---

---

UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

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

For the Quarterly
Period Ended May 31, 2006

OR

[   ] 
   TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT
OF 1934 
For The Transition
Period From _________ To ________

Commission File Number
0-16006

COGNOS INCORPORATED(Exact Name Of
Registrant As Specified In Its Charter)

|CANADA                          | 98-0119485                       
|------------------------------- | ---------------------------------
|(State Or Other Jurisdiction Of | (IRS Employer Identification No.)
|Incorporation Or Organization) 

|3755 Riverside Drive, 
P.O. Box 9707, Station T, 
Ottawa, Ontario, Canada(Address Of Principal Executive
Offices) | K1G 4K9(Zip Code)
|----------------------------------------------------------------------------------------------------------------- | -----------------

(613) 738-1440(Registrants
Telephone Number, Including Area Code)

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

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
 and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer X    Accelerated filer
  Non-accelerated filer

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). 
YES     NO
X

The number of shares outstanding of
the registrants only class of Common Stock as of July 14, 2006, was 89,722,222.

---

---

# COGNOS INCORPORATED

# INDEX

|PAGE                          
|------------------------------
|PART I  FINANCIAL
INFORMATION
|                              
|Item 1.                       
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|Item 2.                       
|                              
|Item 3.                       
|                              
|Item 4.                       
|                              
|PART II  OTHER INFORMATION   
|                              
|Item 1a.                      
|                              
|Item 2.                       
|                              
|Item 5.                       
|                              
|Item 6.                       
|                              
|Signature                     

2

---

PART I  FINANCIAL
INFORMATION

|Item 1. |  | Consolidated Financial Statements
|------- |  | ---------------------------------

COGNOS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(US$000s except share amounts, U.S. GAAP)
(Unaudited)

|                                                      |  | Three months ended May 31,
|----------------------------------------------------- |  | --------------------------
|                                                      |  | 2006                      
|                                                     
|Revenue                                               |  |                           
|Product license                                       |  | $  73,735                 
|Product support                                       |  | 100,181                   
|Services                                              |  | 43,124                    
|                                                     
|Total revenue                                         |  | 217,040                   
|                                                     
|Cost of revenue                                       | 
|Cost of product license                               |  | 1,757                     
|Cost of product support                               |  | 11,227                    
|Cost of services                                      |  | 37,516                    
|                                                     
|Total cost of revenue                                 |  | 50,500                    
|                                                     
|Gross margin                                          |  | 166,540                   
|                                                     
|Operating expenses                                    | 
|Selling, general, and administrative                  |  | 117,592                   
|Research and development                              |  | 33,279                    
|Amortization of acquisition-related intangible assets |  | 1,701                     
|                                                     
|Total operating expenses                              |  | 152,572                   
|                                                     
|Operating income                                      |  | 13,968                    
|Interest and other income, net                        |  | 5,011                     
|                                                     
|Income before taxes                                   |  | 18,979                    
|Income tax provision                                  |  | 4,441                     
|                                                     
|Net income                                            |  | $  14,538                 
|                                                     
|Net income per share                                  | 
|Basic                                                 |  | $0.16                     
|                                                     
|Diluted                                               |  | $0.16                     
|                                                     
|Weighted average number of shares (000s)              | 
|Basic                                                 |  | 89,893                    
|                                                     
|Diluted                                               |  | 90,825                    
|                                                     

(See accompanying notes)

3

---

COGNOS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(US$000s except share amounts, U.S. GAAP)
(Unaudited)

|                                                                    |  | May 31,2006   |   | February 28,2006 |  
|------------------------------------------------------------------- |  | ------------- | - | ---------------- | -
|                                                                   
|Assets                                                              |  |               |   |                  |  
|Current assets                                                      | 
|Cash and cash equivalents                                           |  | $    337,178  |   | $    398,634     |  
|Short-term investments                                              |  | 273,006       |   | 152,368          |  
|Accounts receivable                                                 |  | 139,974       |   | 216,850          |  
|Income taxes receivable                                             |  | 5,670         |   | 1,363            |  
|Prepaid expenses and other current assets                           |  | 26,044        |   | 31,978           |  
|Deferred tax assets                                                 |  | 11,748        |   | 12,936           |  
|                                                                   
|                                                                    |  | 793,620       |   | 814,129          |  
|Fixed assets, net                                                   |  | 79,315        |   | 75,821           |  
|Intangible assets, net                                              |  | 20,507        |   | 22,125           |  
|Other assets                                                        |  | 5,868         |   | 6,096            |  
|Deferred tax assets                                                 |  | 6,440         |   | 6,928            |  
|Goodwill                                                            |  | 225,709       |   | 225,709          |  
|                                                                   
|                                                                    |  | $ 1,131,459   |   | $ 1,150,808      |  
|                                                                   
|Liabilities                                                         | 
|Current liabilities                                                 | 
|Accounts payable                                                    |  | $      27,807 |   | $      33,975    |  
|Accrued charges                                                     |  | 33,429        |   | 30,799           |  
|Salaries, commissions, and related items                            |  | 60,611        |   | 73,229           |  
|Income taxes payable                                                |  | 2,928         |   | 6,009            |  
|Deferred income taxes                                               |  | 5,868         |   | 4,118            |  
|Deferred revenue                                                    |  | 233,468       |   | 246,562          |  
|                                                                   
|                                                                    |  | 364,111       |   | 394,692          |  
|Deferred income taxes                                               |  | 32,735        |   | 30,344           |  
|                                                                   
|                                                                    |  | 396,846       |   | 425,036          |  
|                                                                   
|Stockholders' Equity                                                | 
|Capital stock                                                       | 
|Common shares and additional paid-in capital                        | 
|(May 31, 2006 - 89,711,171; February 28, 2006 - 89,826,706)         |  | 455,451       |   | 439,680          |  
|Treasury shares (May 31, 2006 - 46,989; February 28, 2006 - 55,970) |  | (1,237        | ) | (1,563           | )
|Retained earnings                                                   |  | 274,703       |   | 283,168          |  
|Accumulated other comprehensive income                              |  | 5,696         |   | 4,487            |  
|                                                                   
|                                                                    |  | 734,613       |   | 725,772          |  
|                                                                   
|                                                                    |  | $ 1,131,459   |   | $ 1,150,808      |  
|                                                                   

(See accompanying notes)

4

---

COGNOS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, U.S. GAAP)
(Unaudited)

|                                                                  |  | Three months ended May 31, |  
|----------------------------------------------------------------- |  | -------------------------- | -
|                                                                 
|                                                                  |  | 2006                       |  
|                                                                 
|Cash flows from operating activities                              |  |                            |  
|Net income                                                        |  | $   14,538                 |  
|Non-cash items                                                    | 
|Depreciation and amortization                                     |  | 7,240                      |  
|Stock-based compensation                                          |  | 5,157                      |  
|Deferred income taxes                                             |  | 5,181                      |  
|Loss on disposal of fixed assets                                  |  | 139                        |  
|                                                                 
|                                                                  |  | 32,255                     |  
|Change in non-cash working capital                                | 
|Decrease in accounts receivable                                   |  | 81,140                     |  
|Increase in income tax receivable                                 |  | (4,307                     | )
|Decrease in prepaid expenses and other current assets             |  | 6,891                      |  
|Decrease in accounts payable                                      |  | (7,027                     | )
|Increase (decrease) in accrued charges                            |  | 1,600                      |  
|Decrease in salaries, commissions, and related items              |  | (14,825                    | )
|Decrease in income taxes payable                                  |  | (3,355                     | )
|Decrease in deferred revenue                                      |  | (19,732                    | )
|                                                                 
|Net cash provided by (used in) operating activities               |  | 72,640                     |  
|                                                                 
|Cash flows from investing activities                              | 
|Maturity of short-term investments                                |  | 112,615                    |  
|Purchase of short-term investments                                |  | (232,636                   | )
|Additions to fixed assets                                         |  | (6,371                     | )
|Additions to intangible assets                                    |  | (326                       | )
|Decrease in other assets                                          |  | 269                        |  
|Acquisition costs, net of cash and cash equivalents               |  | --                         |  
|                                                                 
|Net cash provided by (used in) investing activities               |  | (126,449                   | )
|                                                                 
|Cash flows from financing activities                              | 
|Issue of common shares                                            |  | 12,935                     |  
|Repurchase of shares                                              |  | (24,998                    | )
|                                                                 
|Net cash used in financing activities                             |  | (12,063                    | )
|                                                                 
|Effect of exchange rate changes on cash                           |  | 4,416                      |  
|                                                                 
|Net decrease in cash and cash equivalents                         |  | (61,456                    | )
|Cash and cash equivalents, beginning of period                    |  | 398,634                    |  
|                                                                 
|Cash and cash equivalents, end of period                          |  | 337,178                    |  
|Short-term investments, end of period                             |  | 273,006                    |  
|                                                                 
|Cash, cash equivalents, and short-term investments, end of period |  | $ 610,184                  |  
|                                                                 

(See accompanying notes)

5

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

|1. |  | Basis
of Presentation
|-- |  | ---------------------

| | The
accompanying unaudited consolidated financial statements have been prepared by the
Corporation in United States (U.S.) dollars and in accordance with
generally accepted accounting principles (GAAP) in the U.S. with
respect to interim financial statements, applied on a basis consistent in all material
respects with those applied in the Corporations Annual Report on Form 10-K for the
year ended February 28, 2006 except for the adoption of Financial Accounting Standards
Board (FASB) Statement No. 123 (revised), Share-based Payment (FAS
123R) which has been retrospectively applied. These consolidated financial
statements do not include all of the information and footnotes required for compliance
with GAAP in the U.S. for annual financial statements. These unaudited condensed notes to
the consolidated financial statements should be read in conjunction with the audited
financial statements and notes included in the Corporations Annual Report on Form
10-K for the fiscal year ended February 28, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
preparation of these unaudited consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the accompanying notes. In particular,
management makes judgments related to, among other things, revenue recognition,
stock-based compensation, the allowance for doubtful accounts, income taxes, business
acquisitions and the related goodwill, intangibles and restructuring accrual, and the
impairment of goodwill and long-lived assets. In the opinion of management, these
unaudited consolidated financial statements reflect all adjustments (which include only
normal, recurring adjustments) necessary to present fairly the results for the periods
presented. Actual results could differ from these estimates and the operating results for
the interim periods presented are not necessarily indicative of the results expected for
the full year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Revenue
Recognition
|-- |  | -------------------

