COMPUWARE CORPORATION, S-1/A, 1999-05-06

COMPUWARE CORPORATION
S-1/A, 1999-05-06
PREPACKAGED SOFTWARE

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<PAGE> 1

As filed with the Securities and Exchange Commission on May 6, 1999

Registration No. 333-76097
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

COMPUWARE CORPORATION
(Exact name of Registrant as specified in charter)
------------------------

<TABLE>
<S> <C> <C>
MICHIGAN 7371, 7372 38-2007430
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer Identification
incorporation or organization) classification code number) No.)
</TABLE>

31440 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGAN 48334-2564
(248) 737-7300
(Address, including zip code and telephone number, including
area code, or registrant's principal executive offices)
------------------------

PETER KARMANOS, JR., CHAIRMAN
COMPUWARE CORPORATION
31440 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MICHIGAN 48334-2564
(248) 737-7300
(Name, address, including zip code, and telephone number,
including area code, of agent for service for Registrant)

COPIES TO:
DONALD J. KUNZ, ESQ.
HONIGMAN MILLER SCHWARTZ AND COHN
2290 FIRST NATIONAL BUILDING
DETROIT, MICHIGAN 48226
(313) 256-7800
------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock.......................... $19,383,483 $5,389
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</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee based
upon the average of the high and low prices of the Common Stock as reported
on the Nasdaq Stock Market on April 8, 1999 in accordance with Rule 457(c)
of the General Rules and Regulations under the Securities Act of 1933, as
amended.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

1,021,864 Shares

COMPUWARE CORPORATION

Common Stock
(Par Value $0.01 per Share)

-------------------------

Compuware Corporation
31440 Northwestern Highway
Farmington Hills, Michigan 48334
(248) 737-7300

- - The 1,021,864 shares of Common Stock are being offered by the Selling
Shareholders described in this Prospectus under "Selling Shareholders."

- - We will not receive any of the proceeds from the offering.

- - Our Common Stock is quoted on the Nasdaq National Market under the symbol
"CPWR".

- - On May 5, 1999, the last reported sale price for the Common Stock, as reported
on the Nasdaq National Market, was $24.375 per share.

INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is May 7, 1999

<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 5
Use of Proceeds............................................. 9
Dividend Policy............................................. 9
Capitalization.............................................. 9
Price Range of Our Common Stock............................. 9
Selected Consolidated Financial Data........................ 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Business.................................................... 24
Management.................................................. 32
Security Ownership of Certain Beneficial Owners and
Management................................................ 35
Compensation of Executive Officers and Directors............ 37
Related Party Transactions.................................. 39
Description of Capital Stock................................ 40
Selling Shareholders........................................ 43
Plan of Distribution........................................ 44
Legal Matters............................................... 44
Experts..................................................... 44
Where You Can Find More Information......................... 44
Cautionary Statement Regarding Forward-Looking Statements... 45
Index to Financial Statements............................... F-1
</TABLE>

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY SELLING SHAREHOLDER. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF
COMMON STOCK TO WHICH IT RELATES, OR AN OFFER OR SOLICITATION TO ANY PERSON IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL.

2
<PAGE> 4

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this Prospectus.
The summary is not complete and does not contain all of the information that you
should consider before investing in the Common Stock. You should read the entire
Prospectus carefully. Throughout the Prospectus, we use the term "we" or "the
Company" to refer to Compuware Corporation, a business corporation organized
under Michigan law.

THE COMPANY

We provide software products and professional services designed to increase
the productivity of the information systems departments of our target market,
the 20,000 largest enterprises worldwide. We have historically focused on the
testing and implementation environment in the mainframe market, where we have
extensive experience and have established long-term customer relationships. We
also operate in the client/server market, with products and professional
services in the application development, testing and implementation and systems
management environments.

- - OUR BUSINESS STRATEGY

- - PRODUCTS DIVISION

We will continue to develop, market and support high-quality testing and
implementation programmer productivity software as well as client/server
application development, testing and implementation and systems management
software and to work closely with our customers to meet their evolving needs.

- - PROFESSIONAL SERVICES DIVISION

We offer a broad range of professional services, including business systems
analysis, design and programming, software conversion, systems planning and
systems consulting. Our business approach to professional services delivery
emphasizes the hiring of experienced staff, extensive ongoing training, high
staff utilization and immediate, productive deployment of new personnel at
client accounts.

- - CUSTOMERS

Our products and professional services are used by the information systems
departments of a wide variety of large commercial and government organizations.
As of December 31, 1998, approximately 225,000 copies of our software products
had been licensed by over 14,000 customers.

- - SALES AND MARKETING

- - PRODUCT DEVELOPMENT AND DISTRIBUTION

We have been successful in developing acquired products and technologies
into marketable software for our distribution channels. We believe that our
future growth lies, in part, in continuing to identify promising technologies
from all potential sources, including independent software developers,
customers, small startup companies and internal research and development.

- - PRODUCT MAINTENANCE AND CUSTOMER SUPPORT

- - EMPLOYEES

THE OFFERING

Common Stock offered by the
Selling Shareholders.................... 1,021,864 shares

Common Stock outstanding as of
March 31, 1999, which includes
the shares offered by the selling
shareholders............................ 367,926,388 shares

NASDAQ symbol............................. CPWR
4
<PAGE> 6

RISK FACTORS

In addition to the other information in this Prospectus, you should
carefully consider the following factors before investing in the Common Stock.

OUR QUARTERLY FINANCIAL RESULTS VARY AND MAY BE ADVERSELY AFFECTED BY
CERTAIN RELATIVELY FIXED COSTS.

Our revenues vary from quarter to quarter, with the largest portion of
revenues historically recognized in the third and fourth quarters of each fiscal
year. We believe that these quarterly patterns are partly attributable to the
budgeting and purchasing cycles of customers and to our sales commission
policies on our software products, which compensate sales personnel for meeting
or exceeding annual quotas. We typically do not have a material backlog of
unfilled orders, and revenues in any quarter are substantially dependent on
orders booked in the quarter. Our professional services revenues may fluctuate
quarterly due to the completion or commencement of significant assignments, the
number of working days in a quarter and the utilization rate of professional
services personnel.

Our quarterly operating results may fluctuate due to numerous factors,
including the demand for our products and professional services, the size and
timing of customers' orders, the introduction of new products and product
enhancements by us or our competitors, price changes by us, changes in the
proportion of revenues attributable to licenses versus service fees, product
mix, commencement or conclusion of significant services contracts, changes in
foreign currency exchange rates, timing of acquisitions and associated costs,
and competitive conditions in the industry. Net income may be disproportionately
affected by a reduction in revenues because only a small portion of our expenses
varies with revenues.

OUR INABILITY TO DEVELOP NEW PRODUCTS OR PRODUCT ENHANCEMENTS MAY ADVERSELY
AFFECT OUR BUSINESS.

Our success will depend in part on our ability to develop product
enhancements and new products which keep pace with continuing changes in
technology and customer preferences. Our failure to develop technological
improvements or to adapt our products to technological change may, over time,
have a material adverse effect on our business. In addition, the majority of our
products are purchased by customers using IBM and IBM-compatible mainframe
computing platforms and, to a much lesser extent, workstations and personal
computers. Worldwide, computing power is increasingly provided by alternative
computing platforms, including client/server networks, workstations and personal
computers ("PCs"). A significant shift in the way our customers use computing
platforms may have a material adverse effect on our business.

A SIGNIFICANT PERCENTAGE OF OUR REVENUE COMES FROM OVERSEAS, SUBJECTING US
TO EXCHANGE RATE AND OTHER RISKS.

We derived approximately $313.3 million, $253.8 million and $208.8 million
of revenues from foreign operations and export sales in fiscal 1998, 1997 and
1996, respectively, which constituted approximately 27.5%, 31.2% and 34.0% of
total revenues for those periods. We expect that such sales will continue to
generate a significant percentage of our total revenues. Products are priced in
the currency of the country in which they are sold. Changes in the exchange
rates of foreign currencies or exchange controls may adversely affect our
results of operations. The international business is also subject to other
risks, including the need to comply with foreign and U.S. export laws and the
greater difficulty of managing business overseas. In addition, our foreign
operations are affected by general economic conditions in the international
markets in which we do business. A prolonged economic downturn in Europe or Asia
Pacific may have a material adverse effect on our business.

5
<PAGE> 7

ALMOST ALL OF OUR PRODUCTS HAVE RESULTED FROM ACQUISITIONS, AND IF WE CAN
NO LONGER FIND SUITABLE ACQUISITION CANDIDATES, OUR BUSINESS MAY BE ADVERSELY
AFFECTED.

Substantially all of our products have been developed from acquired
technology and products. To date, we have been successful in developing acquired
products and technologies into marketable software suitable for our distribution
channels. We believe that our future growth lies, in part, in continuing to
identify, acquire and then develop promising technologies and products. While we
are continually searching for acquisition opportunities, there are presently no
agreements, arrangements or understandings with respect to any material
acquisition and there can be no assurance that we will continue to be successful
in identifying, acquiring and developing products and technology. If any
potential acquisition opportunities are identified, there can be no assurance
that we will consummate and successfully integrate any such acquisitions and
there can be no assurance as to the timing or effect on our business of any such
acquisitions.

A MAJORITY OF OUR REVENUE FROM SOFTWARE PRODUCTS IS DEPENDENT ON OUR
CUSTOMERS' CONTINUED USE OF IBM MAINFRAME PRODUCTS.

Our currently available run-time software products, which comprise the
majority of our revenues from software products, are designed for use with IBM
and IBM-compatible mainframe computers. Specifically, these software products
target users of the MVS and VSE operating systems, the CICS communications
subsystem and the IMS and DB2 database management systems. As a result, future
sales of our existing run-time products and associated recurring maintenance
revenues are dependent upon continued use of IBM and IBM-compatible mainframes
and their related systems software. In addition, because our run-time products
operate in conjunction with IBM systems software, changes to IBM systems
software may require us to adapt our run-time products to these changes. An
inability to do so, or any delay in doing so, may adversely affect our operating
results.

WE MAY LOSE BUSINESS TO MANY COMPETITORS.

The markets for our software products are highly competitive and
characterized by continual change and improvement in technology. Our competitors
include BMC Software, Inc., Rational Software Corporation, Mercury Interactive
Corporation, Computer Associates International, Inc., Informix Corporation,
Oracle Corporation, PLATINUM technology International, inc., Sybase, Inc., and
VIASOFT, Inc. None of the competitors competes in all of our product lines. In
addition, although we believe our products are generally complementary to those
marketed by IBM, IBM does offer some products that are directly competitive and
there can be no assurance that IBM will not choose to offer significant
competing products in the future. The principal competitive factors affecting
the market for our software products include: responsiveness to customer needs,
functionality, performance, reliability, ease of use, quality of customer
support, vendor reputation and price. We believe, based on our current market
position, that we have competed effectively in the software products marketplace
to date. Nevertheless, a variety of external and internal events and
circumstances could adversely affect our competitive capacity. Our ability to
remain competitive will depend, to a great extent, upon our performance in
product development and customer support. To be successful in the future, we
must respond promptly and effectively to the challenges of technological change
and our competitors' innovations by continually enhancing our own product
offerings.

6
<PAGE> 8

the market for our professional services include responsiveness to customer
needs, breadth and depth of technical skills offered, availability and
productivity of personnel, ability to demonstrate achievement of results and
price. Due to the continued increase in revenues in professional services, we
believe that we have competed effectively to date in all these areas. There is
no assurance that we will be able to compete as successfully in the future.

CURRENT LAWS MAY NOT ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.

We regard our software as proprietary and attempt to protect it with
copyrights, trademarks, trade secret laws and restrictions on disclosure,
copying and transferring title. Despite these precautions, it may be possible
for unauthorized third parties to copy certain portions of our products or to
obtain and use information that we regard as proprietary. Currently, we have
three patents and nine applications pending. However, existing patent and
copyright laws afford only limited practical protection. In addition, the laws
of some foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. Furthermore, as the number of
software products in the industry increases and the functionality of these
products further overlaps, we believe that software developers will become
increasingly subject to infringement claims. Any such claims, with or without
merit, can be time consuming and expensive to defend.

OUR SOFTWARE AND TECHNOLOGY MAY INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.

During the due diligence stage of any software acquisition, we research and
investigate the title to the software we will be acquiring from the seller. This
investigation generally includes without limitation, litigation searches,
copyright and trademark searches, review of development documents and interviews
with key employees of the seller regarding development, title and ownership of
the software products being acquired. The acquisition document itself generally
contains representations, warranties and covenants concerning the title and
ownership of the software products as well as indemnification and remedy
provisions in the event the representations, warranties and covenants are
breached by the seller. Our new hires sign an offer letter which states that the
new employee is being hired for his or her talent and skill rather than for any
trade secrets or proprietary information of others of which he or she may have
knowledge. Further, our employees execute an employee agreement that provides
that work developed for us or our clients belongs to us or our clients,
respectively. Although we have not received any material claims that our
products infringe on the proprietary rights of third parties, there can be no
assurance that third parties will not assert infringement claims against us in
the future with respect to current and future products or that any such
assertion may not require us to enter into royalty arrangements or result in
costly litigation.

WE DEPEND ON KEY EMPLOYEES AND TECHNICAL PERSONNEL.

Our success will depend in part upon the continued service of our key
senior management and technical personnel. All of our executive officers are
subject to employment contracts and we maintain key man life insurance on all
such personnel in amounts ranging from $1.0 million to $7.2 million. Our future
success also depends on our continuing ability to attract and retain highly
qualified technical, managerial and marketing personnel. The market for
professional services and software products personnel has historically been, and
we expect that it will continue to be, intensely competitive. To date, we have
been successful in attracting and retaining qualified technical personnel. There
can be no assurance, however, that we will continue to be successful in
attracting or retaining such personnel. The loss of certain key employees or our
inability to attract and retain other qualified employees could have a material
adverse effect on our business.

7
<PAGE> 9

DIFFICULTIES IN ACQUIRING CONTROL OF OUR COMPANY UNDER OUR CHARTER AND
MICHIGAN LAW MAY DISCOURAGE FUTURE TRANSACTIONS GENERATING SIGNIFICANT
SHAREHOLDER VALUE.

Certain provisions of our Restated Articles of Incorporation and Bylaws and
of Michigan law could delay or make more difficult a merger, tender offer or
proxy contest. Michigan law provides that certain business combinations between
covered Michigan corporations and a holder of 10% or more of the corporation's
stock can only be consummated if approved by a 90% shareholder vote and by a
two-thirds vote of unaffiliated shareholders, unless five years have elapsed
since the acquisition by the 10% shareholder of its stock and unless certain
other conditions are satisfied. Although such provisions are not applicable to
us at this time, Michigan law allows the Board of Directors to choose to be
subject to such provisions at any time. As a result, these provisions could
discourage a third party from paying to the shareholders a premium in a tender
offer or other change of control transaction. In addition, the Board of
Directors has authority to issue up to 5,000,000 shares of Class A Preferred
Stock and to fix the rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
shareholders. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. While we believe that the ability to
issue Preferred Stock provides desirable flexibility in connection with possible
acquisitions and other corporate purposes, the issuance of Preferred Stock could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company.

OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT MARKET VOLATILITY.

We believe that factors such as quarterly fluctuations in results of
operations and announcements of acquisitions or new products by us or by our
competitors may cause the market price of the Common Stock to fluctuate.
Moreover, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations.
These broad market and industry fluctuations may adversely affect the market
price of our Common Stock.

RISKS RELATED TO POTENTIAL YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR
BUSINESS

The Year 2000 problem is the result of the widespread practice of using
only 2 digits instead of 4 to represent the year in computing equipment and
computer software. Failure to address this problem could cause erroneous results
in the proper interpretation of years after 1999. If we fail to properly
recognize and address the Year 2000 problem as it may affect our business
operations, our business, financial condition, and results of operations could
be materially and adversely affected. The Company has instituted various
projects to address this issue which include but are not limited to three major
areas: 1) the software products which the Company develops and markets, 2) its
internal information technology (IT) assets, and 3) aspects not directly related
to the Company's IT assets or software products ("non-IT assets"). This last
area includes such items as embedded systems in infrastructure components (such
as building security and HVAC systems), as well as the business relationships
the Company has with its customers and suppliers, especially those third parties
with whom the Company has a systems interaction.

The Company expects to be able to identify all Year 2000 problems that
could materially adversely affect its business operations. However, the Company
cannot guarantee that the projects it has undertaken to address the Year 2000
issue will be sufficient to resolve any or all Year 2000 problems with respect
to those operations. Further, we believe it is not possible to determine with
complete certainty that all Year 2000 problems affecting us, our suppliers, or
our customers have been identified or corrected. In addition, no one can
accurately predict how many Year 2000 problem-related failures will occur or the
severity, duration, or financial consequences of these perhaps inevitable
failures.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000."

8
<PAGE> 10

USE OF PROCEEDS

We will not receive any of the proceeds from the sale of the Common Stock
offered by the Selling Shareholders.

DIVIDEND POLICY

We have not paid any cash dividends on our Common Stock since fiscal 1986.
Our loan agreement expressly prohibits the payment of any cash dividends on
Common Stock. We currently expect that we will retain any earnings for use in
the operation and expansion of our business and do not anticipate paying any
cash dividends on our Common Stock in the foreseeable future.

CAPITALIZATION

The following table sets forth the total capitalization of the Company at
December 31, 1998. Common Stock and Additional paid-in capital have been
adjusted to reflect the 2-for-1 stock split that was effective March 1, 1999.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------
(IN THOUSANDS)
<S> <C>
Long-term debt.............................................. $ 3,719
----------
Shareholders' equity:
Preferred Stock; no shares issued or outstanding.......... --
Common Stock, $.01 par value; 1,600,000,000 shares
authorized, 370,089,822 shares issued and
outstanding............................................ 3,700
Additional paid-in capital................................ 381,332
Retained earnings......................................... 653,350
Foreign currency translation adjustment................... (3,276)
----------
Total shareholders' equity............................. 1,035,106
----------
Total capitalization................................. $1,038,825
==========
</TABLE>

PRICE RANGE OF OUR COMMON STOCK

Our Common Stock trades on the Nasdaq National Market under the symbol
"CPWR". The following table sets forth the high and low bid prices for our
Common Stock as reported on the Nasdaq National Market for fiscal years 1999 and
1998. All prices have been adjusted to reflect the 2-for-1 stock split effective
March 1, 1999.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended March 31, 1999
First Quarter............................................... 26.69 20.56
Second Quarter.............................................. 31.50 21.50
Third Quarter............................................... 39.91 17.94
Fourth Quarter.............................................. 37.56 20.88
Fiscal Year Ended March 31, 1998
First Quarter............................................... 12.69 7.75
Second Quarter.............................................. 16.35 11.32
Third Quarter............................................... 19.75 14.10
Fourth Quarter.............................................. 25.63 15.57
</TABLE>

The last reported sale price of the Common Stock on the Nasdaq National Market
on May 5, 1999 was $24.375. As of March 26, 1999, there were 77,843 record
holders of our Common Stock.

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<PAGE> 11

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere in this Prospectus. The consolidated statement of operations
data set forth below with respect to the fiscal years ended March 31, 1998, 1997
and 1996 and the consolidated balance sheet data at March 31, 1998 and 1997 are
derived from, and are qualified by reference to, the audited consolidated
financial statements included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended March 31, 1995 and 1994 and the
consolidated balance sheet data at March 31, 1996, 1995 and 1994 are derived
from audited financial statements not included in this Prospectus. The
consolidated statement of operations data for the nine months ended December 31,
1998 and 1997 and the consolidated balance sheet data at December 31, 1998 and
1997 are derived from the unaudited financial statements that, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information set forth
therein. Operating results for the nine months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending March 31, 1999.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
YEAR ENDED MARCH 31, (UNAUDITED)
------------------------------------------------------------------ ---------------------
1998 1997 1996 1995 1994 1998 1997
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software license fees....... $ 467,251 $318,907 $226,690 $223,589 $163,563 $ 450,986 $298,845
Maintenance fees............ 244,273 209,521 184,039 153,828 116,399 242,158 176,986
Professional services
fees...................... 427,794 284,468 203,630 156,460 114,395 445,166 305,663
---------- -------- -------- -------- -------- ---------- --------
Total revenues............ 1,139,318 812,896 614,359 533,877 394,357 1,138,310 781,494
---------- -------- -------- -------- -------- ---------- --------
Operating expenses:
Cost of software license
fees...................... 22,874 20,881 20,146 14,894 10,612 20,892 15,966
Cost of maintenance......... 31,203 27,278 26,867 24,111 19,138 27,761 22,715
Cost of professional
services.................. 365,948 250,405 174,215 133,823 99,129 363,767 263,102
Software product
development............... 54,416 44,494 42,792 31,825 25,596 48,121 42,144
Sales and marketing......... 325,793 256,139 204,403 174,829 120,338 298,594 223,543
Administrative and
general................... 58,965 48,233 38,537 33,951 28,431 52,888 42,701
Restructuring and merger-
related costs............. 3,606 10,688 10,547(1) 3,606
Purchased research and
development............... 3,160 21,790 24,943 11,990 4,350
---------- -------- -------- -------- -------- ---------- --------
Total operating
expenses................ 865,965 669,220 542,591 435,970 303,244 816,373 613,777
---------- -------- -------- -------- -------- ---------- --------
Income from operations........ 273,353 143,676 71,768 97,907 91,113 321,937 167,717
Interest and investment
income, net................. 17,417 5,710 7,015 5,805 2,797 20,274 8,284
---------- -------- -------- -------- -------- ---------- --------
Income before merger costs-
escrow claims............... 290,770 149,386 78,783 103,712 93,910 342,211 176,001
Merger costs-escrow claims.... 8,531(1)
---------- -------- -------- -------- -------- ---------- --------
Income before income taxes.... 290,770 149,386 78,783 95,181 93,910 342,211 176,001
Income tax provision.......... 96,826 51,950 34,541 33,084 31,623 116,316 58,608
---------- -------- -------- -------- -------- ---------- --------
Net income.................... $ 193,944 $ 97,436 $ 44,242 $ 62,097 $ 62,287 $ 225,895 $117,393
========== ======== ======== ======== ======== ========== ========
Basic earnings per share(2 and
3).......................... $ 0.55 $ 0.29 $ 0.13 $ 0.17 $ 0.18 $ 0.62 $ 0.34
Diluted earnings per share (2
and 3)...................... 0.50 0.27 0.12 0.16 0.17 0.56 0.31
Shares used in computing net
income per share(3):
Basic earnings per
share................... 352,274 340,770 347,516 358,058 349,394 365,212 349,906
Diluted earnings per
share................... 387,426 359,740 358,950 381,476 371,252 401,476 384,316
(footnotes on following page)
</TABLE>

10
<PAGE> 12

- -------------------------
(1) Reflects merger costs incurred in connection with the acquisition,
restructuring and integration of Uniface Holding B.V.

