387
Deferred income taxes		7,460			7,554
Other		221			561
Net change in assets and liabilities, net of effects from currency fluctuations and acquisitions:
Accounts receivable		(14,201	)		(23,489	)
Prepaid expenses and other current assets		1,940			14,572
Other assets		(3,451	)		(1,514	)
Accounts payable and accrued expenses		783			(11,882	)
Deferred revenue		(53,184	)		(77,463	)
Income taxes		10,604			4,123
Net cash provided by operating activities		73,685			35,785

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Business, net of cash acquired		(249,337	)		(18,165	)
Property and equipment		(15,879	)		(13,328	)
Capitalized software		(18,346	)		(12,877	)
Other		(575	)
Net cash used in investing activities		(284,137	)		(44,370	)

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from borrowings		180,200
Payments on borrowings		(70,200	)
Net proceeds from exercise of stock awards including excess tax benefits		8,503			53,331
Employee contribution to stock purchase plans		2,101			1,892
Repurchase of common stock		(4,259	)		(116,600	)
Net cash provided by (used in) financing activities		116,345			(61,377	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(3,936	)		1,928

NET DECREASE IN CASH AND CASH EQUIVALENTS		(98,043	)		(68,034	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		180,244			149,897

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	82,201		$	81,863

See notes to condensed consolidated financial statements.

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Note 1 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (“financial statements”) include the accounts of Compuware Corporation and its wholly owned subsidiaries (collectively, the "Company", “Compuware”, “we”, “our” and “us”). All inter-company balances and transactions have been eliminated in consolidation.

The 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 December 31, 2011, final amounts may differ from these estimates.

In the opinion of management of the Company, the accompanying financial statements reflect all adjustments, consisting only of normal recurring adjustments, 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, 2011 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, 2011 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 results expected to be achieved for the full fiscal year.

Basis for Revenue Recognition

The Company derives its revenue from licensing software products; providing maintenance and support services for those products; and rendering web performance, professional and application services. Our software solutions are comprised of license fees, maintenance fees, subscription fees and software related professional services fees.

We sometimes enter into arrangements that include both software related deliverables (licensed software products, maintenance services or software related professional services) and non-software deliverables (web performance services, professional services unrelated to our software products or application services). Our web performance services and application services do not qualify as software deliverables because our license grant does not allow the customer the right or capability to take possession of the software. For arrangements that contain both software and non-software deliverables (almost all of these arrangements combine software deliverables with web performance services), in accordance with ASC 605 “Revenue Recognition,” we allocate the arrangement consideration based on fair value using the following hierarchy: vendor specific objective evidence of fair value (“VSOE,” meaning price when sold separately) if available; third-party evidence if VSOE is not available; or best estimated selling price if neither VSOE nor third-party evidence is available. We currently are unable to establish VSOE or third-party evidence for our web performance services or software deliverables. Therefore, we create our best estimate of selling price by evaluating renewal amounts included in a contract, if any, and prices of deliverables sold separately, taking into consideration geography, volume discounts, and transaction size.

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Once we have allocated the arrangement consideration between software deliverables and non-software deliverables, we recognize revenue as described in the respective category.

In order for a transaction to be eligible for revenue recognition, the following revenue criteria must be met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. We evaluate collectability based on past customer history, external credit ratings and payment terms within various customer agreements.

Software license fees

The Company's software license agreements provide our customers with a right to use our software perpetually (perpetual licenses) or during a defined term (time-based licenses).

Assuming all revenue recognition criteria are met, perpetual license fee revenue is recognized using the residual method, under which the fair value, based on VSOE, of all undelivered elements of the agreement (i.e., maintenance and software related 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.

For revenue arrangements where there is a lack of VSOE for any undelivered elements, license fee revenue is deferred and recognized upon delivery of those elements or when VSOE can be established. When maintenance or software related professional services are the only undelivered elements, the license fee revenue is recognized on a ratable basis over the longer of the maintenance term or the period the software related professional services are expected to be performed. Such transactions include time-based licenses and certain unlimited capacity licenses, as the Company has not established VSOE for the undelivered elements in these arrangements. In order 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 software related professional services fee (which is included in professional services fees) associated with these types of arrangements based on its determination of fair value. The Company applies VSOE for maintenance related to perpetual license transactions and stand alone software related professional services arrangements as a reasonable and consistent approximation of fair value to separate license fee, maintenance fee and software related 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 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 financing 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 related receivable.

Maintenance fees

The Company’s maintenance arrangements allow customers to receive 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 generally included with all license agreements. Maintenance fees are recognized ratably over the term of the maintenance arrangements, which generally range from one to five years.

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Subscription fees

Subscription fees relate to arrangements that permit our customers to access and utilize our web performance services. Subscription fees are deferred upon contract execution and are recognized ratably over the term of the subscription.

Professional services fees

The Company provides a broad range of IT services for mainframe, distributed, web and mobile environments, including mobile computing application development and integration, package software customization, cloud computing consulting, development and integration of legacy systems, IT portfolio management services, enterprise legacy modernization services and application performance management. The Company also offers implementation, consulting and training services in tandem with the Company’s software solutions offerings, which are referred to as software related professional services.

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 it is determined that costs will exceed revenue, the expected loss is recorded at the time the loss becomes apparent.

Application services fees

Our application services fees consist of fees related to our Covisint on-demand software including associated services. The arrangements do not provide customers the right to take possession of the software at any time, nor do the arrangements contain rights of return. Many of our application services fee contracts include a project fee and ongoing software-as-a-service (“SaaS”) operations (“recurring”) fees. Projects that have stand-alone value (e.g. other vendors provide similar services), qualify as a separate element of accounting. Therefore, the project fee is recognized as delivered. For those projects that do not have stand-alone value, the revenue is deferred and recognized over the expected period the customer will receive benefit. The recurring fees are recognized over the applicable service period.

Deferred revenue

Deferred revenue consists primarily of billed and unbilled maintenance fees related to the future service period of maintenance arrangements in effect at the reporting date. Deferred license fees, subscription services and application services are also included in deferred revenue for those arrangements that are being recognized on a ratable basis. Sales commission costs that directly relate to revenue transactions that are deferred are recorded as “prepaid expenses and other current assets” or non-current “other assets”, as applicable, in the condensed consolidated balance sheets. Commission costs for license, maintenance and subscription arrangements are recognized as “sales and marketing” expenses in the condensed consolidated statements of operations over the revenue recognition period of the related customer arrangements. Commission costs for application services are recognized as “cost of application services” expenses in the condensed consolidated statements of operations over the revenue recognition period of the related customer arrangements.

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Research and development

Research and development (“R&D”) costs primarily include the cost of programming personnel and amounted to $22.6 million and $16.2 million for the three months ended December 31, 2011 and 2010, respectively, and $62.2 million and $51.8 million for the nine months ended December 31, 2011 and 2010, respectively. R&D costs related to our software products and web performance services network are reported as “technology development and support” in the condensed consolidated statements of operations and for our application services network, the costs are reported as “cost of application services”.

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 and net operating loss and credit carryforwards 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 does not permanently reinvest any earnings in its foreign subsidiaries and recognizes all deferred tax liabilities that arise from outside basis differences in its investment in subsidiaries.

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.

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

The Company’s effective tax rate for the nine months ended December 31, 2011 was 33.1% compared to 37.3% for the nine months ended December 31, 2010. The decrease in the effective tax rate was primarily due to legislation enacted in May 2011 that amended Michigan’s Income Tax Act to implement a comprehensive set of tax changes effective January 2012. One part of the legislation contains provisions that replaced the Michigan Business Tax (“MBT”) with a new corporate income tax. Certain credits allowed under the MBT, including the Brownfield Redevelopment (“Brownfield”) tax credit, will continue to be effective under the revised Income Tax Act. This allows the Company to reduce its future tax liability for the duration of the credit carryforward period. The Brownfield tax credit was originally awarded to the Company in 2003 when it moved its headquarters to the City of Detroit. Upon enactment of the MBT in 2008, the Company established a deferred tax asset for the Brownfield tax credits, assessed the ability to utilize such credits prior to expiration and recorded a valuation allowance to reduce the carrying value of the Brownfield deferred tax asset to the more likely than not realizable value. As a result of the May 2011 legislation, the valuation allowance associated with the Brownfield deferred tax asset was reversed resulting in a $5.0 million reduction to the Company’s income tax provision for the nine months ended December 31, 2011. The decrease was further impacted by a $2.2 million increase to the valuation allowance recorded during the nine months ended December 31, 2010 to reduce the carrying value of the Brownfield deferred tax asset to the more likely than not realizable value based upon our analysis and the then existing tax laws.

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Cash paid for income taxes was $11.6 million and $28.1 million during the first three quarters of fiscal 2012 and 2011, respectively.

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2011-5, “Presentation of Comprehensive Income”. The ASU disallows the presentation of the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Further, the ASU requires that the statement of net income and the statement of other comprehensive income be presented consecutively within the financial statements. In December 2011, the FASB issued ASU No. 2011-12 which defers the requirement of ASU No. 2011-5 that reclassification adjustments between net income and other comprehensive income be included on the face of the financial statements. For public companies, ASU No. 2011-5 should be applied retrospectively for fiscal years and interim periods beginning after December 15, 2011. We will adopt the requirements of this ASU starting in the fourth quarter of fiscal 2012.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820)”. The amendments in this ASU change the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. For public companies, the ASU should be applied prospectively for annual periods beginning after December 15, 2011. We are currently evaluating the impact of this standard on our consolidated financial statements and plan to adopt this ASU in fiscal 2013.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350)”. The amendments in this ASU allow an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the first step of the two-step impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the entity must perform additional impairment testing. Otherwise, performing the two-step impairment test is not necessary. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We are evaluating the impact this will have on our assessment of goodwill and plan to adopt this ASU in fiscal 2013.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210)”. The amendments in this ASU require improved disclosure information about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. This ASU should be applied retrospectively for all comparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. We are currently evaluating the impact of this standard on our consolidated financial statements and plan to adopt this ASU in fiscal 2014.

Reclassification

The Company has expanded the revenue section of the Statement of Operations to seperately reflect maintenance and subscription fees and to break out application services fees from professional services fees. The respective costs of revenues have also been separated. Therefore, these amounts in the Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2010 have been reclassified to conform with the current presentation.

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Note 2 – Acquisition

On July 1, 2011, the Company acquired all of the outstanding capital stock of dynaTrace software, Inc. (“dynaTrace”), through a merger of dynaTrace with a wholly owned subsidiary of the Company, for $255.8 million in cash, plus approximately $300,000 of direct acquisition costs recorded to “administrative and general” expense. dynaTrace was a privately-held company whose technology enables continuous tracking of business transactions and provides exact identification of performance problems, enhancing our Gomez On-premises software solutions. The assets and liabilities acquired have been recorded at their estimated fair values as of the purchase date. The purchase price exceeded the estimated fair value of the acquired assets and liabilities by $210.9 million, which was recorded to goodwill. The estimated fair value of intangible assets subject to amortization totaled $42.0 million, of which $28.5 million, $9.8 million and $3.7 million related to developed technology, trade names, and customer relationships with a useful life of five, three and ten years, respectively. The purchase price was funded with the Company’s existing cash resources and borrowings of $129.5 million under its credit facility described in Note 11.

