UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

OR

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 T 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 T 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 T 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 T

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

As of August 1, 2011, there were outstanding 218,597,247 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 June 30, 2011 and March 31, 2011	3
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	26
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
PART II.	OTHER INFORMATION
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 6.	Exhibits	54
SIGNATURES		56

2

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In Thousands)

(Unaudited)

	June 30,			March 31,
ASSETS	2011			2011
CURRENT ASSETS:
Cash and cash equivalents	$	194,866		$	180,244
Accounts receivable, net		419,978			474,479
Deferred tax asset, net		42,570			40,756
Income taxes refundable		6,213			6,815
Prepaid expenses and other current assets		34,278			40,446
Total current assets		697,905			742,740
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION		331,272			333,166
CAPITALIZED SOFTWARE AND OTHER
INTANGIBLE ASSETS, NET		80,876			83,001
ACCOUNTS RECEIVABLE		204,397			206,887
DEFERRED TAX ASSET, NET		43,333			35,754
GOODWILL		607,794			607,765
OTHER ASSETS		37,954			29,064
TOTAL ASSETS	$	2,003,531		$	2,038,377
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	17,858		$	18,931
Accrued expenses		81,565			105,242
Income taxes payable		12,264			12,286
Deferred revenue		446,309			462,376
Total current liabilities		557,996			598,835
DEFERRED REVENUE		366,374			393,780
ACCRUED EXPENSES		25,406			28,016
DEFERRED TAX LIABILITY, NET		72,552			65,134
Total liabilities		1,022,328			1,085,765
SHAREHOLDERS' EQUITY:
Common stock		2,185			2,177
Additional paid-in capital		666,533			654,109
Retained earnings		314,052			297,067
Accumulated other comprehensive loss		(1,567	)		(741	)
Total shareholders' equity		981,203			952,612
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,003,531		$	2,038,377

See notes to condensed consolidated financial statements.

3

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Data)

(Unaudited)

	Three Months Ended
	June 30,
	2011		2010
REVENUES:
Software license fees	$	34,126	$	33,330
Maintenance and subscription fees		126,109		116,759
Professional services fees		69,739		56,396
Total revenues		229,974		206,485
OPERATING EXPENSES:
Cost of software license fees		3,536		3,416
Cost of maintenance and subscription fees		16,658		13,287
Cost of professional services		61,953		50,713
Technology development and support		24,701		21,541
Sales and marketing		61,995		57,704
Administrative and general		41,514		37,437
Total operating expenses		210,357		184,098
INCOME FROM OPERATIONS		19,617		22,387
OTHER INCOME, NET		998		865
INCOME BEFORE INCOME TAXES		20,615		23,252
INCOME TAX PROVISION		3,630		10,607
NET INCOME	$	16,985	$	12,645
Basic earnings per share	$	0.08	$	0.06
Diluted earnings per share	$	0.08	$	0.06

See notes to condensed consolidated financial statements.

4

COMPUWARE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Three Months Ended
	June 30,
	2011			2010
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income	$	16,985		$	12,645
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		13,015			12,213
Stock award compensation		5,323			5,304
Deferred income taxes		(1,200	)		(6,079	)
Other		45			336
Net change in assets and liabilities, net of effects from currency fluctuations:
Accounts receivable		64,773			62,573
Prepaid expenses and other current assets		3,787			19,659
Other assets		(6,557	)		1,452
Accounts payable and accrued expenses		(31,561	)		(35,066	)
Deferred revenue		(52,356	)		(64,919	)
Income taxes		2,952			8,024
Net cash provided by operating activities		15,206			16,142
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Property and equipment		(5,020	)		(4,268	)
Capitalized software		(3,593	)		(4,506	)
Net cash used in investing activities		(8,613	)		(8,774	)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from exercise of stock options including excess tax benefits		5,142			2,227
Employee contribution to stock purchase plans		779			719
Repurchase of common stock					(16,160	)
Net cash provided by (used in) financing activities		5,921			(13,214	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		2,108			(5,381	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		14,622			(11,227	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		180,244			149,897
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	194,866		$	138,670

See notes to condensed consolidated financial statements.

5

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 June 30, 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.

We sometimes enter into arrangements that include both software related deliverables (licensed software products, maintenance services and 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.

Once we have allocated the arrangement consideration between software deliverables and non-software deliverables, we recognize revenue as described in the respective software license fees, maintenance and subscription fees, and professional services fees sections.

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 collectibility is reasonably assured. We evaluate collectibility based on past customer history, external credit ratings and payment terms within various customer agreements.

6

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 (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 does not sell maintenance for these separately and therefore cannot establish 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 and subscription fees

The Company’s maintenance agreements 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 may range from one to five years.

7

Subscription fees relate to arrangements that permit our customers to access and utilize our web performance services. We evaluate collectibility based on past customer history, external credit ratings and payment terms within various customer agreements. 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.

Our application services fees are combined with professional services fees in our consolidated statement of operations and consist of fees for our on-demand software and other 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 deferred upon contract execution and are recognized ratably over the period we expect the customer to receive value.

Deferred revenue

Deferred revenue consists primarily of billed and unbilled maintenance fees related to the future service period of maintenance agreements in effect at the reporting date. Deferred license, subscription and professional services fees 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 and recognized as “sales and marketing” expenses in the condensed consolidated statements of operations over the revenue recognition period of the related customer contracts.

