UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2008

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

For the transition period from                       to                      

COMPUWARE CORPORATION

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices including zip code)

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

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

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

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

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

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

As of January 31, 2009, there were outstanding 246,612,447 shares of Common Stock, par value $.01, of the registrant.

 

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2008 and March 31, 2008			3
Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2008 and 2007			4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2008 and 2007			5
Notes to Condensed Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
PART II. OTHER INFORMATION
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 5. Other Information			39
Item 6. Exhibits			41
SIGNATURES			42
EX-3.2
EX-10.111
EX-10.112
EX-10.113
EX-10.114
EX-10.115
EX-10.116
EX-10.117
EX-10.118
EX-10.119
EX-10.120
EX-10.121
EX-15
EX-31.1
EX-31.2
EX-32

COMPUWARE CORPORATION AND SUBSIDIARIES

		December 31,				March 31,
		2008				2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	163,716			$	215,943
Investments							70,474
Accounts receivable, net			522,514				535,094
Deferred tax asset, net			35,403				44,374
Income taxes refundable			3,243				3,746
Prepaid expenses and other current assets			26,850				49,285
Total current assets			751,726				918,916
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION			358,660				365,691
CAPITALIZED SOFTWARE, LESS ACCUMULATED AMORTIZATION			52,853				61,653
OTHER:
Accounts receivable			238,591				244,388
Deferred tax asset, net			28,960				35,851
Goodwill			349,245				356,267
Other			32,370				35,791
Total other assets			649,166				672,297
TOTAL ASSETS		$	1,812,405			$	2,018,557
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	14,997			$	18,772
Accrued expenses			104,175				148,268
Income taxes payable			8,103				4,976
Deferred revenue			422,216				472,864
Total current liabilities			549,491				644,880
DEFERRED REVENUE			363,812				399,548
ACCRUED EXPENSES			22,384				19,513
DEFERRED TAX LIABILITY, NET			20,527				27,585
Total liabilities			956,214				1,091,526
SHAREHOLDERS’ EQUITY:
Common stock			2,466				2,616
Additional paid-in capital			632,267				643,544
Retained earnings			217,499				261,754
Accumulated other comprehensive income			3,959				19,117
Total shareholders’ equity			856,191				927,031
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,812,405			$	2,018,557

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
REVENUES:
Software license fees		$	60,513			$	79,425			$	164,206			$	196,712
Maintenance fees			116,614				120,026				367,858				350,063
Professional services fees			91,540				109,884				305,036				343,920
Total revenues			268,667				309,335				837,100				890,695
OPERATING EXPENSES:
Cost of software license fees			6,117				6,685				18,460				23,660
Cost of maintenance fees			9,488				11,452				32,814				33,110
Cost of professional services			86,887				103,705				289,682				309,752
Technology development and support			22,395				23,636				67,903				77,134
Sales and marketing			55,042				66,392				174,722				196,580
Administrative and general			35,520				46,158				119,138				134,412
Restructuring costs			4,009				4,894				6,922				39,645
Total operating expenses			219,458				262,922				709,641				814,293
INCOME FROM OPERATIONS			49,209				46,413				127,459				76,402
OTHER INCOME, NET			2,291				4,650				8,558				15,736
INCOME BEFORE INCOME TAXES			51,500				51,063				136,017				92,138
INCOME TAX PROVISION			16,548				15,449				44,751				18,919
NET INCOME		$	34,952			$	35,614			$	91,266			$	73,219
Basic earnings per share		$	0.14			$	0.13			$	0.36			$	0.25
Diluted earnings per share		$	0.14			$	0.13			$	0.36			$	0.25