| | The
Corporation recognizes revenue in accordance with Statement of Position (SOP)
97-2, Software Revenue Recognition as amended by SOP 98-9, Software
Revenue Recognition with Respect to Certain Arrangements (collectively SOP
97-2) issued by the American Institute of Certified Public Accountants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation recognizes revenue only when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectibility is probable. For contracts with multiple
obligations, the Corporation allocates revenue to the undelivered elements of a
contract based on vendor specific objective evidence (VSOE) of
the fair value of those elements and allocates revenue to the delivered elements,
principally license revenue, using the residual method as described in SOP 97-2.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Substantially
all of the Corporations product license revenue is earned from licenses of
off-the-shelf software requiring no customization. If a license includes the right
to return the product for refund or credit, revenue is deferred, until the right of
return lapses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from post-contract customer support (PCS) contracts is recognized
ratably over the life of the contract, typically 12 months. Incremental costs
directly attributable to the acquisition of PCS contracts, which would not have been
incurred but for the acquisition of that contract, are deferred and expensed in
the period the related revenue is recognized. These costs include commissions
payable on sales of support contracts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | Many
of the Corporations sales include both software and services. The services are not
essential to the functionality of any other element of the transaction and are
stated separately such that the total price of the arrangement is expected to vary as a
result of the inclusion or exclusion of the service. Accordingly services revenue
from education, consulting, and other services is recognized at the time such
services are rendered, and the software element is accounted for separately from the
service element.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
required by SOP 97-2, the Corporation establishes VSOE of fair value for each element of
a contract with multiple elements (i.e., delivered and undelivered products,
support obligations, education, consulting, and other services). The Corporation determines
VSOE for service elements based on the normal pricing and discounting practices for those
elements when they are sold separately. For PCS, VSOE of fair value is based on
the PCS rates contractually agreed to with customers, if the rate is consistent
with our customary pricing practices. Absent a stated PCS rate, a consistent rate which
represents the price when PCS is sold separately based on PCS renewals is used.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have historically used two forms of contract terms regarding PCS: contracts which include
a stated PCS rate (either a stated renewal rate or a stated rate for the first
year PCS bundled with the software license); and contracts which do not state a PCS rate.
For contracts which include a stated renewal rate, we use the contractually stated
renewal rate to allocate arrangement consideration to the undelivered PCS at the
inception of the arrangement and recognize such consideration ratably over the PCS term
provided that the stated rate is substantive and consistent with our customary pricing practices.
Historically,
there has been a high correlation between the amounts allocated
to PCS in the initial software licensing arrangement for such arrangements and the amounts at which PCS
is renewed.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
contracts that have a stated first year PCS rate, we use such stated prices to allocate
arrangement consideration to the undelivered PCS at the inception of the
arrangement and recognize such consideration ratably over the PCS term, provided that it
is substantive and consistent with our customary pricing practices, as this is typically the rate
at which PCS will be renewed. Historically, there has been a high correlation between the amounts allocated
to PCS in the initial software licensing arrangement for such arrangements and the amounts at which PCS
is renewed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
contracts which do not state a PCS rate, we allocate a consistent percentage of the license fee to PCS in the first
year of such arrangements based on a substantive rate at which our customer experience indicates customers will
typically agree to renew PCS. Historically, there has been a high correlation
between the mean of amounts allocated to PCS in the initial software licensing arrangement for
such arrangements and the mean of amounts at which PCS is renewed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
stratify our customers into three classes in determining VSOE of fair value for PCS. The
classifications are based on the amount of software license business (i.e.,
software license revenues), life-to-date, that has previously been obtained from the respective
customers. For each class of customer, a range of prices exists which represents VSOE of
fair value for PCS for that class of customer.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
PCS in individual arrangements is stated below the lower limits of our acceptable ranges
by customer class, we adjust the percentage allocated for support upwards to the
low end of the applicable range by customer class. This adjustment allocates additional
revenue from license revenue to deferred PCS revenue which is amortized over the life of
the PCS contract, which is typically one year. If the stated PCS is above the
reasonable range, no adjustment is made and the deferred PCS revenue is measured
at the contracted percentage.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | The
Corporation recognizes revenue for resellers in a similar manner to revenue for
end-users. The Corporation recognizes revenue on physical transfer of the master
copy to the reseller if the license fee is a one-time up-front fixed irrevocable payment
and all other revenue recognition criteria have been met. If there are multiple
license fee payments based on the number of copies made or ordered, delivery
occurs and revenue is recognized when the copies are licensed and delivered to an
end-user. It is the Corporations general business practice not to offer or
agree to exchanges or returns with resellers. If a reseller is newly formed,
undercapitalized or in financial difficulty, or if uncertainties about the number of
copies to be sold by the reseller exist, revenue is deferred and recognized when
cash is received if all other revenue recognition criteria have been met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Stock-Based
Compensation
|-- |  | ------------------------

| | The
Corporation adopted FAS 123R on March 1, 2006 to account for its stock option, stock
purchase, deferred share, and restricted share unit plans. This standard addresses the
accounting for share-based payment transactions in which a corporation receives employee
services in exchange for either equity instruments of the corporation or liabilities that
are based on the fair value of the corporations equity instruments or that may be
settled by the issuance of such equity instruments. Under this standard, companies are
required to account for such transactions using a fair value method and recognize the
expense over the requisite service period of the award in the consolidated statements of
income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation previously accounted for share-based compensation transactions using the
intrinsic value method in accordance with Accounting Principles Board (APB) Opinion
25, Accounting for Stock Issued to Employees (APB 25) and
provided the pro forma disclosures prescribed by FASB Statement No. 123, Accounting
for Stock-based Compensation (FAS 123), the
predecessor to FAS 123R. Except for certain acquisition-related options, the exercise
price of all stock options is equal to the closing market price of the stock on the trading day
preceding the date of grant. Accordingly, with the exception of certain
acquisition-related compensation and awards granted under the Corporations deferred
share and restricted share unit plans, no compensation cost had been recognized in the
financial statements prior to fiscal 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation has elected the modified retrospective method of transition provided by FAS
123R and, accordingly, financial statement amounts for all prior periods presented herein
reflect results as if the fair value method of expensing had been applied on a basis
consistent with the pro forma disclosures required in those periods by FAS 123.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin No. 107, Share-based Payment (SAB 107)
regarding the application of FAS 123R. The Corporation has applied the provisions of SAB
107 in its adoption of FAS 123R.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | The
following tables set forth the increase (decrease) to the Corporations consolidated
statements of income and balance sheets as a result of the adoption of FAS 123R for the
three months ended May 31, 2005 and for the years ended February 28, 2006 and 2005:
(000s, except per share amounts)
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Impact of Change for Adoption of FAS 123R
| | -------------------------------- | -----------------------------------------
| |                                 
| |                                  | For the three months ended May 31, 2005  
| |                                  | February 28,2006                         
| |                                 
| | Consolidated Statement of Income |                                          
| | Operating Income                 |                                          
| | Net income                       |                                          
| | Net income per share (basic)     |                                          
| | Net income per share (diluted)   |                                          

| |                                      | Impact of Change for Adoption ofFAS 123R
| | ------------------------------------ | ----------------------------------------
| |                                     
| |                                      | February 28,2006                        
| |                                     
| | Consolidated Balance Sheet           |                                         
| | Deferred income tax asset            |                                         
| |                                     
| | Stockholders' equity:                |                                         
| | Common shares and additional paid-in |                                         
| | capital                              |                                         
| | Deferred stock-based compensation    |                                         
| | Retained Earnings                    |                                         
| |                                     
| |                                      |                                         
| |                                     

| | The
Corporation uses the straight-line attribution method to recognize share-based
compensation costs over the requisite service period of the award for its stock option
plans and the graded attribution method for its performance-based restricted share unit
plan. Stock-based compensation expense is recorded in cost of support, cost of services,
selling, general and administrative expenses or research and development expenses,
depending on the employees job function.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
recording compensation cost for equity awards, FAS 123R requires corporations to estimate
the number of equity awards granted that are expected to be forfeited. Prior to the
adoption of FAS 123R, the Corporation recognized forfeitures when they occurred, rather
than using an estimate at the grant date and subsequently adjusting the estimated
forfeitures to reflect actual forfeitures.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | Stock-based
compensation expense recognized for the three months ended May 31, 2006 and 2005 is as
follows:
| | -----------------------------------------------------------------------------------------------------------

| |                                     |  | Three months endedMay 31,
| | ----------------------------------- |  | -------------------------
| |                                    
| |                                     |  | 2006                     
| |                                    
| |                                     |  | ($000s)                  
| | Compensation cost recognized        |  |                          
| | Cost of Product Support             |  | $     96                 
| | Cost of Services                    |  | 187                      
| | Selling, General and Administrative |  | 4,304                    
| | Research and Development            |  | 491                      
| |                                    
| | Total                               |  | 5,078                    
| | Tax benefit recognized              |  | (931                     
| |                                    
| | Net Stock-based Compensation Cost   |  | $4,147                   
| |                                    

| | Stock
Options
| | -------------

| | The
fair value of the options granted after March 1, 2005 was estimated at the date of grant
using a binomial lattice option-pricing model. Prior to March 1, 2005, the Corporation
used the Black-Scholes option-pricing model to estimate the fair value of options at the
grant date. The following weighted average assumptions were used for options granted
during the following periods:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  |  | Three months endedMay 31,
| | -------------------------------- |  | -------------------------
| |                                 
| |                                  |  | 2006                     
| |                                 
| | Risk-free interest rates         |  | 4.7                      
| | Expected volatility              |  | 33                       
| | Dividend yield                   |  | 0                        
| | Expected life of options (years) |  | 3.7                      

| | Expected
volatilities are based on historical volatility of the Corporations stock, implied
volatilities from traded options on the Corporations stock, and other relevant
factors. The Corporation uses historical data to estimate option exercise and employee
termination within the valuation model. Separate groups of employees that have similar
exercise behavior and turnover rates are considered separately for valuation purposes.
The expected life of the options granted is derived from the output of the option
valuation model and represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of the option are
determined by the US Treasury yields for US dollar options and the Government of Canada
benchmark bond yields for Canadian dollar options in effect at the time of the grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | Options
outstanding that have vested and are expected to vest as of May 31, 2006 are as follows:
| | ------------------------------------------------------------------------------------------------

| |                            | Number of
Awards
(000s) | Weighted
average
exercise
price
(in $) | Aggregate
intrinsic value(1)($000s) | Weighted-average
remaining
contractual term
(in years) | 
| | -------------------------- | ----------------------- | -------------------------------------- | ----------------------------------- | ------------------------------------------------------ | 
| |                           
| | Outstanding, March 1, 2006 |                         | 11,255                                 |                                     | $32.60                                                 | 
| | Granted                    |                         | 76                                     |                                     | 38.88                                                  | 
| | Cancelled                  |                         | (138                                   | )                                   | 33.97                                                  | 
| | Exercised                  |                         | (513                                   | )                                   | 23.43                                                  | 
| |                            |                         |                                       
| | Outstanding, May 31, 2006  |                         | 10,680                                 |                                     | 33.97                                                  | 
| |                            |                         |                                       
| | Exercisable, May 31, 2006  |                         | 6,687                                  |                                     | 33.01                                                  | 
| | Unvested, May 31, 2006     |                         | 3,993                                  |                                     | 35.58                                                  | 

| | (1) |  | The
intrinsic value of an option represents the amount by which the market value
               of the stock exceeds the exercise price of the option of in-the-money
options                only. The aggregate intrinsic value is based on the closing price
of $38.25 and                $30.66 for the Corporations stock on the NASDAQ on
February 28, 2006 and                May 31, 2006, respectively.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Additional
information with respect to stock option activity is as follows:
| | ---------------------------------------------------------------------------

| |                           | Number of
Awards
(in 000s) | Weighted-average
grant date
fair value
(in $)
| | ------------------------- | -------------------------- | ---------------------------------------------
| |                          
| | Unvested at March 1, 2006 |                            | 4,594                                        
| | Granted                   |                            | 76                                           
| | Vested                    |                            | (577                                         
| | Forfeited                 |                            | (100                                         
| |                           |                            |                                              
| | Unvested at May 31, 2006  |                            | 3,993                                        
| |                           |                            |                                              