Research and development

Research and development (“R&D”) costs include primarily the cost of programming personnel and amounted to $18.5 million and $17.3 million for the three months ended June 30, 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 professional services”.

8

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 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 three months ended June 30, 2011 was 17.6% compared to 45.6% for the three months ended June 30, 2010. The decrease in the effective tax rate was primarily due to new legislation enacted in the State of Michigan on May 25, 2011 that amends the Income Tax Act to implement a comprehensive set of tax changes effective January 1, 2012. One part of the legislation contained provisions that replaced the current 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, which will allow the Company to reduce its future tax liability for the duration of the carryforward period. As a result, the valuation allowance currently associated with the Brownfield deferred tax asset was reversed resulting in a $5.0 million reduction to the Company’s income tax provision during the three months ended June 30, 2011.

The decrease was further impacted by a $2.2 million valuation allowance recorded during the three months ended June 30, 2010 related to the Company’s Brownfield deferred tax asset. During the quarter, the State of Michigan published guidance clarifying the sourcing of services revenues which impacts future taxable income under the Michigan Business Tax. As a result, the Company assessed the ability to utilize these credits prior to expiration and recorded the additional valuation allowance to reduce the carrying value of the Brownfield deferred tax asset to the more likely than not realizable value.

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, and also that reclassification adjustments between net income and other comprehensive income be included on the face of the financial statements. For public companies, the ASU 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.

9

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 will be adopting this ASU in fiscal 2013. The Company is currently evaluating the impact of this standard on our consolidated financial statements.

10

Note 2 – 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.

Our loans receivables consist of notes due from CareTech, Inc. and 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 interest-only payment on the related note during the first quarter of fiscal 2012, reducing the loan receivable balance to $5.6 million as of June 30, 2011.

The following is an analysis of our software products and loans financing receivables aged based on invoice date as of June 30, 2011 and March 31, 2011 (in thousands):

	As of June 30, 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	$	2,474	$	328	$	609	$	40,758	$	44,169
Loans								6,849		6,849
Total		2,474		328		609		47,607		51,018
Watch rating
Software products		-		44		137		236		417
Total financing receivables	$	2,474	$	372	$	746	$	47,843	$	51,435

	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 June 30, 2011 and March 31, 2011, the allowance for credit losses on our financing receivables was $417,000 and $389,000, respectively.

11

Note 3 - 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 did 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 4 of the condensed consolidated financial statements for further information.

The foreign currency net gains or (losses) for the three months ended June 30, 2011 and 2010 were $(900,000) and $573,000, respectively. The hedging transaction net (loss) from foreign exchange derivative contracts for the three months ended June 30, 2011 and 2010 was $(256,000) and $(87,000), respectively. These amounts were recorded to “administrative and general” in the condensed consolidated statements of operations.

At June 30, 2011, the Company had derivative contracts maturing through July 2011 to sell $4.5 million and purchase $11.7 million in foreign currencies 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.

12

Note 4 - 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 June 30, 2011
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Estimated		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents - money market funds	$	117,376	$	117,376		-		-
Liabilities:
Foreign exchange derivatives	$	11		-	$	11		-

	As of March 31, 2011
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Estimated		Identical Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents - money market funds	$	106,640	$	106,640		-		-
Liabilities:
Foreign exchange derivatives	$	18		-	$	18		-

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 8 of the condensed consolidated financial statements for further information.

13

Note 5 - Computation of Earnings per Common Share

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

	Three Months Ended
	June 30,
Basic earnings per share:	2011		2010
Numerator:
Net income	$	16,985	$	12,645
Denominator:
Weighted-average common shares outstanding		218,200		224,538
Basic earnings per share	$	0.08	$	0.06
Diluted earnings per share:
Numerator:
Net Income	$	16,985	$	12,645
Denominator:
Weighted-average common shares outstanding		218,200		224,538
Dilutive effect of stock awards		4,748		3,037
Total shares		222,948		227,575
Diluted earnings per share	$	0.08	$	0.06

During the three months ended June 30, 2011 and 2010, stock awards to purchase a total of 5.1 million and 20.1 million shares, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive.

Note 6 - 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
	June 30,
	2011			2010
Net income	$	16,985		$	12,645
Foreign currency translation adjustment, net of tax		(826	)		3,690
Total comprehensive income	$	16,159		$	16,335

14

Note 7 – Stock Benefit Plans and Stock-Based Compensation

Stock benefit plans

The Company has the following stock benefit plans: (1) the 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 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 and Trust (“ESOP”) allows the Company to make contributions to the ESOP for the benefit of substantially all U.S. employees.

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 annual cash incentive awards to employees and directors of Covisint.