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

		Nine Months Ended
		December 31,
		2008				2007
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income		$	91,266			$	73,219
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			40,302				41,364
Property and equipment impairment			662				3,079
Capitalized software impairment							3,873
Acquisition tax benefits			3,933				3,932
Stock option compensation			12,933				8,773
Deferred income taxes			5,943				(14,039	)
Other			419				1,072
Net change in assets and liabilities, net of effects from acquisitions and currency fluctuations:
Accounts receivable			(30,433	)			1,387
Prepaid expenses and other current assets			19,064				10,422
Other assets			(1,549	)			1,201
Accounts payable and accrued expenses			(30,704	)			(10,758	)
Deferred revenue			(36,099	)			(47,848	)
Income taxes			3,070				32,355
Net cash provided by operating activities			78,807				108,032
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchase of:
Property and equipment			(15,257	)			(8,828	)
Capitalized software			(9,456	)			(11,263	)
Investment proceeds			70,212				90,255
Net cash provided by investing activities			45,499				70,164
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from exercise of stock options including excess tax benefits			11,207				66,531
Contribution to stock purchase plans			2,349				3,184
Repurchase of common stock			(177,195	)			(337,785	)
Net cash used in financing activities			(163,639	)			(268,070	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			(12,894	)			7,813
NET DECREASE IN CASH AND CASH EQUIVALENTS			(52,227	)			(82,061	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			215,943				260,681
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	163,716			$	178,620

See notes to condensed consolidated financial statements.

COMPUWARE CORPORATION AND SUBSIDIARIES

Note 1 — Basis of Presentation

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

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, contingencies and results of operations. While management has based their assumptions and estimates on the facts and circumstances existing at December 31, 2008, final amounts may differ from these estimates.

In the opinion of management of the Company, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and notes thereto for the year ended March 31, 2008 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The Condensed Consolidated Balance Sheet at March 31, 2008 has been derived from the audited financial statements at that date but does not include all information and footnotes required by U.S. GAAP for complete financial statements. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years.

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

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

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

For revenue arrangements where there is a lack of VSOE of fair value for any undelivered elements, license fee revenue is deferred and recognized upon delivery of those elements or

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

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

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

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

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

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

Deferred revenue — Deferred revenue consists primarily of maintenance fees related to the remaining term of maintenance agreements in effect at those dates. Deferred license fees and services fees are also included in deferred revenue for those arrangements that are being recognized on a ratable basis. Commission costs associated with deferred revenue are also deferred.

Capitalized Software — Capitalized software includes the costs of purchased and internally developed software products and is stated at the lower of unamortized cost or net realizable value in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”.

Capitalization of internally developed software products begins when technological feasibility of the product is established. Technology development and support includes primarily the costs of programming personnel associated with product development and support, net of amounts capitalized.

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

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

Goodwill and Other Intangibles — Goodwill for each business segment and those intangible assets with indefinite lives are tested for impairment annually and/or when events or circumstances indicate their fair value may have been reduced below carrying value. The Company evaluated its goodwill and indefinite lived intangibles as of March 31, 2008 and determined there was no impairment. In addition, as further discussed in Note 5, the Company performed an interim goodwill impairment evaluation, as of December 31, 2008, for its professional services segment.

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

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

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

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

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

Recently Issued Accounting Pronouncements

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

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

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

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

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

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

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

The Company measures the director phantom stock plan liability (using level 1 inputs) and the forward foreign exchange contract assets (using level 2 inputs) at fair value on a recurring basis in accordance with SFAS No. 157. At December 31, 2008, the fair value of the director phantom stock plan liability was $4.8 million and the forward foreign exchange contract assets were $239,000.

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

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

Note 2 — Computation of Earnings per Common Share

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
BASIC EARNINGS PER SHARE:
Numerator: Net income		$	34,952			$	35,614			$	91,266			$	73,219
Denominator:
Weighted-average common shares outstanding			246,537				281,359				252,850				292,514
Basic earnings per share		$	0.14			$	0.13			$	0.36			$	0.25
DILUTED EARNINGS PER SHARE:
Numerator: Net income		$	34,952			$	35,614			$	91,266			$	73,219
Denominator:
Weighted-average common shares outstanding			246,537				281,359				252,850				292,514
Dilutive effect of stock options			262				1,123				1,385				1,757
Total shares			246,799				282,482				254,235				294,271
Diluted earnings per share		$	0.14			$	0.13			$	0.36			$	0.25

During the three and nine months ended December 31, 2008, stock options to purchase a total of approximately 34,612,000 and 19,283,000 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, 2007, stock options to purchase a total of approximately 26,369,000 and 11,714,000 shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