| | The
weighted-average grant date fair value of options granted during the three month period
ended May 31, 2006 was $9.60 for a total fair value of $730,000. Options with a fair
value of $7,035,000 completed vesting during the three month period ended May 31, 2006.
The total intrinsic value of options exercised during the three month period ended May
31, 2006 was $8,029,000. The actual tax benefit realized for the tax deductions from
option exercises in certain jurisdictions and the deduction of stock-based compensation
in others for the three month period ended May 31, 2006 was $772,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of May 31, 2006, there was $35,569,000 of total unrecognized compensation cost related to
nonvested stock options; that cost is expected to be recognized over a weighted-average
period of 2.1 years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | Restricted
Share Unit Plan
| | --------------------------

| | The
Corporation also maintains a Restricted Share Unit Plan pursuant to which employees,
officers, and directors of the Corporation and its subsidiaries are eligible to
participate. Subject to performance and/or vesting provisions set out in each participants
award agreement, each restricted share unit (RSU) will be exchangeable
for one common share of the Corporation. Performance targets are based on company-wide
performance goals such as operating margin and revenue growth and may include indexes to
competitors performance. RSUs contingently vest over a period of 1 to 5 years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of each RSU is determined on the date of issue based on the value of the
Corporations stock on that day and is remeasured until the performance condition is
met or the shares are repurchased. The Corporation assumes that the performance goals
will be achieved according to the Corporations business plan approved by the Board
of Directors. Compensation cost will only be recognized to the extent that performance
goals are achieved.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
common shares for which RSUs may be exchanged will be purchased on the open market by a
trustee appointed and funded by the Corporation. As no common shares will be issued by
the Corporation pursuant to the plan, the plan is non-dilutive to existing shareholders.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Activity
in the RSU plan for the three month period ended May 31, 2006 was as follows:
| | --------------------------------------------------------------------------------------

| |                                    | RestrictedShareUnits | Weighted
average
Grant DayFair Value(1) | WeightedAverageRemainingContractTerm(in years) | AggregateIntrinsicValue |    
| | ---------------------------------- | -------------------- | --------------------------------------- | ---------------------------------------------- | ----------------------- | ---
| |                                   
| |                                    |                      | (000s)                                  |                                                |                         |    
| | Outstanding, March 1, 2006         |                      | 43                                      |                                                | $37                     | .05
| | Granted  vesting conditions  only |                      | 12                                      |                                                | 38                      | .58
| | Granted  performance  conditions  |                      | 178                                     |                                                | 30                      | .66
| | Vested                             |                      | (9                                      | )                                              | 30                      | .48
| | Forfeited                          |                      | --                                      |                                               
| |                                    |                      |                                        
| | Outstanding, May 31, 2006          |                      | 224                                     |                                                | $31                     | .68
| |                                    |                      |                                        

| | (1) |  | Fair
value of the Corporations stock at May 31, 2006 for RSUs granted with
          performance conditions.
| | --- |  | -------------------------------------------------------------------------------------------------------------

| | The
weighted-average grant date fair value of RSUs granted during the three month period
ended May 31, 2006 was $38.58. The fair value of performance based RSUs at May 31, 2006
was $30.66. The total intrinsic value of RSUs that vested during the three month period
ended May 31, 2006 was $339,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | As
of May 31, 2006, there was $6,214,000 of total unrecognized compensation cost related to
nonvested RSUs; that cost is expected to be recognized over a weighted-average period of
2.1 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation expects to purchase between 70,000 and 286,000 shares in the upcoming year to
meet RSU commitments if certain performance goals are achieved.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Employee
Stock Purchase Plan
| | ----------------------------

| | The
Corporation sponsors the Cognos Employee Stock Purchase Plan (ESPP). A
participant in the ESPP authorizes the Corporation to deduct an amount per pay period
that cannot exceed five (5) percent of annual target salary divided by the number of pay
periods per year. Deductions are accumulated during each of the Corporations fiscal
quarters (Purchase Period) and, on the first trading day following the
end of any Purchase Period, these deductions are applied toward the purchase of common
shares. The purchase price per share is ninety (90) percent of the lesser of the fair
market value of Cognos stock on the Toronto Stock Exchange as of the beginning and the
end of the Purchase Period. As the ESPP is considered a compensatory plan under FAS 123R,
the Corporation recognized $174,000 of ESPP compensation expense in the three-month
period ended May 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
Share Plan for Non-employee Directors
| | ----------------------------------------------

| | The
Corporation has established a deferred share plan for its non-employee directors (DSU
Plan). A DSU is a unit, equivalent in value to a share of the Corporation,
credited by means of a bookkeeping entry in the books of the Corporation to an account in
the name of the non-employee director. DSUs represent the variable (at risk) component of
the directors compensation. At the end of the directors tenure, the director
must redeem the DSUs and, at the option of the Corporation, is either (i) paid the market
value of the shares represented by the DSUs, or (ii) receives the whole number equivalent
of the number of DSUs in shares of the Corporation purchased on the open market. A
director is required to hold 5,000 DSUs which must be attained within three (3) years of
the director commencing service on the Board. At May 31, 2006, the Corporation had a
liability of $4,361,000 in relation to the DSU Plan based on the value of the Corporations
stock at that date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

|4. |  | Intangible
Assets
|-- |  | -----------------

| |                           |  | As at May 31,2006 | As at February 28,2006 
| | ------------------------- |  | ----------------- | -----------------------
| |                          
| |                           |  | Cost              | AccumulatedAmortization
| |                          
| |                           |  | ($000s)           | ($000s)                
| | Acquired technology       |  | $41,611           |                        
| | Contractual relationships |  | 9,654             |                        
| | Trademarks and patents    |  | 6,049             |                        
| |                           |  |                   |                        
| |                           |  | 57,314            |                        
| |                           |  |                   |                        
| | Accumulated amortization  |  | (36,807           | )                      
| |                           |  |                   |                        
| | Net book value            |  | $20,507           |                        
| |                           |  |                   |                        

| | During
the three months ended May 31, 2006 and May 31, 2005, there were additions to trademarks
and patents in the amount of $325,000 and $245,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amortization of trademarks and patents is included in selling, general, and
administrative expenses and the amortization of acquired technology and contractual
relationships is included in income as amortization of acquisition-related intangibles.
The following table sets forth the allocations:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 |  | Three months endedMay 31,
| | ----------------------------------------------- |  | -------------------------
| |                                                
| |                                                 |  | 2006                     
| |                                                
| |                                                 |  | ($000s)                  
| | Amortization of acquisition-related intangibles |  | $1,701                   
| | Selling, general, and administrative expenses   |  | 242                      
| |                                                
| | Total                                           |  | $1,943                   
| |                                                

| | The
estimated amortization expense related to intangible assets in existence as at May 31,
2006, over the next five years, is as follows: ($000s)
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 2007 (Q2 to Q4) |  | $5,706 | 
| | --------------- |  | ------ | 
| | 2008            |  | 6,962  | 
| | 2009            |  | 3,435  | 
| | 2010            |  | 2,649  | 
| | 2011            |  | 1,747  | 
| | 2012            |  | 8      | 

14

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

|5. |  | Goodwill
|-- |  | --------

| | For
the three months ended May 31, 2006, there were no adjustments to goodwill. During the
three months ended May 31, 2005, there was a reduction to goodwill of $131,000 resulting
from fair value adjustments to accounts receivable in the purchase price allocation for
Frango AB (Frango).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                   |  | Three months endedMay 31,
| | ----------------- |  | -------------------------
| |                  
| |                   |  | 2006                     
| |                  
| |                   |  | ($000s)                  
| | Beginning balance |  | $225,709                 
| | Adjustments       |  | --                       
| |                  
| | Closing balance   |  | $225,709                 
| |                  

|6. |  | Commitments
and Contingencies
|-- |  | -----------------------------

| | Legal
Proceedings
| | -----------------

| | The
Corporation and its subsidiaries may, from time to time, be involved in legal
proceedings, claims, and litigation that arise in the ordinary course of business. In the
event that any such claims or litigation are resolved against Cognos, such outcomes or
resolutions could have a material adverse effect on the business, financial condition, or
results of operations of the Corporation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Customer
Indemnification
| | ------------------------

| | The
Corporation has entered into licensing agreements with customers that include limited
intellectual property indemnification clauses. These clauses are typical in the software
industry and require the Corporation to compensate the customer for certain liabilities
and damages incurred as a result of third party intellectual property claims arising from
these transactions. The Corporation also issues letters of credit for a range of global
contingent and firm obligations including insurance, custom obligations, real estate
leases, and support obligations. The Corporation has not made any significant payments as
a result of these indemnification clauses or letters of credit and, in accordance with
FASB Interpretation No. 45, Guarantors Accounting andDisclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, has not
accrued any amounts in relation to these indemnification clauses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. |  | Income
Taxes
|-- |  | ------------

| | The
Corporation provides for income taxes in its quarterly unaudited financial statements
based on the estimated effective tax rate for the full fiscal year. The estimated
effective tax rate is adjusted on a quarterly basis when a tax asset or exposure is
ultimately resolved.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | The
Corporation estimates its effective tax rate for fiscal 2007 to be 24%, exclusive of any
one-time events. This estimated effective tax rate was reduced for the three-month period
ended May 31, 2006 to 23% due to adjustments related to prior year tax assessments. For the three months ended May 31, 2005, the Corporation estimated its
effective tax rate for fiscal 2006 to be 23%, exclusive of any one-time events. This
estimated effective tax rate was reduced for the three-month period ended May 31, 2005 to
12% due to the recognition of one-time benefits resulting from (i) a tax court decision
that allowed corporations to claim investment tax credits on stock-based compensation for
research and development personnel relating to fiscal years 2004 and 2005 and (ii) a
change in tax withholding legislation relating to one of the Corporations
subsidiaries.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. |  | Stockholders Equity
|-- |  | --------------------

| | The
Corporation issued 537,000 common shares for proceeds of $12,935,000 during the three
months ended May 31, 2006, and issued 527,000 common shares for proceeds of $11,784,000
during the three months ended May 31, 2005. The issuance of shares in the three months
ended May 31, 2006 and May 31, 2005 was pursuant to the Corporations stock purchase
plan and the exercise of stock options by employees, officers, and directors. During the
three months ended May 31, 2006 and May 31, 2005, the Corporation repurchased 652,000
shares at a value of $24,998,000 and 617,000 shares at a value of $25,254,000,
respectively. The shares repurchased during both periods were made in the open market
under the Corporations share repurchase program.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Income per Share
| | --------------------

| | The
reconciliation of the numerator and denominator for the calculation of basic and diluted
net income per share is as follows: (000s except per share amounts)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                               |  | Three months endedMay 31,
| | --------------------------------------------- |  | -------------------------
| |                                              
| |                                               |  | 2006                     
| |                                              
| | Basic Net Income per Share                    |  |                          
| | Net income                                    |  | $14,538                  
| |                                              
| | Weighted average number of shares outstanding |  | 89,893                   
| |                                              
| | Basic net income per share                    |  | $0.16                    
| |                                              