Stock Options Activity

A summary of option activity under the Company’s stock-based compensation plans as of June 30, 2011, and changes during the three months then ended is presented below (shares and intrinsic value in thousands):

	Three Months Ended
	June 30, 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		3,035			9.45
Exercised		(490	)		8.62			$	1,197
Forfeited		(9	)		10.73
Cancelled/expired		(361	)		11.90
Options outstanding as of June 30, 2011		19,043		$	8.30		6.62	$	28,126
Options vested and expected to vest, net of estimated forfeitures, as of June 30, 2011		17,876		$	8.24		6.46	$	27,360
Options exercisable as of June 30, 2011		10,265		$	7.75		4.93	$	20,440

15

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:

	Three Months Ended
	June 30,
	2011			2010
Expected volatility		40.20	%		42.66	%
Risk-free interest rate		2.02	%		2.99	%
Expected lives at date of grant (in years)		6.0			5.9
Weighted-average fair value of the options granted	$	3.91		$	3.78

The average fair value of stock options vested during the three months ending June 30, 2011 and 2010 was $4.24 and $4.35 per share, respectively.

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 June 30, 2011 and changes during the three months then ended is presented below (shares and intrinsic value in thousands):

	Three Months Ended
	June 30, 2011
				Weighted
				Average		Aggregate
				Grant-Date		Intrinsic
	Shares			Fair Value		Value
Non-vested RSU outstanding as of March 31, 2011		3,741
Granted		380		$	10.07
Released		(301	)			$	3,120
Forfeited		-
Non-vested RSU outstanding as of June 30, 2011		3,820

Covisint Corporation 2009 Long-Term Incentive Plan

As of June 30, 2011, there were 135,000 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 1.5 million PSAs outstanding as of June 30, 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
	June 30,
	2011		2010
Stock-based compensation classified as:
Cost of maintenance and subscription fees	$	156	$	60
Cost of professional services		620		237
Technology development and support		330		167
Sales and marketing		1,286		1,778
Administrative and general		2,931		3,062
Total stock-based compensation expense before income taxes	$	5,323	$	5,304

As of June 30, 2011, total unrecognized compensation cost of $39.4 million, net of estimated forfeitures, related to nonvested equity awards is expected to be recognized over a weighted-average period of approximately 2.90 years.

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Note 8 – Goodwill, Capitalized Software and Other Intangible Assets

Goodwill

The Company previously 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 9 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 Application Services (“AS”).

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:

· 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 as of April 1, 2011.

· The goodwill balance of $219.5 million related to the web performance services reporting unit as of March 31, 2011 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 as of March 31, 2011 was allocated between traditional professional services, APM, Mainframe, Changepoint and Uniface based on the estimated relative fair value of each respective reporting unit as of April 1, 2011. The portion of goodwill allocated to the traditional professional services will be reported in the professional services reporting unit.

· The goodwill balance of $25.4 million related to the application services reporting unit as of March 31, 2011 will continue to be reported in this reporting unit during fiscal 2012.

The change in the carrying amount of goodwill by reporting unit during the three months ended June 30, 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
Effect of foreign currency translation		(1	)		-		-		-		30		-		29
Goodwill as of June 30, 2011	$	282,814		$	141,020	$	22,151	$	21,350	$	115,074	$	25,385	$	607,794

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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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 June 30, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Unamortized intangible assets:
Trademarks	$	4,472				$	4,472
Amortized intangible assets:
Capitalized software
Internally developed	$	198,376		(164,659	)	$	33,717
Purchased		136,462		(126,288	)		10,174
Customer relationship		48,795		(17,795	)		31,000
Other		11,163		(9,650	)		1,513
Total amortized intangible assets	$	394,796	$	(318,392	)	$	76,404

	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

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 were 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.

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Amortization of intangible assets

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

	Three Months Ended
	June 30,
	2011		2010
Amortized intangible assets:
Capitalized software
Internally developed	$	2,975	$	2,738
Purchased		1,182		1,216
Customer relationship		1,087		1,130
Other		488		466
Total amortization expense	$	5,732	$	5,550

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

Based on the capitalized software, customer relationship and other intangible assets recorded through June 30, 2011, the annual amortization expense over the next five fiscal years is expected to be as follows (in thousands):

	Fiscal Year Ended March 31,
	2012		2013		2014		2015		Thereafter
Amortized intangible assets:
Capitalized software	$	16,681	$	13,634	$	10,112	$	4,814	$	2,813
Customer relationship		4,212		3,835		3,788		3,788		16,460
Other		1,473		487		40		-		-
Total amortization expense	$	22,366	$	17,956	$	13,940	$	8,602	$	19,273

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Note 9 – Segment Information

The Company previously 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) is combined with Gomez on-premises software (formerly Vantage) and reported within the APM segment; and (3) the operating results of our 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, Compuware now has six business segments: APM, Mainframe, Changepoint, Uniface, Professional Services and Application Services.

This business unit structure gives the Company better visibility and control over the operations of the business and increases 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.

· 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.

· IT 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.