(2) See notes 1 and 9 of Notes to the Consolidated Financial Statements and
Exhibit 11.1 for the basis of computing earnings per share.

(3) Adjusted to reflect the 2-for-1 stock split effective March 1, 1999 (see
note 15 of Notes to Consolidated Financial Statements).

11
<PAGE> 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997

The following table sets forth, for the periods indicated, certain
operational data from the Company's consolidated statements of operations as a
percentage of total revenues and the percentage change in such items compared to
the prior period:

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES
--------------
NINE MONTHS
ENDED PERIOD-TO-
DECEMBER 31, PERIOD
-------------- CHANGE
1998 1997 1997 TO 1998
---- ---- ------------
<S> <C> <C> <C>
REVENUES:
Software license fees..................................... 39.6% 38.2% 50.9%
Maintenance fees.......................................... 21.3 22.7 36.8
Professional services fees................................ 39.1 39.1 45.6
----- ----- -----
Total revenues......................................... 100.0 100.0 45.7
----- ----- -----
OPERATING EXPENSES:
Cost of software license fees............................. 1.8 2.0 30.9
Cost of maintenance....................................... 2.4 2.9 22.2
Cost of professional services............................. 32.0 33.7 38.3
Software product development.............................. 4.2 5.4 14.2
Sales and marketing....................................... 26.2 28.6 33.6
Administrative and general................................ 4.7 5.5 23.9
Purchased research and development........................ 0.4 *
Merger-related costs...................................... 0.5 *
----- ----- -----
Total operating expenses 71.7 78.6 33.0
----- ----- -----
INCOME FROM OPERATIONS...................................... 28.3 21.4 92.0
OTHER INCOME................................................ 1.8 1.1 144.7
----- ----- -----
INCOME BEFORE INCOME TAXES.................................. 30.1 22.5 94.4
INCOME TAX PROVISION........................................ 10.2 7.5 98.5
----- ----- -----
NET INCOME.................................................. 19.9% 15.0% 92.4%
===== ===== =====
</TABLE>

- -------------------------
* Period-to-period change expressed as a percentage is not meaningful.

12
<PAGE> 14

NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 1997

Total revenues for the first nine months of fiscal 1999 were $1.1 billion,
an increase of $356.8 million, or 45.7%, as compared to $781.5 million for the
first nine months of fiscal 1998. The Company experienced growth in license
fees, maintenance fees, and professional services fees during the nine months
ended December 31, 1998 as compared to the nine months ended December 31, 1997.

Software license fees increased $152.1 million, or 50.9%, to $451.0 million
in the first nine months of fiscal 1999 from $298.8 million in the first nine
months of fiscal 1998. All of the Company's product families experienced growth
in license fees, with the largest percentage increase in its client/server
testing and implementation products.

Maintenance fee revenues increased $65.2 million, or 36.8%, to $242.2
million in the first nine months of fiscal 1999 from $177.0 million in the first
nine months of fiscal 1998. The Company continues to experience growth in
maintenance fees for all of its product families due to the growth in the number
of installed copies of its products.

Revenues from professional services increased $139.5 million, or 45.6%, to
$445.2 million in the first nine months of fiscal 1999 from $305.7 million in
the first nine months of fiscal 1998. The majority of the Company's professional
services offices experienced growth in revenues. The overall increase was due
primarily to increased business at new and existing clients.

Cost of software license fees increased $4.9 million, or 30.9%, to $20.9
million in the first nine months of fiscal 1999 from $16.0 million in the first
nine months of fiscal 1998. The increase was due primarily to an increase in
amortization of internally developed software products and to a lesser extent
increased author royalties. As a percentage of software license fees, these
costs decreased to 4.6% in the first nine months of fiscal 1999 from 5.3% for
the same period in fiscal 1998.

Cost of maintenance increased $5.0 million, or 22.2%, to $27.8 million in
the first nine months of fiscal 1999 from $22.7 million in the first nine months
of fiscal 1998. The increase in the cost of maintenance was due primarily to the
increase in maintenance and support staff needed to support the worldwide growth
of the installed product base. As a percentage of maintenance fees, these costs
decreased to 11.5% in the first nine months of fiscal 1999 from 12.8% during the
same period of fiscal 1998.

Cost of professional services increased $100.7 million, or 38.3%, to $363.8
million in the first nine months of fiscal 1999 from $263.1 million in the first
nine months of fiscal 1998. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 1,457 to 5,667 people at
December 31, 1998 from 4,210 at December 31, 1997. As a percentage of
professional services fees, these costs decreased to 81.7% in the first nine
months of fiscal 1999 from 86.1% in the first nine months of fiscal 1998.

Software product development costs increased $6.0 million, or 14.2%, to
$48.1 million in the first nine months of fiscal 1999 from $42.1 million in the
first nine months of fiscal 1998. Before the capitalization of internally
developed software products, total research and development expenditures
increased $7.3 million to $57.0 million, or 14.6%, in the first nine months of
fiscal 1999 from $49.7 million in the first nine months of fiscal 1998.
Capitalized research and development expenditures increased $1.3 million to $8.9
million, or 17.1%, in the first nine months of fiscal 1999 from $7.6 million in
the first nine months of fiscal 1998.

Sales and marketing costs increased $75.1 million, or 33.6%, to $298.6
million in the first nine months of fiscal 1999 from $223.5 million in the first
nine months of fiscal 1998. The increase in

13
<PAGE> 15

sales and marketing costs was due primarily to the expansion of the worldwide
sales force, higher sales commissions associated with increased product sales
and increased advertising expenditures. As a percentage of software license fees
these costs declined to 66.2% in the first nine months of fiscal 1999 as
compared to 74.8% in the first nine months of fiscal 1998.

Administrative and general costs increased $10.2 million, or 23.9%, to
$52.9 million in the first nine months of fiscal 1999 from $42.7 million in the
first nine months of fiscal 1998. The increase in these costs was due primarily
to the increase in corporate support systems, facilities, and employee
development programs in order to support the Company's growth. As a percentage
of total revenue, these costs decreased to 4.7% in the first nine months of
fiscal 1999 from 5.5% in the first nine months of fiscal 1998.

During the first nine months of fiscal 1999, the Company recognized $4.4
million of expense for purchased research and development associated with the
acquisition of products from CenterLine Software, Inc., Vireo Software, Inc.,
and Cardume Software Limited. During the first nine months of fiscal 1998, the
Company recognized $3.6 million for merger-related costs associated with the
merger of NuMega Technologies, Inc.

Income from operations increased $154.2 million, or 92.0%, to $321.9
million in the first nine months of fiscal 1999 from $167.7 million in the first
nine months of fiscal 1998. As a percentage of revenues, income from operations
increased to 28.3% in the first nine months of fiscal 1999 from 21.4% in the
same period of fiscal 1998. Excluding special charges of $4.4 million for the
fiscal 1999 purchased research and development discussed above and the NuMega
merger related expenses of $3.6 million in fiscal 1998, income from operations
would have increased $155.0 million, or 90.5%, to $326.3 million in the first
nine months of fiscal 1999 from $171.3 million in the first nine months of
fiscal 1998. As a percentage of total revenues, income from operations,
exclusive of special charges, increased to 28.7% in the first nine months of
fiscal 1999 from 21.9% in the same period of fiscal 1998.

Net interest and investment income for the first nine months of fiscal 1999
was $20.3 million as compared to $8.3 million in the first nine months of fiscal
1998. This increase in income was due to higher average cash and investment
balances resulting from cash generated from higher operating earnings.

In the first nine months of fiscal 1999, the Company had an income tax
provision of $116.3 million, which was an effective tax rate of 34.0%, as
compared to an income tax provision of $58.6 million, which was an effective tax
rate of 33.3% in the first nine months of fiscal 1998. The increase in the
effective tax rate was due to the growth in pre-tax earnings which dilutes the
effect of the tax credits on the effective tax rate.

14
<PAGE> 16

RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996

The following table sets forth for the periods indicated, certain
operational data from the Company's consolidated statements of operations as a
percentage of total revenues and the percentage change in such items compared to
the prior period:

<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUES PERIOD-TO-PERIOD
--------------------------- CHANGE
FISCAL YEAR ENDED -----------------
MARCH 31, 1997 1996
--------------------------- TO TO
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees......................... 41.0% 39.2% 36.9% 46.5% 40.7%
Maintenance fees.............................. 21.4 25.8 30.0 16.6 13.8
Professional services fees.................... 37.6 35.0 33.1 50.4 39.7
----- ----- ----- ----- ------
Total revenues........................... 100.0 100.0 100.0 40.2 32.3
----- ----- ----- ----- ------
Operating expenses:
Cost of software license fees................. 2.0 2.6 3.3 9.5 3.6
Cost of maintenance........................... 2.7 3.4 4.4 14.4 1.5
Cost of professional services................. 32.1 30.8 28.3 46.1 43.7
Software product development.................. 4.8 5.4 7.0 22.3 4.0
Sales and marketing........................... 28.6 31.5 33.3 27.2 25.3
Administrative and general.................... 5.2 5.9 6.3 22.3 25.2
Restructuring and merger-related costs........ 0.3 1.7 100.0 (100.0)
Purchased research and development............ 0.3 2.7 4.0 (85.5) (12.6)
----- ----- ----- ----- ------
Total operating expenses................. 76.0 82.3 88.3 29.4 23.3
----- ----- ----- ----- ------
Income from operations.......................... 24.0 17.7 11.7 90.3 100.2
Interest and investment income, net............. 1.5 0.7 1.1 205.0 (18.6)
----- ----- ----- ----- ------
Income before income taxes...................... 25.5 18.4 12.8 94.6 89.6
Income tax provision 8.5 6.4 5.6 86.4 50.4
----- ----- ----- ----- ------
Net income...................................... 17.0% 12.0% 7.2% 99.0% 120.2%
===== ===== ===== ===== ======
</TABLE>

FISCAL 1998 COMPARED TO FISCAL 1997

Total revenues for fiscal 1998 were $1.1 billion, an increase of $326.4
million, or 40.2%, as compared to $812.9 million for fiscal 1997. The Company
experienced growth in all revenue categories during fiscal 1998.

Software license fees increased $148.3 million, or 46.5%, to $467.3 million
in fiscal 1998 from $318.9 million in fiscal 1997. Almost all of the Company's
product families experienced growth in license sales. These increases were
spread primarily in the third and fourth quarter, and were due primarily to
increased demand for the Company's mainframe testing and implementation
products, and to a lesser extent, client/server testing and implementation
products.

Maintenance fee revenues increased $34.8 million, or 16.6%, to $244.3
million in fiscal 1998 from $209.5 million in fiscal 1997. The Company continues
to experience growth in maintenance fees for all of its product families due to
the growth in the number of installed copies of its products and its relatively
high rate of maintenance contract renewals.

15
<PAGE> 17

Revenues from professional services increased $143.3 million, or 50.4%, to
$427.8 million in fiscal 1998 from $284.5 million in fiscal 1997. This increase
was due primarily to increased business at new and existing clients equal to
$31.8 million, $16.7 million and $13.1 million at Compuware's Farmington Hills,
Michigan, Milwaukee, Wisconsin and Columbus, Ohio branches, respectively.
Revenues from professional services related to client/server systems increased
$53.9 million in fiscal 1998 over fiscal 1997.

Revenues from North American operations increased $266.9 million, or 47.8%
to $826.0 million in fiscal 1998 from $559.0 million in fiscal 1997.
International revenues increased $59.5 million, or 23.4%, to $313.3 million in
fiscal 1998 from $253.9 million in fiscal 1997.

During fiscal 1998, the overall strengthening of the dollar against
European and Japanese currencies had a negative impact on Compuware's foreign
revenues, as compared to fiscal 1997. If exchange rates had been the same as
they were in fiscal 1997, international revenues during fiscal 1998 would have
increased $87.7 million, or 34.6%, instead of $59.5 million, or 23.4%, as
reported. However, the impact on revenue was partially offset by the exchange
rate impact on foreign expenses, the majority of which are in sales and
marketing. The $69.7 million or 27.2% increase in sales and marketing expenses
over fiscal 1997 would have been $85.7 million, or 33.4%, if foreign exchange
rates in fiscal 1998 had been the same as they were in fiscal 1997. As indicated
from the above comments, Compuware's future operating results may be adversely
impacted by the overall strengthening of the U.S. dollar against foreign
currencies of countries where Compuware conducts business; conversely, future
operating results may be favorably impacted by an overall weakening of the U.S.
dollar against foreign currencies.

Cost of software license fees increased $2.0 million, or 9.5%, to $22.9
million in fiscal 1998 from $20.9 million in fiscal 1997. Cost of software
license fees includes amortization of capitalized software, the cost of
preparing and disseminating products to customers and the cost of author
royalties. The Company capitalizes the cost of internally developed software
when technological feasibility has been achieved. The increase in these costs is
due primarily to an increase in amortization of purchased and internally
developed software products, and to a lesser extent, to increased packaging and
distribution costs. As a percentage of software license fees, these costs
decreased to 4.9% in fiscal 1998 from 6.5% in fiscal 1997.

Cost of maintenance increased $3.9 million, or 14.4%, to $31.2 million in
fiscal 1998 from $27.3 million in fiscal 1997. Cost of maintenance consists of
the cost of maintenance programmers and product support personnel and the
computing, facilities and benefits costs allocated to such personnel. The
increase in cost of maintenance was due primarily to the increase in maintenance
and support staff in order to support the worldwide growth of the installed
base. As a percentage of maintenance fees, these costs decreased to 12.8% for
fiscal 1998 from 13.0% in fiscal 1997. The Company will continue to look for
ways to reduce this percentage while maintaining superior service levels and
high renewal rates.

Cost of professional services increased $115.5 million, or 46.1%, to $365.9
million in fiscal 1998 from $250.4 million in fiscal 1997. Cost of professional
services includes all costs of the Company's professional services business,
including the personnel costs of the professional, management and administrative
staff of the Company's services business and the facilities and benefits costs
allocated to such personnel. The increase in these expenses was due primarily to
an increase of 1,033 professional staff to 4,555 people at the end of fiscal
1998, as compared to 3,522 people at the end of fiscal 1997. As a percentage of
professional services fees, these costs decreased to 85.5% in fiscal 1998 from
88.0% in fiscal 1997. The Company believes that the demand for its services
offerings will allow higher rates and staff utilization in order to maintain or
improve services margins.

16
<PAGE> 18

Software product development costs increased $9.9 million, or 22.3% to
$54.4 million in fiscal 1998 from $44.5 million in fiscal 1997. Before the
capitalization of internally developed software products, total research and
development expenditures increased to $65.0 million, or 19.8%, in fiscal 1998
from $54.3 million in fiscal 1997. Software product development costs consist of
the cost of programming personnel, the facilities, computing and benefits costs
allocated to such personnel and the costs of preparing user and installation
guides for the Company's software products, less the amount of software
development costs capitalized during the fiscal year. The increase in these
costs was due primarily to a 27.5% increase in software development staff needed
to meet the demand for new and enhanced products. Those major development
projects that achieved technological feasibility for fiscal 1998 included five
new interactive analysis and debugging products, two new fault management
products, four new file and data management products, five automated testing
products and two systems management products.

Sales and marketing costs increased $69.7 million, or 27.2%, to $325.8
million in fiscal 1998 from $256.1 million in fiscal 1997. Sales and marketing
costs consist of the sales and marketing expenses associated with the Company's
products business, which include costs of direct sales, sales support and
marketing staff, the facilities and benefits costs allocated to such personnel
and the costs of marketing and sales incentive programs. The increase in sales
and marketing costs was largely attributable to the expansion of the worldwide
sales force, higher sales commissions associated with increased product sales,
and increased advertising expenditures. The direct sales and sales support staff
increased by 686 to 1,816 people at the end of fiscal 1998, as compared to 1,130
at the end of fiscal 1997. Approximately 56% of the Company's direct sales force
is selling client/server products. The proportion of client/server sales
representatives is expected to increase gradually over the next few years. As a
percentage of software license fees, sales and marketing costs decreased from
80.3% in fiscal 1997 to 69.7% in fiscal 1998.

Administrative and general costs increased $10.7 million, or 22.3%, to
$59.0 million in fiscal 1998 from $48.2 million in fiscal 1997. Administrative
and general costs consist of facilities, computing, compensation and benefit
costs of the Company's executive officers, legal, human resources, finance,
administrative and recruiting staffs and other personnel. The increase in these
costs was due primarily to the increase in the costs of executive compensation,
plus additional costs of employee development programs, legal services and
corporate communications necessary to support the Company's growth. As a
percentage of total revenues, administrative and general costs decreased from
5.9% in fiscal 1997 to 5.2% in fiscal 1998.

During fiscal 1998, the Company incurred special charges of $3.2 million
related to purchased research and development incurred in connection with the
acquisition of UnderWare, Inc. Since the research and development in process had
not reached technological feasibility, this amount was expensed in accordance
with Statement of Financial Accounting Standards No. 2. The Company also
incurred $3.6 million of merger-related costs incurred in connection with the
merger and integration of NuMega Technologies, Inc.

Net interest and investment income for fiscal 1998 was $17.4 million as
compared to $5.7 million in fiscal 1997. This increase in income was due
primarily to higher average cash and investment balances resulting from cash
generated from higher operating earnings and to interest received on prior
years' amended federal tax returns.

Income before income taxes increased approximately $141.4 million, or
94.6%, to $290.8 million, as compared to income before income taxes of $149.4
million in fiscal 1997. Excluding special charges, Compuware's income before
income taxes would have increased $126.3 million, or 73.8%, to $297.5 million
from $171.2 million in fiscal 1997. As a percentage of total revenues, income
before

17
<PAGE> 19

income taxes exclusive of special charges was 26.1% in fiscal 1998, as compared
to 21.1% in fiscal 1997.

The Company's provision for income taxes was $96.8 million in fiscal 1998,
which represents an effective tax rate of 33.3%, as compared to an income tax
provision of $52.0 million in fiscal 1997, which represents an effective tax
rate of 34.8%. The difference between the effective tax rate for fiscal 1998 and
1997 was due primarily to the non-deductibility of the purchased research and
development costs incurred during fiscal 1997 in connection with the DRD
Promark, Inc. acquisition. The effective tax rate for fiscal 1997 would have
been 33.6% without this cost.

FISCAL 1997 COMPARED TO FISCAL 1996

Total revenues for fiscal 1997 were $812.9 million, an increase of $198.5
million, or 32.3%, as compared to $614.4 million for fiscal 1996. The Company
experienced growth in all revenue categories during fiscal 1997.

Software license fees increased $92.2 million, or 40.7%, to $318.9 million
in fiscal 1997 from $226.7 million in fiscal 1996. Almost all of the Company's
product families experienced growth in license sales. These increases were
accomplished in all four quarters, and were due primarily to increased demand
for the Company's mainframe products, and to a lesser extent, the expansion of
the testing and implementation and systems management sales forces.

Maintenance fee revenues increased $25.5 million, or 13.8%, to $209.5
million in fiscal 1997 from $184.0 million in fiscal 1996. The Company continues
to experience growth in maintenance fees for all of its product families due to
the growth in the number of installed copies of its products and its relatively
high rate of maintenance contract renewals.

Revenues from professional services increased $80.8 million, or 39.7%, to
$284.5 million in fiscal 1997 from $203.6 million in fiscal 1996. This increase
was due primarily to increased business at new and existing clients equal to
$17.1 million, $13.5 million and $10.1 million at Compuware's Minneapolis,
Minnesota, Farmington Hills, Michigan and Columbus, Ohio branches, respectively.
In addition, the acquisition of Adams and Reynolds, Inc. in early fiscal 1997,
contributed approximately $8.8 million in growth in services revenue. Revenues
from professional services related to client/server systems increased $16.8
million in fiscal 1997 over fiscal 1996.

Revenues from North American operations increased $153.5 million, or 37.8%
to $559 million in fiscal 1997 from $405.6 million in fiscal 1996. International
revenues increased $45.1 million, or 21.6%, to $253.8 million in fiscal 1997
from $208.8 million in fiscal 1996.

During fiscal 1997, the overall strengthening of the dollar against
European and Japanese currencies had a negative impact on Compuware's foreign
revenues, as compared to fiscal 1996. If exchange rates had been the same as
they were in fiscal 1996, international revenues during fiscal 1997 would have
increased $58 million, or 28.1%, instead of $45.1 million, or 21.6%, as
reported. However, the impact on revenue was partially offset by the exchange
rate impact on foreign expenses, the majority of which are in sales and
marketing. The $51.7 million or 25.3% increase in sales and marketing expenses
over fiscal 1996 would have been $57.6 million, or 28.2%, if foreign exchange
rates in fiscal 1997 had been the same as they were in fiscal 1996. As indicated
from the above comments, Compuware's future operating results may be adversely
impacted by the overall strengthening of the U.S. dollar against foreign
currencies of countries where Compuware conducts business; conversely, future
operating results may be favorably impacted by an overall weakening of the U.S.
dollar against foreign currencies.