16

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | Diluted Net Income per Share                           |  |         |  |         | 
| | ------------------------------------------------------ |  | ------- |  | ------- | 
| | Net income                                             |  | $14,538 |  | $20,372 | 
| |                                                       
| | Weighted average number of shares outstanding          |  | 89,893  |  | 91,078  | 
| | Dilutive effect of stock options                       |  | 932     |  | 2,819   | 
| |                                                       
| | Adjusted weighted average number of shares outstanding |  | 90,825  |  | 93,897  | 
| |                                                       
| | Diluted net income per share                           |  | $0.16   |  | $0.22   | 
| |                                                       

|9. |  | Comprehensive
Income
|-- |  | --------------------

| | Comprehensive
income includes net income and other comprehensive income (OCI). OCI
refers to changes in net assets from transactions and other events, and circumstances not
included in net income and other than transactions with stockholders. These changes are
recorded directly as a separate component of Stockholders Equity. OCI includes the
foreign currency translation adjustments for subsidiaries that do not use the U.S. dollar
as their functional currency net of gains or losses on derivatives designated as a hedge
of the net investment in foreign operations and the effective portion of cash flow hedges
where the hedged item has not yet been recognized in income. Tax effects of foreign
currency translation adjustments pertaining to those subsidiaries are generally included
in OCI.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
components of comprehensive income were as follows ($000s):
| | ---------------------------------------------------------------

| |                                                               |  | Three months endedMay 31,
| | ------------------------------------------------------------- |  | -------------------------
| |                                                              
| |                                                               |  | 2006                     
| |                                                              
| | Net income                                                    |  | $14,538                  
| | Other comprehensive income (loss):                            | 
| | Foreign currency translation adjustments                      |  | 1,381                    
| | Change  in  net  unrealized  loss  on  derivative instruments |  | (172                     
| |                                                              
| | Comprehensive income                                          |  | $15,747                  
| |                                                              

|10. |  | Segmented
Information
|--- |  | ---------------------

| | The
Corporation operates in one business segment as one reporting unit  computer
software solutions.
| | -----------------------------------------------------------------------------------------------------

17

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

|11. |  | Liabilities
in Connection with Acquisition
|--- |  | ------------------------------------------

| | In
September 2004, in conjunction with the acquisition of Frango, the Corporation undertook
a restructuring plan. In accordance with Emerging Issues Task Force (EITF) No.
95-3, Recognition of Liabilities in Connection with a Business
Combination (EITF 95-3), the liability associated with this restructuring is considered a
liability assumed in the purchase price allocation. The Corporation recorded
restructuring costs of approximately $5,445,000 in relation to this restructuring plan.
This restructuring primarily related to involuntary employee separations of approximately
20 employees of Frango and accruals for vacating leased premises of Frango. The employee
separations impacted all functional groups, primarily in Europe. The restructuring
accrual is included on the balance sheet as accrued charges and salaries, commissions,
and related items. All amounts excluding lease payments will be paid by the end of fiscal
2007. Outstanding balances for the lease payments will be paid over the lease term unless
settled earlier. The Corporation does not believe that any unresolved contingencies,
purchase price allocation issues, or additional liabilities exists that would result in a
material adjustment to the acquisition cost allocation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table sets forth the activity in the Corporations restructuring accrual
for the three-month period ended May 31, 2006: ($000s)
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| |                                                       |  | Employeeseparations | Otherrestructuringaccruals | Total accrual
| | ----------------------------------------------------- |  | ------------------- | -------------------------- | -------------
| |                                                      
| | Balance as at February 28, 2006                       |  | $  277              |                            | $481         
| | Cash payments during the first quarter of fiscal 2007 |  | (229                | )                          | (46          
| | Adjustment                                            |  | (13                 | )                          | --           
| | Foreign exchange adjustment                           |  | 27                  |                            | 25           
| |                                                      
| | Balance as at May 31, 2006                            |  | $    62             |                            | $460         
| |                                                      

|12. |  | New
Accounting Pronouncements
|--- |  | -----------------------------

| | In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASBStatement No. 109(FIN 48).
This Interpretation clarifies the accounting for uncertainty in income taxes recognized
in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This Interpretation prescribes that a company should
use a more-likely-than-not recognition threshold based on the technical merits of the tax
position taken. Tax positions that meet the more-likely-than-not recognition threshold
should be measured in order to determine the tax benefit to be recognized in the
financial statements. FIN 48 is effective in fiscal years beginning after December 15,
2006. The Corporation is currently evaluating the impact of FIN 48 on its consolidated
results of operations and financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
dollars, unless otherwise stated)(In accordance with
U.S. GAAP)

| | In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Instruments  an Amendment of SFAS No. 140 (SFAS 156). This
Statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishmentsof Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. This Statement is
effective for fiscal years beginning after September 15, 2006. The Corporation does not
expect the adoption of SFAS 156 to have a material impact on its consolidated results of
operations and financial condition.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments  an Amendment to SFAS Nos.133 and 140(SFAS 155).
SFAS 155 permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation and clarifies
which interest-only strips and principal-only strips are not subject to the requirements
of SFAS No. 133. This statement also establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain an embedded derivative requiring
bifurcation and clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives. In addition, SFAS 155 amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial
instrument. This Statement is effective for all financial instruments acquired or issued
after the beginning of an entitys first fiscal year that begins after September 15,
2006. The Corporation does not expect the adoption of SFAS 155 to have a material impact
on its consolidated results of operations and financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections(SFAS 154)
which supersedes APB No. 20, Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements
for the accounting for and reporting of changes in accounting principle. The statement
requires the retroactive application to prior periods financial statements of
changes in accounting principles, unless it is impracticable to determine either the
period specific effects or the cumulative effect of the change. SFAS 154 does not change
the guidance for reporting the correction of an error in previously issued financial
statements or the change in an accounting estimate. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS 154 did not have a material impact on the Corporations
consolidated results of operations and financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

Item 2.

# COGNOS INCORPORATED

# MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

# (in United States
dollars, unless otherwise indicated, and in accordance with U.S. GAAP)

FORWARD-LOOKING
STATEMENTS/SAFE HARBOR

Managements Discussion and
Analysis of Financial Condition and Results of Operations (MD&A)
should be read in conjunction with the unaudited Consolidated Financial Statements and
Notes included in Item 1 of this Quarterly Report and can also be read in conjunction with
the audited Consolidated Financial Statements and Notes, and MD&A contained in our
Annual Report on Form 10-K for the fiscal year ended February 28, 2006 (fiscal
2006). Certain statements made in this MD&A that are not based on historical
information are forward-looking statements which are made pursuant to the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934 and Section 138.4(9) of
the Ontario Securities Act.  Terms and phrases such as, opportunity,
expected, plans, aimed at, intends and
similar terms and phrases are intended to identify these forward-looking statements. Such
forward-looking statements relate to and include, among other things future revenues and
earnings; the contribution of Cognos 8 Business Intelligence (Cognos 8) and Cognos Planning to our
revenues and earnings; market trends; new and existing product innovations and
developments; operational performance; our sales force structure and model; the impact of
our relationship with IBM and systems integrators; the importance of identifying, hiring,
engaging and retaining personnel and contractors; the impact of Statement of Financial
Accounting Standard No. 123 (revised), Share-based Payment, (FAS 123R)
on our financial results; our products, including Cognos 8 and Cognos Planning, and their
impact on our revenues and our business; the revenue mix between product license, support
and services; the decline in license revenue from stand alone products incorporated into
Cognos 8; improvements in gross margins; the growth of corporate performance management
(CPM) in the software industry; the trend towards standardization and
larger transactions; product and technological improvements by our competitors and
consolidation in our industry; the strength of the Canadian dollar and its effects;
drivers of growth in the business intelligence (BI) market; and our
investments in personnel and technology.

These forward-looking statements
are neither promises nor guarantees, but involve risks and uncertainties that may cause
actual results to differ materially from those in the forward-looking statements. Factors
that may cause such differences include, but are not limited to, Cognos transition to new products and releases,
including Cognos 8 and customer acceptance and implementation of Cognos 8; a continuing
increase in the number of larger customer transactions and the related lengthening of
sales cycles and challenges in executing on these sales opportunities; the incursion of
enterprise resource planning and other major software companies into the BI market;
continued BI and software market consolidation and other competitive changes in the BI and
software market; currency fluctuations; our ability to identify, hire, train, motivate,
retain, and incent highly qualified management/other key personnel (including sales
personnel) and our ability to manage changes and transitions in management/other key
personnel; the impact of the implementation of FAS 123R; our ability to develop,
introduce and implement new products as well as enhancements or improvements for existing
products that respond, in a timely fashion, to customer/product requirements and rapid
technological change; our ability to maintain or accurately forecast revenue or to
anticipate and accurately forecast a decline in revenue from any of our products or
services; our ability to compete in an intensely competitive market; new product
introductions and enhancements by competitors; our ability to select and implement
appropriate business models, plans and strategies and to execute on them; fluctuations in
our quarterly and annual operating results; fluctuations in our tax exposure; the impact
of natural disasters on the overall economic condition of North America; unauthorized use
or misappropriation of our intellectual property; claims by third parties that our
software infringes their intellectual property; the risks inherent in international
operations, such as the impact of the laws, regulations, rules and pronouncements of
jurisdictions outside of Canada and their interpretation by courts, tribunals, regulatory
and similar bodies of such jurisdictions; our ability to identify, pursue, and complete
acquisitions with desired business results; as well as the risk factors discussed
previously and in other periodic reports filed with the Securities and Exchange Commission
(SEC) and the Canadian Securities Administrators
(CSA). Readers should not place undue reliance on any such
forward-looking statements, which speak only as of the date they are made. We disclaim any
obligation to publicly update or revise any such statement to reflect any change in our
expectations or in events, conditions, or circumstances on which any such statements may
be based, or that may affect the likelihood that actual results will differ from those
contained in the forward-looking statements.

20

---

# ABOUT
COGNOS

Cognos, a global leader in business
intelligence (BI) and corporate performance management
(CPM) software solutions, provides world-class enterprise planning and
BI software and services to help companies plan, understand and manage financial and
operational performance.

Cognos brings together technology,
analytical applications, best practices, and a broad network of partners to give customers
a complete performance system. The Cognos performance system is an open and adaptive
solution that leverages an organizations enterprise resource planning
(ERP), packaged applications, and database investments. It gives
customers the ability to answer the questions  How are we doing? Why are we on or
off track? What should we do about it?  and enables them to understand and monitor
current performance while planning future business strategies.

Our revenue is derived primarily from
the licensing of our software and the provision of related services for BI and CPM
solutions. These related services include product support, education, and consulting. We
generally license software and provide services subject to terms and conditions consistent
with industry standards. For an annual fee, customers may contract with us for product
support, which includes product and documentation enhancements, as well as tele-support
and web-support.

# OVERVIEW OF THE
QUARTER

We posted solid results for the first
quarter of fiscal 2007 in what is seasonally our most challenging quarter. Cognos 8
Business Intelligence (Cognos 8), our newly released enterprise BI
software that facilitates all BI activity, including production and business reporting,
dashboarding, query, analysis, metrics management and interactive scorecarding, delivered
strong license revenue of $43.5 million in the quarter. Cognos 8 has generated over $100
million of license revenue in just over two quarters of general availability reflecting
the strong acceptance and potential for this platform going forward.

# Operating Performance

Revenue for the three month period
ended May 31, 2006 was $217.0 million, an increase of 8% from $200.1 million for the
corresponding period last year. License revenue increased 4% to $73.7 million, compared
with $71.1 million in the first quarter of fiscal 2006 on the strength of Cognos 8.
Product support revenue increased 13% to $100.2 million as we expand our customer base and
continue to experience solid renewal rates. Services revenue also contributed to this
growth increasing 7% from the same quarter last year.