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· Application services, marketed under the brand name “Covisint” and provided on a SaaS platform, 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):

	Three Months Ended
	June 30, 2011
																Unallocated
	APM			MF		CP			UF		PS		AS			Expenses			Total
Software license fees	$	11,453		$	18,698	$	1,994		$	1,981	$	-	$	-		$	-		$	34,126
Maintenance and subscription fees		37,094			76,975		4,302			7,738		-		-			-			126,109
Professional services fees		6,966			1,833		3,670			1,206		39,897		16,167			-			69,739
Total revenues		55,513			97,506		9,966			10,925		39,897		16,167			-			229,974
Operating expenses		69,439			24,076		11,362			5,400		31,589		16,834			51,657			210,357
Income (loss) from operations	$	(13,926	)	$	73,430	$	(1,396	)	$	5,525	$	8,308	$	(667	)	$	(51,657	)	$	19,617

	Three Months Ended
	June 30, 2010
															Unallocated
	APM			MF		CP			UF		PS		AS		Expenses			Total
Software license fees	$	14,232		$	14,708	$	2,352		$	2,038	$	-	$	-	$	-		$	33,330
Maintenance and subscription fees		28,445			77,741		3,551			7,022		-		-		-			116,759
Professional services fees		4,158			1,646		3,519			980		34,854		11,239		-			56,396
Total revenues		46,835			94,095		9,422			10,040		34,854		11,239		-			206,485
Operating expenses		56,795			23,752		11,288			4,687		29,804		10,477		47,295			184,098
Income (loss) from operations	$	(9,960	)	$	70,343	$	(1,866	)	$	5,353	$	5,050	$	762	$	(47,295	)	$	22,387

22

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

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

	Three Months Ended
	June 30,
	2011		2010
Revenues:
United States	$	149,239	$	132,156
Europe and Africa		54,604		48,338
Other international operations		26,131		25,991
Total revenues	$	229,974	$	206,485

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Note 10 - Debt

The Company had no long term debt at June 30, 2011 and March 31, 2011.

On June 30, 2011, the Company amended the unsecured revolving credit agreement (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 reduces 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. The credit facility expires on November 1, 2012.

On July 1, 2011, Compuware borrowed $129.5 million under the credit facility to partially fund the acquisition of dynaTrace software, Inc. (see note 12).

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 June 30, 2011.

Any borrowings under the credit facility bear interest at the prime rate 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). The Company pays a quarterly facility fee on the credit facility based on the applicable margin grid.

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Note 11 – 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 June 30, 2011.

Note 12 – Subsequent Event

On July 1, 2011, the Company acquired all of the outstanding capital stock of dynaTrace software, Inc. (“dynaTrace”) for approximately $256 million in cash, plus approximately $300,000 of direct acquisition costs. In addition, certain unvested options exercisable for shares of dynaTrace common stock issued to dynaTrace employees prior to the acquisition were converted into options to receive shares of Compuware common stock under the same terms and conditions.

dynaTrace was a privately-held company whose technology provides the ability to continuously track business transactions and provide exact identification of performance problems, enhancing our Gomez on-premises software solutions.

The initial purchase accounting for the assets, liabilities, items of consideration and the pro forma historical results is incomplete due to the short period of time between the purchase date and filing date of this report.

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 10.

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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 June 30, 2011, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended June 30, 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, stockholders’ equity, 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

August 5, 2011

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COMPUWARE CORPORATION AND SUBSIDIARIES

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 (“operating margin”). 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.

We previously 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) is combined with Gomez on-premises software (formerly Vantage) and reported within the APM segment; and (3) the operating results of our software related professional services (“software related services”) are reported within APM, Changepoint, Mainframe 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 Application Services (“AS”). These segments are described in detail in note 9 to the condensed consolidated financial statements.

This business unit structure gives us better visibility and control over the operations of our business and increases 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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COMPUWARE CORPORATION AND SUBSIDIARIES

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.

· 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, including First Mile, 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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COMPUWARE CORPORATION AND SUBSIDIARIES

· 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 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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COMPUWARE CORPORATION AND SUBSIDIARIES

· 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 on-premises 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 our mainframe product revenues to decline. 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 in excess of 90%. The cash flow generated from our mainframe business supports the growth of our business.

We have identified the APM market as a primary source of 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 name “Gomez” and provide our customers with on-premises software (“Gomez on-premises”) and SaaS platform based web application performance services (“Gomez SaaS”). These solutions ensure the optimal performance of our 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, which provides the ability to continuously track business transactions and provide exact identification of performance problems, enhancing our Gomez software solutions.

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COMPUWARE CORPORATION AND SUBSIDIARIES

We have also identified the secured collaboration services market as a source to grow revenue. 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 application development to project management needs. 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 provides us an opportunity to continue growing the segment’s revenue and operating margin.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Quarterly Update

The following occurred during the first quarter of 2012:

· Realigned our business segments into the following six reportable segments: Application Performance Management, Mainframe, Changepoint, Uniface, Professional Services and Application Services.

· Realized an increase of $23.5 million or 11.4% in revenue during the first quarter of 2012 as compared to the prior year due to $9.4 million increase in maintenance and subscription fees and a $13.3 million increase in professional services fees (see “Business Segment Analysis” for additional information).

· Experienced a decrease in operating margin to 8.5% during the first quarter of 2012 compared to 10.8% in the first quarter of 2011. The decrease was primarily due to our continued investments in the APM business and increases in administrative and general costs, partially offset by operating margin improvement in our professional services business (see “Business Segment Analysis” for additional information).

· Realized an increase of $13.5 million or 8.4% in software solutions revenue during the first quarter of 2012 compared to the prior year led by the APM and Mainframe businesses.

· Experienced a decrease in software solutions operating margin to 36.6% in the first quarter of 2012 compared to 39.8% during the first quarter of 2011 primarily due to increased investments within our APM business.