Compuware acquired dynaTrace to obtain the technology described above. The acquisition price in excess of the identifiable assets (goodwill) is a result of our expected synergies from the acquisition which are primarily related to expansion of the dynaTrace sales channel. In addition, we are integrating this technology with our Gomez On-premises and SaaS offerings and are expanding the dynaTrace sales channel into all of our sales channels including our direct sales force, inside sales force and independent distributors and partners.

The operations of dynaTrace are part of our APM business unit. Therefore, financial activity and goodwill are included in the APM segment and reporting unit, respectively.

This acquisition was considered immaterial for disclosure of supplemental pro forma information of the acquiree since the acquisition date.

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Note 3 – Financing Receivables

The Company allows deferred payment terms that exceed one year for customers purchasing licenses (perpetual or time-based) for our software products and the related maintenance services (“multi-year deferred payment arrangements”). A financing receivable exists when the license transfers to the customer or the related maintenance service has been provided (i.e., revenue recognition has occurred) prior to the due date of the related receivable. Our software products financing receivables primarily consist of the perpetual license portion of outstanding multi-year deferred payment arrangements.

During the third quarter of fiscal 2012, CareTech Solutions, Inc. paid the remaining balance on its loan from the Company. As of December 31, 2011, our loans receivable balance consists of a note due from ForeSee Results, Inc. (“ForeSee”). During the first quarter of fiscal 2012, the ForeSee loan receivable was modified to extend the payment terms. The modified payment terms require quarterly payments of principal and interest be made through March 31, 2015 at an annual interest rate of 7.0%. The agreement also required ForeSee to make a $2.4 million payment on the related note during the first quarter of fiscal 2012, reducing the principal balance on the loan receivable to $5.6 million as of December 31, 2011.

The following is an analysis of our software products and loaned financing receivables aged based on invoice date as of December 31, 2011 and March 31, 2011 (in thousands):

	As of December 31, 2011
					Greater than
	0-29 days		30-90 days		90 days				Total
	past		past		past				financing
	invoice date		invoice date		invoice date		Unbilled		receivables
Pass rating
Software products	$	6,953	$	1,132	$	17	$	40,072	$	48,174
Loans								5,868		5,868
Total		6,953		1,132		17		45,940		54,042

Watch rating
Software products		-		-		109		190		299

Total financing receivables	$	6,953	$	1,132	$	126	$	46,130	$	54,341

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	As of March 31, 2011
					Greater than
	0-29 days		30-90 days		90 days				Total
	past		past		past				financing
	invoice date		invoice date		invoice date		Unbilled		receivables
Pass rating
Software products	$	6,439	$	434	$	179	$	37,971	$	45,023
Loans								9,753		9,753
Total		6,439		434		179		47,724		54,776

Watch rating
Software products		-		69		40		280		389

Total financing receivables	$	6,439	$	503	$	219	$	48,004	$	55,165

As of December 31, 2011 and March 31, 2011, the allowance for credit losses on our financing receivables was $299,000 and $389,000, respectively.

Note 4 - Foreign Currency Transactions and Derivatives

The Company is exposed to foreign exchange rate risks related to assets and liabilities that are denominated in non-local currency and current inter-company balances due to and from the Company’s foreign subsidiaries. We enter into foreign currency forward contracts to sell or buy currencies with the intent of mitigating foreign exchange rate risks related to these balances. The Company does not hedge currency risk related to anticipated revenue or expenses denominated in foreign currency. All foreign exchange derivatives are recognized in the consolidated balance sheets at fair value. See Note 5 of the condensed consolidated financial statements for further information.

The foreign currency net gains or (losses) for the three months ended December 31, 2011 and 2010 were $138,000 and ($464,000), respectively, and for the nine months ended December 31, 2011 and 2010 were $707,000 and ($1.1) million, respectively. The hedging transaction net gains or (losses) from foreign exchange derivative contracts for the three months ended December 31, 2011 and 2010 were $98,000 and $2,500, respectively, and for the nine months ended December 31, 2011 and 2010 were ($490,000) and $21,500, respectively. These amounts were recorded to “administrative and general” in the condensed consolidated statements of operations.

The Company had derivative contracts maturing through January 2012 to sell $3.4 million and purchase $8.9 million in foreign currencies at December 31, 2011 and had derivative contracts maturing through April 2011 to sell $3.3 million and purchase $5.7 million in foreign currencies at March 31, 2011.

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Note 5 - Fair Value of Assets and Liabilities

The Company reports its money market funds and foreign exchange derivatives at fair value on a recurring basis using the following fair value hierarchy: (1) Level 1 - quoted prices in active markets for identical assets or liabilities; (2) 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; and (3) 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 following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis (in thousands):

As of December 31, 2011

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Estimated

Identical Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash equivalents - money market funds

22,276

Liabilities:

Foreign exchange derivatives

As of March 31, 2011

Quoted Prices in

Significant

Active Markets for

Other Observable

Unobservable

Estimated

Identical Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Cash equivalents - money market funds

106,640

Liabilities:

Foreign exchange derivatives

Non-financial assets such as goodwill and intangible assets are also subject to nonrecurring fair value measurements if they are deemed to be impaired. See note 9 of the condensed consolidated financial statements for further information.

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Note 6 - Computation of Earnings per Common Share

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
Basic earnings per share:	2011		2010		2011		2010

Numerator:
Net income	$	21,588	$	33,999	$	61,252	$	72,636

Denominator:
Weighted-average common shares outstanding		218,534		218,683		218,427		221,490

Basic earnings per share	$	0.10	$	0.16	$	0.28	$	0.33

Diluted earnings per share:

Numerator:
Net income	$	21,588	$	33,999	$	61,252	$	72,636

Denominator:
Weighted-average common shares outstanding		218,534		218,683		218,427		221,490
Dilutive effect of stock awards		3,349		6,475		4,134		3,622

Total shares		221,883		225,158		222,561		225,112

Diluted earnings per share	$	0.10	$	0.15	$	0.28	$	0.32

During the three and nine months ended December 31, 2011, stock awards to purchase a total of approximately 15.3 million and 10.9 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. During the three and nine months ended December 31, 2010, stock awards to purchase a total of approximately 5.2 million and 17.6 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

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Note 7 - Comprehensive Income

Other comprehensive income (loss) relates to 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					Nine Months Ended
	December 31,					December 31,
	2011		2010			2011			2010
Net income	$	21,588	$	33,999		$	61,252		$	72,636

Foreign currency translation adjustment, net of tax		1,197		(107	)		(17,956	)		2,320

Total comprehensive income	$	22,785	$	33,892		$	43,296		$	74,956

Note 8 – Stock Benefit Plans and Stock-Based Compensation

Stock Benefit Plans

The Company has the following stock benefit plans: (1) the Amended and Restated 2007 Long Term Incentive Plan (“2007 LTIP”) allows the Company’s Compensation Committee to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and 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 and Trust (“ESOP”) allows the Company to make contributions to the ESOP for the benefit of substantially all U.S. employees.

During the 2011 annual meeting of shareholders, shareholders approved an increase of 13.5 million in the number of common shares authorized for issuance under the 2007 LTIP, which increased the aggregate number of common shares reserved by the Company for issuance under the 2007 LTIP to 41.5 million as of December 31, 2011 (less shares previously issued).

Covisint Corporation (“Covisint”), a subsidiary of the Company, maintains a stock benefit plan referred to as the 2009 Long-Term Incentive Plan (“2009 Covisint LTIP”) allowing the Board of Directors of Covisint to grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based cash or restricted stock unit awards and cash incentive awards to employees and directors of Covisint.

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Stock Option Activity

A summary of option activity under the Company’s stock-based compensation plans as of December 31, 2011, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended
	December 31, 2011
						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Options			Price		Term in Years		Value
Options outstanding as of March 31, 2011		16,868		$	8.18
Granted		7,806			8.06
Exercised		(872	)		7.82			$	1,854
Forfeited		(479	)		8.50
Cancelled/expired		(803	)		11.85
Options outstanding as of December 31, 2011		22,520		$	8.01		6.72	$	19,793

Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2011		20,980		$	7.96		6.58	$	19,085

Options exercisable as of December 31, 2011		10,824		$	7.69		4.83	$	10,940

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

	Nine Months Ended
	December 31,
	2011			2010

Expected volatility		39.87	%		42.12	%
Risk-free interest rate		1.72	%		2.42	%
Expected lives at date of grant (in years)		5.8			6.1
Weighted-average fair value of the options granted	$	4.04		$	4.10

The average fair value of stock options vested during the nine months ending December 31, 2011 and 2010 was $4.72 and $4.64 per share, respectively.

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Restricted Stock Units and Performance-Based Stock Awards Activity

A summary of non-vested restricted stock units and performance-based stock awards (collectively “Non-vested RSU”) activity under the Company’s 2007 LTIP as of December 31, 2011 and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

	Nine Months Ended
	December 31, 2011
				Weighted
				Average		Aggregate
				Grant-Date		Intrinsic
	Shares			Fair Value		Value

Non-vested RSU outstanding as of March 31, 2011		3,741
Granted		1,294		$	9.84
Released		(410	)			$	4,037
Forfeited		(91	)
Non-vested RSU outstanding as of December 31, 2011		4,534

Covisint Corporation 2009 Long-Term Incentive Plan

As of December 31, 2011, there were 119,000 stock options outstanding from the 2009 Covisint LTIP. These options will vest only if, prior to August 26, 2015, Covisint completes an initial public offering (“IPO”) or if there is a change of control of Covisint.

The individuals who received stock options from the 2009 Covisint LTIP were also awarded performance-based restricted stock unit awards (“PSAs”) from the Company’s 2007 LTIP. There were 1.4 million PSAs outstanding as of December 31, 2011. These PSAs will vest only if Covisint does not complete an IPO or a change of control transaction by August 25, 2015, and the Covisint business meets a pre-defined revenue target for any four consecutive calendar quarters ending prior to August 26, 2015.

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Stock Awards Compensation

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

	Three Months Ended					Nine Months Ended
	December 31,					December 31,
	2011			2010		2011			2010
Stock-based compensation classified as:

Cost of maintenance fees	$	202		$	190	$	604		$	349
Cost of subscription fees		(68	)		33		(8	)		33
Cost of professional services		54			118		287			468
Cost of application services		254			140		1,196			282
Technology development and support		575			318		1,655			833
Sales and marketing		1,493			1,272		4,546			4,202
Administrative and general		3,062			2,121		9,275			7,220

Total stock-based compensation expense before income taxes	$	5,572		$	4,192	$	17,555		$	13,387

As of December 31, 2011, total unrecognized compensation cost of $45.1 million, net of estimated forfeitures, related to nonvested equity awards is expected to be recognized over a weighted-average period of approximately 2.58 years.