18
<PAGE> 20

Cost of software license fees increased $735,000, or 3.6%, to $20.9 million
in fiscal 1997 from $20.1 million in fiscal 1996. Cost of software license fees
includes amortization of capitalized software, the cost of preparing and
disseminating products to customers and the cost of author royalties. The
Company capitalizes the cost of internally developed software when technological
feasibility has been achieved. The increase in these costs is due primarily to
an increase in amortization of purchased and internally developed software
products, and to a lesser extent, to increased packaging and distribution costs.
As a percentage of software license fees, these costs decreased to 6.5% in
fiscal 1997 from 8.9% in fiscal 1996.

Cost of maintenance increased $411,000, or 1.5%, to $27.3 million in fiscal
1997 from $26.9 million in fiscal 1996. Cost of maintenance consists of the cost
of maintenance programmers and product support personnel and the computing,
facilities and benefits costs allocated to such personnel. The increase in cost
of maintenance was due primarily to the increase in maintenance and support
staff in order to support the worldwide growth of the installed base. As a
percentage of maintenance fees, these costs decreased to 13.0% for fiscal 1997
from 14.6% in fiscal 1996.

Cost of professional services increased $76.2 million, or 43.7%, to $250.4
million in fiscal 1997 from $174.2 million in fiscal 1996. Cost of professional
services includes all costs of the Company's professional services business,
including the personnel costs of the professional, management and administrative
staff of the Company's services business and the facilities and benefits costs
allocated to such personnel. The increase in these expenses was due primarily to
an increase of 1,141 professional staff to 3,522 people at the end of fiscal
1997, as compared to 2,381 people at the end of fiscal 1996. As a percentage of
professional services fees, these costs increased to 88.0% in fiscal 1997 from
85.6% in fiscal 1996.

Software product development costs increased $1.7 million, or 4.0% to $44.5
million in fiscal 1997 from $42.8 million in fiscal 1996. Before the
capitalization of internally developed software products, total research and
development expenditures decreased to $54.3 million, or 2.5%, in fiscal 1997
from $55.7 million in fiscal 1996. Software product development costs consist of
the cost of programming personnel, the facilities, computing and benefits costs
allocated to such personnel and the costs of preparing user and installation
guides for the Company's software products, less the amount of software
development costs capitalized during the fiscal year. The decrease in these
costs was due primarily to the consolidation of product development facilities
and cross-training of certain development staff personnel. This was offset by a
5.5% increase in software development staff needed to meet the demand for new
and enhanced products. Those major development projects that achieved
technological feasibility for fiscal 1997 included the major new release of
UNIFACE, two new interactive analysis and debugging products, two new fault
management products, two new file and data management products, three automated
testing products and one systems management product.

Sales and marketing costs increased $51.7 million, or 25.3%, to $256.1
million in fiscal 1997 from $204.4 million in fiscal 1996. Sales and marketing
costs consist of the sales and marketing expenses associated with the Company's
products business, which include costs of direct sales, sales support and
marketing staff, the facilities and benefits costs allocated to such personnel
and the costs of marketing and sales incentive programs. The increase in sales
and marketing costs was largely attributable to the expansion of the worldwide
sales force and higher sales commissions associated with increased product
sales. Including the increase in sales staff for the Company's client/server
products, the direct sales and sales support staff increased by 307 to 1,130
people at the end of fiscal 1997, as compared to 823 at the end of fiscal 1996.
As a percentage of software license fees, sales and marketing costs decreased
from 90.2% in fiscal 1996 to 80.3% in fiscal 1997.

Administrative and general costs increased $9.7 million, or 25.2%, to $48.2
million in fiscal 1997 from $38.5 million in fiscal 1996. Administrative and
general costs consist of facilities, computing,

19
<PAGE> 21

compensation and benefit costs of the Company's executive officers, legal, human
resources, finance, administrative and recruiting staffs and other personnel.
The increase in these costs was due primarily to the increase in the costs of
executive compensation, plus additional costs of employee development programs,
legal services and corporate communications necessary to support the Company's
growth. As a percentage of total revenues, administrative and general costs
decreased from 6.3% in fiscal 1996 to 5.9% in fiscal 1997.

During fiscal 1997, the Company incurred special charges of $21.8 million
related to purchased research and development acquired in connection with the
purchases of Direct Technology Limited and DRD Promark, Inc. Since the research
and development in process had not reached technological feasibility, this
amount was expensed in accordance with Statement of Financial Accounting
Standards No. 2.

Net interest and investment income for fiscal 1997 was $5.7 million as
compared to $7.0 million in fiscal 1996. This decrease in income was due
primarily to lower average cash and investment balances as a result of large
cash expenditures for acquisitions.

Income before income taxes increased approximately $70.6 million, or 89.6%,
to $149.4 million, as compared to income before income taxes of $78.8 million in
fiscal 1996. Excluding special charges, Compuware's income before income taxes
would have increased $56.8 million, or 49.6%, to $171.2 million from $114.4
million in fiscal 1996. As a percentage of total revenues, income before income
taxes exclusive of special charges was 21.1% in fiscal 1997, as compared to
18.6% in fiscal 1996.

The Company's provision for income taxes was $52.0 million in fiscal 1997,
which represents an effective tax rate of 34.8%, as compared to an income tax
provision of $34.5 million in fiscal 1996, which was an effective tax rate of
43.8%. The difference between the effective tax rates in fiscal 1997 and 1996 is
due primarily to the nondeductibility of the purchased research and development
incurred in connection with the DRD Promark Inc. and CoroNet acquisitions,
respectively. Without these expenses, the effective tax rates for fiscal 1997
and 1996 would have been 33.6% and 33.3%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1998, the Company held $683.4 million in cash and
investments. The Company has no debt other than the $3.7 million of notes issued
in connection with certain acquisitions.

Compuware believes its available cash resources, together with cash flow
from operations, will be sufficient to meet its cash needs for the foreseeable
future.

On February 23, 1999, the Company acquired M.I.S. International, Inc. and
Simco International, Inc. in exchange for 1,021,864 shares of common stock,
valued at approximately $31 million. The acquisition will be accounted for as a
purchase and the acquired companies' results of operations (which are not
material in relation to the Company) will be included in the Company's statement
of income after February 23, 1999. The Company will continue to evaluate
business acquisition opportunities that fit the Company's strategic plans.

On March 15, 1999, the Board of Directors authorized the Company to buy
back up to $500,000,000 of the Company's Common Stock. As of April 8, 1999, the
Company has spent a total of $206.6 million in connection with the buy back.

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<PAGE> 22

YEAR 2000

The Year 2000 problem is the result of the widespread practice of using
only 2 digits instead of 4 to represent the year in computing equipment and
computer software. Failure to address this problem could cause erroneous results
in the proper interpretation of years after 1999. The Company has instituted
various projects to address this issue which include three major areas: the
software products which the Company develops and markets, its internal
information technology (IT) assets, and aspects not directly related to the
Company's IT assets or software products ("non-IT assets"). This last area
includes such items as embedded systems in infrastructure components (such as
building security and HVAC systems), as well as the business relationships the
Company has with its customers and suppliers, especially those third parties
with whom the Company has a systems interaction.

The Company undertook a project to inventory and assess the impact of the
Year 2000 on its software products in the middle of 1994. As a part of this
project the Company identified the software products that would be supported
beyond December 31, 1999. Plans were put in place to complete the necessary
changes to make the identified software products Year 2000 compliant. The
Company believes that all of the Company's current product offerings are Year
2000 compliant and that plans are on schedule to ensure compliance for those
products the Company will continue to support.

The Company has established a WEB page to update customers on the Year 2000
status of the software products. This site assists the customers in
understanding the Year 2000 strategy. Part of the site gives customers access to
frequently asked Year 2000 questions. The Company is committed to supporting our
customers into the year 2000 and beyond. The strategy provides leadership and
tools needed to meet the challenge of the millennium change.

The Company has undertaken a project to inventory, assess and remediate its
significant internal software applications and other IT assets. Many of these
applications are essential for day-to-day operations. The Company believes it
has completed remediation, testing, and implementation for all critical
software. The remediation and testing activities have been performed exclusively
by internal resources.

The Company is also in the process of assessing and remediating its other
IT and non-IT assets. These include areas such as PCs, networks, voice mail,
email, building security, etc. This portion of the project is planned for
completion by October 1, 1999, and appears to be on schedule.

The Company has also undertaken a project to identify and assess its
significant third-party suppliers, and is developing a plan to address vendor or
supplier Year 2000 issues (through remediation, repair, replacement, or upgrade)
so as to avoid any business disruption. In most cases, the Company is forced to
rely on third party representations, without any ability to do independent
testing or evaluation. Contingency plans are being developed for certain key
third parties which are deemed to be critical for the Company's operation. Based
upon the information received to date, the Company does not expect any material
financial impacts from third party vendors. Embedded systems and other non-IT
systems are being evaluated for Year 2000 compliance, and being repaired or
replaced as necessary.

The costs for Year 2000-related activities are being budgeted as necessary.
Costs of the Company's Year 2000 compliance activities have not been and are not
expected to have a material impact on the Company's results of operations or
financial position. This expectation assumes that the Company will not be
obligated to incur significant Year 2000 related costs on behalf of its
customers or suppliers, and that the Company's critical vendors will be able to
meet their commitments to the Company.

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<PAGE> 23

The Company will be adequately prepared to meet the challenges of the
coming of Year 2000 without significant impact to the Company's ability to carry
on its normal business operations. Management estimates that we are
approximately 85% complete with all remediation efforts, which includes 100%
completion of all critical business systems and supported software products. The
balance of the efforts yet to be expended are in the areas of non-IT assets,
monitoring supplier compliance, and contingency planning.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board issued SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" in June 1997. The Company is required to
adopt these Statements with its fiscal year ending March 31, 1999. The adoption
of these new standards are not expected to have a material impact on the
Company's financial statements. In March 1998, the AICPA released SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", which establishes guidance on accounting for the costs of
computer software developed or obtained for internal use. The Company is
required to adopt this pronouncement with its fiscal year ending March 31, 1999.
The adoption of SOP 98-1 is not expected to have a material impact on the
Company's financial statements.

In October 1997, the American Institute of Certified Public Accountants
(AICPA) released Statement of Position (SOP) 97-2, "Software Revenue
Recognition", which supersedes SOP 91-1, "Software Revenue Recognition". SOP
97-2 establishes standards for recognizing revenues related to software products
and related services. The Company adopted this pronouncement prospectively with
its fiscal year ending March 31, 1999. The adoption of SOP 97-2 is not expected
to have a material impact on the Company's financial statements.

In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 98-9"). The provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company has not yet determined the effect, if any, of SOP 98-9 on its future
revenues and results of operations. These and future changes to, and
interpretations of, accounting standards and rules could affect the timing of
revenue recognition.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Company is required to
adopt this statement for the year ending March 31, 2001. SFAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. The
Company has not determined the effect, if any, that adoption will have on its
financial position or results of operations.

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<PAGE> 24

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Investment Portfolio

The table below provides information about the Company's investment
portfolio. For investment securities, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates (in
thousands, except interest rates) at March 31, 1998:

<TABLE>
<CAPTION>
FAIR VALUE AT
FY 1999 FY 2000 FY 2001 TOTAL MARCH 31, 1998
-------- -------- ------- -------- --------------
<S> <C> <C> <C> <C> <C>
Cash Equivalents.................... $182,366 $182,366 $182,366
Average Interest Rate............... 5.02% 5.02%
Investments......................... 54,349 $103,659 $4,062 162,070 162,191
Average Interest Rate............... 3.91% 3.97% 4.03% 3.95%
Average Interest Rate (tax
equivalent)....................... 6.01% 6.11% 6.20% 6.08%
</TABLE>

Foreign Exchange Hedging

Compuware uses a hedging program employing forward contracts on the local
currencies of its major foreign subsidiaries to reduce its exposure to currency
fluctuations on intercompany foreign currency denominated balance sheet
positions. Rather than hedging individual transactions denominated in one
currency the Company hedges the aggregate of such transactions in each currency,
or the balance due from the foreign subsidiary to the U.S. at a given point,
usually at month end. The normal holding period for any hedge entered into is 30
to 90 days. The Company does not take firm delivery of the foreign currency
amounts and it does not hedge anticipated transactions or outstanding
commitments. The difference between the contract rate and the current market
rate on the maturity date is paid or received from the bank on the settlement
date. The gain or loss incurred as of month end on any open contract is
recognized in the Statement of Income. See note 1 of Notes to Consolidated
Financial Statements. The Board of Directors has approved the Company's hedging
program. The Chief Financial Officer reviews and approves all hedging
transactions.

The Company had $45.5 million of short-term foreign exchange forward
contracts at March 31, 1998, denominated in German, Belgium, Austrian, French,
Japanese, Australian, Dutch, Italian and Swiss currencies. The Company does not
anticipate any material adverse effect on its consolidated financial position,
results of operations, or cash flows resulting from the use of these
instruments. There can be no assurance that these strategies will be effective
in eliminating or reducing transaction losses.

The following table provides information about the Company's foreign
exchange forward contracts at March 31, 1998. The table presents the value of
the contracts in U.S. dollars at the contract maturity date and the fair value
of the contracts at March 31,1998 (in thousands, except contract rates):

<TABLE>
<CAPTION>
FORWARD FAIR VALUE
CONTRACT DATE MATURITY DATE CONTRACT POSITION IN AT
IN 1998 IN 1998 RATE U.S. DOLLARS MARCH 31, 1998
------------- ------------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
German Marks............ Mar-31 May-29 1.84466 $11,926 $11,959
Belgium Francs.......... Feb-27 Apr-30 37.29500 3,754 3,684
Austrian Shilling....... Mar-31 May-29 13.01440 3,688 3,710
French Francs........... Mar-31 May-29 6.18440 7,600 7,627
Japanese Yen............ Mar-31 May-29 132.06200 3,407 3,411
Australian Dollar....... Mar-31 May-29 1.50750 3,317 3,309
Dutch Guilders.......... Mar-31 May-29 2.07965 4,809 4,824
Italian Lire............ Mar-31 May-29 1,824.32000 1,370 1,375
Swiss Francs............ Mar-31 May-29 1.51950 5,607 5,632
</TABLE>

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<PAGE> 25

BUSINESS

We were incorporated in Michigan in 1973. Our executive offices are located
at 31440 Northwestern Highway, Farmington Hills, Michigan 48334-2564, and our
telephone number is (248) 737-7300.

RECENT DEVELOPMENTS

On April 29, 1999, in a press release, Compuware reported the following
results of operations, all of which are unaudited: Fourth quarter revenue was
$500.1 million, an increase of 39.8% from $357.8 million during the same quarter
of the prior fiscal year. Income from operations grew 69.2% to $178.7 million
from $105.6 million in the fourth quarter of the previous fiscal year.

Software license fees increased 38.0% to $232.4 million from $168.4 million
in the fourth quarter of the previous fiscal year and maintenance fees increased
37.0% to $92.2 million from $67.3 million during the comparable period.
Professional services fees increased 43.7% to $175.6 million from $122.1 million
during the fourth quarter of the prior fiscal year.

Earnings per share (diluted computation) increased 63.2% to 31 cents from
19 cents based upon 403.2 million and 397.6 million shares outstanding,
respectively.

During the fiscal year ended March 31, 1999, revenues increased 43.8% to
$1.638 billion from $1.139 billion, an increase of $499.0 million. Income from
operations during the fiscal year increased 83.1% to $500.6 million from $273.4
million. Net income increased 80.4% to $349.9 million from $193.9 million in the
previous fiscal year. Earnings per share (diluted computation) increased 74.0%
to 87 cents from 50 cents.

During the year, software license fees increased 46.2% to $683.4 million
from $467.3 million and maintenance revenue grew 36.9% to $334.4 million from
$244.3 million. Professional services fees increased 45.1% to $620.7 million
from $427.8 million.

OUR BUSINESS STRATEGY

Our focus is to provide products and professional services to improve the
productivity of both mainframe and client/server programmers and analysts in our
target market, the 20,000 largest enterprises worldwide deploying data
processing technology. These companies invest substantial resources to build and
maintain large, complex, mission-critical applications. As a result, this target
market can benefit most from our product and professional services offerings. We
have developed software products and professional services for the mainframe and
client/server markets. We believe that each market includes three environments:

1. The application development environment in which application software is
initially constructed;

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<PAGE> 26

2. The testing and implementation environment in which application software
is executed, debugged, tested and maintained in a series of repetitive,
ongoing cycles for the life of the application; and

3. The systems management environment in which operating systems,
databases, applications and telecommunications networks are managed.

We have chosen not to compete in the application development and systems
management environments of the mainframe market because these are mature markets
served by several other large companies.

PRODUCTS DIVISION

Mainframe Market

We believe that the market for mainframe products is well-defined, mature
and is influenced by large, well-established companies. The prevalence of IBM
and IBM-compatible mainframes over the past thirty years has resulted in a set
of well-established standards in today's mainframe market.

We intend to remain focused on developing, marketing and supporting
high-quality testing and implementation programmer productivity software and to
work closely with our customers to meet their evolving needs. In doing so, we
believe we can leverage our customer relationships, market presence and testing
and implementation expertise to better serve our mainframe clients, as well as
the faster-growing client/server market. In addition, we intend to bridge the
mainframe and client/server markets with integrated product offerings.

Mainframe Testing and Implementation Tools

We currently offer testing and implementation software products that focus
on improving the productivity of programmers and analysts in application
testing, test data preparation, error analysis and maintenance of systems
running on IBM and IBM-compatible mainframes.

Our testing and implementation products are functionally rich, focused on
user needs and require minimal user training. We strive to ensure a common "look
and feel" across our products and emphasize ease of use in all aspects of
product design and functionality. Most products can be used immediately without
modification of customer development practices and standards, can be quickly
integrated into day-to-day testing, debugging, and maintenance activities and
provide demonstrable benefits soon after installation.

Our mainframe testing and implementation products are grouped into the
following four product families:

- File and Data Management.

Our file and data management products include the File-AID and XPERT
series products. These products provide a consistent, familiar and secure
method for IS professionals to access data across all strategic
environments in order to automate the creation of test data, quickly
resolve production data problems and manage changes to data and databases.

- Fault Management.

Our Abend-AID products assist programmers in more quickly and
accurately analyzing and diagnosing software errors generally occurring
during testing and implementation. These errors,

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<PAGE> 27

which result in the abnormal end of the application execution, must be
corrected before the program at fault is restarted.

- Interactive Analysis and Debugging.

Our XPEDITER interactive debugging products enable programmers to
identify and resolve errors in complex software efficiently and accurately.
PATHVU interactive analysis products enable programmers to assess the
quality of program code, document program logic and trace the flow of the
program's logical execution.

- Automated Testing.

Our QA Hiperstation simulates the on-line systems environment,
allowing programmers to test on-line applications under production
conditions without requiring actual users at terminals. These products
capture actual production transactions, allow test data to be created by
modification of these transactions, and then execute application programs
using the test data in a simulated on-line environment. QA Solutions is a
complete line of testing services that supplements our testing products.

Client/Server Market

In contrast to the mainframe market, the client/server market is
characterized by multiple hardware, software and network configurations, as well
as evolving standards and practices. As a result, it is a burdensome task for
large organizations to develop, deploy and maintain software applications that
address the wide-ranging needs of individual users, departments and the
enterprise as a whole. We believe our client/server products address these
challenges and that we are well-positioned to successfully market client/server
application development, testing and implementation and systems management
software to our target market.

In the last four years, we have developed products and made acquisitions in
the application development, testing and implementation and systems management
environments of the client/server market. We believe we have made substantial
progress in penetrating the market in all three environments because of the
quality and visibility of our UNIFACE, EcoSystems, QA Center and DevPartner
Studio products.

Client/Server Application Development Tools

Our client/server application development toolset, UNIFACE, is designed to
assist software developers in the creation, deployment and maintenance of
complex client/server applications. UNIFACE enables software developers to
create applications that are not tied to any specific hardware platform,
operating system, database management system, or graphical user interface.
Application objects are captured in a central repository, which permits their
re-use in the development of technology-independent applications and allows for
easier management and maintenance of applications. In addition, UNIFACE
insulates applications development and deployment from the individual technical
components which comprise a computing environment. This reduces development and
maintenance costs, permits applications to be developed once using existing
technology, and then permits the application to be deployed into different
computing technology without significant redevelopment.

UNIFACE runs on Microsoft Windows, Windows 98, Windows/NT, DOS, VMS,
MPE/IX, OS/2, Macintosh System 7 and a variety of UNIX platforms. In addition,
applications built with UNIFACE have access to relational and non-relational
data sources, including Oracle, Sybase, Informix, Ingres, DB2/6000 and RdB.

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<PAGE> 28

Client/Server Testing and Implementation Tools

Our client/server testing and implementation toolset is rapidly evolving to
improve the productivity of programmers and analysts who work in the various
client/server computing platforms. Similar to their mainframe counterparts,
these products can be used immediately without modification of customer
development practices and standards, can be quickly integrated into day-to-day
testing, debugging and maintenance activities and provide demonstrable benefits
soon after installation.

Our client/server testing and implementation products are grouped into the
following four product lines:

- File and Data Management.

File-AID/CS is a test data management tool designed to save time and
reduce the level of expertise required to manipulate data during the
development, testing and support of client/server applications. Users can
age, reformat, generate, convert, copy, compare, modify and view data
without being an expert in numerous database environments. File-AID/CS
eliminates the need to write programs, scripts or SQL or use multiple
utilities. It works with Oracle, Sybase, Microsoft SQL Server, Informix,
DB2 UDB and many other file and database types.

- NuMega.

Our DevPartner Studio is the SmartDebugging(TM) companion for
Microsoft(R) Visual Studio(TM) 97. It accelerates team development of
multi-language components for Windows and Internet applications. DevPartner
Studio SmartDebugging tools automatically detect, diagnose and facilitate
resolution of software errors and performance problems.

- Interactive Analysis and Debugging.

Our XPEDITER/SQL provides interactive analysis and resolution of SQL
program errors.

