YEARS ENDED MARCH 31, 1999, 1998 AND 1997

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 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, 1999 and 1998 and the results of operations for the years ended March 31, 1999, 1998 and 1997. While management has based their assumptions and estimates on the facts and circumstances known at March 31, 1999, 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. Product maintenance fees are recognized as revenue ratably over the contract period. Professional services fees are recognized in the period the services are performed. 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 did not have a material impact on the Company's financial statements.

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, U.S. Government agencies and tax free and advantage auction rate securities. All are classified as held-to-maturity and carried at amortized cost. 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 is stated at the lower of unamortized cost or net realizable value. Net purchased software included in capitalized software at March 31, 1999 and 1998 is $12,396,000 and $14,249,000, 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 internally by the Company were $76,831,000, $65,015,000 and $54,292,000 in fiscal 1999, 1998 and 1997, respectively, of which $11,874,000, $10,599,000 and $9,798,000, 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 Statement 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 and accounts payable 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 occurred. Translation adjustments have been excluded from the results of operations and are reported as accumulated other comprehensive income.

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 or buy 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 loss was $2,944,000, $627,000 and $1,446,000 for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. These amounts are included in "Sales and marketing" in the Statement of Income.

At March 31, 1999, the Company had contracts maturing through May 1999 to sell $27,993,000 in foreign currencies. At March 31, 1998, the Company had contracts maturing through May 1998 to sell $45,478,000 in foreign currencies.

Earnings Per Share - The Company calculates its earnings per share under the provisions of SFAS No. 128, "Earnings per Share." Basic EPS is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS assumes the issuance of common stock for all potentially dilutive equivalent shares outstanding.

Business Segments - Effective March 31, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 superseded SFAS 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect the results of operations or financial position, but did affect the disclosure of segment information. Segment information for all periods has been presented to conform to SFAS 131 requirements. See note 9.

Comprehensive Income - During fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS 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.

Recently Issued Accounting Pronouncements - In December 1998, the American Institute of Certified Public Accountants ("AICPA") released SOP 98-9, which modified SOP 97-2 with respect to certain transactions. SOP 98-9 provides guidance on recognizing revenue on software transactions which involve multiple elements (such as license fees and maintenance) and is effective for the Company beginning with the quarter ending June 30, 1999. The Company is continuing to evaluate the effect of SOP 98-9 on the Company's existing revenue recognition policies; however, the Company does not currently believe there will be a material impact on its operating results from implementation of the SOP.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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.

  Annual Report 1999