21

---

On March 1, 2006, we adopted Financial
Accounting Standards Board (FASB) Statement No. 123 (revised),
Share-based Payment (FAS 123R). FAS 123R requires all companies
to measure compensation costs for all share-based payments (including stock options) at
fair value and to recognize such costs in the statement of income. As a result of the
adoption of FAS 123R, our operating income, net income, and earnings per share have been
significantly impacted. We have elected the modified retrospective method of transition
provided by FAS 123R and, accordingly, financial statement amounts for all prior periods
presented herein reflect results as if the fair value method of expensing had been applied
from the original effective date of FASB Statement No. 123, Accounting for Stock-based
Compensation(FAS 123), the predecessor to FAS 123R. See Note 3 of
the Condensed Notes to the Consolidated Financial Statements.

Net income for the three month period
ended May 31, 2006 was $14.5 million or $0.16 per diluted share compared to net income of
$20.4 million or $0.22 per diluted share for the same period last year, representing a
decrease of 29%. The decrease in net income for the quarter is primarily due to the
unfavorable effect of foreign currency, predominantly the stronger Canadian dollar, a
lower gross margin on our services and a higher tax rate as compared to the same period
last year. The decrease in net income was partially offset by an increase in interest and
other income.

Our balance sheet remains strong,
ending the quarter with $610.2 million in cash, cash equivalents, and short-term
investments. This represents an increase of $59.2 million from February 28, 2006,
primarily attributable to the collection of accounts receivable.

We signed 13 contracts in excess of
one million dollars during the quarter, compared with 6 contracts in the corresponding
period last year. The number of contracts greater than $200,000 continues to grow,
increasing 13% compared to the corresponding period last year. Average license order size
for orders greater than $50,000 was $186,000, compared to $175,000 last year. We believe
that order size is an indication of enterprise-scale investment in our products by our
customers which creates a foundation for future growth as it enables us to generate
additional software licensing and ongoing maintenance renewals.

# SEC Review

The Staff of the Division of
Corporation Finance of the SEC (theStaff) has recently completed its
review of our Annual Report on Form 10-K for the period ended February 28, 2005.  The
Staff review related primarily to the manner in which we allocate revenue pursuant to
Statement of Position No. 97-2 Software Revenue Recognition as amended
by SOP No. 98-9 Software Revenue Recognition With Respect to Certain
Arrangements (collectively SOP 97-2) for post-contract
customer support (PCS) in multiple element arrangements that include
PCS and license. In particular, the Staff analyzed our processes to establish
vendor-specific objective evidence of the fair value for PCS in contracts for the purpose
of allocating revenue to PCS and the license in such arrangements. On July 20, 2006 the
Staff informed us that the Staff would not object to our revenue recognition policy under
SOP 97-2. We delayed the filing of our Annual Report on Form 10-K for the year ended
February 28, 2006 and our Quarterly Report on Form 10-Q for the quarter ended May 31, 2006
because of the pendency of the Staff review. We are also filing our Form 10-K for the year
ended February 28, 2006 on even date and will, as a result, be current with our regulatory
filings.

# Executive Appointment

On May 15, 2006, we appointed Mr. Les
Rechan as Chief Operating Officer of the Corporation. Mr. Rechan is responsible for
leading our worldwide sales, services and marketing operations. Mr. Rechan joins us with
over 20 years of industry experience, including senior positions with Oracle, Siebel
Systems and IBM.

22

---

# Recent Announcements

In March 2006, we announced a new
global strategic alliance with IBM. This alliance represents a significant commitment by
both companies to providing clients with open standards-based business solutions that will
allow them to leverage their existing IT assets, lower costs, and provide flexibility
regarding their choice of operating environments, including Linux. Building on our
existing relationship, this new strategic alliance tightens the integration between Cognos
and IBM across all areas of the organizations, including software, hardware, services,
marketing, and joint product development.

During the quarter, we also announced
Cognos Go! Search Service, a new BI search capability that will enable users to instantly
find relevant, strategic enterprise information available through Cognos 8 Business
Intelligence. With a familiar, browser-based search that ranks results based on user
priorities, we believe Cognos Go! will deliver users an intuitive and efficient way of
quickly finding BI information presented in reports, analyses, dashboards, metric
information, and events across the organization. We expect Cognos Go! to be generally
available in the third quarter of fiscal 2007.

In addition, we released Cognos 8
Workforce Performance. Building on the Cognos 8 architecture, this product helps
organizations better manage and optimize their human capital assets by allowing customers
to quickly construct analytic applications for Workforce Performance based on user roles
and report requirements, rather than the traditional approach of building specific reports
one at a time.

# Outlook for the balance
of the fiscal year

We continue to expect revenue and net
income to increase for the full fiscal year when compared to fiscal 2006 on a consistent
basis. We believe that the BI market remains strong and that we will benefit from the
Cognos 8 product cycle in the upcoming year. However, we continue to face increasing
competition from traditional and non-traditional competitors and uncertainty in foreign exchange
rate fluctuations, primarily the Canadian dollar and the euro.

With the general availability of
Cognos 8 and its first maintenance release, we believe that we are well positioned to
benefit from licensing revenue from new customers as well as provide existing customers
with the opportunity to add to their current reporting and analysis capabilities. Given
the positive response we have experienced for Cognos 8 since its release, we believe that
Cognos 8 will continue to make a significant contribution to fiscal 2007 license revenue.

We continue to experience a healthy
market for our other products, including our performance management applications. Cognos 8
and Cognos Planning are the key components of our product strategy and we believe that the
strength of these two products in the market will be significant contributors to our
business. We will continue to focus on bringing innovative new products to market and we
continue to develop new releases of our products.

The BI and performance management
markets continue to be very competitive and we expect our competitors to continue to
improve the performance of their current products and to introduce new products (or
integrated products) or new technologies to compete with our strong product portfolio. In
addition, the software market continues to consolidate by acquisition and larger software
vendors, including ERP software vendors, may continue to expand their product offering
into our markets, creating stronger competitors.

In the first quarter of fiscal 2007,
the Canadian dollar continued to strengthen compared to the U.S. dollar and, in fiscal
2006, the euro weakened compared to the U.S. dollar. If these trends continue through
fiscal 2007, it will continue to put pressure on our business and operating margin
percentage as a disproportionate amount of our expenses are incurred in Canadian dollars
and a considerable amount of our revenue is received in euros. Accordingly, we will
continue to manage our spending in an effort to mitigate the impact of foreign exchange
changes on our operating performance.

23

---

# RESULTS OF
OPERATIONS

# Recently Adopted
Accounting Principle

We adopted FAS 123R on March 1, 2006
to account for our stock option, stock purchase, and deferred share and restricted share
unit plans. This standard addresses the accounting for share-based payment transactions in
which a company receives services in exchange for either equity instruments of the company
or liabilities that are based on the fair value of the companys equity instruments
or that may be settled by the issuance of such equity instruments. Under this standard,
companies are required to account for such transactions using a fair value method and to
recognize the expense over the vesting period of the award in the consolidated statements
of income.

We previously accounted for
share-based compensation transactions using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion 25, Accounting for Stock
Issued to Employees (APB 25) and provided the pro forma disclosures
prescribed by FAS 123, the predecessor to FAS 123R. Except for certain acquisition-related
options, the exercise price of all stock options is equal to the closing market price of the stock
on the trading day preceding the date of grant. Accordingly, with the exception of this
acquisition-related compensation and awards granted under our deferred share and
restricted share unit plans, no compensation cost had been recognized in the financial
statements prior to fiscal 2007.

We have elected the modified
retrospective method of transition provided by FAS 123R and, accordingly, financial
statement amounts for all prior periods presented herein reflect results as if the fair
value method of expensing had been applied from the original effective date of FAS 123
(See Note 3).

We use the straight-line attribution
method to recognize share-based compensation costs over the service period of the award
for our stock option plans and the graded attribution method which is required for our
performance-based restricted share unit plan. Stock-based compensation expense is
recorded, consistent with other compensation expenses, in cost of support, cost of
services, selling, general and administrative expenses or research and development
expenses, by employee job function.

Stock-based compensation expense
recognized for the three months ended May 31, 2006 and 2005 is as follows:

| |                                     |         | Three months endedMay 31,
| | ----------------------------------- | ------- | -------------------------
| |                                    
| |                                     |         | 2006                     
| |                                    
| |                                     | ($000s)
| | Compensation cost recognized        |         |                          
| | Cost of Product Support             |         | $     96                 
| | Cost of Services                    |         | 187                      
| | Selling, General and Administrative |         | 4,304                    
| | Research and Development            |         | 491                      
| |                                    
| | Total                               |         | 5,078                    
| |                                    
| | Tax benefit recognized              |         | (931                     
| |                                    
| | Net Stock-based Compensation Cost   |         | $4,147                   
| |                                    

24

---

# Operating Performance

|(000s, except per share amounts) | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|-------------------------------- | ------------------------- | ------------------------------------------
|                                
|                                 | 2006                      | 2005                                      
|                                
|Revenue                          |                           | $217,040                                  
|Cost of revenue                  |                           | 50,500                                    
|                                 |                          
|Gross margin                     |                           | 166,540                                   
|Operating expenses               |                           | 152,572                                   
|                                 |                          
|Operating income                 |                           | $  13,968                                 
|                                
|Gross margin percentage          |                           | 76.7                                      
|Operating margin percentage      |                           | 6.4                                       
|                                
|Net income                       |                           | $  14,538                                 
|                                 |                          
|Basic net income per share       |                           | $0.16                                     
|                                 |                          
|Diluted net income per share     |                           | $0.16                                     
|                                 |                          

Revenue for the quarter ended May 31,
2006 was $217.0 million, an 8% increase from revenue of $200.1 million for the same
quarter last year. Net income for the current quarter was $14.5 million, a 29% decrease
from net income of $20.4 million for the same quarter last year. Diluted net income per
share was $0.16 for the current quarter, compared to diluted net income per share of $0.22
for the same quarter last year. Basic net income per share was $0.16 and $0.22 for the
quarters ended May 31, 2006 and May 31, 2005, respectively.

Gross margin for the quarter ended May
31, 2006 was $166.5 million, an increase of 6% over gross margin of $157.6 million for the
same quarter last year. Gross margin percentage was 76.7% for the quarter ended May 31,
2006 as compared to 78.8% for the corresponding quarter last fiscal year. Total operating
expenses for the quarter ended May 31, 2006 were $152.6 million, an 11% increase from
operating expenses of $137.1 million for the same quarter last year. Operating income for
the quarter ended May 31, 2006 was $14.0 million, a decrease of 32% from operating income
of $20.4 million in the same quarter last year. The operating margin for the quarter ended
May 31, 2006 was 6.4% as compared to 10.2% for the comparative quarter of the previous
fiscal year.

The decrease in operating income and
net income for the quarter is primarily due to the unfavorable effect of foreign currency,
predominantly the stronger Canadian dollar, and a lower gross margin on our services
revenue. Also contributing to the decrease in net income was a higher tax rate compared to
the same quarter last year. The decrease in net income was partially offset by an increase
in interest and other income.