- Automated Testing.

Our line of QA/Center products addresses the growing demand for
automated testing solutions for client/server and web applications. QARun
is our enterprise-wide script development and test execution tool for
client/server applications. QADirector provides test management. QALoad is
used for server load and performance testing. These products are augmented
by QASolutions, a complete line of testing services.

Client/Server Systems Management Tools

EcoSYSTEMS is our suite of products for improving service level management
of enterprise networks, servers, distributed databases and client/server
applications in a variety of environments. Supported environments include
Windows NT, UNIX, Oracle, Sybase and Informix. EcoTOOLS simplifies
troubleshooting by allowing users to monitor vital service level metrics, as
well as the ability to automatically initiate corrective actions to help prevent
application downtime. EcoSCOPE gathers and monitors data for managing
application performance. Fault XPERT allows real-time responses to application
failures.

PROFESSIONAL SERVICES DIVISION

We believe that the demand for professional services is driven by the need
to control costs, the greater level of resources necessary to support complex
and rapidly changing hardware, software and

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<PAGE> 29

communication technologies, the need for a larger technical staff for ongoing
maintenance, and more recently, the increased growth of the client/server
market.

The rapid growth of the client/server market has created strong demand for
professional services and consulting to assist customers in building new
client/server environments. Generally, these customers do not have a sufficient
staff of programmers with the expertise to implement client/server systems and
applications. We believe we have a competitive advantage in the client/server
market by providing products as well as professional services. For an
organization implementing a client/server system, we offer software tools and
professional services to deliver complete client/server solutions. We have
trained a significant segment of our professional services staff in UNIFACE,
EcoSystems, QA Center and other major client/server technologies so that we can
assign such personnel to fulfill client/server-oriented consulting and
implementation requirements.

The need to modify applications systems for the Year 2000 has created
demand for professional services and consulting to assist customers in sizing,
analyzing, converting and testing their applications programs for Year 2000
compliance. We believe we have a competitive advantage by combining our products
and services offerings in order to provide clients with comprehensive, efficient
Year 2000 solutions. Our PRODUCTION 2000 offerings demonstrate our unique
capability to respond to our customers' evolving, and sometimes transient,
needs. We believe that our long term success, however, will depend upon our
ability to respond effectively to changes in customer needs beyond the Year
2000.

Our objective in the professional services division is to create long-term
relationships with clients in which our professional staff joins with the
client's information systems organization to plan, design, program, implement
and maintain technology-based solutions that achieve client business goals.
Typically, the professional services staff is integrated with the client's
development team on a specific application or project. Professional services
staff work primarily at client sites or at our Development Centers in Farmington
Hills, Michigan; Milwaukee, Wisconsin; Columbus, Ohio; Colorado Springs,
Colorado; Phoenix, Arizona; Cleveland, Ohio; Washington, D.C.; and Minneapolis,
Minnesota. We also have professional services operations in our international
locations.

CUSTOMERS

SALES AND MARKETING

We market our testing and implementation tools, client/server systems
management tools and client/server application development tools primarily
through a direct sales force in the United States, Canada, Europe, Japan,
Asia/Pacific, Brazil, and South Africa as well as through independent
distributors in over 25 other countries. Our combined products sales and
marketing staff as of December 31, 1998 numbered 871 in the United States
(including headquarters support for international sales), 37 in Canada, 798 in
Europe, 101 in Japan, 184 in Asia/Pacific, 55 in Brazil and 53 in South Africa,
for a total of 2,099 worldwide.

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<PAGE> 30

We market our professional services primarily through account managers
located in offices throughout North America, Europe and Asia/Pacific. Senior
professional services executives support branch marketing efforts by identifying
new business opportunities and making joint sales calls. This marketing
structure enables us to keep abreast of, and respond quickly to, the changing
needs of our clients and to call on the actual users of our professional
services on a regular basis. UNIFACE and QA Solutions professional services are
generally provided in conjunction with product sales, but have substantial
follow-up business as well.

PRODUCT DEVELOPMENT AND MANUFACTURING

We have been successful in developing acquired products and technologies
into marketable software for our distribution channels. We believe that our
future growth lies in part in continuing to identify promising technologies from
all potential sources, including independent software developers, customers,
small startup companies and internal research and development.

Our product development staff consisted of 594 employees as of December 31,
1998. Product development is performed primarily at our headquarters in
Farmington Hills, Michigan, and at our offices in Campbell, California; Nashua,
New Hampshire and Amsterdam, The Netherlands.

Total research and development costs incurred internally by Compuware were
$57.0 million through December 31, 1998, and were $65.0 million, $54.3 million
and $55.7 million during fiscal 1998, 1997 and 1996, respectively. Of these
amounts, $8.9 million, $10.6 million, $9.8 million and $12.9 million were
capitalized during the same periods, respectively. Capitalization of internally
developed software products begins when technological feasibility of the product
is established. Software product development expense in the statement of
operations includes all expenditures for research and development net of amounts
capitalized.

Our software products are distributed as object code on standard magnetic
cartridges and diskettes, together with printed documentation. We purchase
cartridges, diskettes and documentation printing from outside vendors. The
product duplication, packing and distribution to our customers is performed at
our corporate headquarters in Farmington Hills, Michigan.

PRODUCT MAINTENANCE AND CUSTOMER SUPPORT

We believe that effective support of our customers and products during both
the trial period and for the license term is a substantial factor in product
acceptance and subsequent new product sales. We believe our installed base is a
significant asset and intend to continue to provide high levels of customer
support and periodic product upgrades to assure a continuing high level of
customer satisfaction. Through the first three quarters of fiscal year 1999
(i.e., through December 31, 1998), over 95% of our existing customers renewed at
least one of their maintenance arrangements. We had 292 employees as of December
31, 1998 devoted to maintenance and customer support services.

All customers who subscribe to our maintenance and support services are
entitled to receive technical support and advice, including problem resolution
services and assistance in product installation, error corrections and any
product enhancements released by us during the maintenance period. Maintenance
and support services are provided primarily by telephone access to technical
personnel located in Farmington Hills, Michigan; Campbell, California; Nashua,
New Hampshire; and in the offices of our foreign subsidiaries and distributors.

Licensees have the option of renewing their maintenance agreements each
year for an annual fee of approximately 15% of the then-current list price of
the licensed product. They also have the option of committing to maintenance for
up to five years on a contractual basis. Through the first three

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<PAGE> 31

quarters of fiscal year 1999 (i.e., through December 31, 1998), maintenance fees
represented approximately 21.3% of our total revenue. For fiscal years 1998,
1997 and 1996, maintenance fees represented approximately 21.4%, 25.8% and
30.0%, respectively, of our total revenues.

COMPETITION

The markets for our software products are highly competitive and
characterized by continual change and improvement in technology. Our competitors
include BMC Software, Inc., Computer Associates International, Inc., Informix
Corporation, Mercury Interactive Corporation, Oracle Corporation, PLATINUM
technology International, inc., Rational Software Corporation, Sybase, Inc. and
VIASOFT, Inc. None of the competitors competes in all of our product lines.
Although we believe our mainframe products are generally complementary to those
marketed by IBM, IBM does offer some products that are directly competitive and
there can be no assurance that IBM will not choose to offer significant
competing products in the future. The principal competitive factors affecting
the market for our software products include: responsiveness to customer needs,
functionality, performance, reliability, ease of use, quality of customer
support, vendor reputation and price. We believe, based on our current market
position, that we have competed effectively in the software products
marketplace. Nevertheless, a variety of external and internal events and
circumstances could adversely affect our competitive capacity. Our ability to
remain competitive will depend, to a great extent, upon our performance in
product development and customer support. To be successful in the future, we
must respond promptly and effectively to the challenges of technological change
and our competitors' innovations by continually enhancing our own product
offerings.

The market for data processing professional services is highly competitive,
fragmented and characterized by low barriers to entry. Our principal competitors
in professional services include Andersen Consulting, Computer Sciences
Corporation, Electronic Data Systems Corporation, IBM Global Services, Analysts
International Corporation, Keane, Inc. and numerous other regional and local
firms in the markets in which we have professional services offices. Several of
these competitors have substantially greater financial, marketing, recruiting
and training resources than we do. The principal competitive factors affecting
the market for our professional services include responsiveness to customer
needs, breadth and depth of technical skills offered, availability and
productivity of personnel, ability to demonstrate achievement of results and
price.

PROPRIETARY RIGHTS

We regard our products as proprietary trade secrets and confidential
information. We rely largely upon a combination of trade secret, copyright and
trademark laws together with our license agreements with customers and our
internal security systems, confidentiality procedures and employee agreements to
maintain the trade secrecy of our products. We typically provide our products to
users under nonexclusive, nontransferable licenses. Under the general terms and
conditions of our standard product license agreement, the licensed software may
be used solely for the licensee's own internal operations on designated
computers at specific sites. Under certain circumstances, we make source code
for our products available to our customers under an escrow arrangement which
restricts access to and use of the source code. Although we take steps to
protect our trade secrets, there can be no assurance that misappropriation will
not occur. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States.

We seek to protect our software, documentation and other written materials
under copyright law, which affords only limited protection. We also assert
trademark rights in our product names. We have been granted three patents and
have nine patent applications pending for certain product technology and have
plans to seek additional patents in the future. However, because the industry is

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<PAGE> 32

characterized by rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are more important to establishing and maintaining a technology leadership
position than the various legal protections of our technology.

There can be no assurance that third parties will not assert infringement
claims against us in the future with respect to current and future products or
that any such assertion may not require us to enter into royalty arrangements or
result in costly litigation.

EMPLOYEES

As of December 31, 1998, we employed 10,080 people worldwide, with 1,957 in
products sales, sales support and marketing; 594 in research and development;
292 in product maintenance and customer support; 6,312 in professional services
marketing and delivery; and 925 in other general and administrative functions.
None of our domestic employees is represented by a labor union. We have
experienced no work stoppages and believe that our relations with our employees
are good. Our success will depend in part on our continued ability to attract
and retain highly qualified personnel in a competitive market for experienced
and talented software developers, professional services staff and sales and
marketing personnel.

PROPERTIES

The Company's executive offices, research and development, principal
marketing, primary professional services office, customer service and support
facilities are located in approximately 225,000 square feet that the Company
owns in an executive office park in Farmington Hills, Michigan. The Company also
leases approximately 80,000 square feet in the same office park. In addition,
the Company owns approximately 40,000 square feet in nearby West Bloomfield,
Michigan which houses its production, distribution and additional services
facilities.

LEGAL PROCEEDINGS

The Company is currently not a party to any material legal proceedings.

31
<PAGE> 33

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors and their respective ages and
positions as of March 31, 1999, are as follows:

Peter Karmanos, Jr.

Mr. Karmanos, age 56, a founder of the Company, has served as a director of
the Company since its inception, as Chairman of the Board since November 1978,
and as Chief Executive Officer since July 1987. From January 1992 until October
1994, Mr. Karmanos served as President of the Company.

Joseph A. Nathan

Mr. Nathan, age 46, has served as a director of the Company since September
1990 and as President and Chief Operating Officer since October 1994. From
December 1990 to October 1994 Mr. Nathan served as Senior Vice President and
Chief Operating Officer-Products Division.

Eliot R. Stark

Mr. Stark, age 46, has served as Executive Vice President, Finance, since
February 1998. From June 1995 through January 1998, Mr. Stark served as Senior
Vice President, Mergers & Acquisitions, Strategic Business Planning, and
Corporate Planning. In 1995, Mr. Stark served at Comerica Bank as Senior Vice
President, Corporate Development and Planning. From 1993 to 1995, Mr. Stark
served at Comerica Bank, as Director, Information Technology.

Denise A. Knobblock

Ms. Knobblock, age 43, has served as Executive Vice President, Human
Resources and Administration since February 1998. From January 1995 through
January 1998, Ms. Knobblock served as Senior Vice President, Administration, and
from August 1991 through December 1994, as the Company's Director, Facilities,
Administration.

Laura Lawson Fournier

Ms. Fournier, age 46, has served as Senior Vice President, Chief Financial
Officer since April 1998. From June 1995 through March 1998, Ms. Fournier served
as Corporate Controller and from February 1990 through May 1995, as the
Company's Director of Internal Audit.

Phyllis Recca

Ms. Recca, age 45, has served as Senior Vice President, Professional
Services Division, since January, 1999. From January 1995 through December 1998,
Ms. Recca served as Vice President, Professional Services, Mideast Region. From
1987 through December 1994, Ms. Recca served as Branch Manager,
Baltimore/Washington.

Stephen H. Fagan

Mr. Fagan, age 44, has served as Senior Vice President, Strategic
Relationships, Europe, since April 1999. From November 1997 through March 1999,
Mr. Fagan served as Senior Vice President, Professional Services. From 1994
through October 1997, Mr. Fagan served as Vice President, Enterprise Products.

32
<PAGE> 34

Henry A. Jallos

Mr. Jallos, age 50, has served as Executive Vice President, Products
Division, since September 1997. From August 1994 through August 1997, Mr. Jallos
served as Senior Vice President, Worldwide Sales.

John N. Shevillo

Mr. Shevillo, age 62, has served as Senior Vice President, Enterprise
Systems, since April 1997. From April 1994 through March 1997, Mr. Shevillo
served as Senior Vice President, Professional Services.

Thomas Thewes

Mr. Thewes, age 67, a founder of the Company, has served as a director of
the Company since its inception, and has served as Vice Chairman of the Board
since March 1988. Mr. Thewes served as Treasurer from May 1988 until May 1995.
Mr. Thewes served as Senior Vice President from March 1988 until March 1995 and
as Secretary from April 1973 until May 1995.

W. James Prowse

Mr. Prowse, age 56, has served as a director of the Company since December
1986 and served as Executive Vice-President from February 1998 through March 31,
1999. From January 1992 through January 1998, Mr. Prowse served as Senior Vice
President.

William O. Grabe

Mr. Grabe, age 60, has served as a director of the Company since April
1992. Mr. Grabe is a Managing Member of General Atlantic Partners, LLC and has
been affiliated with General Atlantic Partners, LLC or its predecessor since
April 1992. From 1984 until March 1992, Mr. Grabe was an IBM Vice President. Mr.
Grabe is also a director of Baan Company NV, Gartner Group, Inc., LHS Group,
Inc., Marcan Solutions, Inc. and TDS GmbH along with a number of privately held
companies in which General Atlantic Partners, LLC is an investor.

Bernard M. Goldsmith

Mr. Goldsmith, age 55, has served as a director of the Company since July
1992. Mr. Goldsmith has been the Managing Director of Updata Capital, Inc., an
investment banking firm, since 1986.

G. Scott Romney

Mr. Romney, age 57, has served as a director of the Company since January 1996.
Mr. Romney has been a partner at Honigman Miller Schwartz and Cohn, a law firm,
since 1977. The law firm serves as counsel to the Company.

William R. Halling

Mr. Halling, age 60, has served as a director of the Company since October
1996. Mr. Halling is the President of The Economic Club of Detroit. Mr. Halling
was with KPMG Peat Marwick from 1961 through 1993, where he served as a Managing
Partner and member of the Board of Directors.

Lowell P. Weicker, Jr.

Mr. Weicker, age 67, has served as a director of the Company since October
1996. Mr. Weicker is presently a visiting professor at the University of
Virginia in Charlottesville, Virginia, and currently serves on the Board of
Directors of Duty Free International, HPSC, Inc., UST Corporation, and

33
<PAGE> 35

Phoenix Duff & Phelps Mutual Funds. From 1990 through 1994, Mr. Weicker served
as the Governor of Connecticut, and from 1970 through 1988, as a U.S. Senator
from Connecticut. From 1962 through 1968, Mr. Weicker served as a Connecticut
State Representative.

Elizabeth A. Chappell

Ms. Chappell, age 41, has served as a director of the Company since October
1997. Ms. Chappell is the Chief Executive Officer of The Chappell Group, Inc., a
consulting firm. From September 1979 to September 1994, Ms. Chappell served as a
Vice President with ATT.

Elaine K. Didier

Ms. Didier, age 51, has served as a director of the Company since October
1997. Ms. Didier served as the Interim Director of Academic Outreach at the
University of Michigan until her retirement in March 1999. Prior to her
assignment as Interim Director, Ms. Didier held other positions with the
University, including Director of Information Resources.

COMPENSATION OF DIRECTORS

Under the current Non-Employee Director Stock Option Plan, new non-employee
directors receive a one-time grant of 20,000 shares of Common Stock which are
exercisable over a four year period. As of April 1, 1999, under the Non-Employee
Director Stock Option Plan, non-employee directors receive an annual grant of
40,000 option shares of Common Stock. In addition, non-employee directors
receive additional grants of 2,000 option shares for each Board of Directors
meeting attended in person, 1,000 option shares for each Board of Directors
Committee meeting attended in person, 500 option shares for each Board of
Directors meeting attended by telephone, and 250 option shares for each Board of
Directors Committee meeting attended by telephone. On March 9, 1999, current
non-employee directors received a one-time grant of 30,000 option shares. All
directors are also entitled to reimbursement for out-of-pocket expenses incurred
in connection with attendance at Board of Director and Committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

As of March 31, 1999 and 1998, Messrs. Goldsmith, Halling and Weicker
served as members of the Company's Compensation Committee. As of March 31, 1997,
Messrs. Karmanos, Goldsmith, Halling and Weicker served as members of the
Company's Compensation Committee. Messrs. Goldsmith, Halling and Weicker have
never been officers or employees of the Company or any of its subsidiaries.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% shareholders are required by Commission regulation to furnish the Company
with copies of all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations, for fiscal year
1999, a Form 4 was not filed in a timely manner for (i) Mr. Goldsmith, a
director, (ii) Ms. Didier, a director, and (iii) Michael J. Lobsinger, party to
a Voting Agreement, dated November 5, 1992, under which Mr. Karmanos voted the
shares

34
<PAGE> 36

of certain shareholders of the Company. The Voting Agreement was terminated
effective March 1, 1999. Other than the forms referenced, during the fiscal year
ended March 31, 1999, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% beneficial owners were complied with.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table shows as of March 31, 1999 the beneficial ownership of
Compuware Common Stock by each current director, by each executive officer
listed in the Summary Compensation Table on page 37, and by all directors and
executive officers as a group.

<TABLE>
<CAPTION>
BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
---- ------------ --------
<S> <C> <C>
Stephen H. Fagan............................................ 795,216(2) *
Henry A. Jallos............................................. 544,358(3) *
Peter Karmanos, Jr.......................................... 22,255,678(4) 6.0
Joseph A. Nathan............................................ 1,779,730(5) *
W. James Prowse............................................. 2,068,979(6) *
John N. Shevillo............................................ 162,910(7) *
Thomas Thewes............................................... 12,870,292(8) 3.5
Bernard M. Goldsmith........................................ 291,928(9) *
William O. Grabe............................................ 172,500(10) *
G. Scott Romney............................................. 174,500(11) *
William R. Halling.......................................... 66,500(12) *
Lowell P. Weicker, Jr....................................... 14,500(13) *
Elizabeth A. Chappell....................................... 28,500(14) *
Elaine K. Didier............................................ 23,500(15) *
By all executive officers and directors as a group (18
persons).................................................. 39,287,931 10.7
Massachusetts Financial Services............................ 31,337,902(16) 8.5
FMR Corp. .................................................. 39,910,680(17) 10.8
</TABLE>

- -------------------------
* Less than one percent.

(1) Except as otherwise noted, each beneficial owner identified in this table
has sole investment power with respect to the shares shown in the table to
be owned by the person or entity.

(2) Includes (i) 4,478 shares owned directly by Mr. Fagan; (ii) 538 shares held
for Mr. Fagan through the Company's ESOP; and (iii) 790,200 option shares
which are fully vested.

(3) Includes (i) 4,778 shares owned directly by Mr. Jallos; (ii) 33,230 shares
held for Mr. Jallos through the Company's ESOP; and (iii) 506,350 option
shares which are fully vested.

(4) Includes (i) 5,550 shares owned directly by Mr. Karmanos; (ii) 6,029,080
shares held by Mr. Karmanos's trusts; (iii) 11,211,202 shares held by Mr.
Karmanos's Stock Limited Partnership; (iv) 2,978,000 shares Mr. Karmanos is
entitled to vote pursuant to shareholder agreements with certain
shareholders; (v) 377,600 shares held for Mr. Karmanos through the
Company's ESOP; (vi) 1,033,188 shares held by Mr. Karmanos's wife (under a
voting agreement, dated July 1, 1997) and (vii) 621,058 option shares which
are fully vested. The shareholder group referenced in (iv) above includes
shares beneficially owned by (a) Thomas Thewes and the Thewes entities and
(b) General Atlantic Partners II, L.P., General Atlantic Partners, LLC, and
GAP-Amsterdam Partners, L.P. (under a shareholder agreement, dated October
22, 1992).

35
<PAGE> 37

(5) Includes (i) 180,132 shares owned directly by Mr. Nathan; (ii) 183,054
shares held for Mr. Nathan through the Company's ESOP; and (iii) 1,416,544
option shares which are fully vested.

(6) Includes (i) 879,139 shares held by Mr. Prowse's trust; (ii) 272,240 shares
held for Mr. Prowse through the Company's ESOP; (iii) 901,600 option shares
which are fully vested; and (iv) 16,000 option shares which will vest
within 60 days.

(7) Includes (i) 4,994 shares owned directly by Mr. Shevillo; (ii) 77,916
shares held for Mr. Shevillo through the Company's ESOP; and (iii) 80,000
option shares which are fully vested.

(8) Includes (i) 10,036,880 shares held by Mr. Thewes's trusts; (ii) 1,000,000
shares held by The Thewes Family Limited Partnership; (iii) 1,560,000
shares held by The Thewes GST Limited Partnership; (iv) 236,272 shares held
for Mr. Thewes through an IRRA; (v) 14,640 option shares which are fully
vested; and (vi) 22,500 option shares which will vest within 60 days.