· Realized an increase in professional services segment operating margin to 20.8% in the first quarter of 2012 from 14.5% during the first quarter of 2011.

· Experienced a decrease in application services segment operating margin to negative 4.1% in the first quarter of 2012 from 6.8% during the first quarter of 2011.

· Experienced a decline in our effective tax rate during the first quarter of 2012 to 17.6% due to changes to the State of Michigan Income Tax Act that were enacted in May 2011.

· Temporarily suspended our stock repurchase program during the quarter. Future purchases will be dependent on our cash position and market conditions.

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
June 30, 2011
Total revenues	$	55,513		$	97,506		$	9,966		$	10,925		$	173,910		$	39,897		$	16,167					$	229,974
Operating expenses		69,439			24,076			11,362			5,400		$	110,277			31,589			16,834			51,657			210,357
Income (loss) from operations *	$	(13,926	)	$	73,430		$	(1,396	)	$	5,525		$	63,633		$	8,308		$	(667	)	$	(51,657	)	$	19,617
Operating margin %		(25.1	%)		75.3	%		(14.0	%)		50.6	%		36.6	%		20.8	%		(4.1	%)		N/A			8.5	%
June 30, 2010
Total revenues	$	46,835		$	94,095		$	9,422		$	10,040		$	160,392		$	34,854		$	11,239					$	206,485
Operating expenses		56,795			23,752			11,288			4,687		$	96,522			29,804			10,477			47,295			184,098
Income (loss) from operations *	$	(9,960	)	$	70,343		$	(1,866	)	$	5,353		$	63,870		$	5,050		$	762		$	(47,295	)	$	22,387
Operating margin %		(21.3	%)		74.8	%		(19.8	%)		53.3	%		39.8	%		14.5	%		6.8	%		N/A			10.8	%

* Unallocated expenses were $51.7 million and $47.3 million, respectively, for the first quarter of 2012 and 2011.

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
	June 30,
	2011		2010		Change
Software license fees	$	34,126	$	33,330		2.4	%
Maintenance fees		106,985		103,487		3.4	%
Subscription fees		19,124		13,272		44.1	%
Professional services fees		13,675		10,303		32.7	%
Total software solutions revenue	$	173,910	$	160,392		8.4	%

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COMPUWARE CORPORATION AND SUBSIDIARIES

Software license fees (“license fees”) increased $800,000, which included a positive impact from foreign currency fluctuations of $2.4 million. Excluding the impact from currency, license fees declined by $1.6 million. The decrease was due to a decline in Gomez on-premises software; partially offset by growth in our mainframe solutions (see the APM and Mainframe sections within “Software Solutions by Business Segment” for more details).

During the first quarter of 2012 and 2011, for software license transactions that were required to be recognized ratably, we deferred $2.9 million and $7.0 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $13.6 million and $15.3 million of previously deferred license revenue during the first quarter 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 $3.5 million, which included a positive impact from foreign currency fluctuations of $6.1 million. Excluding the impact from currency, maintenance fees declined by $2.6 million. 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 partially offset by an increase in Gomez on-premises software maintenance fees as demand for APM solutions continues to increase.

Subscription fees increased $5.9 million primarily as a result of increased customer demand for web application monitoring tools such as our Gomez SaaS solution over the past twelve months.

Professional services fees related to our software related services increased $3.4 million. The increase primarily occurred within our APM business unit as demand for our APM solutions continues to grow.

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

	Three Months Ended
	June 30,
	2011		2010
United States	$	95,967	$	88,005
Europe and Africa		53,011		47,378
Other international operations		24,932		25,009
Total software solutions revenue	$	173,910	$	160,392

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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
	June 30,						%
	2011			2010			Chg
Revenue
Software license fees	$	11,453		$	14,232			(19.5	%)
Maintenance fees		18,433			15,173			21.5	%
Subscription fees		18,661			13,272			40.6	%
Professional services fees		6,966			4,158			67.5	%
Total revenue	$	55,513		$	46,835			18.5	%
Operating expenses		69,439			56,795			22.3	%
Loss from operations	$	(13,926	)	$	(9,960	)		(39.8	%)
Operating margin %		(25.1	%)		(21.3	%)

APM segment revenue increased $8.7 million as customer demand for APM solutions increased subscription fees related to Gomez SaaS solutions and maintenance fees associated with Gomez on-premises software. These increases were partially offset by a decline in Gomez on-premises license fees. In the prior year, we closed a significant transaction with an U.S. automotive customer that resulted in $2.7 million of license fees being recorded during the first quarter of 2011.

Operating expenses increased $12.6 million as we continue to make investments in our APM solutions by hiring developers and sales personnel, and continue to increase the capacity of our web application services network in order to capitalize on the growth of the APM industry. However, the costs associated with these investments during the quarter exceeded revenue growth, which had a negative impact on our operating margin.