25

---

We operate internationally and, as a
result, a substantial portion of our business is conducted in foreign currencies.
Accordingly, our results are affected by year-over-year changes in the value of the U.S.
dollar relative to the Canadian dollar, to various European currencies, and, to a lesser
extent, other foreign currencies. The following table breaks down the year-over-year
percentage change in revenue, expenses, and operating income between change attributable
to growth and change attributable to fluctuations in the value of the U.S. dollar as
compared to these other currencies.

|                                       | Three Months Ended May 31,2006 over 2005
|-------------------------------------- | ----------------------------------------
|                                      
|                                       | Growth ExcludingForeign Exchange        
|                                      
|Revenue                                |                                         
|Cost of Revenue and Operating Expenses |                                         
|Operating Income                       |                                         

Growth excluding foreign exchange is a
non-GAAP measure. We disclose this non-GAAP or pro forma measure of growth to provide
greater insight into our ongoing operating performance without the impact of foreign
exchange. Pro forma measures should not be considered an alternative to measurements
required by accounting principles generally accepted in the United States. Pro forma
measures are unlikely to be comparable to pro forma information provided by other issuers.

The following table sets out, for the
periods indicated, the percentage that each income and expense item bears to revenue, and
the percentage change of each item as compared to the indicated prior period.

|                                                      | Percentage of Revenue     | Percentage Change        
|----------------------------------------------------- | ------------------------- | -------------------------
|                                                     
|                                                      | Three months endedMay 31, | Three months endedMay 31,
|                                                      | 2006                      |                          
|                                                     
|Revenue                                               |                           | 100                      
|                                                      |                          
|Cost of revenue                                       |                           | 23                       
|                                                      |                          
|Gross margin                                          |                           | 76                       
|                                                      |                          
|Operating expenses                                    |                          
|Selling, general, and administrative                  |                           | 54                       
|Research and development                              |                           | 15                       
|Amortization of acquisition-related intangible assets |                           | 0                        
|                                                      |                          
|Total operating expenses                              |                           | 70                       
|                                                      |                          
|Operating income                                      |                           | 6                        
|Interest and other income, net                        |                           | 2                        
|                                                      |                          
|Income before taxes                                   |                           | 8                        
|Income tax provision                                  |                           | 2                        
|                                                      |                          
|Net income                                            |                           | 6                        
|                                                      |                          

26

---

REVENUE

|($000s)         | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------- | ------------------------- | ------------------------------------------
|               
|                | 2006                      | 2005                                      
|               
|Product License |                           | $  73,735                                 
|Product Support |                           | 100,181                                   
|Services        |                           | 43,124                                    
|                |                          
|Total Revenue   |                           | $217,040                                  
|                |                          

Our total revenue was $217.0 million
for the quarter ended May 31, 2006, an increase of $17.0 million or 8% compared to the
quarter ended May 31, 2005. Our total revenue was derived primarily from our suite of BI
products now combined into one single product, Cognos 8. Although we continue to generate
license revenue from PowerPlay, Impromptu, Cognos ReportNet, Cognos DecisionStream, Cognos
Metrics Manager, Cognos Visualizer, NoticeCast, and Cognos Query, the functionality of
these products has now been combined on a single platform and as a single product in
Cognos 8 and therefore we expect a continuing decline in license revenue from these
products in the future offset by increased revenue from Cognos 8. During the quarter, we
also generated license revenue from Cognos Planning, Cognos Controller, Cognos Analytic
Applications, and Cognos Finance which we will continue to license as standalone products.

The overall change in total revenue
from our three revenue categories in the quarter ended May 31, 2006 from May 31, 2005
was as follows: a 4% increase in product license revenue, a 13% increase in product
support revenue, and a 7% increase in services revenue.

Industry Trends and
Geographic Information

We believe that the growth in the BI
market continues to be driven by three main factors: (1) a desire by enterprises to
standardize on one BI platform, (2) investment in the Office of Finance driven by the
increasing importance of compliance and transparency, and (3) a growing focus on CPM.

First, we believe BI has become a
leading priority within IT budgets as businesses try to leverage their investments in
enterprise applications and expand the usage of BI within their organizations. In
particular, businesses are looking to standardize on one BI platform to reduce the number
of platforms and vendors they support and better align their operations with their
strategy. We believe that the breadth and depth of functionality of our BI offering make
it the solution of choice.

Second, there is increased investment
in systems within the Office of Finance of most enterprises driven by our customers
continued focus on compliance and transparency. Organizations are looking to replace
spreadsheet-based applications and legacy systems with single instance planning,
consolidation, and financial reporting solutions that reduce the effort and cost of
compliance. Further, these organizations are looking to extend these solutions beyond
compliance to achieve best practices, specifically in the area of rolling plans, planning
standardization, and reduced time to close. This focus allows the Office of Finance to
extend beyond managing pure financial goals and towards overall performance goals and CPM.
We believe that our planning and consolidation products help improve the accuracy,
transparency, and timeliness of financial information. For this reason, we believe, we are
seeing increased demand for these products.

27

---

Finally, CPM is a growing segment in
the software industry. It blends BI with planning, budgeting, and scorecarding to provide
management performance visibility and to support the corporate decision-making process. We
believe that our market-leading BI, planning, consolidation, and scorecarding products
deliver a complete CPM solution. These separate agendas provide multiple entry points into
a CPM solution that are appealing to both the finance and operational segments of
enterprises. Our single platform for BI differentiates us from our competition by enabling
enterprises to easily integrate new and existing IT assets into their CPM plan.

We believe these trends are leading to
our increase in the number of large customer contracts that we are experiencing, our
increase in enterprise-wide deployment of BI products, and a strengthening of our
relationships with some of the worlds largest companies, and with our strategic
partners. We expect the trend towards larger contracts to continue as a result of the
growing demand for standardization and the deepening strategic importance of performance
management within our customers businesses. While we are becoming involved in more
and more of these larger contracts, small and medium-sized contracts continue to be
important contributors to our success.

We believe that order size is an
indication of enterprisescale investment in our products by our customers which
creates a foundation for future growth. We use the following summary of key revenue
indicators to track order size:

Key Revenue Indicators

|                                                    | Three months ended May 31,
|--------------------------------------------------- | --------------------------
|                                                   
|                                                    | 2006                      
|                                                   
|Orders (License, Support, Services)                 |                           
|Transactions greater than $1 million                |                           
|Transactions greater than $200,000                  |                           
|Transactions greater than $50,000                   |                           
|Average selling price (License Orders Only) ($000s) |                           
|Greater than $50,000                                |                           

As the number of large sales
opportunities increases, specifically with regard to our customers standardization
agenda, our sales cycles have become longer as these larger transactions typically require
greater scrutiny, a more extensive proof of concept, and a longer decision cycle by our
customers because these transactions are more complex and represent a larger proportion of
the customers investment budgets.

28

---

Our operations are divided into three
main geographic regions: (1) the Americas (consisting of Canada, Mexico, the United
States, and Central and South America), (2) EMEA (consisting of the U.K., Continental
Europe, the Middle East, and Africa), and (3) Asia/Pacific (consisting of Australia and
countries in the Far East). The following table sets out, for each fiscal period
indicated, the revenue attributable to each of our three main geographic regions and the
percentage change in the dollar amount in each region as compared to the prior fiscal
period.

Revenue by Geography

|($000s)      | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------ | ------------------------- | ------------------------------------------
|            
|             | 2006                      | 2005                                      
|            
|The Americas |                           | $129,913                                  
|EMEA         |                           | 72,225                                    
|Asia/Pacific |                           | 14,902                                    
|             |                          
|Total        |                           | $217,040                                  
|             |                          

This table sets out, for each fiscal
period indicated, the percentage of total revenue earned in each geographic region.

# Revenue by Geography as a
Percentage of Total Revenue

|             | Three months endedMay 31,
|------------ | -------------------------
|            
|             | 2006                     
|            
|The Americas |                          
|EMEA         |                          
|Asia/Pacific |                          
|            
|Total        |                          
|            

The growth rates of our revenue in
EMEA, Asia/Pacific and, to a lesser extent, in the Americas are affected by foreign
exchange rate fluctuations. The following table breaks down the year-over-year percentage
change in revenue for the quarter ending May 31, 2006 by geographic area between change
attributable to growth and change due to fluctuations in the value of the U.S. dollar.

# Year-over-year Percentage
Change in Revenue by Geography

|             | Three Months Ended May 31,2006 over 2005
|------------ | ----------------------------------------
|            
|             | Growth ExcludingForeign Exchange        
|            
|The Americas |                                         
|EMEA         |                                         
|Asia/Pacific |                                         
|            
|Total        |                                         
|            

Growth excluding foreign exchange is a
non-GAAP measure. We disclose this non-GAAP or pro forma measure of revenue growth to
provide greater insight into our ongoing operating performance without the impact of
foreign exchange. Pro forma measures should not be considered an alternative to
measurements required by accounting principles generally accepted in the United States.
Pro forma measures are unlikely to be comparable to pro forma information provided by
other issuers.

29

---

The growth rate of our revenue in the
Americas and EMEA during the three months ended May 31, 2006 was mostly attributable to
increases in volume and size of transactions as there was only a slight impact from
fluctuations in foreign currencies. The decrease in revenue in Asia Pacific was largely
due to a very strong performance in that region in the comparative period last fiscal year. Changes in the
valuation of the U.S. dollar relative to other currencies will continue to impact our
revenue in the future.

# Product License Revenue

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2006                      | 2005                                      
|                           
|Product license revenue     |                           | $73,735                                   
|Percentage of total revenue |                           | 34.0                                      

Product license revenue was $73.7
million in the quarter ended May 31, 2006, an increase of $2.6 million or 4% over the
corresponding period last year. The increase in product license revenue during the quarter
reflects the strength of Cognos 8. Exchange rate fluctuations relative to the U.S. dollar
had negligible impact during the quarter compared to the prior fiscal year. Product
license revenue accounted for 34% of total revenue for the three months ended May 31, 2006
as compared to 36% for the comparative quarter of the previous fiscal year.

The breadth of our solution continues
to allow us to develop long-term strategic relationships with our customers which, in
turn, enables us to generate additional software licensing and ongoing maintenance
renewals. With the release of Cognos 8, these relationships represent a significant
opportunity for upgrade revenue over the next several quarters as these organizations look
to upgrade their environments. Approximately 71% of our license revenue came from existing
customers in the three-month period ended May 31, 2006.

We license our software through our
direct sales force and third-party channels including resellers, value-added resellers,
and OEMs. Total product license revenue for the quarter from direct sales was $51.8
million compared to $48.6 million in the corresponding period last fiscal year. Direct
sales accounted for approximately 70% and 68% of our license revenue for the first quarter
of fiscal 2007 and 2006, respectively.

We believe that a direct sales force
is an effective way of building long-term relationships with our customers. In addition,
as enterprise-wide deployments become larger and more strategic, we believe that our
relationships with systems integrators will help us succeed in the large enterprise market
as the role of systems integrators in large standardization opportunities is increasing.
We will continue to commit management time and financial resources to developing
relationships with systems integrators. We are also investing resources developing our
direct and indirect sales and support channels in order to have coverage in every
desirable market.

30

---

# Product Support Revenue

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2006                      | 2005                                      
|                           
|Product support revenue     |                           | $100,181                                  
|Percentage of total revenue |                           | 46.1                                      

Product  support  revenue was $100.2
 million in the quarter  ended May 31, 2006,  an increase of $11.7  million or 13%
compared to the corresponding  period in the prior fiscal year. The increase was the
result of the strong rate of renewal of our support  contracts and the expansion of our
customer base. Exchange rate fluctuations had a negligible impact on product support
revenue during the quarter.