(9) Includes (i) 39,428 shares owned directly by Mr. Goldsmith; (ii) 230,000
option shares which are fully vested; and (iii) 22,500 option shares which
will vest within 60 days.

(10) Includes (i) 40,000 shares owned directly by Mr. Grabe; (ii) 110,000 option
shares which are fully vested; and (iii) 22,500 option shares which will
vest within 60 days.

(11) Includes (i) 10,238 shares owned directly by Mr. Romney; (ii) 2,000 shares
owned by Mr. Romney's wife; (iii) 139,762 option shares which are fully
vested; and (iv) 22,500 option shares which will vest within 60 days.

(12) Includes (i) 4,000 shares owned directly by Mr. Halling; (ii) 50,000 option
shares which are fully vested; and (iii) 12,500 option shares which will
vest within 60 days.

(13) Includes (i) 800 shares owned directly by Mr. Weicker; (ii) 1,200 shares
owned by Mr. Weicker's wife; and (iii) 12,500 option shares which will vest
within 60 days.

(14) Includes (i) 6,000 shares owned directly by Ms. Chappell; (ii) 20,000
option shares which are fully vested; and (iii) 2,500 option shares which
will vest within 60 days.

(15) Includes (i) 2,600 shares owned directly by Ms. Didier; (ii) 18,400 option
shares which are fully vested; and (iii) 2,500 option shares which will
vest within 60 days.

(16) The shares listed are from Schedule 13G dated February 11, 1999. The
address for Massachusetts Financial Services is 500 Boylston Street, 25th
Floor, Boston, Massachusetts 02116.

(17) The shares listed are from Schedule 13G for shares held on March 31, 1999.
The address for FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109-3614.

36
<PAGE> 38

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Summary Compensation Table

The following table sets forth information for each of the fiscal years
ended March 31, 1998, 1997 and 1996 concerning the compensation of Compuware's
Chief Executive Officer and of each of Compuware's other five most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ----------------
---------------------- SECURITIES
FISCAL ALL OTHER UNDERLYING
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION(3) OPTION AWARDS(5)
- ---------------------------- ------ ------ ----- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Peter Karmanos, Jr.(2)....... 1998 $600,000 $1,600,000 $ 0 1,280,000
Chairman of the Board and 1997 500,000 1,330,000 0 1,064,000
Chief Executive Officer 1996 636,000 0 2,657(1) 80,000
Joseph A. Nathan............. 1998 500,000 1,333,333 0 1,066,666
President and 1997 400,000 1,064,000 0 851,200
Chief Operating Officer 1996 530,000 0 2,657(1) 400,000
Stephen H. Fagan............. 1998 315,000 933,006 0 672,000
Senior Vice President 1997 300,000 798,000 0 638,400
Professional Services 1996 350,000 0 1,550(1) 220,000
W. James Prowse(4)........... 1998 350,000 466,667 0 373,334
Executive Vice President 1997 320,000 445,600 0 356,480
Corporate Marketing and 1996 320,000 0 2,657(1) 100,000
Communications
John N. Shevillo............. 1998 300,000 841,715 0 640,000
Senior Vice President 1997 300,000 798,000 0 638,400
Enterprise Solutions 1996 424,000 0 2,657(1) 160,000
Henry A. Jallos.............. 1998 330,000 880,000 0 704,000
Senior Vice President 1997 300,000 798,000 0 638,400
Worldwide Sales 1996 320,000 0 2,657(1) 240,000
</TABLE>

- -------------------------
(1) The amounts shown for 1996 represent the value of the stock allocation,
valued at $2,657 under the provisions of the Compuware Employee Stock
Ownership Plan (ESOP), a qualified contribution plan open to all Compuware
employees after the completion of one year of service. Each executive
officer, excluding Mr. Fagan, received an allocation of 924.32 common shares
on March 31, 1996. Mr. Fagan received an allocation of 539.20 common shares
on March 31, 1996 valued at $1,550. The amount shown is based on the closing
price of Compuware's Common Stock on The Nasdaq Stock Market, Inc. in 1996
of $2.875. The numbers of common shares allocated to the executive officers
and the closing price of the Common Stock have been adjusted to reflect the
2-for-1 stock split effective February 25, 1999.

(2) In fiscal 1998, 1997 and 1996, Compuware paid premiums of approximately
$185,000 in each year in connection with a split dollar life insurance
arrangement maintained on the life of Mr. Karmanos. In connection with that
arrangement, the insurance premiums paid with respect to term life insurance
and a portion of the whole life insurance were paid by Mr. Karmanos's

37
<PAGE> 39

children or trusts for their benefit. The premiums paid by Compuware will be
repaid to it upon the earliest to occur of Mr. Karmanos's death or retirement,
the cancellation of the policies or the transfer of the policies to Mr.
Karmanos's children or trusts for their benefit. It is currently
anticipated that such premiums will be repaid to Compuware in approximately
5 years, when the policies, if still outstanding, will be transferred to
Mr. Karmanos's children or trusts for their benefit. At that time, the cash
surrender value of the policies is expected to be equal to the aggregate
premiums to be repaid to Compuware.

(3) The executive officers elected not to receive an ESOP allocation for fiscal
1998 or 1997.

(4) Mr. Prowse retired from the Company on March 31, 1999, although he continues
to serve as a director.

(5) Adjusted to reflect the 2-for-1 stock split effective March 1, 1999.

Option Grants in Last Fiscal Year

The following table sets forth information concerning the number of options
granted, exercise price and potential realized value at assumed annual rates of
stock price appreciation for the option term for grants to each of the executive
officers named in the Summary Compensation Table for the year ended March 31,
1998. The information presented below reflects the executive stock option grant
covering 7,288,794 shares on April 1, 1998 pursuant to the fiscal 1998 executive
bonus plan. The information is also adjusted to reflect the 2-for-1 stock split
effective March 1, 1999.

INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
PERCENTAGE OF OF STOCK PRICE
TOTAL OPTIONS APPRECIATION
GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------------
NAME GRANTED FISCAL 1998 PRICE DATE 5% ($) 10% ($)
---- ------- ------------- -------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Peter Karmanos, Jr.......... 1,280,000 7.18% $24.563 4/1/08 19,772,447 50,107,262
Joseph A. Nathan............ 1,066,666 5.98 24.563 4/1/08 16,477,028 41,756,026
W. James Prowse............. 373,334 2.09 24.563 4/1/08 5,766,974 14,614,644
John N. Shevillo............ 640,000 3.59 24.563 4/1/08 9,886,223 25,053,631
Stephen H. Fagan............ 672,000 3.77 24.563 4/1/08 10,380,534 26,306,313
Henry A. Jallos............. 704,000 3.95 24.563 4/1/08 10,874,845 27,558,994
</TABLE>

38
<PAGE> 40

Aggregated Option Exercises and Fiscal 1998 Option Value Table

The following table sets forth information concerning the number of options
exercised, value realized (market price less the exercise price) and the value
of unexercised in-the-money stock options held by each of the executive officers
named in the Summary Compensation Table above as of March 31, 1998:

AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND OPTION VALUES AT MARCH 31, 1998

<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY
MARCH 31, 1998 OPTIONS/SARS AT
(#)(2) MARCH 31, 1998 ($)
SHARES ------------------ ---------------------
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(2) REALIZED UNEXERCISABLE UNEXERCISABLE/(1)
---- -------------- -------- ------------- -----------------
<S> <C> <C> <C> <C>
Peter Karmanos, Jr...... 1,440,000 $21,904,942 3,729,600 85,704,660
2,288,000 39,353,500
W. James Prowse......... 864,000 12,857,865 1,665,600 38,382,780
912,960 16,547,420
Joseph A. Nathan........ 480,000 6,531,225 1,801,600 40,798,400
2,502,400 46,224,800
Stephen H. Fagan........ 860,000 11,639,142 1,384,300 31,391,117
1,717,700 31,176,389
John N. Shevillo........ 390,000 5,863,926 274,800 6,243,747
1,596,800 25,886,100
Henry A. Jallos......... 144,000 2,321,665 735,600 16,750,275
1,756,800 32,036,100
</TABLE>

- -------------------------
(1) Represents the amount by which the market price of the Company's common
stock exceeded the exercise price of the outstanding options on March 31,
1998. Market price is based on the closing price on The Nasdaq Stock Market,
Inc. on that date of $24.688 (as adjusted to reflect the 2-for-1 stock split
approved by the shareholders of the Company on February 25, 1999).

(2) Adjusted to reflect the 2-for-1 stock split effective March 1, 1999.

RELATED PARTY TRANSACTIONS

George Karmanos, the brother of Peter Karmanos, Jr., owns Karmanos Printing
and Graphics, which provides certain printing services to the Company, including
the printing of Company brochures, stationery, envelopes, business cards,
invoices and other office supplies. For fiscal 1999 the Company paid $948,822 to
such company for printing costs. The costs for such printing in fiscal 1998 were
$1,045,742 and in fiscal 1997 were $759,000. The Company believes that such
printing services were provided to the Company on terms that were no less
favorable to the Company than could have been obtained from unaffiliated third
parties.

Peter Karmanos, Jr. owns 67% of the common stock of Compuware Sports
Corporation ("CSC"), which operates an amateur hockey program in southeastern
Michigan. Thomas Thewes, a director of the Company, owns 33% of the common stock
of CSC. One of CSC's teams, the Plymouth Whalers, plays in the Ontario Hockey
League and supplies players to the National Hockey League ("NHL"); the other
team, the Compuware Junior Ambassadors, plays in the North

39
<PAGE> 41

American Junior Hockey League ("NAJHL"), which primarily supplies players to
leading college hockey programs. On September 8, 1992, Compuware entered into a
one year Promotion Agreement with CSC to promote and sponsor Compuware's
business ("Promotion Agreement"). The Promotion Agreement with CSC automatically
renews for successive one year terms, unless terminated with 60 days prior
notice by either party.

The CSC teams play their home games at the Compuware Arena in Plymouth,
Michigan. The Compuware Arena is owned and managed by entities controlled by
interests of Peter Karmanos, Jr. and interests of Thomas Thewes. On December 1,
1996, Compuware entered into an Advertising Agreement with the Arena to promote
and sponsor Compuware's business, including but not limited to the right for the
Arena to be named "Compuware Arena" and the placement of fixed advertising in
and about the Arena. The Advertising Agreement will terminate by its terms on
November 30, 2016. Pursuant to the Promotion and Advertising Agreements, the
Company paid an aggregate of $1,235,000 in fiscal 1999 and $1,065,000 in fiscal
1998. In fiscal 1997, the Company paid $600,000 pursuant to the Promotion
Agreement.

Peter Karmanos, Jr. and Thomas Thewes, both directors of the Company, are
the major stockholders of the Carolina Hurricanes Hockey Club of the National
Hockey League. Prior to the Club's relocation to North Carolina in 1997, the
Club was known as the Hartford Whalers Hockey Club. The Company recognized
approximately $286,000 in revenues for computer programming services to the Club
in 1997.

Bernard M. Goldsmith, a director of the Company, is the managing director
of The Updata Group, Inc. ("Updata"). Updata received approximately $295,000
from the Company upon the completion of the acquisition in May 1996 of Adams &
Reynolds & Company for services rendered to the Company in connection with the
acquisition.

The Company, pursuant to a Promissory Note, dated April 8, 1999, provided a
loan in the amount of $3,000,000 to Peter Karmanos, Jr. As provided in the
Promissory Note, the loan is payable in full on or before June 30, 1999, and is
subject to annual interest at the Applicable Federal Rate (4.99%).

The Company, pursuant to a Promissory Note dated March 18, 1999, provided a
secured loan in the amount of $1,384,685 to Eliot Stark, Executive Vice
President. As provided in the Promissory Note, the loan is payable in full on or
before March 17, 2000, is subject to the annual accrual of interest at the
Applicable Federal Rate (4.67%), compounded monthly, and becomes immediately due
and payable should Mr. Stark's employment terminate with the Company for any
reason prior to the loan being paid in full.

G. Scott Romney, a director of the Company, is a partner in the law firm of
Honigman Miller Schwartz and Cohn ("Honigman"). Honigman was engaged by the
Company to perform legal services in fiscal 1999, and it is anticipated that
Honigman will continue to be so engaged in fiscal 2000.

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 1,600,000,000 shares of
Common Stock, $.01 par value per share, and 5,000,000 shares of Class A
Preferred Stock

The following summary of certain provisions of each class of the Company's
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the

40
<PAGE> 42

Company's Restated Articles of Incorporation, which is included as an exhibit to
the Registration Statement of which this Prospectus forms a part, and by
provisions of applicable law.

COMMON STOCK

The Common Stock is entitled to one vote for each share held of record on
all matters submitted to a vote of shareholders. The holders of Common Stock are
not entitled to cumulative voting rights with respect to the election of
directors, and as a consequence, minority shareholders will not be able to elect
directors on the basis of their votes alone. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock have no preemptive rights and no right to convert their Common
Stock into any other securities, except as indicated above. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of this offering will be, validly issued, fully paid
and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
shareholders, to issue up to 5,000,000 shares of Class A Preferred Stock in one
or more series, and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, rights and
terms of redemption, liquidation preferences and sinking fund terms. The
issuance of Class A Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without any further action by
the shareholders. The Board of Directors, without shareholder approval, can
issue Class A Preferred Stock, with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock. In addition,
such Class A Preferred Stock may have other rights, including economic rights
senior to the Common Stock, and as a result, the issuance thereof could have a
material adverse effect on the market value of the Common Stock. The Company has
no present plan to issue any additional shares of Class A Preferred Stock.

MICHIGAN LAW

Chapter 7A and 7B of the Michigan Business Corporation Act may affect
attempts to acquire control of the Company. In general, under Chapter 7A,
"business combinations" (defined to include, among other transactions, certain
mergers, dispositions of assets or shares and recapitalizations) between covered
Michigan business corporations or their subsidiaries and an "interested
shareholder" (defined as the direct or indirect beneficial owner of at least 10%
of the voting power of a covered corporation's outstanding shares) can only be
consummated if approved by at least 90% of the votes of each class of the
corporation's shares entitled to vote and by at least two-thirds of such voting
shares not held by the interested shareholder or affiliates, unless five years
have elapsed after the person involved became an "interested shareholder" and
unless certain price and other conditions are satisfied. The Board of Directors
has the power to elect to be subject to Chapter 7A as to specifically identified
or unidentified interested shareholders. Upon completion of the offering, FMR
Corp. will beneficially own more than 10% of the outstanding Common Stock and,
if the Board of Directors elects to be subject to Chapter 7A, will be able to
prevent attainment of the required supermajority approval of such transactions.
See "Security Ownership of Certain Beneficial Owners and Management."

41
<PAGE> 43

In general, under Chapter 7B, an entity that acquires "Control Shares" of
the Company may vote the Control Shares on any matter only if a majority of all
shares, and of all non- "Interested Shares," of each class of shares entitled to
vote as a class, approve such voting rights. Interested Shares are shares owned
by officers of the Company, employee-directors of the Company and the entity
making the Control Share Acquisition. Control Shares are shares that when added
to shares already owned by an entity, would give the entity voting power in the
election of directors over any of the three thresholds: one-fifth, one-third and
a majority. The effect of the statute is to condition the acquisition of voting
control of a corporation on the approval of a majority of the pre-existing
disinterested shareholders. The Board of Directors may amend the bylaws before a
Control Share Acquisition occurs to provide that Chapter 7B does not apply to
the Company.

TRANSFER AGENT AND REGISTRAR

EquiServe Limited Partnership has been appointed as the transfer agent and
registrar for the Company's Common Stock.

42
<PAGE> 44

SELLING SHAREHOLDERS

The persons listed in the first column of the table below are the "Selling
Shareholders." The Selling Shareholders are the former shareholders of M.I.S.
International, Inc. a Michigan corporation ("MIS") and Simco International,
Inc., a Michigan corporation ("Simco"), both acquired by Compuware pursuant to
an Agreement and Plan of Merger, dated as of February 23, 1999 (the "Merger
Agreement"). In connection with the acquisition of MIS and Simco by Compuware,
the Selling Shareholders received an aggregate of 510,932 shares of Compuware
Common Stock for their stock in MIS and Simco. On March 1, 1999, Compuware split
its Common Stock 2 for 1. On a post-split basis, the Selling Shareholders
received an aggregate of 1,021,864 shares of Common Stock. Of the 510,932
(1,021,864 post-split) shares received by the Selling Shareholders, up to 51,092
(102,184 post-split) may be held in escrow to secure the indemnification
obligations of the Selling Shareholders as provided in the Merger Agreement.

The following table shows for each Selling Shareholder, as of the date of
this Prospectus, certain information with regard to beneficial ownership of
Common Stock of the Company:

<TABLE>
<CAPTION>
AMOUNT AND PERCENT
AMOUNT OF OF BENEFICIAL
AMOUNT OF BENEFICIAL COMMON OWNERSHIP
OWNERSHIP OF COMMON STOCK OF COMMON STOCK
NAME STOCK PRIOR TO OFFERING HEREBY OFFERED AFTER OFFERING(1)
---- ----------------------- -------------- ------------------
<S> <C> <C> <C>
Michael M. Bahn Revocable............ 421,066* 421,066 0(0%)
Trust, dated January 23, 1995
Mary C. Bahn Revocable............... 302,118* 302,118 0(0%)
Trust, dated January 23, 1995
Mary C. Bahn 1999.................... 149,340* 149,340 0(0%)
Qualified Annuity Trust
Michael J. Bahn, Jr.................. 49,780* 49,780 0(0%)
Marisa R. Bahn....................... 49,780* 49,780 0(0%)
Renee C. Phillips 1999............... 49,780* 49,780 0(0%)
Qualified Annuity Trust
</TABLE>

- -------------------------
* Represents less than 1% of outstanding Common Stock.

(1) Based on the number of shares outstanding at the date of this Prospectus;
assumes all of the shares offered hereby are sold by the Selling
Shareholders.

43
<PAGE> 45

PLAN OF DISTRIBUTION

The shares offered hereby may be sold from time to time by the Selling
Shareholders, or by pledgees, donees, transferees or other successors in
interest of the Selling Shareholders. Such sales may be made on the Nasdaq
National Market, or otherwise, at prices and on terms then prevailing or at
prices related to the then-current market prices, or in negotiated transactions
at negotiated prices. The shares may be sold by one or a combination of the
following: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction; (b) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In effecting sales,
brokers or dealers engaged by the Selling Shareholders may arrange for other
brokers or dealers to participate. Brokers or dealers will receive commissions
or discounts from Selling Shareholders in amounts to be negotiated immediately
prior to the sale. The Selling Shareholders and any broker-dealers that
participate in the distribution may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Acts, and any commission received by
them and any profit on the resale of shares sold by them may be deemed to be
underwriting discounts and commissions.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Honigman Miller Schwartz and Cohn, Detroit, Michigan. G.
Scott Romney, a director of the Company, is also a partner of Honigman Miller
Schwartz and Cohn, Detroit, Michigan.

EXPERTS

The financial statements as of March 31, 1998 and 1997 and for each of the
three years in the period ended March 31, 1998 included in this Prospectus and
the related financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission") relating to its business, financial position, results of
operations and other matters. Such reports and other information can be
inspected and copied at the Public Reference Section maintained by the
Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and its Regional Offices located at Citicorp Center, 500 West Madison
Street, 14th Floor, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, 13th Floor, Suite 1300 New York, New York 10048. Copies of such material
can also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material
may also be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov.

44
<PAGE> 46

The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-1 under the Securities Act of 1933 (the
"Securities Act") with respect to the securities offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus regarding the contents
of any documents filed with, or incorporated by reference in, the Registration
Statement as exhibits are not necessarily complete, and each such statement is
qualified in all respects by reference to the copy of the applicable documents
filed with the Commission. The Registration Statement, including the exhibits
and schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part thereof may be obtained from such
office upon payment of the prescribed fees.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus, including the documents incorporated by reference in this
Prospectus, contains certain "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 and information relating to us
that are based on the beliefs of our management, as well as assumptions made by
and information currently available to our management. When used in this
Prospectus, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events. These statements are subject to risks and uncertainties that could cause
actual results to differ materially from those contemplated in the
forward-looking statements. Many of these risks are discussed under "Risk
Factors", which begins on page 5 below. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Prospectus. We do not undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after such date or to reflect the occurrence of unanticipated events.