Note 3 — Comprehensive Income

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Net income		$	34,952			$	35,614			$	91,266			$	73,219
Foreign currency translation adjustment, net of tax			(6,759	)			(1,580	)			(15,158	)			7,618
Total comprehensive income		$	28,193			$	34,034			$	76,108			$	80,837

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

Note 4 — Stock Benefit Plans and Stock-Based Compensation

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

Stock Options

A summary of option activity under the Company’s stock-based compensation plans as of December 31, 2008, and changes during the nine months then ended is presented below (shares and intrinsic value in thousands):

		Nine Months Ended
		December 31, 2008
										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of				Exercise				Contractual				Intrinsic
		Options				Price				Term in Years				Value
Options outstanding as of March 31, 2008			34,289			$	12.69
Granted			9,719				7.75
Exercised			(1,335	)			7.87							$	3,903
Forfeited			(492	)			8.28
Cancelled/expired			(6,631	)			23.59
Options outstanding as of December 31, 2008			35,550			$	9.60				4.74			$	1,742
Options vested and expected to vest, net of estimated forfeitures, as of December 31, 2008			33,212			$	9.71				4.44			$	1,737
Options exercisable as of December 31, 2008			21,733			$	10.70				2.20			$	1,640

SFAS No. 123 (revised 2004), “Share-Based Payment” requires the use of a valuation model to calculate the fair value of stock option awards. The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected term, risk-free interest rates and dividend yields. The volatility is based on historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on either historical exercise data if available or the simplified method as described in Staff Accounting Bulletins No. 107 and No. 110. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our awards. The dividend yield assumption is based on the Company’s history and expectation regarding dividend payouts.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

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

		Nine Months Ended
		December 31,
		2008				2007
Expected volatility			54.39	%			59.35	%
Risk-free interest rate			3.25	%			4.15	%
Expected lives at date of grant (in years)			6.4				6.8
Weighted-average fair value of the options granted		$	4.31			$	6.07

Dividend yields were not a factor in determining fair value of stock options granted as the Company has never issued cash dividends and does not anticipate issuing cash dividends in the future.

Restricted Stock Units

In November 2008, the Company issued 192,000 shares of restricted stock units to employees under the LTIP with a grant date fair value of $6.03 per share. The Company measures the grant date fair value of restricted stock units at the market price of the Company’s common stock as of the date of the grant. These awards vest as follows: 50% on the third year anniversary of the date of grant, and 25% on each of the fourth year and fifth year anniversaries of the date of grant. Vesting is accelerated upon death, disability or a change in control.

The Company’s nonvested restricted stock units as of December 31, 2008, and the activity during the nine months then ended is summarized as follows (shares in thousands):

		Nine Months Ended
		December 31, 2008
						Weighted
						Average
						Grant-Date
		Shares				Fair Value
Nonvested restricted stock units as of March 31, 2008			—			$	—
Granted			192				6.03
Vested			—				—
Forfeited			—				—
Nonvested restricted stock units as of December 31, 2008			192			$	6.03

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Stock-based compensation classified as:
Cost of software license fees														$	1
Cost of maintenance fees		$	519			$	78			$	706				217
Cost of professional services			459				360				2,443				1,032
Technology development and support			1,224				164				1,590				506
Sales and marketing			1,529				552				3,774				1,684
Administrative and general			1,232				436				3,444				1,216
Restructuring costs (see Note 7)			70								976				4,117
Total stock-based compensation expense before income taxes			5,033				1,590				12,933				8,773
Income tax benefit			(1,798	)			(542	)			(4,665	)			(3,031	)
Total stock-based compensation expense after income taxes		$	3,235			$	1,048			$	8,268			$	5,742

The fair value of equity awards vested during the nine months ending December 31, 2008 was $3.88 per share.