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Note 9 – Goodwill, Capitalized Software and Other Intangible Assets

Goodwill

In previous fiscal years, the Company operated in four business segments in the technology industry: products, web application performance management services, professional services and application services. Effective April 1, 2011, the Company realigned its business unit structure which resulted in a change in the Company’s segment reporting and reporting unit structure (see Note 10 for additional information). The following reporting units were created as a result of this change: Application Performance Management (“APM”), Mainframe (“MF”), Changepoint (“CP”), Uniface (“UF”), Professional Services (“PS”) and Covisint Application Services (“AS” or “Covisint”).

As of April 1, 2011, the Company performed a valuation to determine the reallocation of the goodwill balance from the prior period reporting units (products, web performance services, professional services and application services) to the new reporting units based on our estimated relative fair value. This valuation and reallocation resulted in the following as of April 1, 2011:

The goodwill balance of $221.1 million related to the products reporting unit as of March 31, 2011 was proportionally allocated to APM, Mainframe, Changepoint and Uniface (collectively “software solutions”) using the estimated relative fair value of each respective reporting unit.

The goodwill balance of $219.5 million related to the web performance services reporting unit is now included within the APM reporting unit.

As of March 31, 2011, the professional services reporting unit consisted of traditional professional services and software related professional services. The fiscal 2012 business unit structure realignment transferred the software related professional services to APM, Mainframe, Changepoint and Uniface. As a result, the goodwill balance of $141.8 million related to the professional services reporting unit was allocated between traditional professional services, APM, Mainframe, Changepoint and Uniface based on the estimated relative fair value of each respective reporting unit. The portion of goodwill allocated to the traditional professional services is reported in the professional services reporting unit.

The goodwill balance of $25.4 million related to the Covisint reporting unit continues to be reported in the application services reporting unit during fiscal 2012.

Following the allocation of goodwill to the new reporting units, the Company performed impairment evaluations of each reporting unit’s goodwill as of April 1, 2011 which indicated the goodwill carrying values were not impaired.

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The change in the carrying amount of goodwill by reporting unit during the nine months ended December 31, 2011 is summarized as follows (in thousands):

	APM			MF			CP			UF			PS			AS		Total
Goodwill as of April 1, 2011	$	282,815		$	141,020		$	22,151		$	21,350		$	115,044		$	25,385	$	607,765

Acquisition (1)		210,908			-			-			-			-			-		210,908

Effect of foreign currency translation		(21,017	)		(130	)		(20	)		(20	)		(323	)		-		(21,510	)

Goodwill as of December 31, 2011	$	472,706		$	140,890		$	22,131		$	21,330		$	114,721		$	25,385	$	797,163

(1)The Company acquired dynaTrace on July 1, 2011. See Note 2 for information related to the purchase accounting that resulted in the recording of goodwill.

As of December 31, 2011, the Company concluded that the shortfall of APM revenues compared to expected results was a triggering event requiring an interim impairment review of goodwill for the APM reporting unit. The evaluation indicated that the estimated fair value of the APM reporting unit exceeded the reporting unit’s carrying value by 59% at December 31, 2011. Therefore, no impairment charge was taken.

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Capitalized software and other intangible assets

The components of the Company’s capitalized software and other intangible assets are as follows (in thousands):

	As of December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,425				$	4,425

Amortized intangible assets:
Capitalized software
Internally developed	$	208,959		(171,162	)	$	37,797
Purchased (1)		166,142		(131,253	)		34,889
Customer relationship (2)		51,979		(19,982	)		31,997
Other (2)		22,348		(14,281	)		8,067
Total amortized intangible assets	$	449,428	$	(336,678	)	$	112,750

	As of March 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,467				$	4,467

Amortized intangible assets:
Capitalized software
Internally developed	$	194,770	$	(161,671	)		33,099
Purchased		136,469		(125,118	)		11,351
Customer relationship		48,813		(16,729	)		32,084
Other		11,162		(9,162	)		2,000
Total amortized intangible assets	$	391,214	$	(312,680	)	$	78,534

(1) In July 2011, the Company acquired developed technology valued at $28.5 million as part of the dynaTrace acquisition (see Note 2 for additional information). Additionally, the Company acquired developed technology valued at $4.2 million during fiscal 2012.

(2) In July 2011, the Company acquired customer relationship agreements valued at $3.7 million and trade names valued at $9.8 million as part of the dynaTrace acquisition (see Note 2 for additional information).

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Capitalized software includes the costs of internally developed software technology and software technology purchased through acquisitions. Internally developed capitalized software costs and capitalized purchased software technology are being amortized over periods up to five years.

Customer relationship agreements are related to acquisition activity and are being amortized over periods up to ten years.

Other amortized intangible assets include amortizable trademarks and patents relating to acquisition activity and are being amortized over periods up to three years.

Unamortized trademarks were acquired as part of the Covisint and Changepoint acquisitions in fiscal 2004 and fiscal 2005. These trademarks are deemed to have an indefinite life.

Amortization of intangible assets

Amortization expense of capitalized software, customer relationship and other intangible assets were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
Amortized intangible assets:
Capitalized software
Internally developed	$	3,323	$	2,806	$	9,483	$	8,250
Purchased		2,711		1,200		6,438		3,535
Customer relationship		1,164		1,163		3,427		3,382
Other		1,092		490		2,867		1,425

Total amortization expense	$	8,290	$	5,659	$	22,215	$	16,592

Capitalized software amortization related to our product software is reported as “cost of software license fees”, amortization related to our web performance services (“Gomez SaaS”) is reported as “cost of subscription fees” and amortization related to our application services (“Covisint”) is reported as “cost of application services” in the condensed consolidated statements of operations.

Customer relationship amortization related to our software solutions segments is reported as “sales and marketing” and amortization related to our application services segment is reported as “cost of application services” in the condensed consolidated statements of operations.

Amortization expense associated with trademarks and trade names is reported as “administrative and general” in the condensed consolidated statements of operations.

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Based on the capitalized software, customer relationship and other intangible assets recorded through December 31, 2011, the annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (in thousands):

	Fiscal Year Ended March 31,
	2012		2013		2014		2015		2016		Thereafter
Amortized intangible assets:
Capitalized software	$	21,808	$	21,926	$	18,414	$	12,880	$	10,258	$	3,321
Customer relationship		4,470		4,168		4,121		4,121		4,121		14,423
Other		3,791		3,427		2,981		735		-		-

Total amortization expense	$	30,069	$	29,521	$	25,516	$	17,736	$	14,379	$	17,744

Note 10 – Segment Information

In previous fiscal years, the Company operated in four business segments: products, web application performance management services, professional services and application services. Effective April 1, 2011, the Company realigned its business unit structure which had the following effect: (1) the former products segment split into four new segments: Application Performance Management, Mainframe, Changepoint and Uniface; (2) the former web performance services segment (Gomez SaaS solution) and Gomez On-premises software (formerly Vantage) are combined within the APM segment; and (3) the operating results of our software related professional services are reported within APM, Mainframe, Changepoint and Uniface, as applicable (previously reported in the Professional Services segment).

As a result of these changes, Compuware now has six business segments: APM, Mainframe, Changepoint, Uniface, Professional Services and Covisint Application Services.

This business unit structure should provide the Company with better visibility and control over the operations of the business and increase its market agility, enabling it to more effectively capitalize on market conditions and competitive advantages to maximize revenue growth and profitability. The segment presentation in the prior period has been recast to conform to the current presentation of the business segments. This change did not have an impact on previously reported consolidated financial results.

The Company’s products and services are offered worldwide to the largest IT organizations across a broad spectrum of technologies, including mainframe, distributed, Internet and mobile platforms and provide the following capabilities:

APM includes Gomez SaaS and On-premises solutions. The SaaS solutions are designed to test and monitor the performance, availability and quality of companies’ web and mobile applications. The On-premises solutions provide detailed application insight that identifies and helps correct the causes of poor application performance within client workstations, network, server, Java and .NET environments. dynaTrace operations are included within our APM segment. The acquisition of dynaTrace provided additional technology which enables continuous tracking of business transactions and provides exact identification of performance problems, enhancing our Gomez On-premises software solutions.

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Mainframe solutions are designed to improve the productivity of development, maintenance and support teams in application analysis, testing, defect detection and remediation, fault management, file and data management, data compliance and application performance management specifically within IBM mainframe environments.

Changepoint is a business portfolio management and professional services automation solution that addresses the needs of executives within technology companies, enterprise IT and professional services organizations, allowing for management of the entire customer lifecycle, as well as for improved process efficiency, planning and visibility across program, project and product portfolios.

Uniface is a rapid application development environment for building, renewing and integrating the largest and most complex enterprise applications. Uniface enables enterprises to meet increasing demand for developing complex, secure and global Web 2.0 applications, deployable on any platform including the cloud.

Professional services include a broad range of IT services for mainframe, distributed and mobile environments, including mobile computing application development and integration, package software customization, cloud computing consulting, and development and integration of legacy systems.

Covisint services are provided on a SaaS platform and use business-to-business applications to integrate vital business information and processes between partners, customers and suppliers.