45
<PAGE> 47

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997... F-3
Consolidated Statements of Income for the Years Ended March
31, 1998, 1997 and 1996................................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended March 31, 1998, 1997 and 1996................. F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996............................. F-6
Notes to Consolidated Financial Statements for the Years
Ended March 31, 1998, 1997 and 1996....................... F-7
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of December 31,
1998...................................................... F-23
Condensed Consolidated Statements of Income for the Nine
Months Ended December 31, 1998 and 1997................... F-24
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 1998 and 1997................... F-25
Notes to Condensed Consolidated Financial Statements for the
Nine Months Ended December 31, 1998 and 1997.............. F-26
</TABLE>

F-1
<PAGE> 48

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors of Compuware Corporation:

We have audited the accompanying consolidated balance sheets of Compuware
Corporation and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended March 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Compuware Corporation and its
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Detroit, Michigan
May 4, 1998 (March 1, 1999 as to the effects
of the stock split described in Note 15)

F-2
<PAGE> 49

COMPUWARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------
NOTES 1998 1997
----- ---- ----
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 206,278 $107,341
Investments.............................................. 4 54,349 26,604
Accounts receivable, less allowance for doubtful accounts
of $8,812 and $6,941.................................. 388,573 290,922
Deferred tax asset....................................... 10 14,133 9,747
Income taxes refundable.................................. 2,594 9,593
Prepaid expenses and other current assets................ 10,348 7,605
---------- --------
Total current assets.................................. 676,275 451,812
---------- --------
INVESTMENTS................................................ 4 107,721 44,465
---------- --------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION............................................. 5 84,494 70,578
---------- --------
CAPITALIZED SOFTWARE, LESS ACCUMULATED AMORTIZATION OF
$70,243 AND $53,933...................................... 50,455 53,355
---------- --------
OTHER:
Accounts receivable...................................... 64,282 54,637
Deferred tax asset....................................... 10 12,926 11,084
Excess of cost of investment over fair value of net
assets acquired, less accumulated amortization of
$9,835 and $5,417..................................... 2 57,607 55,700
Other assets............................................. 6 18,880 13,776
---------- --------
Total other assets.................................... 153,695 135,197
---------- --------
TOTAL ASSETS.......................................... $1,072,640 $755,407
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 19,985 $ 24,275
Accrued expenses......................................... 71,104 53,562
Accrued bonuses and commissions.......................... 42,688 30,100
Deferred revenue......................................... 180,174 164,367
---------- --------
Total current liabilities............................. 313,951 272,304
LONG-TERM DEBT............................................. 7 6,956 6,068
DEFERRED REVENUE........................................... 43,437 31,399
---------- --------
Total liabilities..................................... 364,344 309,771
SHAREHOLDERS' EQUITY:
Preferred stock, no par value -- authorized 5,000,000
shares................................................
Common stock, $.01 par value -- authorized 1,600,000,000
shares; issued and outstanding 360,341,946 and
343,727,080 shares in 1998 and 1997, respectively..... 8, 15 3,603 3,438
Additional paid-in capital............................... 8, 15 280,867 210,413
Retained earnings........................................ 427,455 232,630
Foreign currency translation adjustment.................. (3,629) (845)
---------- --------
Total shareholders' equity............................ 708,296 445,636
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $1,072,640 $755,407
========== ========
</TABLE>

See notes to consolidated financial statements.
F-3
<PAGE> 50

COMPUWARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------
NOTES 1998 1997 1996
----- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Software license fees.......................... $ 467,251 $318,907 $226,690
Maintenance fees............................... 244,273 209,521 184,039
Professional services fees..................... 427,794 284,468 203,630
---------- -------- --------
Total revenues.............................. 1,139,318 812,896 614,359
---------- -------- --------
OPERATING EXPENSES:
Cost of software license fees.................. 22,874 20,881 20,146
Cost of maintenance............................ 31,203 27,278 26,867
Cost of professional services.................. 365,948 250,405 174,215
Software product development................... 54,416 44,494 42,792
Sales and marketing............................ 325,793 256,139 204,403
Administrative and general..................... 58,965 48,233 38,537
Restructuring and merger-related costs......... 2,3 3,606 10,688
Purchased research and development............. 2 3,160 21,790 24,943
---------- -------- --------
Total operating expenses.................... 865,965 669,220 542,591
---------- -------- --------
INCOME FROM OPERATIONS........................... 273,353 143,676 71,768
OTHER INCOME..................................... 17,417 5,710 7,015
---------- -------- --------
INCOME BEFORE INCOME TAXES....................... 290,770 149,386 78,783
INCOME TAX PROVISION............................. 96,826 51,950 34,541
---------- -------- --------
NET INCOME....................................... $ 193,944 $ 97,436 $ 44,242
========== ======== ========
Basic earnings per share......................... $ 0.55 $ 0.29 $ 0.13
========== ======== ========
Diluted earnings per share....................... $ 0.50 $ 0.27 $ 0.12
========== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 51

COMPUWARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
------------------------------------------------------------------------------------------
FOREIGN UNREALIZED
COMMON STOCK ADDITIONAL CURRENCY LOSS ON TOTAL
-------------------- PAID-IN RETAINED TRANSLATION MARKETABLE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT SECURITIES EQUITY
------ ------ ---------- -------- ----------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1995, AS
RESTATED (NOTES 8 AND
15)....................... 364,057,136 $3,640 $183,910 $149,257 $ 271 $(877) $336,201
Net income................ 44,242 44,242
Issuance of common
stock................... 720,000 8 1,500 1,508
Purchase of common
stock................... (23,326,400) (234) (11,735) (58,305) (70,274)
Return of Uniface escrow
shares.................. (5,429,752) (54) 54
Acquisition tax
benefits................ 3,852 3,852
Foreign currency
translation
adjustment.............. (1,287) (1,287)
Unrealized loss on
marketable securities... (88) (88)
Exercise of employee stock
options and related tax
benefit (Note 13) and
other................... 2,363,200 24 4,807 4,831
----------- ------ -------- -------- ------- ----- --------
BALANCE AT MARCH 31, 1996... 338,384,184 3,384 182,388 135,194 (1,016) (965) 318,985
Net income................ 97,436 97,436
Issuance of common
stock................... 320,000 4 2,326 2,330
Acquisition tax
benefits................ 6,603 6,603
Foreign currency
translation
adjustment.............. 171 171
Realized gain on sale of
marketable securities
(Note 4)................ 965 965
Exercise of employee stock
options and related tax
benefit (Note 13)....... 5,022,896 50 19,096 19,146
----------- ------ -------- -------- ------- ----- --------
BALANCE AT MARCH 31, 1997... 343,727,080 3,438 210,413 232,630 (845) -- 445,636
Net income................ 193,944 193,944
NuMega acquisition (Note
2)...................... 6,683,206 66 3,734 881 4,681
Issuance of common
stock................... 1,450,616 14 12,731 12,745
Acquisition tax
benefits................ 6,485 6,485
Foreign currency
translation
adjustment.............. (2,784) (2,784)
Exercise of employee stock
options and related tax
benefit (Note 13)....... 8,481,044 85 47,504 47,589
----------- ------ -------- -------- ------- ----- --------
BALANCE AT MARCH 31, 1998... 360,341,946 $3,603 $280,867 $427,455 $(3,629) $ -- $708,296
=========== ====== ======== ======== ======= ===== ========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 52

COMPUWARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 193,944 $ 97,436 $ 44,242
Adjustments to reconcile net income to cash
provided by operations:
Purchased research and development.............. 3,160 21,790 24,943
Depreciation and amortization................... 36,504 31,401 21,915
Tax benefit from exercise of stock options...... 30,402 5,306 1,467
Issuance of common stock to Employee Stock
Ownership Trust.............................. 3,500 2,330 1,508
Acquisition tax benefits........................ 6,485 6,603 3,852
Deferred income taxes........................... (6,108) (4,256) (10,219)
Other........................................... 240 (290) 999
Net change in assets and liabilities, net of
effects from acquisitions:
Accounts receivable.......................... (104,702) (88,574) (57,736)
Prepaid expenses and other current assets.... (2,118) 1,361 5,153
Other assets................................. (6,255) 88 (5,898)
Accounts payable and accrued expenses........ 22,582 25,960 15,935
Deferred revenue............................. 26,206 37,797 39,000
Refundable income taxes...................... 6,765 (2,618) (6,965)
--------- --------- --------
Net cash provided by operating
activities........................... 210,605 134,334 78,196
--------- --------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses...................................... (5,198) (69,083) (26,113)
Property and equipment.......................... (28,006) (23,442) (15,789)
Capitalized software............................ (13,823) (14,544) (13,647)
Minority interest in subsidiary................. (9,419)
Investments:
Proceeds from maturity.......................... 85,682 63,202 162,227
Purchases....................................... (172,865) (74,491) (95,340)
Other............................................. (246) (2,661)
--------- --------- --------
Net cash used in investing activities... (134,210) (118,604) (742)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt......................... (3,890)
Net proceeds from sale of common stock............ 9,245
Repurchase of common stock........................ (70,274)
Net proceeds from exercise of stock options....... 17,187 13,840 3,364
--------- --------- --------
Net cash provided by (used in) financing
activities........................... 22,542 13,840 (66,910)
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 98,937 29,570 10,544
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.... 107,341 77,771 67,227
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.......... $ 206,278 $ 107,341 $ 77,771
========= ========= ========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 53

COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business -- Compuware Corporation develops, markets and supports an
integrated set of systems software products designed to improve the productivity
of data processing professionals in application development, implementation and
maintenance. In addition, the Company's professional services division offers
business systems analysis, design, programming and implementation as well as
software conversion and systems planning and consulting. The Company's products
and services are offered worldwide across a broad spectrum of technologies,
including mainframe, mid-range and client/server platforms.

Basis of Presentation -- The consolidated financial statements include the
accounts of Compuware Corporation and its wholly owned subsidiaries after
elimination of all significant intercompany balances and transactions. The
financial statements have been prepared in conformity with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and the disclosure of
contingencies at March 31, 1998 and 1997 and the results of operations for the
years ended March 31, 1998, 1997 and 1996. While management has based their
assumptions and estimates on the facts and circumstances known at March 31,
1998, final amounts may differ from estimates.

Revenue Recognition -- Revenue from licensing of software products is
recognized upon shipment of the products, provided that no significant
obligations remain and collection of the related receivable is deemed probable.
A portion of new license fees, generally 15%, is deferred and recognized ratably
over the initial maintenance period, generally one year. Annual product
maintenance fees are recognized as revenue ratably over the contract period.
Professional services fees are recognized in the period the services are
performed.

Cash and Cash Equivalents -- For the purpose of the statement of cash
flows, the Company considers all investments with an original maturity of three
months or less to be cash equivalents.

Investments consist of municipal obligations and marketable equity
securities. Municipal obligations are classified as held-to-maturity and carried
at amortized cost. Marketable equity securities are classified as
available-for-sale and are carried at market value. Unrealized gains and losses
on available-for-sale securities are reported as a separate component of
shareholders' equity, net of tax. Those investments that mature within one year
from the balance sheet date are classified as short-term. The amortization of
bond premiums and discounts is included in interest income.

Property and Equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets.

Capitalized Software includes the costs of purchased and internally
developed software products and are stated at the lower of unamortized cost or
net realizable value. Net purchased software included in capitalized software at
March 31, 1998 and 1997 is $14,249,000 and $20,284,000, respectively. In
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed", capitalization of internally developed software products
begins when technological feasibility of the product is established. Software
product development includes all expenditures for research and development, net
of amounts capitalized. Total software development costs incurred

F-7
<PAGE> 54
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

internally by the Company were $65,015,000, $54,292,000 and $55,705,000 in
fiscal 1998, 1997 and 1996, respectively, of which $10,599,000, $9,798,000 and
$12,913,000, respectively, were capitalized.

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

Excess of Cost Over Fair Value of Net Assets Acquired ("goodwill") is being
amortized over periods ranging from 15 to 20 years using the straight-line
method.

Fair Value of Financial Instruments -- The carrying value of cash
equivalents, accounts receivable, accounts payable and long-term debt
approximated fair values due to the short-term maturities of these instruments.

Income Taxes -- The Company accounts for income taxes 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.

Foreign Currency Translation -- The Company's foreign subsidiaries use the
local currency as the functional currency. Accordingly, assets and liabilities
in the consolidated balance sheets have been translated at the rate of exchange
at the respective balance sheet dates, and revenues and expenses have been
translated at average exchange rates prevailing during the year the transactions
occur. Translation adjustments have been excluded from the results of operations
and are reported as a separate component of shareholders' equity.

Foreign Currency Transactions and Derivatives -- Gains and losses from
foreign currency transactions are included in the determination of net income.
To offset the risk of future currency fluctuations on receivables due from
foreign subsidiaries, the Company enters into foreign exchange contracts to sell
currencies at specified rates on specific dates. Market value gains and losses
on these contracts are recognized, offsetting foreign exchange gains or losses
on foreign receivables. The Company does not use foreign exchange contracts to
hedge anticipated transactions. The net foreign currency transaction gain (loss)
was ($627,000), ($1,446,000) and $192,000 for the fiscal years ended March 31,
1998, 1997 and 1996, respectively. These amounts are included in "Sales and
marketing" in the Statements of Income.

At March 31, 1998, the Company had contracts maturing through May 1998 to
sell $45,478,000 in foreign currencies. At March 31, 1997, the Company had
contracts maturing through May 1997 to sell $51,937,000 in foreign currencies.

Earnings Per Share -- Effective in December 1997, the Company adopted SFAS
No. 128, "Earnings per Share", which replaces the presentation of primary
earnings per share ("EPS") and fully diluted EPS with presentation of basic EPS
and diluted EPS, respectively. Basic EPS is computed by dividing earnings
available to common stockholders by the weighted-average number of

F-8
<PAGE> 55
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

common shares outstanding for the period. Similar to fully diluted EPS, diluted
EPS assumes the issuance of common stock for all potentially dilutive equivalent
shares outstanding. All prior-period EPS data have been restated. The adoption
of this new accounting standard did not have a material effect on the Company's
reported EPS amounts on a diluted basis.

Recently Issued Accounting Pronouncements -- The Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
in June 1997. The Company is required to adopt these Statements with its fiscal
year ending March 31, 1999. The adoption of these new standards are not expected
to have a material impact on the Company's financial statements. In October
1997, the American Institute of Certified Public Accountants (AICPA) released
Statement of Position (SOP) 97-2, "Software Revenue Recognition", which
supersedes SOP 91-1, "Software Revenue Recognition". SOP 97-2 establishes
standards for recognizing revenues related to software products and related
services. The Company is required to adopt this pronouncement prospectively with
its fiscal year ending March 31, 1999. The adoption of SOP 97-2 is not expected
to have a material impact on the Company's financial statements. In March 1998,
the AICPA released SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which establishes guidance on
accounting for the costs of computer software developed or obtained for internal
use. The Company is required to adopt this pronouncement with its fiscal year
ending March 31, 1999. The adoption of SOP 98-1 is not expected to have a
material impact on the Company's financial statements.

2. ACQUISITIONS

UnderWare, Inc. -- In March 1998, the Company acquired UnderWare, Inc., a
privately held software product company, for approximately $3,500,000 cash. The
acquisition has been accounted for as a purchase and, accordingly, assets and
liabilities acquired have been recorded at fair value as of the date of
acquisition. The amount by which the acquisition cost exceeded the fair value of
the net assets acquired was approximately $141,000 and is being amortized over a
fifteen-year period on a straight-line basis. Of the total purchase price,
$3,160,000 was allocated to in-process research and development based upon
independent valuations of the expected future cash flows, less costs to complete
the development. In accordance with SFAS No. 2, "Accounting for Research and
Development Costs", this amount was expensed as of the purchase date. The
company that provided the independent valuation for the UnderWare acquisition is
Valuation Counselors.

NuMega Technologies, Inc. -- In December 1997, the Company issued
approximately 6,682,000 shares of its common stock in exchange for all of the
outstanding common stock of NuMega Technologies, Inc. (NuMega). In addition,
options to acquire approximately 1,776,000 shares of the Company's common stock
were exchanged for all outstanding NuMega options. The merger has been accounted
for by the pooling of interests method, and accordingly, the assets and
liabilities of NuMega were combined with those of the Company at their book
value. The financial results of NuMega have been included in the accompanying
financial statements since October 1, 1997. Due to the immaterial size of NuMega
when compared with the Company, prior periods were not restated to include the
financial results of NuMega. The Company also incurred approximately $3,606,000
of special charges related to the merger and integration of NuMega. Such costs
consisted primarily of financial advisory fees and professional fees.

F-9
<PAGE> 56
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

Vine Systems Company Ltd. -- In April 1997, the Company acquired Vine
Systems Company Ltd., a professional services firm, for approximately 3,100,000
pounds sterling (approximately $5,022,000). Of the total purchase price
approximately $566,000 was paid in cash. The Company issued notes for the
remaining $4,456,000, of which approximately $3,656,000 was repaid during fiscal
1998. The acquisition has been accounted for as a purchase and, accordingly,
assets and liabilities acquired have been recorded at fair value as of the date
of acquisition. The amount by which the acquisition cost exceeded the fair value
of the net assets acquired was approximately $4,841,000 and is being amortized
over a fifteen-year period on a straight-line basis.

During fiscal 1997, the Company completed the acquisition of certain
professional service companies for a combined total of $48,045,000 net cash
expended. The companies purchased were Technalysis ($25,061,000), Adams &
Reynolds ($12,410,000), MC Squared Incorporated ($9,212,000) and Virtual
Innovations, Inc. ($362,000). All of the acquisitions were accounted for as
purchases and, accordingly, assets and liabilities acquired have been recorded
at fair value as of their respective acquisition dates. The aggregate amount by
which the acquisition cost exceeded the fair value of the net assets acquired
was approximately $44,177,000 and is being amortized over a fifteen-year period
on a straight line basis.

The Company also acquired all of the outstanding stock of certain
privately-held software product companies for an aggregate cost of $29,637,000
during fiscal 1997. The companies purchased were Direct Technology Limited
($23,800,000) and DRD Promark, Inc. ($5,837,000). Of the total purchase price,
$23,837,000 was paid in cash and $5,800,000 in notes that are due in April 1999.
The aggregate amount by which the acquisition cost exceeded the fair value of
the net assets acquired was approximately $3,165,000 and is being amortized over
a fifteen-year period on a straight-line basis. Of the total purchase price,
$21,790,000 was allocated to in-process research and development based upon
independent valuations of the expected future cash flows, less costs to complete
the development and in accordance with SFAS No. 2 this amount was expensed as of
the purchase date. The company that provided the independent valuation for these
acquisitions is Valuation Counselors.

In September 1995, the Company acquired all non-Company owned outstanding
stock of Compuware Nordic AS (Nordic) for approximately $9,419,000. Nordic was
formerly a majority owned subsidiary which distributes the Company's products in
Norway and Denmark. The acquisition of the minority interest has been accounted
for as a purchase. The amount by which the acquisition cost exceeded the fair
value of the net assets acquired of approximately $8,592,000 is being amortized
over a fifteen-year period on a straight-line basis.

In November 1995, the Company acquired all of the outstanding stock of
CoroNet Systems, Inc. for approximately $27,000,000 in cash. The acquisition has
been accounted for as a purchase and, accordingly, assets and liabilities
acquired have been recorded at fair value as of the date of the acquisition. Of
the total purchase price, $24,943,000 was allocated to in-process development
projects based on their expected future cash flows, less costs to complete the
development, and in accordance with SFAS No. 2 this amount was expensed as of
the purchase date.

3. RESTRUCTURING COSTS

In fiscal 1996, the Company recognized $10,688,000 of special charges
related to the reorganization of the Company's operating units and the
decentralization of certain corporate office

F-10
<PAGE> 57
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

functions. The components of the restructuring reserve, as ultimately executed,
included $5,806,000 for severance related costs for employees made redundant by
the reorganization, and $4,882,000 for estimated future leasing costs of
abandoned offices in the United States and Europe. At March 31, 1998, the costs
accrued for future lease expenses of approximately $3,286,000 are expected to be
paid over a period not to exceed the remaining lease terms, which extend through
April 2002.

4. INVESTMENTS

Municipal obligations -- The Company's municipal obligations are classified
as held-to-maturity and are carried at amortized cost. The Company will receive
the face value of these bonds at their maturity date and, accordingly, has not
recognized any gain or loss resulting from current fair value fluctuations. The
amortized cost and aggregate fair value of the debt securities, by maturity, are
as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------
1998 1997
--------------------- --------------------
LESS THAN 1-5 LESS THAN 1-5
ONE YEAR YEARS ONE YEAR YEARS
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Amortized cost.................................... $54,349 $107,721 $26,604 $44,465
Aggregate fair value.............................. 54,419 107,772 26,614 44,209
------- -------- ------- -------
Difference between amortized cost and fair
value........................................... $ (70) $ (51) $ (10) $ 256
======= ======== ======= =======
</TABLE>

Marketable equity securities -- There were no marketable equity securities
held during fiscal 1998. During fiscal 1997, the Company sold securities that
had been classified as available-for-sale for approximately $6.2 million. The
gain realized during fiscal 1997 related to these sales was approximately
$905,000. The Company uses the specific identification method as a basis for
determining cost and calculating realized gains.

5. PROPERTY AND EQUIPMENT

Property and equipment, summarized by major classification, is as follows
(in thousands):

<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Land........................................................ $ 1,776 $ 1,297
Buildings................................................... 28,777 26,293
Leasehold improvements...................................... 14,227 10,242
Furniture and fixtures...................................... 29,678 24,601
Computer equipment and software............................. 59,279 47,069
-------- --------
133,737 109,502
Less accumulated depreciation and amortization.............. 49,243 38,924
-------- --------
Total....................................................... $ 84,494 $ 70,578
======== ========
</TABLE>

F-11
<PAGE> 58
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

6. RELATED PARTY TRANSACTIONS

At March 31, 1997 the Company had a $300,000 note receivable, included in
"Other assets", from a company controlled by certain shareholders of the
Company. The note was repaid in fiscal 1998.

The Company has agreed to pay 75% of the annual premiums on a life
insurance policy for the Chief Executive Officer. The Company has received a
collateral assignment of the policy and will recover the premiums advanced upon
the termination of the policy or the death of the officer. For each of the years
ended March 31, 1998 and 1997, the total premiums paid by the Company were
approximately $185,000. The aggregate amount paid of approximately $1,113,000 is
included in "Other assets".

The following items included in operations were paid to or from companies
controlled by certain officers or directors of the Company or their affiliates
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Professional services fees................................ $ -- $286 $1,346
EXPENSES
Marketing and promotion................................... $1,354 $823 $ 644
Printing.................................................. 1,046 759 908
Professional services..................................... 232 618 185
</TABLE>

7. CREDIT FACILITIES AND LONG-TERM DEBT

Cash paid for interest totaled approximately $810,000, $450,000 and
$313,000 for the years ended March 31, 1998, 1997 and 1996, respectively.

Revolving Bank Credit Facility -- The Company has a revolving bank credit
facility which provides for borrowings of up to $30,000,000 through September 1,
1999. The Company is obligated for a commitment fee of .125% per annum for any
unused portion of the credit facility. The Company may choose between various
interest rate options. The revolving credit arrangement contains affirmative and
negative covenants including limitations on dividend payments, loans and
advances. The Company had no borrowings outstanding during fiscal 1998 or 1997.