As of December 31, 2008, $35.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested equity awards is expected to be recognized over a weighted-average period of approximately 3.10 years.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

Note 5 — Intangible Assets and Goodwill

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

		December 31, 2008
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Unamortized intangible assets:
Trademarks (1)		$	5,815							$	5,815
Amortized intangible assets:
Capitalized software (2)		$	347,332			$	(294,479	)		$	52,853
Customer relationship agreements (3)			13,290				(10,133	)			3,157
Non-compete agreements (3)			2,565				(2,533	)			32
Other (4)			6,851				(6,576	)			275
Total amortized intangible assets		$	370,038			$	(313,721	)		$	56,317

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

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

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

						Professional				Application
Goodwill		Products				Services				Services				Total
Balance at March 31, 2008, net		$	202,502			$	142,294			$	11,471			$	356,267
Adjustments to previously recorded purchase price (1)			(373	)							61				(312	)
Effect of foreign currency translation			(5,024	)			(1,686	)							(6,710	)
Balance at December 31, 2008, net		$	197,105			$	140,608			$	11,532			$	349,245

During the third quarter of 2009, the Company’s professional services revenues declined as current economic conditions impacted our customer base. As a result, we terminated approximately 140 personnel in our professional services division during the quarter. This trend continued during the month of January 2009 and has resulted in an increase to the number of off assignment personnel. We have concluded that the current trend represents a triggering event for evaluation of potential goodwill impairment of the professional services reporting unit. As a result, we performed an interim goodwill impairment evaluation, as required under FASB Statement No. 142, Goodwill and Other Intangibles Assets (“SFAS No. 142”). Pursuant to SFAS No. 142, goodwill and intangible assets with indefinite lives must be tested for impairment at least once a year or more frequently if management believes indicators of impairment exist. Carrying values are compared with fair values, and when the carrying value exceeds the fair value, the carrying value of the impaired goodwill is reduced to fair value. The performance test involves a two-step process. Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs Step 2 of the goodwill impairment test to determine the amount of impairment loss by comparing the implied fair value of the respective reporting unit’s goodwill with the carrying amount of that goodwill.

The Company has completed Step 1 of the impairment test and has concluded that there was no impairment. The Company determined the fair value of the professional services segment using a discounted cash flow analysis supported by market multiples of revenue. The discounted cash flow analysis uses management’s best estimate of market conditions over the projected period, including growth rates in revenue and estimated changes in margins. Other significant estimates and assumptions include terminal value growth rates and changes in future working capital requirements. The analysis takes into consideration actions management intends to execute to improve the profitability of the professional services segment. If management’s actions are not successful in improving the profitability of the professional services segment or other adverse changes of market conditions not currently contemplated occur, an impairment of some or all of the $140.6 million of goodwill related to the professional services segment may be recorded in the future as a non-cash charge to earnings in the period in which it is recorded. The goodwill analysis of each of our reporting units will be updated as of March 31, 2009 which is our annual assessment date based on developments during the fourth quarter.

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

Note 6 — Segment Information

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

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Revenues:
Products:
Mainframe		$	109,296			$	125,710			$	340,577			$	339,421
Distributed systems			67,831				73,741				191,487				207,354
Total product revenue			177,127				199,451				532,064				546,775
Professional services			82,705				101,241				278,851				316,385
Application services			8,835				8,643				26,185				27,535
Total revenues		$	268,667			$	309,335			$	837,100			$	890,695
Income (loss) from operations:
Products		$	84,085			$	91,286			$	238,165			$	216,291
Professional services			4,601				6,816				17,777				34,509
Application services			52				(637	)			(2,423	)			(341	)
Subtotal			88,738				97,465				253,519				250,459
Corporate expenses			(35,520	)			(46,158	)			(119,138	)			(134,412	)
Restructuring costs			(4,009	)			(4,894	)			(6,922	)			(39,645	)
Income from operations			49,209				46,413				127,459				76,402
Other income, net			2,291				4,650				8,558				15,736
Income before income taxes		$	51,500			$	51,063			$	136,017			$	92,138

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Revenues:
United States		$	164,626			$	186,436			$	522,023			$	566,200
Europe and Africa			74,332				85,072				227,125				232,755
Other international operations			29,709				37,827				87,952				91,740
Total revenues		$	268,667			$	309,335			$	837,100			$	890,695

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

Note 7 — Restructuring Accrual

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

In the first nine months of fiscal 2009, the Company incurred restructuring charges of $6.9 million as management continued evaluating the Company’s business processes to identify operating efficiencies with the goal of reducing operating expenses. Employee termination costs accounted for $6.1 million of the charge resulting in the elimination of 140 professional services personnel and management positions, 139 positions within our product segment related to technology and sales and marketing personnel and 40 corporate general and administrative positions. In addition, full or partial closing of four offices occurred resulting in a lease abandonment charge of $500,000. The remaining facilities charge primarily related to changes in sublease income assumptions associated with lease facilities that were abandoned in previous restructuring initiatives.