The Company evaluates the performance of its segments based primarily on operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). The allocation of income taxes is not evaluated at the segment level. Financial information for the Company’s business segments was as follows (in thousands):

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	Three Months Ended
	December 31, 2011
														Unallocated
	APM			MF		CP		UF		PS		AS		Expenses			Total

Software license fees	$	24,360		$	26,720	$	3,513	$	2,528	$	-	$	-	$	-		$	57,121

Maintenance fees		19,441			75,782		3,895		7,725		-		-		-			106,843

Subscription fees		19,379			-		552		-		-		-		-			19,931

Professional services fees		8,893			558		4,517		981		35,626		-		-			50,575

Application services fees		-			-		-		-		-		18,587		-			18,587

Total revenues		72,073			103,060		12,477		11,234		35,626		18,587		-			253,057

Operating expenses		82,118			24,721		11,683		5,044		31,794		17,265		47,839			220,464

Income (loss) from operations	$	(10,045	)	$	78,339	$	794	$	6,190	$	3,832	$	1,322	$	(47,839	)	$	32,593

	Three Months Ended
	December 31, 2010
															Unallocated
	APM			MF		CP			UF		PS		AS		Expenses			Total

Software license fees	$	21,059		$	34,877	$	1,545		$	2,671	$	-	$	-	$	-		$	60,152

Maintenance fees		17,194			77,838		3,742			7,547		-		-		-			106,321

Subscription fees		17,841			-		-			-		-		-		-			17,841

Professional services fees		5,937			1,784		4,141			1,354		35,116		-		-			48,332

Application services fees		-			-		-			-		-		14,379		-			14,379

Total revenues		62,031			114,499		9,428			11,572		35,116		14,379		-			247,025

Operating expenses		63,450			26,419		11,680			4,932		29,108		12,719		49,236			197,544

Income (loss) from operations	$	(1,419	)	$	88,080	$	(2,252	)	$	6,640	$	6,008	$	1,660	$	(49,236	)	$	49,481

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	Nine Months Ended
	December 31, 2011
																Unallocated
	APM			MF		CP			UF		PS		AS			Expenses			Total

Software license fees	$	54,142		$	83,874	$	7,643		$	7,299	$	-	$	-		$	-		$	152,958

Maintenance fees		57,003			230,776		11,647			23,482		-		-			-			322,908

Subscription fees		56,639			-		1,517			-		-		-			-			58,156

Professional services fees		22,646			3,960		12,487			3,259		115,051		-			-			157,403

Application services fees		-			-		-			-		-		52,302			-			52,302

Total revenues		190,430			318,610		33,294			34,040		115,051		52,302			-			743,727

Operating expenses		231,489			72,926		33,989			15,595		95,045		53,934			150,379			653,357

Income (loss) from operations	$	(41,059	)	$	245,684	$	(695	)	$	18,445	$	20,006	$	(1,632	)	$	(150,379	)	$	90,370

	Nine Months Ended
	December 31, 2010
															Unallocated
	APM			MF		CP			UF		PS		AS		Expenses			Total

Software license fees	$	53,520		$	72,346	$	6,145		$	7,084	$	-	$	-	$	-		$	139,095

Maintenance fees		47,912			233,465		10,904			21,878		-		-		-			314,159

Subscription fees		48,769			-		-			-		-		-		-			48,769

Professional services fees		15,404			4,918		11,489			3,390		104,375		-		-			139,576

Application services fees		-			-		-			-		-		37,780		-			37,780

Total revenues		165,605			310,729		28,538			32,352		104,375		37,780		-			679,379

Operating expenses		177,527			73,591		34,370			14,231		87,748		34,159		145,024			566,650

Income (loss) from operations	$	(11,922	)	$	237,138	$	(5,832	)	$	18,121	$	16,627	$	3,621	$	(145,024	)	$	112,729

The Company does not evaluate assets and capital expenditures on a segment basis, and accordingly such information is not provided.

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
Revenues:
United States	$	154,857	$	148,842	$	475,193	$	426,738
Europe and Africa		67,426		64,479		177,756		165,890
Other international operations		30,774		33,704		90,778		86,751
Total revenues	$	253,057	$	247,025	$	743,727	$	679,379

	As of		As of
	December 31,		March 31,
	2011		2011
Long-lived assets
United States	$	946,653	$	944,506
Europe and Africa		241,297		33,037
Other international operations		7,998		7,838
Total long-lived assets	$	1,195,948	$	985,381

Long-lived assets are comprised of property, plant and equipment, goodwill and capitalized software. As of December 31, 2011, long-lived assets in Europe include goodwill associated with the dynaTrace acquisition which is recorded in Austria (see Note 2 for additional information).

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Note 11 - Debt

On June 30, 2011, the Company amended the credit facility with Comerica Bank and other lenders. Under the amendment, the Company exercised its right to increase the revolving line of credit from $150 million to $200 million. The amendment reduced the amount the Company can increase the revolving line of credit to an additional $100 million (previously $150 million) subject to receiving further commitments from lenders and certain other conditions.

On July 1, 2011, Compuware borrowed $129.5 million under the credit facility to partially fund the acquisition of dynaTrace (see note 2).

As of December 31, 2011, the Company’s debt balance under its unsecured revolving credit agreement (the “credit facility”) was $110.0 million. As the credit facility expires on November 1, 2012, the full balance is classified as short term as of December 31, 2011. The Company had no short term or long term debt at March 31, 2011.

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 was in compliance with the covenants under the credit facility at December 31, 2011.

Any borrowings under the credit facility bear interest at the base rate (the greatest of the prime rate, the federal funds effective rate plus one percent, or the daily LIBOR rate plus one percent) or the Eurodollar rate, at the Company’s option, plus the applicable margin (which is based on the level of maximum total debt to EBITDA ratio). As of December 31, 2011, interest rates on outstanding borrowings were at a weighted average rate of 1.8%. The Company pays a quarterly fee on the credit facility based on the applicable margin grid. Interest and fees related to the credit facility were $1.4 million during the nine months ended December 31, 2011.

Cash paid for interest during the third quarter and first nine months of fiscal 2012 was $983,000 and $2.4 million, respectively. Cash paid for interest during the third quarter and first nine months of fiscal 2011 was $413,000 and $1.0 million, respectively.

Note 12 – Contingencies

The Company is subject to various legal actions and claims incidental to its business. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not predictable with assurance. It is the opinion of management that the outcome of such matters will not have a material impact on the Company’s financial position, results of operations or cash flows as of December 31, 2011.

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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 December 31, 2011, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended December 31, 2011 and 2010 and of cash flows for the nine-month periods ended December 31, 2011 and 2010. 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, 2011, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated May 27, 2011, 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, 2011 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

February 7, 2012

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) is intended to provide an understanding of our financial condition, changes in financial condition, cash flow, liquidity and results of operations. The MD&A 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, 2011, particularly “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”. References to years are to fiscal years ended March 31.

In this section, we first discuss our results of operations on a business unit and segment basis. We evaluate segment performance based primarily on operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges. Following the segment discussion, we then provide a separate discussion of the material period-to-period changes in our operating expenses, other income and income taxes as reflected on our income statement.

In previous fiscal years, we operated in four business segments in the technology industry: products, web application performance management services, professional services and application services. Effective April 1, 2011, we realigned our business unit structure which had the following effect on our segments: (1) the former products segment split into four new segments: Application Performance Management (“APM”), Mainframe, Changepoint and Uniface; (2) the former web performance services segment (“Gomez SaaS” solution) and Gomez On-premises software (formerly Vantage) are combined within the APM segment; and (3) the operating results of our software related professional services (“software related services”) are reported within APM, Mainframe, Changepoint and Uniface, as applicable (previously reported in the Professional Services segment).

As a result of these changes, we now have six business segments: APM, Mainframe (“MF”), Changepoint (“CP”), Uniface (“UF”), Professional Services (“PS”) and Covisint Application Services (“AS” or “Covisint”). These segments are described in detail in Note 10 to the condensed consolidated financial statements.

This business unit structure is intended to provide better visibility and control over the operations of our business and to increase our market agility, enabling us to more effectively capitalize on market conditions and competitive advantages to maximize revenue growth and profitability. The segment presentation in the prior period has been revised to conform to the current presentation of our reportable segments. The change in reporting segments had no impact on previously reported consolidated financial results.

We collectively refer to the solutions offered within our APM, Mainframe, Changepoint and Uniface segments as “software solutions”. In order to provide a supplementary view of this business, aggregated financial data for our software solutions is presented herein.

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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. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties discussed elsewhere in this report and the other reports we file with the Securities and Exchange Commission (see for example Item 1A Risk Factors in our 2011 Form 10-K), 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.

Summary of Risk Factors

A substantial portion of our mainframe segment revenue is dependent on our customers’ continued use of International Business Machines Corporation and IBM-compatible products.

Our software solutions revenue is dependent on the acceptance of our pricing structure for software licenses, maintenance services and web performance services.

Mainframe maintenance revenue could continue to decline.

The markets for web performance services (Gomez SaaS) are at an early stage of development with emerging competitors. If these markets do not develop or develop more slowly than we expect, or if there is an increase in competition, our revenue may decline or fail to grow.

The success of our APM solutions is dependent on customer acceptance of these offerings.

Changes to our organizational structure can be disruptive and may negatively impact our results of operations.

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The market for application services (Covisint SaaS) is in its early stages of development with emerging competitors. As the market matures, competition may increase and could have a material negative impact on our results of operations.

If we are not successful in implementing our professional services strategy, our operating margins may decline materially.

We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other unpredictable factors. If we fail to meet the expectations of analysts or investors, our stock price could decline substantially.

Economic uncertainties or slowdowns may reduce demand for our products and services, which may have a material negative effect on our revenues and operating results.

Defects or disruptions in our web performance services (Gomez SaaS) or application services (Covisint SaaS) networks or interruptions or delays in service would impair the delivery of our on-demand services and could diminish demand for our services and subject us to substantial liability.

Future changes in the U.S. domestic automotive manufacturing business could reduce demand for our professional services and application services, which may have a material negative effect on our revenues and operating results.

If the fair value of our long-lived assets, primarily goodwill, deteriorates below the carrying value of these assets, recognition of an impairment loss would be required, which could materially and adversely affect our financial results.

Our software technology may infringe upon the proprietary rights of others.

Our results could be materially and adversely affected by increased competition, pricing pressures and technological changes within the software solutions market.

The market for professional services is highly competitive, fragmented and characterized by low barriers to entry.

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 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.

Unanticipated changes in our effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.

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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 materially and 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.

OVERVIEW

We deliver value to businesses by providing software products; web performance services and application services through software-as-a-service (“SaaS”) platforms; and professional services that improve the performance of information technology organizations.

Our primary source of profitability and cash flow is the sale of our mainframe productivity tools (“mainframe”) that are used within our customers’ mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. Over the past few years, we have experienced lower volumes of software license transactions for our mainframe solutions causing an overall downward trend in our mainframe product revenues. Changes in our current customer IT computing environments and spending habits have impacted their need for additional mainframe computing capacity. In addition, increased competition and pricing pressures have had a negative impact on our revenues. Customers utilize our products to reduce operating costs, increase programmer productivity and create a smooth transition to the next generation of mainframe environment programmers. We will continue to make strategic enhancements to our mainframe solutions through research and development investments with the goal of meeting customer needs and maintaining a maintenance renewal rate of approximately 90%. The cash flow generated from our mainframe business supports our growth segments.

We have identified the APM market as a key source of future revenue growth. Web, mobile and cloud applications and the complex distributed applications delivery chain supporting them have become increasingly critical to a company’s brand awareness, revenue growth and overall market share. Because of this, the market for APM solutions is significant and growing rapidly. Our APM solutions are marketed under the brand names “Gomez” and “dynaTrace”. These solutions provide our customers with on-premises software (“Gomez On-premises” and “dynaTrace”) and SaaS platform based web application performance services (“Gomez SaaS”). These solutions ensure the optimal performance of each customer’s enterprise, web, streaming, mobile and cloud applications. We are investing in our APM solutions with the goal of providing solutions that are best-in-class within the APM market. Specifically, our investments include: (1) enhancements to our global web performance services network with specific focus on ease of use, time-to-value and data analytics in mobile application performance capabilities and in video streaming performance; (2) enhancements to our First Mile to Last Mile solution which combines our on-premises software and SaaS solution into a single platform that provides performance metrics for cloud, web and data center applications in a consolidated dashboard; and (3) the acquisition of dynaTrace software, Inc. (“dynaTrace”) in July 2011. The dynaTrace software enables companies to continuously track business transactions and provides exact identification of performance problems, enhancing our Gomez On-premises software solutions.