Long-term debt -- The Company's long-term debt includes $6.1 million of
pound-denominated notes issued as part of the Direct Technology Limited
acquisition (see note 2 of Notes to Consolidated Financial Statements). The
notes are due April 30, 1999 and interest is paid semiannually at the six month
LIBOR rate. The Company also has approximately $800,000 of pound-denominated
notes outstanding at March 31, 1998 that were issued as part of the Vine Systems
acquisition (see note 2 of Notes to Consolidated Financial Statements). The
notes are due March 31, 2001 and interest is paid semiannually using the six
month LIBOR rate.

F-12
<PAGE> 59
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

8. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

On April 3, 1997 the Company's shareholders approved an increase in the
Company's authorized shares of common stock from 80,000,000 to 200,000,000
shares to permit a two-for-one stock split which was previously approved by the
Board of Directors. The stock split was effected by means of a 100% stock
dividend as of April 14, 1997 to holders of record April 4, 1997. In August
1997, the Company's shareholders approved an increase in the Company's
authorized shares of common stock from 200,000,000 to 400,000,000 shares. In
October 1997, the Company's Board of Directors approved a two-for-one stock
split, payable as a 100% stock dividend to shareholders of record on October 22,
1997.

The effect of the stock splits has been retroactively reflected as of April
1, 1995. All references throughout the consolidated financial statements to
number of shares, per share amounts and stock option data have been restated to
reflect the stock splits.

9. EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BASIC EPS:
Numerator: Net Income..................................... $193,944 $97,436 $44,242
-------- ------- -------
Denominator:
Weighted-average common shares outstanding............. 352,274 340,770 347,516
-------- ------- -------
Basic EPS................................................. $ 0.55 $ 0.29 $ 0.13
======== ======= =======
DILUTED EPS:
Numerator: Net Income..................................... $193,944 $97,436 $44,242
-------- ------- -------
Denominator:
Weighted-average common shares outstanding............. 352,274 340,770 347,516
Dilutive effect of stock options....................... 35,152 18,970 11,434
-------- ------- -------
Total Shares........................................... 387,426 359,740 358,950
-------- ------- -------
Diluted EPS............................................... $ 0.50 $ 0.27 $ 0.12
======== ======= =======
</TABLE>

F-13
<PAGE> 60
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

10. INCOME TAXES

Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities are as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accrued vacation.......................................... $ 2,582 $ 2,682
Purchased software........................................ 9,410 9,371
Net operating loss carryforwards.......................... 35,139 26,138
Other..................................................... 12,055 7,288
------- -------
59,186 45,479
Less: valuation allowance................................. 8,891 5,065
------- -------
Net deferred tax assets.............................. 50,295 40,414
Current portion........................................... 14,512 10,267
------- -------
Long-term portion......................................... $35,783 $30,147
======= =======
Deferred tax liabilities:
Capitalized research and development costs................ $ 9,605 $10,576
Purchased software........................................ 2,565 3,373
Other..................................................... 11,066 5,634
------- -------
Total deferred tax liabilities....................... 23,236 19,583
Current portion........................................... 379 520
------- -------
Long-term portion......................................... $22,857 $19,063
======= =======
</TABLE>

The income tax provision (benefit) includes the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................. $ 96,629 $ 46,073 $ 41,354
Foreign................................................. 4,316 6,506 952
State................................................... 5,800 4,500 3,000
-------- -------- --------
Total current tax provision............................... 106,745 57,079 45,306
-------- -------- --------
Deferred:
Federal................................................. 1,309 6,050 (382)
Foreign................................................. (11,228) (11,179) (10,383)
-------- -------- --------
Total deferred tax benefit................................ (9,919) (5,129) (10,765)
-------- -------- --------
Total income tax provision................................ $ 96,826 $ 51,950 $ 34,541
======== ======== ========
</TABLE>

F-14
<PAGE> 61
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

The Company's income tax expense differed from the amount computed on
pre-tax income at the U.S. federal income tax rate of 35% for the following
reasons (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rates....................... $101,769 $52,285 $27,574
Increase (decrease) in taxes:
Items related to acquisitions............................. 1,792 9,332
Foreign Sales Corporation subsidiary...................... (6,462) (4,638) (3,190)
Research and development credit........................... (1,700) (1,300) (325)
Other, net................................................ 3,219 3,811 1,150
-------- ------- -------
Provision for income taxes.................................. $ 96,826 $51,950 $34,541
======== ======= =======
</TABLE>

At March 31, 1998 the Company has net operating loss carryforwards for
income tax purposes of approximately $101,173,000 which expire as follows (in
thousands):

<TABLE>
<S> <C>
Year ending March 31:
1999............................................. $ 480
2000............................................. 5,737
2001............................................. 2,238
2002............................................. 6,787
2003............................................. 13,908
2004............................................. 2,430
2005............................................. 2,035
2008............................................. 898
2010............................................. 919
2011............................................. 274
Unlimited carryforward............................. 65,467
</TABLE>

Of this amount, approximately $4,511,000 is available to offset U.S.
federal income taxes and approximately $96,662,000 relates to various foreign
jurisdictions. In addition, approximately $921,000 of tax credits expiring
through the year 2002 are available to offset future U.S. federal income tax
liabilities.

Cash paid for income taxes totaled approximately $55,481,000, $46,760,000
and $45,414,000 for the years ended March 31, 1998, 1997 and 1996, respectively.

F-15
<PAGE> 62
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

11. GEOGRAPHIC SEGMENT INFORMATION

Revenues and income (loss) for each of the three years in the period ended
March 31, 1998 and identifiable assets at March 31, 1998, 1997 and 1996 are as
follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
North America.......................................... $ 825,989 $559,058 $405,603
European subsidiaries.................................. 217,478 180,095 150,656
Other international operations......................... 95,851 73,743 58,100
---------- -------- --------
Total revenue..................................... $1,139,318 $812,896 $614,359
========== ======== ========
Income (loss) before taxes:
North America(1)....................................... $ 309,602 $174,643 $107,486
European subsidiaries.................................. (13,733) (19,985) (22,203)
Other international operations......................... (5,099) (5,272) (6,500)
---------- -------- --------
Total income before taxes(2)...................... $ 290,770 $149,386 $ 78,783
========== ======== ========
Identifiable assets:
North America.......................................... $ 837,568 $568,458 $404,463
European subsidiaries.................................. 176,107 139,307 122,448
Other international operations......................... 58,965 47,642 28,815
---------- -------- --------
Total assets...................................... $1,072,640 $755,407 $555,726
========== ======== ========
</TABLE>

- -------------------------
(1) Includes net intercompany royalty income of approximately $114,973,000,
$87,548,000 and $71,105,000 for the years ended March 31, 1998, 1997 and
1996, respectively. The income (loss) from foreign subsidiaries reflects the
corresponding net royalty expense.

(2) Income before taxes also includes $6,766,000, $21,790,000 and $35,631,000 of
special charges for the years ended March 31, 1998, 1997 and 1996,
respectively. Exclusive of these charges, income (loss) before taxes is as
follows:

<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income (loss) before special charges and
taxes:
North America............................. $316,368 $196,433 $139,964
European subsidiaries..................... (13,733) (19,985) (19,284)
Other international operations............ (5,099) (5,272) (6,266)
-------- -------- --------
Total income before special charges
and taxes......................... $297,536 $171,176 $114,414
======== ======== ========
</TABLE>

12. COMMITMENTS AND CONTINGENCIES

Leases -- The Company leases building and office space and computer
equipment under various operating lease agreements extending through fiscal
2005. Certain of these leases contain provisions

F-16
<PAGE> 63
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

for renewal options and escalation clauses. The following is a schedule of
future minimum rental payments for the next five years (in thousands):

<TABLE>
<S> <C>
Year ending March 31:
1999............................................. $23,710
2000............................................. 19,134
2001............................................. 14,230
2002............................................. 10,525
2003............................................. 7,241
Thereafter....................................... 8,503
-------
Total....................................... $83,343
=======
</TABLE>

Lease expense for the years ended March 31, 1998, 1997 and 1996 under all
operating leases amounted to approximately $19,193,000, $16,815,000 and
$10,078,000, respectively.

Employment Contracts -- The Company has entered into employment agreements
with certain key employees that include noncompete provisions in exchange for
specified terms of employment.

13. BENEFIT PLANS

Employee Stock Ownership Plan -- In July 1986, the Company established an
Employee Stock Ownership Plan (ESOP) and Trust. Under the terms of the ESOP, the
Company makes annual contributions to the Plan for the benefit of substantially
all employees of the Company. The contribution may be in the form of cash or
common shares of the Company. The Board of Directors may authorize contributions
between a maximum of 25% of eligible compensation and a minimum sufficient to
cover current obligations of the Plan. The Company made contributions of
$3,500,000, $2,330,000 and $1,508,000 in fiscal 1998, 1997 and 1996,
respectively. The provisions of SFAS No. 123 do not apply to the Employee Stock
Ownership Plan. This is a non-leveraged ESOP plan.

Employee Stock Purchase Plan -- During fiscal 1997, the Company adopted the
Global Employee Stock Purchase Plan (GESPP) under which the Company is
authorized to issue up to eight million shares of common stock to eligible
employees. Each offering period is limited to six months and a maximum number of
1,000,000 common shares. The Company's first offering period began January 1,
1997. Under the terms of the plan, employees elect to have up to 10 percent of
their annual earnings withheld to purchase Company stock, with a value not to
exceed $25,000, at the close of the offering period. The purchase price is 85
percent of the first or last day's closing market price for each offering
period, whichever is lower. During fiscal 1998, the Company sold approximately
1,250,258 shares to eligible employees.

NuMega Technologies, Inc. 1996 Stock Option Plan -- In connection with the
NuMega acquisition (see note 2 of Notes to Consolidated Financial Statements),
options to acquire approximately 1,775,662 shares of the Company's common stock
were exchanged for all outstanding NuMega incentive and nonqualified stock
options, of which 1,040,462 were outstanding at March 31, 1998. The option
prices range from $1.32 to $11.83 and expire in 10 years.

1998 Employee Stock Option Plan -- In August 1997, the Company adopted the
Fiscal 1998 Stock Option Plan. The plan provides for grants of options to
purchase up to 16,000,000 shares of the

F-17
<PAGE> 64
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

Company's common stock to employees of the Company, of which 6,071,248 were
outstanding at March 31, 1998. Under the terms of the plan, the Company may
grant nonqualified options at the fair market value of the stock on the date of
grant. During fiscal 1998, the Company granted 6,841,640 options under the 1998
Employee Stock Option Plan.

1996 Employee Stock Option Plan -- In August 1995, the Company adopted the
1996 Employee Stock Option Plan. The plan provides for grants of options to
purchase up to 28,600,000 shares of the Company's common stock to employees of
the Company, of which 26,372,104 were outstanding at March 31, 1998. Under the
terms of the plan, the Company may grant nonqualified options at the fair market
value of the stock on the date of grant. During fiscal 1998, the Company granted
3,548,272 options under the 1996 Employee Stock Option Plan.

1993 Employee Stock Option Plan -- In November 1992, the Company adopted
the 1993 Employee Stock Option Plan. The plan provides for grants of options to
purchase up to 21,600,000 shares of the Company's common stock to officers and
key employees of the Company, of which 9,322,182 non qualified options were
outstanding at March 31, 1998. Under the terms of the plan, the Company may
grant incentive stock options at the fair market value of the stock on the date
of grant or nonqualified stock options at a price not less than 50% of fair
market value or $1.00 per share. The plan also provides for stock appreciation
rights which may be granted independently, or in conjunction with any stock
option granted under the plan. Stock options and appreciation rights expire 10
years from the date of grant. In addition, the Company may award shares of
restricted stock to participants subject to the terms and conditions specified
at the time of the award. During fiscal 1998, the Company granted 54,000
nonqualified options under the 1993 Employee Stock Option Plan.

1992 Employee Stock Option Plan -- The 1992 Employee Stock Option Plan
provides for grants of options to purchase shares of common stock to officers
and key employees of the Company. Under this plan, up to 16,800,000 shares of
common stock may be granted to officers and key employees. The provisions of the
plan are identical to the Company's 1993 Employee Stock Option Plan. During
fiscal 1998, the Company granted 56,400 nonqualified options under the 1992
Employee Stock Option Plan of which 7,416,284 were outstanding at March 31,
1998.

Non-Employee Director Stock Option Plan -- In July 1992, the Company
adopted the Stock Option Plan for Non-Employee Directors. Under this plan,
2,400,000 shares of common stock are reserved for issuance to non-employee
directors of the Company who have not been employees of the Company, any
subsidiary of the Company or any entity which controls more than 10% of the
total combined voting power of the Company's capital stock for at least one year
prior to becoming director. In June 1995, the Compensation Committee amended the
provisions of this plan to provide for the one-time grant of 20,000 option
shares to each new non-employee director in addition to an annual grant of 5,000
option shares to each non-employee director. During fiscal 1998, 400,000 options
were granted under the Non-Employee Director Stock Option Plan of which
1,480,000 options were outstanding at March 31, 1998.

Options generally vest in cumulative annual installments over a three to
five year period. All options were granted at fair market value and expire 10
years from the date of grant.

At March 31, 1998, a total of 399,108 options were outstanding under plans
that were terminated by the Company, of which 354,264 are fully vested. All
outstanding options under the terminated plans remain in effect in accordance
with the terms under which they were granted.

F-18
<PAGE> 65
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans and its stock purchase plan.

If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the grant dates for fiscal 1998, 1997
and 1996 consistent with the method prescribed by SFAS No. 123, Compuware's net
earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Earnings
As reported............................................... $193,944 $97,436 $44,242
Pro forma................................................. 172,394 85,319 37,565
Earnings per Share
As reported:
Basic earnings per share............................... 0.55 0.29 0.13
Diluted earnings per share............................. 0.50 0.27 0.12
Pro forma:
Basic earnings per share............................... 0.49 0.25 0.11
Diluted earnings per share............................. 0.44 0.24 0.10
</TABLE>

The pro forma amounts for compensation cost may not be indicative of the
effects on net earnings and earnings per share for future years.

Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1998, 1997 and 1996, respectively:
expected volatility of 51.50, 55.22 and 64.73 percent; risk-free interest rates
of 5.7, 6.6 and 6.6 percent; and expected lives at date of grant of 4.9, 4.3 and
4.8 years. Dividend yields were not a factor as the Company has never issued
cash dividends and has no plans to do so in the future.

Under SFAS No. 123, the fair value of the employees' purchase rights were
estimated using the Black-Scholes model with assumptions that, except for an
expected life of six months and a risk-free interest rate of 5.26 percent for
fiscal 1998, were consistent with those used for the Company's stock purchase
plans described above. The weighted average fair value of those purchase rights
granted in fiscal 1998 were $2.47.

F-19
<PAGE> 66
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

A summary of the status of fixed stock option grants under Compuware's
stock-based compensation plans as of March 31, 1998, 1997 and 1996, and changes
during the years ending on those dates is as follows (shares in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
SHARES SHARES SHARES
UNDER WEIGHTED-AVERAGE UNDER WEIGHTED-AVERAGE UNDER WEIGHTED-AVERAGE
OPTION EXERCISE PRICE OPTION EXERCISE PRICE OPTION EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year............... 50,636 $ 3.83 40,416 $2.31 29,156 $1.97
NuMega acquisition... 1,776 1.66
Granted.............. 10,540 14.90 17,696 6.90 16,054 2.87
Exercised............ (8,482) 2.07 (5,022) 2.75 (2,364) 1.21
Forfeited............ (2,368) 7.43 (2,454) 2.74 (2,430) 2.92
------ ------ ------
Outstanding at end of
year............... 52,102 $ 6.13 50,636 $3.83 40,416 $2.31
====== ====== ======
Options exercisable
at year end..... 17,090 $ 2.71 21,290 $2.02 20,452 $1.80
====== ====== ======
Weighted-average fair
value of options
granted during the
year............... $ 7.58 $ 3.68 $ 1.74
====== ====== ======
</TABLE>

The following table summarizes information about fixed stock options
outstanding at March 31, 1998 (shares in thousands):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
SHARES SHARES
UNDER WEIGHTED-AVERAGE WEIGHTED-AVERAGE UNDER WEIGHTED-AVERAGE
OPTION REMAINING LIFE EXERCISE PRICE OPTION EXERCISE PRICE
------ ---------------- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices
$ 0.05 to $ 4.50........ 28,018 6.12 $ 2.35 15,616 $ 2.02
4.51 to 9.00........ 14,728 8.83 7.53 972 6.60
9.01 to 13.50........ 174 9.22 11.65 10 11.25
13.51 to 18.50........ 8,690 9.49 15.04 392 16.06
18.51 to 22.50........ 492 9.80 20.50 100 19.00
------ ------
52,102 7.49 6.13 17,090 2.71
====== ======
</TABLE>

The maximum number of shares for which additional options may be granted
was 13,401,204 at March 31, 1998, 5,440,736 at March 31,1997 and 20,695,248 at
March 31, 1996. At March 31, 1998, a total of 65,502,592 shares of the Company's
common stock are reserved for issuance under all option plans. Income tax
benefits associated with the exercise of stock options are reflected as
adjustments to additional paid-in capital.

F-20
<PAGE> 67
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for the years ended March 31, 1998 and 1997
is as follows (in thousands, except for per share data):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Fiscal 1998:
Revenues........................... $224,478 $247,381 $309,635 $357,824 $1,139,318
Operating income................... 39,998 49,804 77,915 105,636 273,353
Pre-tax income..................... 42,387 51,949 81,665 114,769 290,770
Net Income(1)...................... 28,272 34,650 54,471 76,551 193,944
Basic earnings per share(1)........ 0.08 0.10 0.15 0.21 0.55
Diluted earnings per share(1)...... 0.08 0.09 0.14 0.19 0.50
Fiscal 1997:
Revenues........................... $162,338 $184,266 $213,713 $252,579 $ 812,896
Operating income................... 3,651 25,646 47,020 67,359 143,676
Pre-tax income..................... 4,883 26,694 48,345 69,464 149,386
Net income(2)...................... 3,257 16,100 32,246 45,833 97,436
Basic earnings per share(2)........ 0.01 0.05 0.09 0.13 0.29
Diluted earnings per share(2)...... 0.01 0.05 0.09 0.13 0.27
</TABLE>

- -------------------------
(1) In fiscal 1998, the Company incurred special pre-tax charges totaling
$3,606,000 and $3,160,000 in the third and fourth quarters, respectively.
The charges include $3,606,000 for merger-related costs and $3,160,000 for
purchased research and development, expensed in connection with the NuMega
and UnderWare acquisitions, respectively (Note 2). Excluding these charges,
in fiscal 1998 net income was $56,876,000 and $78,659,000 for the third and
fourth quarters, respectively, basic earnings per share was $0.16 and $0.22,
and diluted earnings per share was $0.14 and $0.20 for the third and fourth
quarters, respectively. For the year ended March 31, 1998, net income and
earnings per share, excluding special charges, was $198,457,000 and $0.56
per share -- basic and $0.51 per share -- diluted.

(2) In fiscal 1997, the Company incurred special pre-tax charges totaling
$16,670,000 and $5,120,000 in the first and second quarters, respectively.
The charges include $16,670,000 and $5,120,000 for purchased research and
development expensed in connection with the Direct Technology and DRD
Promark acquisitions, respectively (Note 2). Excluding these charges, in
fiscal 1997 net income was $14,376,000 and $21,220,000 for the first and
second quarters, respectively, basic earnings per share was $0.04 and $0.06,
and diluted earnings per share was $0.04 and $0.06 for the first and second
quarters, respectively. For the year ended March 31, 1997, net income and
earnings per share, excluding special charges, was $113,675,000 and $0.33
per share -- basic and $0.32 per share -- diluted.

15. SUBSEQUENT EVENTS

On February 25, 1999, the Company's shareholders approved an increase in
the Company's authorized shares of common stock from 400,000,000 to
1,600,000,000 shares to permit a two for one

F-21
<PAGE> 68
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

stock split which was previously approved by the Board of Directors. The stock
split was effected by means of a 100% stock dividend as of March 1, 1999 to
holders of record on January 26, 1999.

The effect of the stock split has been retroactively reflected and all
references throughout the consolidated financial statements to number of shares,
per share amounts, and stock option data have been restated to reflect the stock
split.

F-22
<PAGE> 69

COMPUWARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(UNAUDITED)
(IN
THOUSANDS)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 157,064
Investments................................................. 351,997
Accounts receivable, net.................................... 437,858
Deferred tax asset.......................................... 16,155
Income taxes refundable.....................................
Prepaid expenses and other current assets................... 18,816
----------
Total current assets................................... 981,890
----------
INVESTMENTS................................................. 174,379
----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION.............................................. 92,245
----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED AMORTIZATION......... 50,476
----------
OTHER:
Accounts receivable......................................... 123,870
Deferred tax asset.......................................... 10,438
Excess of cost over fair value of net assets acquired, less
accumulated amortization.................................. 58,885
Other....................................................... 16,007
----------
Total other assets..................................... 209,200
----------
TOTAL ASSETS................................................ $1,508,190
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 20,737
Accrued expenses............................................ 149,213
Income taxes payable........................................ 22,474
Deferred revenue............................................ 222,633
----------
Total current liabilities.............................. 415,057
----------
DEFERRED REVENUE............................................ 54,308
LONG TERM DEBT.............................................. 3,719
----------
Total liabilities...................................... 473,084
----------
SHAREHOLDERS' EQUITY:
Common stock................................................ 3,700
Additional paid-in capital.................................. 381,332
Retained earnings........................................... 653,350
Foreign currency translation adjustment..................... (3,276)
----------
Total shareholders' equity............................. 1,035,106
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $1,508,190
==========
</TABLE>

See notes to condensed consolidated financial statements.