Management will continue to evaluate business processes to identify opportunities to streamline operations and reduce costs. Any further actions will likely result in additional restructuring charges. The amount of such charges will depend upon the nature, timing and extent of the restructuring actions taken.

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

						Expensed				Paid
		Accrual				during the				during the				Accrual
		balance at				nine months ended				nine months ended				balance at
		March 31,				December 31,				December 31,				December 31,
		2008				2008				2008				2008
Employee termination benefits		$	2,655			$	6,101			$	(6,530	)		$	2,226
Facilities costs (primarily lease abandonments)			4,716				739				(3,314	)			2,141
Other			85				82				(139	)			28
Total		$	7,456			$	6,922			$	(9,983	)		$	4,395

As of December 31, 2008, $3.4 million of the restructuring accrual is recorded in current “accrued expenses” with the remaining balance of $1.0 million recorded in long-term “accrued expenses” in the Condensed Consolidated Balance Sheets.

The accruals for employee termination benefits at December 31, 2008 primarily represent the amounts to be paid to employees that have been terminated as a result of initiatives described above.

The accruals for facilities costs at December 31, 2008 represent the remaining fair value of lease obligations for exited and demised locations, as determined at the cease-use dates of those facilities, net of estimated sublease income that could be reasonably obtained in the

COMPUWARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Quarter Ended December 31, 2008
(Unaudited)

future, and will be paid out over the remaining lease terms, the last of which ends in fiscal 2012. Projected sublease income is based on management’s estimates, which are subject to change.

Note 8 — Debt

The Company has no long term debt.

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

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

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

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, 2008, and the related condensed consolidated statements of operations for the three-month and nine-month periods ended December 31, 2008 and 2007, and of cash flows for the nine-month periods ended December 31, 2008 and 2007. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Compuware Corporation and subsidiaries as of March 31, 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated May 28, 2008 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan
February 4, 2009

COMPUWARE CORPORATION AND SUBSIDIARIES

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

FORWARD-LOOKING STATEMENTS

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

The material risks and uncertainties that we believe affect us are summarized below (see Item 1A Risk Factors in our 2008 Form 10-K and Part II Item 1A in our June 30, 2008 Form 10-Q). These risks and uncertainties are not the only ones we face. Additional risks and uncertainties discussed elsewhere in the reports we file with the Securities and Exchange Commission, as well as other risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial, may also impair business operations. This report is qualified in its entirety by these risk factors and those listed below. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment.

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

	•		The majority of our software products revenue is dependent on our customers’ continued use of International Business Machines Corp. (“IBM”) and IBM-compatible products.
	•		Our software product revenue is dependent on the acceptance of our pricing structure for software licenses and maintenance.
	•		Our strategy to package products and services as a single offering may not be accepted by our customers, negatively impacting our revenue.
	•		The continuing uncertainty in the United States and global economies may reduce demand for our software products, professional services and application services, which may negatively affect our revenues and operating results.
	•		We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other factors.
	•		If we fail to achieve the results we expect from our expense reduction program, our results of operations and financial condition may be adversely affected.
	•		Our software and technology may infringe the proprietary rights of others, which may require us to enter into royalty arrangements or result in costly litigation.
	•		Our results could be adversely affected if our operating margin or operating margin percentage decline.