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Mainframe

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

	Three Months Ended
	June 30,						%
	2011			2010			Chg
Revenue
Software license fees	$	18,698		$	14,708			27.1	%
Maintenance fees		76,975			77,741			(1.0	%)
Professional services fees		1,833			1,646			11.4	%
Total revenue	$	97,506		$	94,095			3.6	%
Operating expenses		24,076			23,752			1.4	%
Income from operations	$	73,430		$	70,343			4.4	%
Operating margin %		75.3	%		74.8	%

Mainframe segment revenue increased $3.4 million as a result of two significant license transactions (a financial services company and government entity) that closed during the first quarter of 2012 that had originally been anticipated to close in the fourth quarter of 2011. The financial services contract resulted in $2.4 million of license fees. A portion of the government contract was closed during the first quarter of 2012 for $2.0 million in license fees. We anticipate a larger component of the government contract to close during the second quarter of 2012.

The operating margin improvement was primarily due to the increase in software license fees.

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Changepoint

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

	Three Months Ended
	June 30,						%
	2011			2010			Chg
Revenue
Software license fees	$	1,994		$	2,352			(15.2	%)
Maintenance fees		3,839			3,551			8.1	%
Subscription fees		463			-			N/A
Professional services fees		3,670			3,519			4.3	%
Total revenue	$	9,966		$	9,422			5.8	%
Operating expenses		11,362			11,288			0.7	%
Loss from operations	$	(1,396	)	$	(1,866	)		25.2	%
Operating margin %		(14.0	%)		(19.8	%)

The Changepoint segment revenue increased $600,000 primarily due to growth in maintenance and subscription fees. The improvement in operating margin relates primarily to the increase in revenue as expenses were relatively unchanged period to period.

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Uniface

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

	Three Months Ended
	June 30,						%
	2011			2010			Chg
Revenue
Software license fees	$	1,981		$	2,038			(2.8	%)
Maintenance fees		7,738			7,022			10.2	%
Professional services fees		1,206			980			23.1	%
Total revenue	$	10,925		$	10,040			8.8	%
Operating expenses		5,400			4,687			15.2	%
Income from operations	$	5,525		$	5,353			3.2	%
Operating margin %		50.6	%		53.3	%

The Uniface segment revenue increased $900,000 primarily due to foreign currency impact on revenue. Operating expenses increased $700,000 as we invested in our development and customer support groups to pursue the segment’s growth objectives and also due to the impact of foreign currency changes. The disproportionate increase in costs associated with our investments had a negative impact on our operating margin.

Professional Services

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

	Three Months Ended
	June 30,						%
	2011			2010			Chg
Professional services fees	$	39,897		$	34,854			14.5	%
Operating expenses		31,589			29,804			6.0	%
Income from operations	$	8,308		$	5,050			64.5	%
Operating margin %		20.8	%		14.5	%

The professional services segment fees increased $5.0 million primarily due to an increase in application development service demand within the financial services industry. Operating expense increased $1.8 million primarily due to increased staffing levels and increases in subcontractor costs to manage the growth of the business. The improvement in operating margin was due to increases in average billing rates and staff utilization.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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

	Three Months Ended
	June 30,
	2011		2010
United States	$	39,379	$	34,335
Europe and Africa		517		282
Other international operations		1		237
Total products segment revenue	$	39,897	$	34,854

Application Services

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

	Three Months Ended
	June 30,						%
	2011			2010			Chg
Application services fees	$	16,167		$	11,239			43.8	%
Operating expenses		16,834			10,477			60.7	%
Income (loss) from operations	$	(667	)	$	762			(187.5	%)
Operating margin %		(4.1	%)		6.8	%

The application services segment fees increased $5.0 million due to growth from automotive customers as the industry has stabilized from the recent economic downturn, and due 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 towards 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 and will be a factor in the future growth of the application services segment.

As of June 30, 2011, backlog for the application services segment was $143.9 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 expense increased $6.4 million as we continue to make investments in our Covisint business by hiring developers, customer support and sales personnel, and continue to increase the capacity of our global application services network in anticipation of capitalizing on the growth of the secured collaboration services market.

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COMPUWARE CORPORATION AND SUBSIDIARIES

We continue to invest in order to manage the growth in this segment. These investments have proportionally exceeded revenue growth causing the decline in our operating margin.

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

	Three Months Ended
	June 30,
	2011		2010
United States	$	13,893	$	9,816
Europe and Africa		1,076		678
Other international operations		1,198		745
Total application services segment revenue	$	16,167	$	11,239

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
	June 30,
	2011		2010		Change
Unallocated expenses	$	51,657	$	47,295		9.2	%

Unallocated expenses increased $4.4 million primarily due to an increase in administrative and general expense. See “Administrative and General” within the “Operating Expenses” section for additional information.

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COMPUWARE CORPORATION AND SUBSIDIARIES

OPERATING EXPENSES

Our operating expenses include cost of software license fees; cost of maintenance and subscription fees; cost of professional 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, 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
	June 30,
	2011			2010			Change
Cost of software license fees	$	3,536		$	3,416			3.5	%
Percentage of software license fees		10.4	%		10.2	%

Cost of Maintenance and Subscription Fees

Cost of maintenance and subscription fees consists of the direct costs allocated to maintenance and product support such as helpdesk and technical support; amortization of capitalized software, 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 maintenance and subscription fees is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2011			2010			Change
Cost of maintenance and subscription fees	$	16,658		$	13,287			25.4	%
Percentage of maintenance and subscription fees		13.2	%		11.4	%

The $3.4 million increase was due to the following: (1) a $1.1 million increase in customer support costs primarily due to the hiring of additional employees to support the growth of the APM business segment; (2) a $900,000 increase in data center and peer costs as we continue to make investments in our Gomez SaaS global network; and (3) a $840,000 increase in development costs related to maintenance upgrades primarily to our Gomez on-premises and Changepoint products.