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We have also identified the secured collaboration services market as a key source of revenue growth. Technology has allowed business communities, organizations and systems to globally connect and share vital information, applications and processes across their internal and extended enterprises. Our application services, which are marketed under the brand name “Covisint” and provided on a SaaS platform, create an environment that simplifies and secures this collaboration atmosphere. Our Covisint services are utilized primarily in the automotive and healthcare industries. The need for these services is growing, particularly in the healthcare industry as hospitals, physicians and the United States government move towards establishing electronic patient health and medical records that will require secured computerized databases and environments for storing and sharing of information.

We also continue to enhance our Changepoint and Uniface solutions primarily through research and development expenditures.

Our Changepoint solution provides a single automated solution for professional services organizations to forecast and plan, as well as, manage resources, projects and client engagements. In addition, for project-centric organizations, Changepoint provides a cohesive and consolidated view of projects, investments, resources and applications to help manage the entire business portfolio.

Our Uniface solution is mature with over 25 years on the market. Uniface is a rapid application development environment for building, renewing and integrating the latest complex enterprise applications. Our strategy with the Uniface solution is to enhance the product with additional features making it more effective for enterprise applications and to expand the capabilities of the product to other technology applications.

The professional services reporting segment recently went through a business transformation and is now focused on achieving modest revenue growth and high operating margins by delivering high quality solutions and resources to our customers that meet their needs from application development through project management. Our goal is to provide the expertise, best practices and agility needed to meet our customers’ critical technology challenges. Areas of growth that we have identified are cloud and mobile application development services. Enhancing our competencies in these areas will provide an opportunity to continue growing the segment’s revenue and operating margin.

During fiscal 2012, we have invested additional resources in supporting anticipated growth in our APM and application services markets. We do not anticipate significant overall headcount increases going forward and, therefore, expect margins to increase in the future.

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Quarterly Update

The following occurred during the third quarter of 2012:

Management communicated continued total annual revenue growth expectations with increasing operating margins over the next three fiscal years. While revenue and earnings expectations fell short during the third quarter, we still expect to achieve targeted growth rates and operating margins over the coming three years.

Realized an increase of $6.0 million or 2.4% in revenue during the third quarter of 2012 as compared to the prior year due to a $4.2 million increase in application services revenue, a $2.2 million increase in professional services revenue and a $2.1 million increase in subscription revenue, partially offset by a $3.0 million decline in software license fees (see “Business Segment Analysis” for additional information).

Experienced a decline in operating margin to 12.9% during the third quarter of 2012 compared to 20.0% in the third quarter of 2011. The decrease was primarily due to our continued investments in the APM and application services businesses (see “Business Segment Analysis” for additional information).

Realized an increase in software solutions revenue of $1.3 million or 0.7% as compared to the prior year but experienced a decrease in operating margin to 37.9% in the third quarter of 2012 as compared to 46.1% during the third quarter of 2011 primarily due to increased investments within our APM business and a decline in mainframe revenue.

Professional services segment revenue increased $510,000 or 1.5% during the third quarter of 2012 as compared to the prior year. Operating margin declined to 10.8% in the third quarter of 2012 from 17.1% during the second quarter of 2011 due to a revenue reserve on a government contract (see “Professional Services” for additional information).

Covisint revenue increased 29% from the third quarter of 2011. Operating margin declined to 7.1% in the third quarter of 2012 from 11.5% during the third quarter of 2011 as a result of hiring additional personnel to prepare for anticipated growth in the market.

Our ability to execute our strategies and achieve our objectives is subject to a number of risks and uncertainties. See "Forward-Looking Statements".

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BUSINESS SEGMENT ANALYSIS

The following table sets forth, for the periods indicated, certain business segment operational data. We evaluate the performance of our segments based primarily on operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). Comparisons are to the comparable period of the prior year. Financial information for our business segments was as follows (in thousands):

	Software Solutions																					Unallocated
Three Months Ended:	APM			MF			CP			UF			Total			PS			AS			Expenses			Total

December 31, 2011

Total revenues	$	72,073		$	103,060		$	12,477		$	11,234		$	198,844		$	35,626		$	18,587		$	-		$	253,057

Operating expenses		82,118			24,721			11,683			5,044			123,566			31,794			17,265			47,839			220,464

Income (loss) from operations	$	(10,045	)	$	78,339		$	794		$	6,190		$	75,278		$	3,832		$	1,322		$	(47,839	)	$	32,593

Operating margin %		(13.9	%)		76.0	%		6.4	%		55.1	%		37.9	%		10.8	%		7.1	%		N/A			12.9	%

December 31, 2010

Total revenues	$	62,031		$	114,499		$	9,428		$	11,572		$	197,530		$	35,116		$	14,379		$	-		$	247,025

Operating expenses		63,450			26,419			11,680			4,932			106,481			29,108			12,719			49,236			197,544

Income (loss) from operations	$	(1,419	)	$	88,080		$	(2,252	)	$	6,640		$	91,049		$	6,008		$	1,660		$	(49,236	)	$	49,481

Operating margin %		(2.3	%)		76.9	%		(23.9	%)		57.4	%		46.1	%		17.1	%		11.5	%		N/A			20.0	%

	Software Solutions																					Unallocated
Nine Months Ended:	APM			MF			CP			UF			Total			PS			AS			Expenses			Total

December 31, 2011

Total revenues	$	190,430		$	318,610		$	33,294		$	34,040		$	576,374		$	115,051		$	52,302		$	-		$	743,727

Operating expenses		231,489			72,926			33,989			15,595			353,999			95,045			53,934			150,379			653,357

Income (loss) from operations	$	(41,059	)	$	245,684		$	(695	)	$	18,445		$	222,375		$	20,006		$	(1,632	)	$	(150,379	)	$	90,370

Operating margin %		(21.6	%)		77.1	%		(2.1	%)		54.2	%		38.6	%		17.4	%		(3.1	%)		N/A			12.2	%

December 31, 2010

Total revenues	$	165,605		$	310,729		$	28,538		$	32,352		$	537,224		$	104,375		$	37,780		$	-		$	679,379

Operating expenses		177,527			73,591			34,370			14,231			299,719			87,748			34,159			145,024			566,650

Income (loss) from operations	$	(11,922	)	$	237,138		$	(5,832	)	$	18,121		$	237,505		$	16,627		$	3,621		$	(145,024	)	$	112,729

Operating margin %		(7.2	%)		76.3	%		(20.4	%)		56.0	%		44.2	%		15.9	%		9.6	%		N/A			16.6	%

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Software Solutions as a Group

Our software solutions are comprised of the following business segments: (1) Application Performance Management; (2) Mainframe; (3) Changepoint; and (4) Uniface.

Revenue associated with our software solutions consists of software license fees, maintenance fees, subscription fees and professional services fees (software related services). Software solutions revenues are presented in the table below (in thousands):

	Three Months Ended							Nine Months Ended
	December 31,				%			December 31,				%
	2011		2010		Change			2011		2010		Change
Software license fees	$	57,121	$	60,152		-5.0	%	$	152,958	$	139,095		10.0	%
Maintenance fees		106,843		106,321		0.5	%		322,908		314,159		2.8	%
Subscription fees		19,931		17,841		11.7	%		58,156		48,769		19.2	%
Professional services fees		14,949		13,216		13.1	%		42,352		35,201		20.3	%
Total software solutions revenue	$	198,844	$	197,530		0.7	%	$	576,374	$	537,224		7.3	%

Software license fees (“license fees”) decreased $3.0 million during the third quarter of 2012, which included a negative impact from foreign currency fluctuations of $95,000, and increased $13.9 million during the first nine months of 2012, which included a positive impact of foreign currency fluctuations of $4.7 million, as compared to the same periods of the prior year. Excluding the impact from foreign currency fluctuations, license fees decreased $2.9 million for the third quarter of 2012 and increased $9.2 million for the first nine months of 2012 as compared to the same periods of the prior year. The decrease for the third quarter of 2012 was due to an $8.2 million decrease in mainframe license revenue, partially offset by a $3.3 million increase in APM license revenue and a $2.0 million increase in Changepoint license revenue. The increase for the first nine months of 2012 was due primarily to additional mainframe license revenue (see the discussion within “Software Solutions by Business Segment” for more details).

During the third quarters of 2012 and 2011, for software license transactions that were required to be recognized ratably, we deferred $6.4 million and $9.2 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $12.0 million and $15.6 million of previously deferred license revenue during the third quarter of 2012 and 2011, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

During the first nine months of 2012 and 2011, for software license transactions that were required to be recognized ratably, we deferred $11.8 million and $21.8 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $37.9 million and $46.5 million of previously deferred license revenue during the first nine months of 2012 and 2011, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

Maintenance fees increased $522,000 during the third quarter of 2012, which included a positive impact from foreign currency fluctuations of $131,000, and increased $8.7 million during the first nine months of 2012, which included a positive impact from foreign currency fluctuations of $10.9 million, as compared to the same periods of the prior year. Excluding the impact from foreign currency fluctuations, maintenance fees increased $391,000 for the third quarter of 2012 and decreased $2.2 million for the first nine months of 2012 as compared to the same periods of the prior year. Although we continue to experience a high maintenance renewal rate with our current mainframe customers, the decline in mainframe license transactions during 2010 and 2011 is impacting mainframe maintenance revenue as new or growth customers are not entirely replacing the maintenance revenue loss from the non-renewed or reduced capacity mainframe maintenance arrangements. The decline was entirely offset for the third quarter of 2012 and partially offset for the first nine months of 2012 by an increase in Gomez On-premises software maintenance fees including additional maintenance revenue gained from the acquisition of dynaTrace.

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Subscription fees increased $2.1 million during the third quarter of 2012 and increased $9.4 million during the first nine months of 2012 as compared to the same periods of the prior year. The improvement in subscription fees over the prior year is primarily a result of new SaaS solution sales exceeding customer cancellations.

Professional services fees within our software solutions business segments increased $1.7 million during the third quarter of 2012 and increased $7.2 million during the first nine months of 2012. The improvement in professional services fees over the prior year primarily occurred within our APM business unit due to increased implementation fees associated with new APM solution sales and increases in demand for our managed service offerings.