COMPUWARE CORPORATION AND SUBSIDIARIES

	•		Our results could be adversely affected by increased competition, pricing pressures and technological changes.
	•		The market for professional services is highly competitive, fragmented and characterized by low barriers to entry.
	•		The market for application services is in its early stages with emerging competitors. As the market matures, competition may increase and could have a negative impact on our results of operations.
	•		We must develop or acquire product enhancements and new products to succeed.
	•		Acquisitions may be difficult to integrate, disrupt our business or divert the attention of our management and may result in financial results that are different than expected.
	•		We are exposed to exchange rate risks on foreign currencies and to other international risks, which may adversely affect our business and results of operations.
	•		A further decline or consolidation in the U.S. domestic automotive manufacturing business could adversely affect our professional services and application services businesses.
	•		Current laws may not adequately protect our proprietary rights.
	•		The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse affect on our business.
	•		Our quarterly financial results vary and may be adversely affected by a number of unpredictable factors.
	•		Declines in our license commitments, increases in customer cancellations or currency fluctuations could lead to declines in our maintenance revenue.
	•		Unanticipated changes in our operating results or effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.
	•		The continued suspension or the termination of our stock repurchase plan may result in a decrease in our stock price.
	•		If the fair value of our long-lived assets, including without limitation goodwill, deteriorated below their carrying value, recognition of an impairment loss would be required, which would adversely affect our financial results.
	•		Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers which could adversely affect our business, financial condition and operating results.
	•		Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law have anti-takeover effects that may deter hostile takeovers or delay or prevent changes in control or management, including transactions in which the stockholders of Compuware might otherwise receive a premium for their shares over the current market prices.

COMPUWARE CORPORATION AND SUBSIDIARIES

OVERVIEW

In this section, we discuss our results of operations on a segment basis for each of our three business segments in the technology industry: products, professional services and application services. We evaluate segment performance based primarily on segment contribution before corporate expenses. References to years are to fiscal years ended March 31. This discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes included elsewhere in this report and our annual report on Form 10-K for the fiscal year ended March 31, 2008, particularly “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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

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

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

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

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

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

COMPUWARE CORPORATION AND SUBSIDIARIES

Quarterly Update

The following occurred during the third quarter of 2009:

	•		Realized an increase in product contribution margin to 47.5% in the third quarter of 2009 from 45.8% in the third quarter of 2008.
	•		Realized an increase in application services segment contribution margin to 0.6% in the third quarter of 2009 from a negative contribution margin of 7.4% in the third quarter of 2008.
	•		Experienced a decline in professional services segment contribution margin to 5.6% in the third quarter of 2009 from 6.7% in the third quarter of 2008.
	•		Experienced a decline in mainframe and distributed product revenue of 13.1% and 8.0%, respectively, compared to the third quarter of 2008.
	•		Restructuring actions to improve operating efficiencies resulted in a charge of $4 million.
	•		Released 1 mainframe and 10 distributed product updates designed to increase the productivity of the IT departments of our customers.

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

COMPUWARE CORPORATION AND SUBSIDIARIES

RESULTS OF OPERATIONS

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

		Percentage of												Percentage of
		Total Revenues												Total Revenues
		Three Months Ended								Period-				Nine Months Ended								Period-
		December 31, *								to-Period				December 31, *								to-Period
		2008				2007				Change				2008				2007				Change
REVENUE:
Software license fees			22.5	%			25.7	%			(23.8	)%			19.6	%			22.1	%			(16.5	)%
Maintenance fees			43.4				38.8				(2.8	)			44.0				39.3				5.1
Professional services segment revenue			30.8				32.7				(18.3	)			33.3				35.5				(11.9	)
Application services segment revenue			3.3				2.8				2.2				3.1				3.1				(4.9	)
Total revenues			100.0				100.0				(13.1	)			100.0				100.0				(6.0	)
OPERATING EXPENSES:
Cost of software license fees			2.3				2.2				(8.5	)			2.2				2.6				(22.0	)
Cost of maintenance fees			3.5				3.7				(17.1	)			3.9				3.7				(0.9	)
Professional services segment expenses			29.1				30.5				(17.3	)			31.2				31.7				(7.4	)
Application services segment expenses			3.3				3.0				(5.4	)			3.4				3.1				2.6
Technology development and support			8.3				7.6				(5.3	)			8.1				8.7				(12.0	)
Sales and marketing			20.5				21.5				(17.1	)			20.9				22.1				(11.1	)
Administrative and general			13.2				14.9				(23.0	)			14.3				15.1				(11.4	)
Restructuring cost			1.5				1.6				(18.1	)			0.8				4.4				(82.5	)
Total operating expenses			81.7				85.0				(16.5	)			84.8				91.4				(12.9	)
Income from operations			18.3				15.0				6.0				15.2				8.6				66.8
Other income, net			0.9				1.5				(50.7	)			1.0				1.7				(45.6	)
Income before income taxes			19.2				16.5				0.9				16.2				10.3				47.6
Income tax provision			6.2				5.0				7.1				5.3				2.1				136.5
Net income			13.0	%			11.5	%			(1.9	)%			10.9	%			8.2	%			24.6	%