F-23
<PAGE> 70

COMPUWARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1998 1997
---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
REVENUES:
Software license fees....................................... $ 450,986 $298,845
Maintenance fees............................................ 242,158 176,986
Professional services fees.................................. 445,166 305,663
---------- --------
Total revenues......................................... 1,138,310 781,494
---------- --------
OPERATING EXPENSES:
Cost of software license fees............................... 20,892 15,966
Cost of maintenance......................................... 27,761 22,715
Cost of professional services............................... 363,767 263,102
Software product development................................ 48,121 42,144
Sales and marketing......................................... 298,594 223,543
Administrative and general.................................. 52,888 42,701
Purchased research and development.......................... 4,350
Merger-related costs........................................ 3,606
---------- --------
Total operating expenses............................... 816,373 613,777
---------- --------
INCOME FROM OPERATIONS...................................... 321,937 167,717
OTHER INCOME................................................ 20,274 8,284
---------- --------
INCOME BEFORE INCOME TAXES.................................. 342,211 176,001
INCOME TAX PROVISION........................................ 116,316 58,608
---------- --------
NET INCOME.................................................. $ 225,895 $117,393
========== ========
Basic earnings per share.................................... $ 0.62 $ 0.34
========== ========
Diluted earnings per share.................................. $ 0.56 $ 0.31
========== ========
</TABLE>

See notes to condensed consolidated financial statements.

F-24
<PAGE> 71

COMPUWARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1998 1997
---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $225,895 $117,393
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization............................... 30,661 26,864
Tax benefit from exercise of stock options.................. 77,102 27,481
Deferred income taxes....................................... 466 (487)
Other....................................................... 731 (471)
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable......................................... (108,873) (65,340)
Prepaid expenses and other current assets................... (8,468) (1,506)
Other assets................................................ 2,453 (771)
Accounts payable and accrued expenses....................... 36,173 9,312
Deferred revenue............................................ 53,330 1,825
Income taxes................................................ 25,068 (10,433)
-------- --------
Net cash provided by operating activities.............. 334,538 103,867
-------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses................................................ (4,624) (709)
Property and equipment.................................... (19,304) (21,670)
Capitalized software...................................... (12,946) (10,686)
Investments:
Proceeds from maturity.................................... 217,479 53,465
Purchases................................................. (585,038) (134,230)
-------- --------
Net cash used in investing activities (404,433) (113,830)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options................. 13,948 14,871
Net proceeds from sale of common stock...................... 9,512 3,710
Payment of long term debt................................... (2,779) (3,890)
-------- --------
Net cash provided by financing activities.............. 20,681 14,691
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (49,214) 4,728
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 206,278 107,341
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $157,064 $112,069
======== ========
</TABLE>

See notes to condensed consolidated financial statements.

F-25
<PAGE> 72

COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1998

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
include the accounts of Compuware Corporation and its wholly owned subsidiaries
(collectively, the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.

In the opinion of management of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of the
results for the interim periods presented. These financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto for the year ended March 31, 1998 included in the Company's
Annual Report to Shareholders and the Company's Form 10-K filed with the
Securities and Exchange Commission.

NOTE 2 -- COMPUTATION OF EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
BASIC EPS:
Numerator: Net Income....................................... $225,895 $117,393
-------- --------
Denominator: Weighted-average common shares outstanding..... 365,212 349,906
-------- --------
Basic EPS................................................... $ 0.62 $ 0.34
======== ========
DILUTED EPS:
Numerator: Net Income....................................... $225,895 $117,393
-------- --------
Denominator: Weighted-average common shares outstanding..... 365,212 349,906
Dilutive effect of stock options............................ 36,264 34,410
-------- --------
Total shares................................................ 401,476 384,316
-------- --------
Diluted EPS................................................. $ 0.56 $ 0.31
======== ========
</TABLE>

NOTE 3 -- COMPREHENSIVE INCOME

Effective April 1, 1998, Compuware adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("Statement
130"). Statement 130 establishes standards for reporting and presenting
comprehensive income and its components in consolidated financial statements.
Comprehensive income is defined as net income plus the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. For the nine-month period ended December
31, 1998 and 1997, Compuware had

F-26
<PAGE> 73
COMPUWARE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NINE MONTHS ENDED DECEMBER 31, 1998

other comprehensive income resulting from foreign currency translation
adjustments. Comprehensive income for the nine-month period ended December 31,
1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Net income.................................................. $225,895 $117,393
Foreign currency translation adjustment, net of tax......... 233 (1,672)
-------- --------
Total comprehensive income........................... $226,128 $115,721
======== ========
</TABLE>

NOTE 4 -- ACQUISITIONS

In December 1998, the Company acquired certain software products from
Cardume Software Ltd. for $2,250,000 in cash and notes payable that are due
within one year. Of the total purchase price, $1,400,000 was allocated to
in-process research and development and in accordance with SFAS No. 2, this
amount was expensed as of the purchase date.

In October 1998, the Company acquired certain software products from Vireo
Software Inc., for $4,100,000 in cash and notes payable that are due within one
year. Of the total purchase price, $200,000 was allocated to in-process research
and development and in accordance with SFAS No. 2, this amount was expensed as
of the purchase date.

In July 1998, the Company acquired certain software products from
Centerline Software, Inc. for approximately $2,900,000 in cash and notes payable
that are due within one year. Of the total purchase price, $2,750,000 was
allocated to in-process research and development and in accordance with SFAS No.
2, this amount was expensed as of the purchase date.

NOTE 5 -- SUBSEQUENT EVENTS

On February 25, 1999, the Company's shareholders approved an increase in
the Company's authorized shares of Common Stock from 400,000,000 to
1,600,000,000 shares to permit a two for one stock split which was previously
approved by the Board of Directors. The stock split was effected by means of a
100% stock dividend as of March 1, 1999 to holders of record January 26, 1999.

The effect of the stock split has been retroactively reflected and all
references throughout the condensed consolidated financial statements to number
of shares and per share amounts have been restated to reflect the stock split.

F-27
<PAGE> 74

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 5,389
Legal Fees and Expenses..................................... 25,000
Accounting Fees and Expenses................................ 28,000
Printing.................................................... 32,000
Miscellaneous............................................... 4,611
-------
Total.................................................. $95,000
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article VI of the Bylaws of the Registrant provides for the indemnification
of the officers and directors of the Registrant in the manner authorized by the
Michigan Business Corporation Act. The Michigan Business Corporation Act
authorities a corporation, under certain circumstances, to indemnify its
directors and officers (including reimbursement for expenses incurred).
Reference is made to Exhibit 3.4 to this Registration Statement for the complete
text of Article VI of the Bylaws.

For provisions regarding the indemnification of the Registrant by the
Selling Shareholders, and the indemnification of the Selling Shareholders by the
Registrant, against certain liabilities, including liabilities under the
Securities Act of 1933, reference is made to Section 8 of the Registration
Rights Agreement, a form of which is filed as Exhibit 4.8 to this Registration
Statement.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In the three years preceding the filing of the Registration Statement,
Compuware has sold the following securities that were not registered under the
Securities Act:

On December 12, 1997, the Company issued 6,683,206 shares of its Common
Stock to the shareholders of Nu-Mega Technologies, Inc., pursuant to the terms
of an Agreement and Plan of Merger among Nu-Mega, certain shareholders of
Nu-Mega, Compuware Corporation, and Nusub Acquisition, Inc., a New Hampshire
corporation and wholly-owned subsidiary of Compuware.

On February 23, 1999, the Company issued 1,021,864 shares of its Common
Stock to the shareholders of M.I.S. International, Inc. and Simco International,
Inc., pursuant to the terms of an Agreement and Plan of Merger among Compuware
Corporation, CPWRT1, Inc., CPWRT2, Inc., M.I.S. International, Inc., Simco
International, Inc., Autoflex, Inc., and Michael M. Bahn, Mary C. Bahn 1999
Qualified Annuity Trust, Michael M. Bahn Revocable Trust Dated January 23, 1995,
Mary C. Bahn Revocable Trust Dated January 23, 1995, Michael J. Bahn, Marisa R.
Bahn, and Renee C. Phillips 1999 Qualified Annuity Trust.

The sale and issuance of the securities described above was deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, or Regulation D promulgated thereunder, as transactions by
an issuer not involving a public offering. The recipients of the securities in
each such transaction represented their intention to acquire the

II-1
<PAGE> 75

securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were placed on all share
certificates issued in such transactions.

ITEM 16. EXHIBITS

(a) Exhibits

<TABLE>
<C> <S>
2.1 Stock Exchange Agreement, dated as of March 16, 1994, by and
among Compuware Corporation, Uniface Holding B.V., the
Sellers therein and the Sellers' Agent (incorporated by
reference to the corresponding exhibit to the Registration
Statement on Form S-4, as amended, Registration No.
33-78822)
2.2 Agreement and Plan of Merger, dated February 23, 1999, among
Compuware Corporation, CPWRT1, Inc., CPWRT2, Inc., M.I.S.
International, Inc., Simco International, Inc., Autoflex,
Inc., and Michael M. Bahn, Mary C. Bahn 1999 Qualified
Annuity Trust, Michael M. Bahn Revocable Trust Dated January
23, 1995, Mary C. Bahn Revocable Trust Dated January 23,
1995, Michael J. Bahn, Marisa R. Bahn, and Renee C. Phillips
1999 Qualified Annuity Trust
3.4 Certificate of Restated Bylaws of Compuware, as amended
(incorporated by reference to the corresponding exhibit to
the Registration Statement on Form S-1, as amended,
Registration No. 33-53652)
4.7 Certificate of Amendment to the Restated Articles of
Incorporation (incorporated by reference to the
corresponding exhibit to the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997)
4.8 Registration Rights Agreement, dated February 23, 1999, by
and among Compuware Corporation, Michael J. Bahn, Marisa R.
Bahn, Renee C. Phillips 1999 Qualified Annuity Trust,
Michael M. Bahn Revocable Trust dated January 23, 1995, Mary
C. Bahn 1999 Qualified Annuity Trust and Mary C. Bahn
Revocable Trust dated January 23, 1995*
5.1 Opinion of Honigman Miller Schwartz and Cohn concerning the
legality of the securities being offered*
10.4 1992 Stock Option Plan.(1)
10.22 Promotion Agreement, dated March 1, 1990, and Amendment
dated December 26, 1990, between Computer Hockey Corporation
and the Company.(1)
10.23 Agreement, dated October 28, 1982, between Compuware Hockey
Club, L.P. and the Company, as amended.(1)
10.24 Promotion Agreement, dated September 8, 1992, between
Compuware Sports Corporation and the Company.(1)
10.31 Compuware Corporation Shareholder Agreement, dated November
5, 1992, among the Company and certain of its
shareholders.(2)
10.35 Fiscal 1993 Stock Option Plan.(1)
10.36 Stock Option Plan for Non-Employee Directors.(1)
10.50 Registration Rights Agreement dated as of March 16, 1994 by
and among the Company, Uniface Holding B.V., the Sellers
listed therein and the Sellers' Agent.(3)
10.58 Stockholders' Agreement, dated August 1, 1990, by and among
the Company and the Stockholders therein.(4)
</TABLE>

II-2
<PAGE> 76

<TABLE>
<C> <S>
10.59 Employment Agreement, dated as of April 1, 1995, between the Company and Peter Karmanos, Jr.(5)
10.60 Employment Agreement, dated as of April 1, 1995, between the Company and Joseph Nathan.(5)
10.61 Employment Agreement, dated as of April 1, 1995, between the Company and John Shevillo.(5)
10.64 Employment Agreement, dated as of April 1, 1995, between the Company and Stephen Fagan.(5)
10.65 Employment Agreement, dated as of April 1, 1995, between the Company and Henry Jallos.(5)
10.66 Employment Agreement, dated as of April 1, 1995, between the Company and Denise Knobblock.(5)
10.68 Amended and Restated Revolving Loan Agreement.(5)
10.69 Agreement and Plan of Reorganization dated as of October 17, 1995 between CoroNet Systems, Inc. and
the Company.(6)
10.70 Escrow Agreement made as of October 17, 1995 between CoroNet Systems, Inc., the Company and the
Escrow Agent.(6)
10.71 Agreement and Plan of Merger, dated as of January 10, 1996, between the Company and Technalysis
Corporation.(7)
10.72 Agreement and Plan of Merger, dated as of May 31, 1996, between Adams & Reynolds & Company and the
Company.(8)
10.73 Agreement for the Sale and Purchase of the Issued Share Capital of Direct Technology Limited dated
May 1996.(8)
10.74 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Peter
Karmanos, Jr.(9)
10.75 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Joseph A.
Nathan.(9)
10.76 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and John N.
Shevillo.(9)
10.78 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Henry A.
Jallos.(9)
10.79 Amendment to Employment Agreement, dated as of April 1, 1996, between the Company and Stephen H.
Fagan.(9)
10.80 Employment Agreement, dated as of April 1, 1995, between the Company and Laura Fournier.(10)
10.81 Employment Agreement, dated as of April 1, 1995, between the Company and its subsidiaries and
affiliates, and Phyllis Recca.*
10.82 Fiscal 1998 Stock Option Plan(11)
10.83 Fiscal 1999 Stock Option Plan*
23.1 Independent Auditors' Consent and Report on Schedule
23.2 Consent of Honigman Miller Schwartz and Cohn (contained in their opinion filed as Exhibit 5.1)
</TABLE>

II-3
<PAGE> 77

<TABLE>
<C> <S>
24.1 Power of Attorney (included after the signature of the Registrant contained on page II-6 of this
Registration Statement)*
</TABLE>

- -------------------------

* Previously filed

(1) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-1, as amended (Registration No. 33-53652).

(2) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-1, as amended (Registration No. 33-63400).

(3) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-4, as amended (Registration No. 33-78822).

(4) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-3, as amended (Registration No. 33-82734).

(5) Incorporated by reference to the corresponding exhibit to the 1995 Annual
Report on Form 10-K.

(6) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1995.

(7) Incorporated by reference to the corresponding exhibit to the Quarterly
Report on Form 10-Q for the quarterly period ended December 31, 1995.

(8) Incorporated by reference to the corresponding exhibit to the 1996 Annual
Report on Form 10-K.

(9) Incorporated by reference to the corresponding exhibit to the 1997 Annual
Report on Form 10-K.

(10) Incorporated by reference to the corresponding exhibit to the 1998 Annual
Report on Form 10-K.

(11) Incorporated by reference to the corresponding exhibit to the Registration
Statement on Form S-3, as amended (Registration No. 333-43915)

ITEM 16.

(b) Schedule

Schedule II -- Valuation and Qualifying Accounts

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under "Item 14
Indemnification of Directors and Officers" above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

II-4
<PAGE> 78

(b) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and

(4) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of Prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

II-5
<PAGE> 79

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Farmington Hills, State of Michigan, on
May 5, 1999.

COMPUWARE CORPORATION

By: /s/ THOMAS COSTELLO, JR.

------------------------------------
Thomas Costello, Jr.
Vice President,
General Counsel and Secretary

Each person whose signature appears below hereby appoints Thomas Costello,
Jr. his or her true and lawful attorney-in-fact, with power to act and with full
power of substitution, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to the Registration Statement and file the
same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agents, or their substitutes,
may lawfully cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<S> <C> <C> <C>
* Chairman of the Board, Chief May 5, 1999
------------------------------------------------ Executive Officer and Director
Peter Karmanos, Jr. (Principal Executive Officer)

* Vice Chairman of the Board and May 5, 1999
------------------------------------------------ Director
Thomas Thewes

* President, Chief Operating May 5, 1999
------------------------------------------------ Officer and Director
Joseph A. Nathan

* Senior Vice President, Chief May 5, 1999
------------------------------------------------ Financial Officer and Treasurer
Laura L. Fournier (Principal Financial Officer
and Principal Accounting
Officer)

* Director May 5, 1999
------------------------------------------------
W. James Prowse

* Director May 5, 1999
------------------------------------------------
Bernard M. Goldsmith

* Director May 5, 1999
------------------------------------------------
William O. Grabe
</TABLE>

II-6
<PAGE> 80

<TABLE>
<S> <C> <C> <C>
* Director May 5, 1999
------------------------------------------------
William R. Halling

* Director May 5, 1999
------------------------------------------------
G. Scott Romney

* Director May 5, 1999
------------------------------------------------
Lowell Weicker, Jr.

* Director May 5, 1999
------------------------------------------------
Elaine K. Didier

* Director May 5, 1999
------------------------------------------------
Elizabeth A. Chappell

*By: /s/ Thomas Costello, Jr.
-----------------------------------------
Attorney-in-fact
</TABLE>

II-7
<PAGE> 81

COMPUWARE CORPORATION AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MARCH 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- -------------------------- ------------ ----------
ADDITIONS
--------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER (1) BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- ---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended March 31, 1998............. $6,941 $7,260 $5,389 $8,812
Year ended March 31, 1997............. 5,244 5,106 3,409 6,941
Year ended March 31, 1996............. 1,605 7,355 3,716 5,244
</TABLE>

- -------------------------
(1) Write-off of uncollectible accounts, product maintenance cancellations and
service cost overruns.

S-1
<PAGE> 82

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
2.1 Stock Exchange Agreement, dated as of March 16, 1994, by and
among Compuware Corporation, Uniface Holding B.V., the
Sellers therein and the Sellers' Agent (incorporated by
reference to the corresponding exhibit to the Registration
Statement on Form S-4, as amended, Registration No.
33-78822)
2.2 Agreement and Plan of Merger, dated February 23, 1999, among
Compuware Corporation, CPWRT1, Inc., CPWRT2, Inc., M.I.S.
International, Inc., Simco International, Inc., Autoflex,
Inc., and Michael M. Bahn, Mary C. Bahn 1999 Qualified
Annuity Trust, Michael M. Bahn Revocable Trust Dated January
23, 1995, Mary C. Bahn Revocable Trust Dated January 23,
1995, Michael J. Bahn, Marisa R. Bahn, and Renee C. Phillips
1999 Qualified Annuity Trust
3.4 Certificate of Restated Bylaws of Compuware, as amended
(incorporated by reference to the corresponding exhibit to
the Registration Statement on Form S-1, as amended,
Registration No. 33-53652)
4.7 Certificate of Amendment to the Restated Articles of
Incorporation (incorporated by reference to the
corresponding exhibit to the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997)
4.8 Registration Rights Agreement, dated February 23, 1999, by
and among Compuware Corporation, Michael J. Bahn, Marisa R.
Bahn, Renee C. Phillips 1999 Qualified Annuity Trust,
Michael M. Bahn Revocable Trust dated January 23, 1995, Mary
C. Bahn 1999 Qualified Annuity Trust and Mary C. Bahn
Revocable Trust dated January 23, 1995*
5.1 Opinion of Honigman Miller Schwartz and Cohn concerning the
legality of the securities being offered*
10.4 1992 Stock Option Plan.(1)
10.22 Promotion Agreement, dated March 1, 1990, and Amendment
dated December 26, 1990, between Computer Hockey Corporation
and the Company.(1)
10.23 Agreement, dated October 28, 1982, between Compuware Hockey
Club, L.P. and the Company, as amended.(1)
10.24 Promotion Agreement, dated September 8, 1992, between
Compuware Sports Corporation and the Company.(1)
10.31 Compuware Corporation Shareholder Agreement, dated November
5, 1992, among the Company and certain of its
shareholders.(2)
10.35 Fiscal 1993 Stock Option Plan.(1)
10.36 Stock Option Plan for Non-Employee Directors.(1)
10.50 Registration Rights Agreement dated as of March 16, 1994 by
and among the Company, Uniface Holding B.V., the Sellers
listed therein and the Sellers' Agent.(3)
10.58 Stockholders' Agreement, dated August 1, 1990, by and among
the Company and the Stockholders therein.(4)
10.59 Employment Agreement, dated as of April 1, 1995, between the
Company and Peter Karmanos, Jr.(5)
10.60 Employment Agreement, dated as of April 1, 1995, between the
Company and Joseph Nathan.(5)
</TABLE>

<PAGE> 83

<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
10.61 Employment Agreement, dated as of April 1, 1995, between the
Company and John Shevillo.(5)
10.64 Employment Agreement, dated as of April 1, 1995, between the
Company and Stephen Fagan.(5)
10.65 Employment Agreement, dated as of April 1, 1995, between the
Company and Henry Jallos.(5)
10.66 Employment Agreement, dated as of April 1, 1995, between the
Company and Denise Knobblock.(5)
10.68 Amended and Restated Revolving Loan Agreement.(5)
10.69 Agreement and Plan of Reorganization dated as of October 17,
1995 between CoroNet Systems, Inc. and the Company.(6)
10.70 Escrow Agreement made as of October 17, 1995 between CoroNet
Systems, Inc., the Company and the Escrow Agent.(6)
10.71 Agreement and Plan of Merger, dated as of January 10, 1996,
between the Company and Technalysis Corporation.(7)
10.72 Agreement and Plan of Merger, dated as of May 31, 1996,
between Adams & Reynolds & Company and the Company.(8)
10.73 Agreement for the Sale and Purchase of the Issued Share
Capital of Direct Technology Limited dated May 1996.(8)
10.74 Amendment to Employment Agreement, dated as of April 1,
1996, between the Company and Peter Karmanos, Jr.(9)
10.75 Amendment to Employment Agreement, dated as of April 1,
1996, between the Company and Joseph A. Nathan.(9)
10.76 Amendment to Employment Agreement, dated as of April 1,
1996, between the Company and John N. Shevillo.(9)
10.78 Amendment to Employment Agreement, dated as of April 1,
1996, between the Company and Henry A. Jallos.(9)
10.79 Amendment to Employment Agreement, dated as of April 1,
1996, between the Company and Stephen H. Fagan.(9)
10.80 Employment Agreement, dated as of April 1, 1995, between the
Company and Laura Fournier.(10)
10.81 Employment Agreement, dated as of April 1, 1995, between the
Company and its subsidiaries and affiliates, and Phyllis
Recca.*
10.82 Fiscal 1998 Stock Option Plan(11)
10.83 Fiscal 1999 Stock Option Plan*
23.1 Independent Auditors' Consent and Report on Schedule
23.2 Consent of Honigman Miller Schwartz and Cohn (contained in
their opinion filed as Exhibit 5.1)
24.1 Power of Attorney (included after the signature of the
Registrant contained on page II-6 of this Registration
Statement)*
</TABLE>

<PAGE> 84