Product  support  revenue  accounted
 for 46% of our total  revenue  in the  quarter  ended  May 31,  2006 as  compared  to
44% for the comparative quarter of the previous fiscal year.

# Services Revenue

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2006                      | 2005                                      
|                           
|Services revenue            |                           | $43,124                                   
|Percentage of total revenue |                           | 19.9                                      

Services revenue (training,
consulting, and other revenue) was $43.1 million in the quarter ended May 31, 2006, an
increase of $2.7 million or 7% compared to the corresponding period in the prior fiscal
year. Services revenue accounted for 20% of our total revenue for the three months ended
May 31, 2006 and May 31, 2005.

The increase was primarily
attributable to an increase in consulting revenue as we moved more towards large
enterprise-wide deployments and financial applications-based software. Exchange rate fluctuations
had a negligible impact on services revenue for the quarter.

As our business moves more towards
these larger enterprise-wide deployments and financial applications-based software, our customers
require an increased level of technical expertise and support to meet their specific
needs. Successful installation and deployment of our solutions has, we believe, become
critical to our customers success. As a result, our customers have increasingly
required services such as project management, analysis and design, technical advisory, and
instruction to effectively deploy our solutions.

31

---

# COST OF
REVENUE

# Cost of Product License

|($000s)                       | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------- | ------------------------- | ------------------------------------------
|                             
|                              | 2006                      | 2005                                      
|                             
|Cost of product license       |                           | $1,757                                    
|Percentage of license revenue |                           | 2.4                                       

For the three months ended May 31,
2006, the cost of product license revenue was $1.8 million, an increase of $0.5 million or
44% compared to the corresponding period in the prior fiscal year. These costs represented
2% of product license revenue for both the quarters ended May 31, 2006 and May 31, 2005.

The cost of product license consists
primarily of royalties for technology licensed from third parties, as well as the cost of
materials and distribution related to licensed software. The change in cost of product
license is as follows:

|($000s)                     | Year-over-yearChangefrom May 31,
|--------------------------- | --------------------------------
|                           
|                            | 2005 to2006                     
|                           
|Royalty cost                |                                 
|Other                       |                                 
|                           
|Total year-over-year change |                                 
|                           

The increase in these costs was the
result of increases in royalties related to suppliers whose technology is embedded in our
product offering.

# Cost of Product Support

|($000s)                       | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------- | ------------------------- | ------------------------------------------
|                             
|                              | 2006                      | 2005                                      
|                             
|Cost of product support       |                           | $11,227                                   
|Percentage of support revenue |                           | 11.2                                      

The cost of product support revenue
was $11.2 million, an increase of $2.2 million or 25% in the quarter ended May 31, 2006
compared to the corresponding period in the prior fiscal year. The cost of product support
represented 11% of total product support revenue for the quarter ended May 31, 2006 as
compared to 10% for the quarter ended May 31, 2005.

32

---

The cost of product support includes
the costs associated with resolving customer inquiries and other tele-support and
web-support activities, royalties in respect of technological support received from
third-parties, and the cost of materials delivered in connection with enhancement
releases. The change in cost of product support is as follows:

|($000s)                     | Year-over-yearChangefrom May 31,
|--------------------------- | --------------------------------
|                           
|                            | 2005 to2006                     
|                           
|Staff-related costs         |                                 
|Computer-related costs      |                                 
|Other                       |                                 
|                           
|Total year-over-year change |                                 
|                           

The increase in the cost of product
support for the three months ended May 31, 2006 was primarily the result of increases in
staff-related costs to service our growing customer base and computer-related costs. The
average number of employees within the support organization increased 6% from one year
ago. Other includes direct selling and travel and living expenses. The unfavorable effect
of fluctuations of foreign currencies relative to the U.S. dollar increased cost of
product support by approximately 5% for the quarter.

Cost of Services

|($000s)                       | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------- | ------------------------- | ------------------------------------------
|                             
|                              | 2006                      | 2005                                      
|                             
|Cost of services              |                           | $37,516                                   
|Percentage of service revenue |                           | 87.0                                      

The cost of services was $37.5
million, an increase of $5.2 million or 16% in the quarter ended May 31, 2006 compared to
the corresponding period in the prior fiscal year. The cost of services increased as a
percentage of services revenue, representing 87% for the quarter ended May 31, 2006
as compared to 80% for the corresponding period in the prior fiscal year.

The cost of services includes the
costs associated with delivering education, consulting, and other services in relation to
our products. The change in cost of services is as follows:

33

---

|($000s)                       | Year-over-yearChangefrom May 31,
|----------------------------- | --------------------------------
|                             
|                              | 2005 to2006                     
|                             
|Staff-related costs           |                                 
|Services purchased externally |                                 
|Travel & Living               |                                 
|Other                         |                                 
|                             
|Total year-over-year change   |                                 
|                             

The increase in cost of services for
the three months ended May 31, 2006 was primarily attributable to increases in
staff-related costs. The average number of employees within the services organization
increased 7% from one year ago. We continue to invest in services staff as we believe the
availability and positioning of services is a key factor in the timing, closure, and
success for large transactions. Also contributing to the increase were services purchased
externally and travel and living expenses. Subcontractors are currently an important part
of our services offering and are engaged to fill excess demand that cannot be met by
internal Cognos service consultants. This demand can be in the form of increased volume or
requirements for industry specialization. While we continue to hire new employees in this
area, we intend to supplement our skills by engaging subcontractors. Other includes
recruiting fees and professional services costs. The effect of fluctuations of foreign
currencies had minimal impact on cost of services during the three months ended May 31,
2006.

# OPERATING
EXPENSES

# Selling, General, and
Administrative

|($000s)                              | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------------------------------ | ------------------------- | ------------------------------------------
|                                    
|                                     | 2006                      | 2005                                      
|                                    
|Selling, general, and administrative |                           | $117,592                                  
|Percentage of total revenue          |                           | 54.2                                      

Selling, general, and administrative
(SG&A) expenses were $117.6 million, an increase of $11.9 million
or 11% in the quarter ended May 31, 2006, compared to the corresponding period in the
prior fiscal year. These costs increased as a percentage of revenue, representing 54% for
the three months ended May 31, 2006 compared to 53% for the corresponding period in the
prior fiscal year.

SG&A expenses include
staff-related costs and travel and living expenditures for sales, marketing, management,
and administrative personnel. These expenses also include costs associated with the sale
and marketing of our products, professional services, and other administrative costs.The change in SG&A expenses is as follows:

34

---

|($000s)                     | Year-over-yearChangefrom May 31,
|--------------------------- | --------------------------------
|                           
|                            | 2005 to2006                     
|                           
|Staff-related costs         |                                 
|Professional services       |                                 
|Travel & Living             |                                 
|Other                       |                                 
|                           
|Total year-over-year change |                                 
|                           

The increase in SG&A expenses for
the three-month period ended May 31, 2006 was predominantly the result of increases in
staff related costs resulting from increases in compensation, as well as associated
benefits compared to the previous fiscal year. In addition, we incurred increased
professional services and travel and living costs. The average number of employees within
SG&A increased by 4% in fiscal 2007 from the previous fiscal year. The unfavorable
effect of fluctuations of foreign currencies relative to the U.S. dollar increased
SG&A expenses by approximately 2% during the quarter.

# Research and Development

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2006                      | 2005                                      
|                           
|Research and development    |                           | $33,279                                   
|Percentage of total revenue |                           | 15.3                                      

Research and development
(R&D) expenses were $33.3 million, an increase of $3.5 million or
12% in the quarter ended May 31, 2006, compared to the corresponding period in the prior
fiscal year. R&D costs were 15% of revenue for both the quarters ended May 31, 2006
and May 31, 2005.

R&D expenses are primarily
staff-related costs attributable to the design and enhancement of existing products along
with the creation of new products. The change in R&D expenses is as follows:

|($000s)                     | Year-over-yearChangefrom May 31,
|--------------------------- | --------------------------------
|                           
|                            | 2005 to2006                     
|                           
|Staff-related costs         |                                 
|Other                       |                                 
|                           
|Total year-over-year change |                                 
|                           

The increase in R&D expenses for
the three months ended May 31, 2006 was predominantly the result of increases in
staff-related costs resulting from increases in salaries as well as associated benefits as
compared to the previous fiscal year. The average number of employees within R&D
increased by 7% from the previous fiscal year. The unfavorable effect of fluctuations of
foreign currencies relative to the U.S. dollar increased R&D expenses by approximately
7% in the quarter.

35

---

During the quarter ended May 31, 2006,
we continued to invest significantly in R&D activities. We shipped the first
maintenance release for Cognos 8. This new version of Cognos 8 includes new capabilities
to extend the reach of BI to more users and expanded enterprise-application and data
support to help maximize operational infrastructure investments. We also announced Cognos
Go! Search Service, a new BI search capability that will enable users to instantly find
relevant, strategic enterprise information available through Cognos 8. With a familiar,
browser-based search that ranks results based on user priorities, Cognos Go! will deliver
users an intuitive and efficient way of quickly finding BI information presented in
reports, analyses, dashboards, and metric information across the organization. We expect
Cognos Go! to be generally available in the third quarter of fiscal 2007. In addition, we
released Cognos 8 Workforce Performance. Building on the Cognos 8 architecture, this
product helps organizations better manage and optimize their human capital assets by
allowing customers to quickly construct analytic applications for Workforce Performance
based on user roles and report requirements, rather than the traditional approach of
building specific reports one at a time.

We currently do not have any software
development costs capitalized on our balance sheet. Software development costs are
expensed as incurred unless they meet generally accepted accounting criteria for deferral
and amortization. Software development costs incurred prior to the establishment of
technological feasibility do not meet these criteria, and are expensed as incurred.
Capitalized costs are amortized over a period not exceeding 36 months. No costs were
deferred in the quarters ended May 31, 2006 and May 31, 2005. Costs were not deferred in
the period because either no projects met the criteria for deferral or, if met, the period
between achieving technological feasibility and the general availability of the product
was short, rendering the associated costs immaterial.

# Amortization of
Acquisition-related Intangible Assets

|($000s)                             | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------------- | ------------------------- | ------------------------------------------
|                                   
|                                    | 2006                      | 2005                                      
|                                   
|Amortization of acquisition-related |                           |                                           
|intangible assets                   |                           | $1,701                                    

Amortization of acquisition-related
intangible assets was $1.7 million, an increase of $0.1 million or 4% for the quarter
ended May 31, 2006 compared to the corresponding period in the prior fiscal year. This
increase was due to the amortization of acquired technology relating to the acquisitions
of Databeacon Inc. and Digital Aspects Ltd. during the third quarter of fiscal 2006.

# Interest and Other
Income, Net

|($000s)                        | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------------------------ | ------------------------- | ------------------------------------------
|                              
|                               | 2006                      | 2005                                      
|                              
|Interest and other income, net |                           | $5,011                                    

36

---

Interest and other income, net, was
$5.0 million, an increase of $2.2 million or 80% in the quarter ended May 31, 2006
compared to the corresponding period in the prior fiscal year. The change in net interest
and other income is as follows:

|($000s)                       | Year-over-yearChangefrom May 31,
|----------------------------- | --------------------------------
|                             
|                              | 2005 to2006                     
|                             
|Increase in interest revenue  |                                 
|Loss on foreign exchange      |                                 
|Increase in interest expenses |                                 
|                             
|Total year-over-year change   |                                 
|                             

The increase in interest revenue was
attributable to an increase in the average portfolio size accompanied by an increase in
the average yield on investments as compared to the same period in the prior fiscal year.