COMPUWARE CORPORATION AND SUBSIDIARIES

PRODUCTS SEGMENT

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Revenue		$	177,127			$	199,451			$	532,064			$	546,775
Expenses			93,042				108,165				293,899				330,484
Product contribution		$	84,085			$	91,286			$	238,165			$	216,291

The products segment generated contribution margins of 47.5% and 45.8% during the third quarter of 2009 and 2008, respectively, and 44.8% and 39.6% for the first nine months of 2009 and 2008, respectively. The increases in margin for the third quarter and first nine months of 2009 were due to declines in product expenses, primarily sales and marketing costs, outpacing the declines in product revenue for the reasons discussed below.

Products Segment Revenue

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

		Three Months Ended												Nine Months Ended
		December 31,												December 31,
		2008				2007				Change				2008				2007				Change
Software License Fees
Mainframe		$	27,594			$	41,898				(34.1	)%		$	82,955			$	92,351				(10.2	)%
Distributed			32,919				37,527				(12.3	)			81,251				104,361				(22.1	)
Total Software License Fees			60,513				79,425				(23.8	)			164,206				196,712				(16.5	)
Maintenance Fees
Mainframe			81,702				83,812				(2.5	)			257,622				247,070				4.3
Distributed			34,912				36,214				(3.6	)			110,236				102,993				7.0
Total Maintenance Fees			116,614				120,026				(2.8	)			367,858				350,063				5.1
Total Product Revenue
Mainframe			109,296				125,710				(13.1	)			340,577				339,421				0.3
Distributed			67,831				73,741				(8.0	)			191,487				207,354				(7.7	)
Total Product Revenue		$	177,127			$	199,451				(11.2	)%		$	532,064			$	546,775				(2.7	)%

Our software products are designed to enhance the effectiveness of key disciplines throughout the IT organization from application development and delivery to service management and IT portfolio management supporting all major enterprise computing platforms. Product revenue, which consists of software license fees and maintenance fees, comprised 65.9% and 64.5% of total revenue during the third quarter of 2009 and 2008, respectively, and 63.6% and 61.4% of total revenue during the first nine months of 2009 and 2008, respectively.

COMPUWARE CORPORATION AND SUBSIDIARIES

Software license fees

Software license fees (“license fees”) decreased $18.9 million or 23.8%, which included a negative impact from foreign currency fluctuations of $5.1 million, during the third quarter of 2009 to $60.5 million from $79.4 million during the third quarter of 2008 and decreased $32.5 million or 16.5%, which included a negative impact from foreign currency fluctuations of $1.1 million, during the first nine months of 2009 to $164.2 million from $196.7 million during the first nine months of 2008.

Mainframe license fees for the third quarter and first nine months of 2009 declined $14.3 million and $9.4 million, respectively, and distributed license fees for the third quarter and first nine months of 2009 declined $4.6 million and $23.1 million, respectively, compared to the same periods from the prior year.

The declines in software license fees for the third quarter and first nine months of 2009 as compared to 2008 is a result of the economic slowdown experienced since the end of the second quarter of 2009 affecting the closure of license transaction deals across all product lines.

During the third quarter and first nine months of 2009, for software license transactions that are required to be recognized ratably, we deferred $21.4 million and $52.7 million, respectively, of license revenue relating to such transactions that closed during the respective periods, and recognized as revenue $20.4 million and $64.3 million of previously deferred license revenue relating to such transactions that closed and had been deferred prior to the beginning of the respective periods.