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COMPUWARE CORPORATION AND SUBSIDIARIES

The increase in the cost of maintenance and subscription fees as a percentage of maintenance and subscription fees was primarily due to incremental maintenance activities related to our on-premises software solutions (e.g. customer support and maintenance upgrades) proportionally exceeding the increase in maintenance fees.

Cost of Professional Services

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

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

	Three Months Ended
	June 30,
	2011			2010			Change
Total cost of professional services fees	$	61,953		$	50,713			22.2	%
Percentage of professional services fees		88.8	%		89.9	%

The $11.2 million increase was due to the following: (1) a $8.3 million increase in salary and benefit costs of which $6.3 million primarily related to the hiring of additional developers, sales and customer support personnel to support the growth of the application services business segment and $2.0 million related primarily to the hiring of billable staff to support the growth of the professional services segment; and (2) a $2.7 million increase in subcontractor costs to support the growth in our professional services business segment.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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 during the first quarter of 2012 and 2011 were as follows (in thousands):

	Three Months Ended
	June 30,
	2011			2010			Change
Technology development and support costs incurred	$	27,128		$	25,392			6.8	%
Capitalized internal software costs		(2,427	)		(3,851	)		(37.0	%)
Technology development and support costs expensed	$	24,701		$	21,541			14.7	%
Technology development and support costs expensed as a percentage of software solutions revenue		14.2	%		13.4	%

The $1.7 million increase in technology development and support costs before capitalized internal software costs primarily related to higher salary and benefit 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.

The $1.4 million decrease in capitalized internal software costs relates primarily to a decline in the number of products that are in the technological feasibility phase primarily Gomez on-premises and Changepoint solutions.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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
	June 30,
	2011			2010			Change
Sales and marketing costs	$	61,995		$	57,704			7.4	%
Percentage of software solutions revenue		35.6	%		36.0	%

The $4.3 million increase primarily relates to an increase in salary and benefits due to the following: (1) a $2.1 million increase within our European operations due to severance charges related to certain employee terminations during the first quarter of 2012 and (2) a $2.0 million increase in salary and benefits due to annual wage increases and a negative impact from currency fluctuations as the U.S. dollar weakened against non-U.S. currencies.

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.

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

	Three Months Ended
	June 30,
	2011		2010		Change
Administrative and general expenses	$	41,514	$	37,437		10.9	%

The $4.1 million increase was due to the following: (1) a $1.6 million negative currency impact primarily related to assets and liabilities that are denominated in non-local currency; (2) a $1.0 million increase in bonus expense; (3) a $600,000 increase in building rent expense; and (4) a $300,000 increase in legal expense associated with the dynaTrace acquisition.

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COMPUWARE CORPORATION AND SUBSIDIARIES

OTHER INCOME (EXPENSES)

Other income, net (“other income”) 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.

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

	Three Months Ended
	June 30,
	2011		2010		Change
Other income	$	998	$	865		15.4	%

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.

Income tax provision and effective tax rate is presented in the table below (in thousands):

	Three Months Ended
	June 30,
	2011			2010			Change
Income tax provision	$	3,630		$	10,607			(65.8	%)
Effective tax rate		17.6	%		45.6	%

The income tax provision was $3.6 million and $10.6 million, respectively, during the first quarter of 2012 and 2011 representing an effective tax rate of 17.6% and 45.6%, respectively.

The decrease in the effective tax rate was primarily due to new legislation enacted in the State of Michigan on May 25, 2011 that amends the Income Tax Act to implement a comprehensive set of tax changes effective January 1, 2012. One part of the legislation contained provisions that replaced the current 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, which will allow us to reduce our future tax liability for the duration of the carryforward period. As a result, the valuation allowance currently associated with this Brownfield deferred tax asset was reversed resulting in a $5.0 million reduction to our income tax provision during the first quarter of 2012.

The effective tax rate decrease from the prior year was further impacted by a $2.2 million valuation allowance recorded during the first quarter of 2011 related to our Brownfield deferred tax asset. During the quarter, the State of Michigan published guidance clarifying the sourcing of services revenues which impacts future taxable income under the Michigan Business Tax. As a result, the Company assessed the ability to utilize these credits prior to expiration and recorded the additional valuation allowance to reduce the carrying value of the Brownfield deferred tax asset to the more likely than not realizable value.

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COMPUWARE CORPORATION AND SUBSIDIARIES

RESTRUCTURING COSTS AND ACCRUAL

There were no restructuring actions taken during the first quarter of 2012.

At this time, there are no initiatives that require us to incur restructuring charges; however, unanticipated future conditions or events may require us to reassess the need for new restructuring initiatives.

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COMPUWARE CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at June 30, 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 9 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 8 for additional information.

The goodwill balance by reporting unit as of April 1, 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

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. The professional services reporting unit’s estimated fair value exceeded the reporting unit’s carrying value by 15% at April 1, 2011.