Software solutions revenue by geographic location is presented in the table below (in thousands):

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
United States	$	103,056	$	102,226	$	315,464	$	292,232
Europe and Africa		66,347		62,598		173,897		161,279
Other international operations		29,441		32,706		87,013		83,713
Total software solutions revenue	$	198,844	$	197,530	$	576,374	$	537,224

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Software Solutions by Business Segment

Application Performance Management

The financial results of operations for our APM segment were as follows (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Chg			2011			2010			Chg
Revenue
Software license fees	$	24,360		$	21,059			15.7	%	$	54,142		$	53,520			1.2	%
Maintenance fees		19,441			17,194			13.1	%		57,003			47,912			19.0	%
Subscription fees		19,379			17,841			8.6	%		56,639			48,769			16.1	%
Professional services fees		8,893			5,937			49.8	%		22,646			15,404			47.0	%
Total revenue	$	72,073		$	62,031			16.2	%	$	190,430		$	165,605			15.0	%

Operating expenses		82,118			63,450			29.4	%		231,489			177,527			30.4	%

Loss from operations	$	(10,045	)	$	(1,419	)		(607.9	%)	$	(41,059	)	$	(11,922	)		(244.4	%)

Operating margin %		(13.9	%)		(2.3	%)					(21.6	%)		(7.2	%)

APM segment revenue increased $10.0 million during the third quarter of 2012 and $24.8 million during the first nine months of 2012 as compared to the same periods of the prior year. The increase in software license fees from the prior year can be attributed to additional revenue related to the acquisition of dynaTrace, partially offset by the effects of integrating our new dynaTrace solution into our sales force and changes in the related sales strategy during 2012, which had a negative impact on license sales.

The increase in maintenance fees for the third quarter of 2012 as compared to the same period of the prior year is primarily attributable to revenue related to dynaTrace. The increase in maintenance fees for the first nine months of 2012 as compared to the same period of the prior year is primarily a result of current year on-premises solution sales exceeding customer cancellations as we experienced a high renewal rate with existing customers and, to a lesser extent, positive impact of revenue from dynaTrace and foreign currency rate fluctuations.

The increases in subscription fees for the third quarter of 2012 and the first nine months of 2012 as compared to the same periods of the prior year are primarily the result of new SaaS solution sales exceeding customer cancellations.

The increase in professional services fees primarily relates to delivering a small backlog of projects and an increase in demand for our managed service offerings which are marketed as Guardian Services, and to a lesser extent, additional revenue related to the acquisition of dynaTrace.

Operating expenses increased $18.7 million during the third quarter of 2012 and $54.0 million during the first nine months of 2012 as compared to the same periods of the prior year. These increases can be attributed to continued investment in our APM solutions including hiring developers and sales personnel, increasing the capacity of our web application services network and the acquisition of dynaTrace. We believe these investments will better position us to capitalize on the anticipated growth of the APM industry. The costs associated with these investments exceeded revenue growth, which had a negative impact on our operating margin for the third quarter and the first nine months of 2012 as compared to the same periods of the prior year.

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Mainframe

The financial results of operations for our Mainframe segment were as follows (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Chg			2011			2010			Chg
Revenue
Software license fees	$	26,720		$	34,877			(23.4	%)	$	83,874		$	72,346			15.9	%
Maintenance fees		75,782			77,838			(2.6	%)		230,776			233,465			(1.2	%)
Professional services fees		558			1,784			(68.7	%)		3,960			4,918			(19.5	%)
Total revenue	$	103,060		$	114,499			(10.0	%)	$	318,610		$	310,729			2.5	%

Operating expenses		24,721			26,419			(6.4	%)		72,926			73,591			(0.9	%)

Income from operations	$	78,339		$	88,080			(11.1	%)	$	245,684		$	237,138			3.6	%

Operating margin %		76.0	%		76.9	%					77.1	%		76.3	%

Mainframe segment revenue decreased $11.4 million for the third quarter of 2012 as compared to the same period of the prior year due to $12.4 million in license fees recognized during the third quarter of 2011 related to several significant license transactions that closed during that quarter.

Mainframe segment revenue increased $7.9 million for the first nine months of 2012 as compared to the same period of the prior year due primarily to several significant license transactions with government entities that resulted in the recognition of $21.5 million in license fees during the first three quarters of 2012, some of which we had anticipated closing in the fourth quarter of 2011. Additionally, two license contracts with financial services companies closed during the first nine months of 2012, resulting in the recognition of $4.9 million in license fees. Significant license transactions during the first nine months of 2011 resulted in the recognition of approximately $15.2 million in license fees. We do not anticipate comparable revenues from significant license transactions in the coming years and therefore, expect mainframe revenue to decline going forward.

The decline in operating margin for the third quarter of 2012 was due to the decline in mainframe revenue as compared to the same period of the prior year. The operating margin improvement for the first nine months of 2012 was due to the increase in software license fees as compared to the same period of the prior year.

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Changepoint

The financial results of operations for our Changepoint segment were as follows (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Chg			2011			2010			Chg
Revenue
Software license fees	$	3,513		$	1,545			127.4	%	$	7,643		$	6,145			24.4	%
Maintenance fees		3,895			3,742			4.1	%		11,647			10,904			6.8	%
Subscription fees		552			-			N/A			1,517			-			N/A
Professional services fees		4,517			4,141			9.1	%		12,487			11,489			8.7	%
Total revenue	$	12,477		$	9,428			32.3	%	$	33,294		$	28,538			16.7	%

Operating expenses		11,683			11,680			0.0	%		33,989			34,370			(1.1	%)

Income (loss) from operations	$	794		$	(2,252	)		135.3	%	$	(695	)	$	(5,832	)		88.1	%

Operating margin %		6.4	%		(23.9	%)					(2.1	%)		(20.4	%)

Changepoint segment revenue increased $3.0 million for the third quarter of 2012 and $4.8 million for the first nine months of 2012 as compared to the same periods of the prior year. The increase in revenue is primarily related to additional sales within our customer base, and to a lesser extent, sales to new customers. The improvement in operating margin relates primarily to the increase in revenue.

Uniface

The financial results of operations for our Uniface segment were as follows (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Chg			2011			2010			Chg
Revenue
Software license fees	$	2,528		$	2,671			(5.4	%)	$	7,299		$	7,084			3.0	%
Maintenance fees		7,725			7,547			2.4	%		23,482			21,878			7.3	%
Professional services fees		981			1,354			(27.5	%)		3,259			3,390			(3.9	%)
Total revenue	$	11,234		$	11,572			(2.9	%)	$	34,040		$	32,352			5.2	%

Operating expenses		5,044			4,932			2.3	%		15,595			14,231			9.6	%

Income from operations	$	6,190		$	6,640			(6.8	%)	$	18,445		$	18,121			1.8	%

Operating margin %		55.1	%		57.4	%					54.2	%		56.0	%

Uniface segment revenue decreased $338,000 for the third quarter of 2012 as compared to the same period of the prior year due to a decline in software license and professional services fees, partially offset by an increase in maintenance fees. Uniface segment revenue increased $1.7 million for the first nine months of 2012 as compared to the same period of the prior year due primarily to positive foreign currency impact on revenue and higher maintenance billings throughout the previous year. Operating expenses for the third quarter of 2012 were consistent with operating expenses for the same period of the prior year while operating expenses for the first nine months of 2012 increased due to a negative foreign currency impact and additional expenses associated with the increase in revenue as compared to the same period of the prior year. We continue to make investments in our development and customer support groups to pursue the segment’s growth objectives which caused a slight decline in operating margins during the first nine months of 2012.

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Professional Services

The financial results of operations for our professional services segment were as follows (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Chg			2011			2010			Chg

Professional services fees	$	35,626		$	35,116			1.5	%	$	115,051		$	104,375			10.2	%

Operating expenses		31,794			29,108			9.2	%		95,045			87,748			8.3	%

Income from operations	$	3,832		$	6,008			(36.2	%)	$	20,006		$	16,627			20.3	%

Operating margin %		10.8	%		17.1	%					17.4	%		15.9	%

Professional services segment fees increased $510,000 for the third quarter of 2012 and $10.7 million for the first nine months of 2012 as compared to the same periods of the prior year primarily due to an increase in application development services for customers within the financial services industry. Professional services fees were negatively impacted $2.5 million during the third quarter of 2012 by a revenue reserve taken on a government contract due to collectability concerns.

Operating expenses increased $2.7 million for the third quarter of 2012 and $7.3 million for the first nine months of 2012 as compared to the same periods of the prior year primarily due to increased staffing levels and increases in subcontractor costs to manage the growth of the business. The improvement in operating margin for the first nine months of 2012 was due to increases in average billing rates and staff utilization, partially offset by the revenue reserve discussed above.

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
United States	$	35,331	$	34,173	$	113,988	$	101,778
Europe and Africa		295		943		1,061		2,120
Other international operations		-		-		2		477
Total professional services segment revenue	$	35,626	$	35,116	$	115,051	$	104,375

Application Services

The financial results of operations for our Covisint application services segment were as follows (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Chg			2011			2010			Chg

Application services fees	$	18,587		$	14,379			29.3	%	$	52,302		$	37,780			38.4	%

Operating expenses		17,265			12,719			35.7	%		53,934			34,159			57.9	%

Income (loss) from operations	$	1,322		$	1,660			(20.4	%)	$	(1,632	)	$	3,621			(145.1	%)

Operating margin %		7.1	%		11.5	%					(3.1	%)		9.6	%

Application services segment fees increased $4.2 million for the third quarter of 2012 and $14.5 million for the first nine months of 2012 as compared to the same periods of the prior year primarily due to growth from automotive customers, as the industry has stabilized from the recent economic downturn, and to continued expansion into the healthcare industry. We anticipate demand in the healthcare industry will continue to grow as hospitals, physicians and the United States government move toward establishing electronic patient health and medical records which will require secure computerized databases and environments for storing and sharing of information. Our application services are designed to meet this demand for secure sharing of information which we believe will be a factor in the future growth of the Covisint segment.

As of December 31, 2011, backlog for the application services segment was approximately $142.5 million and represents contractually committed arrangements for the next five years that have yet to be recognized, and up to three years of anticipated revenue associated with certain annual contracts that we believe are highly likely to be renewed.

Operating expenses increased $4.5 million during the third quarter of 2012 and $19.8 million during the first nine months of 2012 as compared to the same periods of the prior year due to continued investment in our Covisint business. In anticipation of capitalizing on the growth of the secured collaboration services market, we have continued to hire developers, customer support and sales personnel, and we continue to increase the capacity of our global application services network. As we continue to invest in order to manage the growth in this segment, our spending on these investments has proportionally exceeded revenue growth, causing the decline in our operating margin.

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

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
United States	$	16,470	$	12,443	$	45,741	$	32,728
Europe and Africa		784		938		2,798		2,491
Other international operations		1,333		998		3,763		2,561
Total application services segment revenue	$	18,587	$	14,379	$	52,302	$	37,780

Unallocated Expenses

Costs related to internal information system support, finance, human resources, legal, administration and other corporate charges are not allocated to our business units when management analyzes business unit operating results.