Maintenance fees

Maintenance fees decreased $3.4 million or 2.8%, which included a negative impact from foreign currency fluctuations of $7.6 million, during the third quarter of 2009 to $116.6 million from $120.0 million during the third quarter of 2008, and increased $17.8 million or 5.1%, which included a positive impact from foreign currency fluctuations of $2.7 million, during the first nine months of 2009 to $367.9 million from $350.1 million during the first nine months of 2008. The decrease in maintenance fees for the quarter was due to the negative impact of foreign currency fluctuations as the U.S. dollar generally strengthened against non-U.S. currencies during the third quarter of 2009. The increase in maintenance fees for the first nine months of 2009 relates primarily to maintaining a high rate of renewals.

COMPUWARE CORPORATION AND SUBSIDIARIES

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

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
United States		$	89,360			$	97,898			$	274,135			$	281,536
Europe and Africa			60,558				66,459				178,763				180,535
Other international operations			27,209				35,094				79,166				84,704
Total product revenue		$	177,127			$	199,451			$	532,064			$	546,775

Products Segment Expenses

Products segment expenses include cost of software license fees, cost of maintenance fees, technology development and support costs and sales and marketing expenses. These expenses are discussed below.

Cost of software license fees includes amortization of capitalized software, the cost of duplicating and disseminating products to customers, including associated hardware costs, and the cost of author royalties. Cost of software license fees decreased $600,000 or 8.5% during the third quarter of 2009 to $6.1 million from $6.7 million in the third quarter of 2008 and for the first nine months of 2009 decreased $5.2 million or 22.0% to $18.5 million from $23.7 million in the first nine months of 2008. The decreases in cost of software license fees were due to a decline in hardware costs associated with our Vantage product line. The decline in the first nine months of 2009 was further affected by a $3.9 million capitalized software impairment charge recorded during the first quarter of 2008 associated with the 2008 restructuring initiative.

As a percentage of software license fees, cost of software license fees were 10.1% and 8.4% in the third quarter of 2009 and 2008, respectively, and 11.2% and 12.0% (including 2.0% from the impairment charge) in the first nine months of 2009 and 2008, respectively. The increase in the percentage for the third quarter of 2009 was primarily due to the decline in software license fees. The decline in the percentage for the first nine months of 2009 was primarily due to the capitalized software impairment charge and decrease in hardware costs, as discussed above, offset in part by the decline in software license fees.

Cost of maintenance fees consists of the direct costs allocated to maintenance and product support such as helpdesk and technical support. Customers who subscribe to maintenance are also eligible to receive the benefit of new releases as well as technical support. Cost of maintenance fees decreased $2.0 million or 17.1% during the third quarter of 2009 to $9.5 million from $11.5 million in the third quarter of 2008 and for the first nine months of 2009 decreased $300,000 or 0.9% to $32.8 million from $33.1 million in the first nine months of 2008. The decreases were primarily due to lower compensation and benefit costs resulting from employee headcount reductions as part of the restructuring actions taken during 2008 and 2009 (see Note 7 to the Condensed Consolidated Financial Statements). As a percentage of maintenance fees, cost of maintenance fees were 8.1% and 9.5% in the third quarter of 2009 and 2008, respectively, and 8.9% and 9.5% in the first nine months of 2009 and 2008, respectively.

Technology development and support includes, primarily, the costs of programming personnel associated with product development and support less the amount of software development

COMPUWARE CORPORATION AND SUBSIDIARIES

costs capitalized during the period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives. As a percentage of product revenue, costs of technology development and support were 12.6% and 11.9% in the third quarter of 2009 and 2008, respectively, and 12.8% and 14.1% in the first nine months of 2009 and 2008, respectively.

Capitalization of internally developed software products begins when technological feasibility of the product is established. Total technology development and support costs incurred internally and capitalized in the third quarter and first nine months of 2009 and 2008 were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Technology development and support costs incurred		$	24,882			$	26,393			$	75,591			$	87,207
Capitalized technology development and support costs			(2,487	)			(2,757	)			(7,688	)			(10,073	)
Technology development and support costs expensed		$	22,395			$	23,636			$	67,903			$	77,134