We continue to believe the risk of future goodwill impairment for the professional services reporting unit, which has a goodwill balance of $114.0 million at June 30, 2011, is low due to the improvement in the reporting unit’s operating margin. There has been no triggering event since April 1, 2011. See “Professional Services” above for information on the segment’s results of operations.

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.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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 June 30, 2011, cash and cash equivalents totaled $194.9 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 three months of 2012 was $15.2 million, a decrease of $900,000 from the first three months of 2011. The decrease was primarily due to the following: (1) a $21 million reduction in cash provided from the IBM settlement as the payment during the first quarter of 2011 was the last payment under that arrangement; (2) a $15 million increase in employee compensation payments primarily due to staff increases to support the growth of our APM and Covisint business; and to a lesser extent annual wage increases, partially offset by a decrease in bonus payments during the first quarter of 2012 as compared to same period from the prior year; and (3) a $3 million increase in payments to subcontractors primarily associated with our professional and application services businesses. The decrease in cash provided by operating activities was partially offset by a $38 million increase in cash received from customers primarily due to the growth in our APM, professional services and application services businesses.

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 increase from the net change in accounts receivable was $2.2 million and primarily related to the timing of billings from multi-year product arrangements during the first quarter of 2012 compared to the first quarter of 2011. The increase from the net change in deferred revenue was $12.6 million and primarily related to the increase in mainframe maintenance contracts during the first quarter of 2012 compared to first quarter of 2011.

The other significant change in our reconciliation of net income to derive net cash from operating activities during the first quarter of 2012 as compared to the same period of 2011 was the decrease from the net change in prepaid expenses and other current assets of $15.9 million. This was primarily due to the IBM settlement payment received during the first quarter of 2011 which was the last payment received pursuant to that settlement.

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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COMPUWARE CORPORATION AND SUBSIDIARIES

Net cash used in investing activities

Net cash used in investing activities during the first quarter of 2012 was $8.6 million, relatively unchanged from the first quarter of 2011.

On July 1, 2011, we acquired dynaTrace for approximately $256.0 million, which will enhance our Gomez on-premises solutions. We used $126.5 million of available cash resources and financed $129.5 million to complete the acquisition. This acquisition is discussed in note 12 of the condensed consolidated financial statements included in this report, but is not otherwise reflected in our financial statements for the first 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 quarter of 2012 was $5.9 million. Net cash used in financing activities during the first quarter of 2011 was $13.2 million, resulting in a net increase to cash of $19.1 million.

The increase was primarily due to the following: (1) we did not repurchase stock during the first quarter of 2012, which accounted for $16.2 million of the change; and (2) a $2.9 million increase in cash received from employees exercising stock options.

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 June 30, 2011, approximately $243 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 beginning in the first quarter of 2012 and will reassess the repurchase program initiative during the third quarter of 2012. Our long-term goal 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. We reserve the right to change the timing and volume of our repurchases at any time without notice. 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.

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. On June 30, 2011, we amended the credit facility and exercised our right to increase the revolving line of credit from $150 million to $200 million. The amendment reduces the amount by which we can increase the revolving line of credit in the future to an additional $100 million (previously $150 million). Any such increases remain subject to receiving further commitments from lenders and certain other conditions. The credit facility expires on November 1, 2012.

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COMPUWARE CORPORATION AND SUBSIDIARIES

We had no borrowings under the credit facility as of June 30, 2011, but on July 1, 2011, we borrowed $129.5 million under the credit facility to partially fund the dynaTrace acquisition. See notes 10 and 12 of the condensed consolidated financial statements included in this report for further discussion of the credit facility and the dynaTrace acquisition.

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.

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COMPUWARE CORPORATION AND SUBSIDIARIES

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.

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.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 June 30, 2011.

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COMPUWARE CORPORATION AND SUBSIDIARIES

Item 6. Exhibits

  Exhibit

Number Description of Document

2.11 Agreement and Plan of Merger by and among Compuware Corporation, Compuware Acquisition Corp., dynaTrace software, Inc. and the Stockholder Representative dated as of July 1, 2011 (Company’s second Form 8-K dated July 8, 2011).

4.8 Consent and First Amendment to Credit Agreement dated June 30, 2011 (Company’s Form 8-K dated July 11, 2011).

10.130 Compuware Executive Incentive Agreement – Corporate (Company’s first Form 8-K dated July 8, 2011).

10.131 Form of Stock Option Agreement (Company’s first Form 8-K dated July 8, 2011).

10.132 Stock Option Agreement dated June 20, 2011 granting an option to purchase 2,500,000 shares of Compuware common stock to Joseph R. Angileri.

10.133 Stock Option Agreement dated June 20, 2011 granting an option to purchase 500,000 shares of Compuware common stock to Joseph R. Angileri.

10.134 Restricted Stock Unit Award Agreement dated June 20, 2011 between Compuware Corporation and Joseph R. Angileri.

15 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.

32 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*

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COMPUWARE CORPORATION AND SUBSIDIARIES

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:	August 5, 2011		By: /s/ Robert C. Paul
			Robert C. Paul
			Chief Executive Officer
			(duly authorized officer)
Date:	August 5, 2011		By: /s/ Laura L. Fournier
			Laura L. Fournier
			Executive Vice President,
			Chief Financial Officer and
			Treasurer
			(principal financial officer and
			principal accounting officer)

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