Unallocated expenses are presented in the table below (in thousands):

	Three Months Ended							Nine Months Ended
	December 31,				%			December 31,				%
	2011		2010		Change			2011		2010		Change
Unallocated expenses	$	47,839	$	49,236		(2.8	%)	$	150,379	$	145,024		3.7	%

Unallocated expenses remained relatively consistent for the third quarter of 2012 as compared to 2011. Unallocated expenses increased $5.4 million for the first nine months of 2012 as compared to the same period of the prior year primarily due to increases in administrative and general expense and technology development and support expense. See “administrative and general” and “technology development and support” within the “operating expenses” section for additional information.

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OPERATING EXPENSES

Our operating expenses include cost of software license fees; cost of maintenance fees; cost of subscription fees; cost of professional services; cost of appliacation services; technology development and support costs; sales and marketing expenses; and administrative and general expenses. These expenses are described below without regard to the relevant segment(s) to which they are allocated.

Cost of Software License Fees

Cost of software license fees includes amortization of capitalized software related to our licensed software products, the cost of duplicating and disseminating products to customers, including associated hardware costs, and the cost of author royalties.

Cost of software license fees is presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Change			2011			2010			Change
Cost of software license fees	$	4,844		$	3,745			29.3	%	$	13,150		$	10,428			26.1	%

Percentage of software license fees		8.5	%		6.2	%					8.6	%		7.5	%

Cost of software license fees increased $1.1 million during the third quarter of 2012 and $2.7 million during the first nine months of 2012 due primarily to $1.3 million and $2.7 million in additional amortization expense in the third quarter of 2012 and the first nine months of 2012, respectively, related to the $28.5 million in purchased software obtained through the dynaTrace acquisition.

Cost of Maintenance Fees

Cost of maintenance fees consists of the direct costs allocated to maintenance and product support such as helpdesk and technical support.

Cost of maintenance fees is presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Change			2011			2010			Change
Cost of maintenance fees	$	9,603		$	8,735			9.9	%	$	28,907		$	23,842			21.2	%

Percentage of maintenance fees		9.0	%		8.2	%					9.0	%		7.6	%

Cost of maintenance increased $868,000 during the third quarter of 2012 and $5.1 million during the first nine months of 2012 as compared to the same periods of the prior year primarily as a result of development costs related to maintenance for our mainframe products and customer support costs due to the hiring of additional employees to support the growth of the APM business segment.

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The increase in the cost of maintenance fees as a percentage of maintenance fees was primarily due to incremental customer support and maintenance for our licensed software products exceeding the increase in maintenance fees.

Cost of Subscription Fees

Cost of subscription fees consists of the amortization of capitalized software related to our web performance services offerings, depreciation and maintenance expense associated with our web performance services network related computer equipment; data center costs; and payments to individuals for tests conducted from their Internet-connected personal computers (“peer”).

Cost of subscription fees is presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Change			2011			2010			Change
Cost of subsription fees	$	7,291		$	6,539			11.5	%	$	22,192		$	17,984			23.4	%

Percentage of subscription fees		36.6	%		36.7	%					38.2	%		36.9	%

Cost of subscription fees increased $752,000 during the third quarter of 2012 and $4.2 million during the first nine months of 2012 as compared to the same periods of the prior year primarily as a result of increases in data center and peer costs as we continue to make investments in our Gomez SaaS global network. To a lesser extent, increases in depreciation of computer equipment also contributed to the increased costs.

The increase in the cost of subscription fees as a percentage of subscription fees for the first nine months of 2012 as compared to the same period of the prior year was primarily due to incremental data center and peer costs proportionally exceeding the increase in subscription fees.

Cost of Professional Services

Cost of professional services consists primarily of personnel-related costs of providing professional services, including billable and technical staff, subcontractors and sales personnel.

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Cost of professional services is presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Change			2011			2010			Change
Cost of professional services	$	45,277		$	41,092			10.2	%	$	136,496		$	121,661			12.2	%

Percentage of professional services fees		89.5	%		85.0	%					86.7	%		87.2	%

Cost of professional services increased $4.2 million during the third quarter of 2012 and $14.8 million during the first nine months of 2012 as compared to the same periods of the prior year. The increases were primarily due to increases in compensation and benefits costs related to the hiring of billable staff of $3.1 million and $8.8 million for the third quarter and the first nine months of 2012, respectively. Additionally, subcontractor and outside services costs to support the activity in our professional services segment increased $787,000 and $5.2 million for the third quarter and the first nine months of 2012, respectively.

The increase in cost of professional services as a percentage of professional services fees for the third quarter of 2012 was primarily due to increased compensation and benefits costs proportionally exceeding the increase in revenues which were negatively impacted by the $2.5 million revenue reserve discussed in the “Professional Services” section of this report.

Cost of Application Services

Cost of application services consists primarily of personnel-related costs of providing application services, including billable and technical staff, subcontractors and sales personnel.

Cost of application services is presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Change			2011			2010			Change
Cost of application services	$	17,265		$	12,719			35.7	%	$	53,934		$	34,159			57.9	%

Percentage of application services fees		92.9	%		88.5	%					103.1	%		90.4	%

Cost of application services increased $4.5 million during the third quarter of 2012 as compared to the third quarter of 2011 primarily due to a $2.4 million increase in compensation and benefits costs related to the hiring of additional developers, sales and customer support personnel to support the growth of the application services business segment as well as increased amortization expense on capitalized projects.

Cost of application services increased $19.8 million during the first nine months of 2012 as compared to the first nine months of 2011 primarily due to a $15.4 million increase in compensation and benefits costs related to the hiring of additional developers, sales and customer support personnel and a $2.6 million increase in subcontractor and outside services costs to support the continuing application services revenue growth.

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The increase in cost of application services as a percentage of application services fees was primarily due to increased compensation and benefits costs for application services proportionally exceeding the increase in application services fees.

Technology Development and Support

Technology development and support includes, primarily, the costs of programming personnel associated with software technology development and support of our products and the web performance services network less the amount of capitalized internal software costs during the reporting period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives.

Technology development and support costs incurred internally and capitalized are presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Change			2011			2010			Change
Technology development and support costs incurred	$	30,471		$	24,765			23.0	%	$	87,996		$	76,558			14.9	%

Capitalized internal software costs		(3,206	)		(2,248	)		42.6	%		(9,290	)		(10,607	)		(12.4	%)

Technology development and support costs expensed	$	27,265		$	22,517			21.1	%	$	78,706		$	65,951			19.3	%

Technology development and support costs expensed as a percentage of software solutions revenue		13.7	%		11.4	%					13.7	%		12.3	%

Technology development and support increased $5.7 million before capitalized internal software costs during the third quarter of 2012 and $11.4 million before capitalized internal software costs during the first nine months of 2012 as compared to the same periods of the prior year. These increases primarily relate to higher compensation and benefits costs due to the hiring of developers and customer support personnel to support the growth of the APM business segment and, to a lesser extent, annual wage increases and a negative impact from currency fluctuations as the U.S. dollar weakened against non-U.S. currencies during the first nine months of 2012. Technology development and support as a percentage of software solutions revenues increased from the prior year as the additional investment in our products and technology proportionally exceeded the increase in software solutions revenue.

The fluctuations in capitalized internal software costs during the third quarter of 2012 and the first nine months of 2012 as compared to the same periods in the prior year relate primarily to the timing of projects that are in the technological feasibility phase of development. The $958,000 increase in capitalized internal software costs during the third quarter of 2012 relates primarily to increased costs capitalized for Gomez On-premises and Uniface projects as compared to the third quarter of 2011. The $1.3 million decrease in capitalized internal software costs during the first nine months of 2012 relates primarily to additional capitalization of costs for Gomez On-premises and Changepoint projects during the first nine months of 2011.

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Sales and Marketing

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 are presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010				Change		2011			2010			Change
Sales and marketing costs	$	69,683		$	62,437			11.6	%	$	197,255		$	176,648			11.7	%

Percentage of software solutions revenue		35.0	%		31.6	%					34.2	%		32.9	%

Sales and marketing costs increased $7.2 million during the third quarter of 2012 as compared to the third quarter of 2011 due primarily to $3.7 million in additional salary and benefits expense related to additional sales employees and salary increases and $2.6 million in additional commission and bonus expense due to higher target attainment.

Sales and marketing costs increased $20.6 million during the first nine months of 2012 as compared to the first nine months of 2011 due to the following: (1) $9.6 million in additional salary and benefits expense related to additional sales employees, salary increases and a negative impact from currency fluctuations as the U.S. Dollar weakened against non-U.S. currencies during the first nine months of 2012; (2) $3.0 million in severance charges for certain employee terminations within our European operations during the first nine months of 2012; (3) a $3.1 million increase in travel expense; (4) $3.1 million in additional commission and bonus expense due to higher target attainment; and (5) $2.3 million in additional advertising expense.

Administrative and General

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 our worldwide offices.

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Administrative and general expenses are presented in the table below (in thousands):

	Three Months Ended							Nine Months Ended
	December 31,				%			December 31,				%
	2011		2010		Change			2011		2010		Change
Administrative and general expenses	$	39,236	$	39,760		(1.3	%)	$	122,717	$	115,977		5.8	%

Administrative and general costs decreased $524,000 during the third quarter of 2012 as compared to the prior year due to a $2.9 million reduction in outside services, travel and contributions expenses, a $1.1 million reduction primarily related to the settlement of prior year tax matters and a $700,000 positive currency impact primarily related to assets and liabilities of a country that are denominated in non-local currency, partially offset by a $3.5 million increase in compensation and benefits expense and an $800,000 increase in amortization expense associated with trade names obtained as a result of the dynaTrace acquisition.

Administrative and general costs increased $6.7 million during the first nine months of 2012 as compared to the prior year due to a $7.8 million increase in compensation and benefits expense and a $1.6 million increase in amortization expense associated with intangible assets obtained as a result of the dynaTrace acquisition, partially offset by a $1.5 million reduction in outside services expense and a $1.3 million positive currency impact primarily related to assets and liabilities of a country that are denominated in non-local currency.

OTHER INCOME (EXPENSE)

Other income (expense), net consists primarily of interest income realized from our cash and cash equivalents, interest earned on our financing receivables and income generated from our investment in a partially owned company offset by interest expense primarily associated with our long-term debt.

Other income (expense) is presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010			Change			2011			2010			Change
Interest income	$	808		$	1,351			(40.2	%)	$	2,767		$	3,167			(12.6	%)
Interest expense		(890	)		(406	)		(119.2	%)		(2,443	)		(1,004	)		(143.3	%)
Other		313			431			(27.4	%)		897			940			(4.6	%)
Other income, net	$	231		$	1,376			(83.2	%)	$	1,221		$	3,103			(60.7	%)

The decline in interest income is primarily due to the decline in cash and cash equivalents related to cash paid for the dynaTrace acquisition and to a lesser extent a decline in interest income related to our installment receivables.

The increase in interest expense is related to interest on borrowings under the line of credit. Borrowings were incurred primarily to fund a portion of the dynaTrace acquisition.

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INCOME TAXES

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 and net operating loss and credit carryforwards.

The income tax provision and effective tax rate are presented in the table below (in thousands):

	Three Months Ended									Nine Months Ended
	December 31,						%			December 31,						%
	2011			2010				Change		2011			2010			Change
Income tax provision	$	11,236		$	16,858			(33.3	%)	$	30,339		$	43,196			(29.8	%)

Effective tax rate		34.2	%		33.1	%					33.1	%		37.3	%

Cash paid for income taxes was $11.6 million and $28.1 million during the first nine months of fiscal 2012 and 2011, respectively.

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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 December 31, 2011. 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, 2011 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 2011.

Goodwill Impairment Evaluation

Effective April 1, 2011, the Company realigned its business unit structure which resulted in a change in the Company’s segment reporting (see Note 10 of the condensed consolidated financial statements for additional information) and reporting unit structure. The following reporting units were created as a result of this change: Application Performance Management, Mainframe, Changepoint, Uniface, Professional Services and Application Services.

As of April 1, 2011, the Company performed a valuation to determine the reallocation of the goodwill balance from the prior period reporting units (products, web performance services, professional services and application services) to the new reporting units based on our estimated relative fair value. See Note 9 of the condensed consolidated financial statements for additional information.

The goodwill balance by reporting unit as of April 1, 2011 and December 31, 2011 is presented as follows (in thousands):

	APM			MF			CP			UF			PS			AS		Total
Goodwill as of April 1, 2011	$	282,815		$	141,020		$	22,151		$	21,350		$	115,044		$	25,385	$	607,765

Acquisition (1)		210,908			-			-			-			-			-		210,908

Effect of foreign currency translation		(21,017	)		(130	)		(20	)		(20	)		(323	)				(21,510	)

Goodwill as of December 31, 2011	$	472,706		$	140,890		$	22,131		$	21,330		$	114,721		$	25,385	$	797,163

(1)	The Company acquired dynaTrace on July 1, 2011. See Note 2 of the condensed consolidated financial statements for information related to the purchase accounting that resulted in the recording of goodwill.

We evaluated our goodwill for impairment on a reporting unit basis at April 1, 2011. This evaluation indicated that none of our reporting units were at risk of failing step one of our goodwill impairment analysis. Our professional services reporting unit was the only reporting unit where the estimated fair value was not substantially in excess of the carrying value, as the estimated fair value exceeded the reporting unit’s carrying value by 15% at April 1, 2011.

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We continue to believe the risk of future goodwill impairment for the professional services reporting unit, which has a goodwill balance of $114.7 million at December 31, 2011, is low due to the improvement in the reporting unit’s operating margin. See “Professional Services” above for information on the segment’s results of operations.

As of December 31, 2011, the Company concluded that the shortfall of APM revenues compared to expected results was a triggering event requiring an interim impairment review of goodwill related to the APM reporting unit. The evaluation indicated that the estimated fair value of the APM reporting unit exceeded the reporting unit’s carrying value by 59% at December 31, 2011. Therefore, no impairment charge was taken.

We use a discounted cash flow analysis and a market comparable value analysis to estimate the fair value of our reporting units. The key assumptions in the discounted cash flow analysis are forecasts for revenue growth rate, profitability, capital investment and weighted average cost of capital. We determine revenue growth rate, profitability and capital investment from the historical operation and future plans management has for the business. These plans for the future are based on assumptions derived from market and specific business knowledge. Further, the weighted average cost of capital uses industry comparable betas as its key assumption. The key assumptions in the market comparable value analysis are peer group selection and application of this peer group to the respective reporting unit. Management research and knowledge of the market is used to make the peer group selection and application.

There is a high degree of uncertainty regarding management’s forecast for the reporting units as market developments for both customers and competitors can affect actual results. There can also be uncertainty regarding management’s selection of peer companies as an exact match of peer companies may not exist.

The events and circumstances that could negatively affect our key assumptions for the professional services reporting unit and the analysis of fair value include the following:

Our inability to achieve sales productivity at a level to achieve the profitability in the forecast period.

Failure of our billable staff to meet their utilization or billable rate targets.

Our inability to hire and retain sales, technical and management personnel.

Negative changes in the United States and global economies.

Increased competition and pricing pressures within the professional services market.

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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2011, cash and cash equivalents totaled $82.2 million, compared to $180.2 million at March 31, 2011.

Net cash provided by operating activities

Net cash provided by operating activities during the first nine months of 2012 was $73.7 million, which represents a $37.9 million increase from the first nine months of 2011. The increase was primarily a result of a $74.7 million increase in cash received from customers due to revenue growth in all areas of the business and a $16.5 million decline in cash paid to taxing authorities but was partially offset by an increase in cash paid to employees of $39.3 million and an increase in cash paid to suppliers of $13.9 million primarily due to increased spending to support the growth of our APM and Covisint businesses. Operating cash flows are expected to be substantially higher in the fourth quarter than in the first three quarters, consistent with our normal seasonal billing and collection trends.

The condensed consolidated statements of cash flows 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 effects from currency fluctuations) are adjusted from net income to derive net cash from operating activities.

Changes in accounts receivable and deferred revenue have typically represented the most significant adjustments to net income to arrive at operating cash flow as we allow for deferred payment terms on multi-year products contracts. The impact of the net change in accounts receivable as compared to the prior year was $9.3 million and primarily related to cash collections on multi-year product arrangements entered into during the second quarter of 2012, partially offset by the timing of billings from other multi-year product arrangements during the first nine months of 2012 as compared to the first nine months of 2011. The impact of the net change in deferred revenue was $24.3 million and primarily related to the increase in multi-year mainframe maintenance contracts during the first nine months of 2012 compared to the first nine months of 2011.

The other significant changes in our reconciliation of net income to derive net cash from operating activities during the first nine months of 2012 as compared to the same period of 2011 were as follows: (1) the impact of the net change in prepaid expenses and other current assets of ($12.6 million) and (2) the impact of the net change in accounts payable and accrued expenses of $12.7 million. The decrease from the change in prepaid expenses and other current assets was due to the final IBM settlement payment for $21 million received during the first quarter of 2011, partially offset by a $4.2 million reclassification between other current assets and other assets during the first nine months of 2012 related to modification of terms on a loan receivable (see Note 3 in the condensed consolidated financial statements for more information), a $2.4 million interest payment received from ForeSee and a $1.8 million reduction in notes receivable from Caretech. The increase from the net change in accounts payable and accrued expenses was due primarily to bonus payments made during the first nine months of 2011 in excess of the payments made during the first nine months of 2012.

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

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Net cash used in investing activities

Net cash used in investing activities during the first nine months of 2012 was $284.1 million, which represents a $239.8 million increase in cash used as compared to the first nine months of 2011 due to the acquisition of dynaTrace (see Note 2 of the condensed consolidated financial statements included in this report for additional information). The transaction resulted in a $249.3 million use of cash during the second quarter of 2012. The increase was partially offset by the acquisition of DocSite during the second quarter of 2011 for $15.7 million in cash and the acquisition of BEZ Systems, Inc. during the third quarter of 2011 for $2.5 million in cash. The remaining change was due to additional purchases of property and equipment and capitalized software during the second quarter of 2012.

We will continue to evaluate business acquisition opportunities that fit our strategic plans. If the cash consideration for a future acquisition or combination of acquisitions were to exceed our operating cash balance resources, we would likely utilize our credit facility again and may need to seek additional financing.

Net cash provided by financing activities

Net cash provided by financing activities during the first nine months of 2012 was $116.3 million. Net cash used in financing activities during the first nine months of 2011 was $61.4 million, resulting in a net increase to cash of $177.7 million for the first nine months of 2012 as compared to the same period of the prior year.

The increase was primarily due to the following: (1) during the second and third quarters of 2012, we borrowed a total of $180.2 million under our revolving credit facility primarily related to financing for the dynaTrace acquisition, of which $70.2 million has been repaid; (2) we repurchased $4.3 million in stock during the first nine months of 2012, as compared to $116.6 million during the first nine months of 2011; and (3) there was a $44.8 million reduction in cash received from employees exercising stock options during the first nine months of 2012 as compared to the same period of 2011.

Since May 2003, the Board of Directors has authorized the Company to repurchase a total of $1.7 billion of our common stock under a discretionary stock repurchase plan (“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.

As of December 31, 2011, approximately $239.4 million remains authorized for future purchases under the Discretionary Plan.

In anticipation of the acquisition of dynaTrace, we temporarily suspended repurchases under the Discretionary Plan during the first quarter of 2012, but resumed our repurchase program initiative during the second quarter of 2012. During the third quarter, we chose to deploy our cash to reduce the outstanding debt balance related to the dynaTrace acquisition, but intend to resume repurchase activity under the Discretionary Plan in the fourth quarter of 2012. Our long-term goal for the Discretionary Plan is to reduce our outstanding common share count to approximately 200 million shares, though we may adjust our goals based on our cash position and market conditions. Share repurchases under the Discretionary Plan are funded primarily through our operating cash flow and, if needed, funds from our credit facility. 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 operating results for the period. We reserve the right to change the timing and volume of our repurchases at any time without notice.

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The Company has an unsecured revolving credit agreement (the “credit facility”) with Comerica Bank and other lenders to provide leverage for the Company if needed. Refer to Note 11 of the condensed consolidated financial statements for additional information related to the credit facility. We plan to extend the credit facility before the end of the fiscal year. The timing for ultimate repayment of the amount currently outstanding will depend on cash flows and share repurchases during the fourth quarter of 2012 and into fiscal 2013.

Recently Issued Accounting Pronouncements

See Note 1 of the condensed consolidated financial statements included in this report for recently issued accounting pronouncements that may 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, 2011. 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 2011.

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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, 2011. Therefore, the market risks remain substantially unchanged since we filed the annual report on Form 10-K for the fiscal year ending March 31, 2011.

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 change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II OTHER INFORMATION

Item 1A. Risk Factors

For information regarding risk factors affecting us, see “Item 1A Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. There have been no material changes to the risk factors previously disclosed in our Form 10-K.

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

There were no repurchases of common stock for the quarter ended December 31, 2011.

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Item 6. Exhibits

Exhibit

Number

Description of Document

Independent Registered Public Accounting Firm’s Awareness Letter

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities Exchange Act.

101.INS

XBRL Instance Document*

101.SCH

XBRL Taxonomy Extension Schema Document*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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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.

COMPUWARE CORPORATION

Date:	February 7, 2012	By: /s/ Robert C. Paul

		Robert C. Paul
		Chief Executive Officer
		(duly authorized officer)

Date:	February 7, 2012	By: /s/ Laura L. Fournier

		Laura L. Fournier
		Executive Vice President,
		Chief Financial Officer and
		Treasurer
		(principal financial officer and principal accounting officer)