# Income Tax Provision

|($000s)              | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|-------------------- | ------------------------- | ------------------------------------------
|                    
|                     | 2006                      | 2005                                      
|                    
|Income tax provision |                           | $4,441                                    
|Effective tax rate   |                           | 23.4                                      

As we operate globally, we calculate
our income tax provision in each of the jurisdictions in which we conduct business. Our
tax rate is therefore affected by the relative profitability of our operations in various
geographic regions. In the three months ended May 31, 2006, we recorded an income tax
provision of $4.4 million, representing an effective income tax rate of 23%.
Comparatively, in the three months ended May 31, 2005, we recorded an income tax provision
of $2.9 million, representing an effective income tax rate of 12%. We estimate our
effective tax rate for the current fiscal year to be 24%, exclusive of any one-time
events. This estimated effective tax rate was reduced for the three-month period ended May
31, 2006 to 23% due to adjustments related to prior year tax assessments. The estimated
effective tax rate for fiscal 2006 including stock-based compensation expense was 23%
which was reduced for the three-month period ended May 31, 2005 to 12% due to the
recognition of one-time benefits resulting from (i) a tax court decision that allowed
corporations to claim investment tax credits on stock-based compensation for research and
development personnel relating to fiscal years 2004 and 2005 and (ii) a change in tax
withholding legislation relating to one of the Corporations subsidiaries.

37

---

# LIQUIDITY AND
CAPITAL
RESOURCES

|($000s)                                            |  | As atMay 31,2006 | As atFebruary 28,2006 | Percentage Change
|-------------------------------------------------- |  | ---------------- | --------------------- | -----------------
|                                                  
|Cash and cash equivalents                          |  | $337,178         |                       | $398,634         
|Short-term investments                             |  | 273,006          |                       | 152,368          
|                                                   |  |                 
|Cash, cash equivalents, and short-term investments |  | $610,184         |                       | $551,002         
|Working capital                                    |  | 429,509          |                       | 419,437          

|($000s)                         | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------------------------- | ------------------------- | ------------------------------------------
|                               
|                                | 2006                      | 2005                                      
|                               
|Net cash provided by (used in): |                           |                                           
|Operating activities            |                           | $   72,640                                
|Investing activities            |                           | (126,449                                  
|Financing activities            |                           | (12,063                                   

|                             |  | As atMay 31,2006 | As atMay 31,2006
|---------------------------- |  | ---------------- | ----------------
|                            
|Days sales outstanding (DSO) |  | 58               |                 

* not meaningful

# Cash, Cash Equivalents,
and Short-term Investments

As of May 31, 2006, we held $610.2
million in cash, cash equivalents, and short-term investments, an increase of $59.2
million from February 28, 2006. This increase is primarily attributable to the collection
of accounts receivable which were seasonally high at the end of last quarter. Cash and
cash equivalents include investments which are highly liquid and held to maturity. Cash
equivalents typically include commercial paper, term deposits, bankers acceptances
and bearer deposit notes issued by major international banks. All cash equivalents have
terms to maturity of ninety days or less. Short-term investments are investments that are
highly liquid and held to maturity with terms to maturity greater than ninety days, but
less than twelve months. Short-term investments typically consist of commercial paper,
corporate bonds, bearer deposit notes and government securities.

We group cash and cash equivalents
with short-term investments when analyzing our total cash position. These balances may
fluctuate from quarter to quarter depending on the renewal terms of the investments.

38

---

# Working Capital

Working capital represents our current
assets less our current liabilities. As of May 31, 2006, working capital was $429.5
million, an increase of $10.1 million from February 28, 2006. The increase in working
capital can be attributed to a net decrease in current liabilities, especially salaries,
commissions, and related items and deferred revenue. The increase in short term
investments was offset by a decrease in cash and cash equivalents and accounts receivable.

Days sales outstanding was 58 days at
May 31, 2006, down from 77 days at February 28, 2006 and 63 days at May 31, 2005. We
calculate our days sales outstanding based on ending accounts receivable balances and
quarterly revenue.

# Long-term Debt

As at February 28, 2006 and May 31,
2006, we had no long-term debt.

# Net Cash Provided by
Operating Activities

Cash provided by operating activities
(after changes in non-cash working capital items) for the three months ended May 31, 2006
was $72.6 million, as compared to cash used in operating activities of $4.8 million in the
comparative period last year. The increase is primarily attributable to the collection of
accounts receivable and a reduction of the amount paid in salaries, commissions, and
related items compared to the same quarter last year.

# Net Cash Used in
Investing Activities

Cash used in investing activities was
$126.4 million for the three months ended May 31, 2006, as compared to cash provided by
financing activities of $21.3 million in the comparative period last year. During the
quarter ended May 31, 2006, we had an increase in the net investment in short-term
investments as our purchases of short-term investments exceeded the maturity of short-term
investments by $120.0 million during the quarter. In comparison, during the quarter ended
May 31, 2005, our proceeds on the maturity of short-term investments, net of investments,
were $25.9 million.

During the three month periods ended
May 31, 2006 and May 31, 2005, we made fixed asset additions in the amount of $6.4 million
and $4.8 million, respectively. The fixed asset additions in both periods related
primarily to computer equipment and software, office furniture, and leasehold
improvements.

# Net Cash Used in
Financing Activities

Cash used in financing activities was
$12.1 million for the three months ended May 31, 2006, a decrease in financing activities
of $1.4 million compared to the same period of the prior fiscal year. We issued 537,000
common shares, for proceeds of $12.9 million, during the three months ended May 31, 2006,
compared to the issue of 527,000 shares for proceeds of $11.8 million during the
corresponding period in the prior fiscal year. The issuance of shares in the three months
ended May 31, 2006 and 2005 was pursuant to our stock purchase plan and the exercise of
stock options by employees, officers, and directors.

39

---

We also paid $25.0 million during the
quarter to repurchase 652,000 shares on the open market. Comparatively, for the three
months ended May 31, 2005 we repurchased 617,000 shares at a value of $25.3 million. The
share repurchases made during both periods were part of distinct open market share
repurchase programs through The Nasdaq Global Market or The Toronto Stock Exchange. The
share repurchase programs have historically been adopted in October of each year and run
for one year. They allow the Corporation to purchase no more than 5% of the issued and
outstanding shares of the Corporation on the date the plan is adopted. These programs do
not commit the Corporation to make any share repurchases. Purchases can be made on The
Nasdaq Global Market or The Toronto Stock Exchange at prevailing open market prices and
are paid out of general corporate funds. We cancel all shares repurchased under the bid. A
copy of the Notice of Intention to Make an Issuer Bid is available from the
Corporate Secretary.

# Contracts and Commitments

We have unsecured credit facilities
subject to annual renewal. These credit facilities permit us to borrow funds or issue
letters of credit or guarantee up to Cdn $39.5 million (U.S. $31.3 million), subject to
certain covenants. As of May 31, 2006 and 2005, there were no direct borrowings under
these facilities.

We do not enter into off-balance sheet
financing as a matter of practice except for the use of operating leases for office space,
computer equipment, and vehicles. In accordance with GAAP, neither the lease liability nor
the underlying asset is carried on the balance sheet, as the terms of the leases do not
meet the thresholds for capitalization.

During fiscal 2005, the Corporation
entered into cash flow hedges in order to offset the risk associated with the effects of
certain foreign currency exposures related to an intercompany loan and the corresponding
interest payments between subsidiaries with different functional currencies. As of May 31,
2006, the Corporation had cash flow hedges, with maturity dates between February 28, 2007
and January 14, 2008, to exchange the U.S. dollar equivalent of $73.8 million in foreign
currency. At May 31, 2006 we had an unrealized loss in the amount of $2.2 million in
relation to these contracts. We entered into these foreign currency exchange forward
contracts with major Canadian chartered banks, and therefore we do not anticipate
non-performance by these counterparties. The amount of the exposure on account of any
non-performance is restricted to the unrealized gains in such contracts.

Our contractual obligations have not
changed materially from those included in our Annual Report on Form 10-K for the year
ended February 28, 2006.

We have never declared or paid any
cash dividends on our common shares. Our current policy is to retain our earnings to
finance expansion and to develop, license, and acquire new software products, and to
otherwise reinvest in Cognos.

Given our historical profitability and
our ability to manage expenses, we believe that our current resources are adequate to meet
our requirements for working capital and capital expenditures through the foreseeable
future.

Inflation has not had a significant
impact on our results of operations.

40

---

# CRITICAL
ACCOUNTING
ESTIMATES

Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. The
estimates form the basis for making judgments about the carrying values of assets and
liabilities that may not be readily apparent from other sources. These judgments may
change based upon changes in business conditions. As a result, actual results may differ
from these estimates under different assumptions, conditions, and experience.

The following critical accounting
policies and significant estimates are used in the preparation of our consolidated
financial statements:

| |  |  | Revenue
Recognition
| | - |  | -------------------

| |  |  | Allowance
for Doubtful Accounts
| | - |  | -------------------------------

| |  |  | Accounting
for Income Taxes
| | - |  | ---------------------------

| |  |  | Business
Combinations
| | - |  | ---------------------

| |  |  | Impairment
of Goodwill and Long-lived Assets
| | - |  | --------------------------------------------

Revenue Recognition
 We recognize revenue in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue Recognition as amended by SOP
No. 98-9, Software Revenue Recognition with Respect to Certain Arrangements
(collectively SOP 97-2). As such, we exercise judgment and use
estimates in connection with the determination of the amount of software license,
post-contract customer support (PCS), and professional services
(services) revenues to be recognized in each accounting period.

We sell off-the shelf software
generally bundled with PCS and, on occasion, services in multiple-element arrangements.
SOP 97-2 requires that judgment be applied to distinguish whether multiple elements in an
arrangement can be treated as separate accounting units. In order to account separately
for the services element of an arrangement that includes both product license and
services, the services (a) must not be essential to the functionality of any other element
of the transaction and (b) must be stated separately such that the total price of the
arrangement can be expected to vary as the result of the inclusion or exclusion of the
services. If these two criteria are not met, the entire arrangement is accounted for using
the percentage of completion method in accordance with SOP 81-1, Accounting for
Performance of Construction Type and Certain Production Type Contracts. While the
service element must be stated separately, the service element does not have to be priced
separately in the contract in order to separately account for the services as a separate
element of the transaction.

For substantially all of our
software arrangements, we defer revenue for the PCS and services to be provided to the
customer based on vendor-specific objective evidence (VSOE) of fair
value and recognize revenue for the product license when persuasive evidence of an
arrangement exists and delivery of the software has occurred, provided the fee is fixed or
determinable and collection is deemed probable.

41

---

We evaluate each of these criteria
as follows:

| |  |  | Persuasive
evidence of an arrangement exists:    Our standard business practice is that
persuasive evidence exists when we have a binding contract between ourselves and a
customer for the provision of software or services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Delivery
has occurred:    Delivery is considered to occur when media containing the
licensed programs is provided to a common carrier or, in the case of electronic
delivery, the customer is given access to download the licensed program. Our typical end
user license agreement does not include customer acceptance provisions. We recognize
revenue from resellers in the same fashion as end-user licenses unless fee
payments are based upon the number of copies made or ordered. In cases where the fees
are linked to the number of copies, revenue is recognized upon sell-through to the end
customer based on the number of copies sold.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
fee is fixed or determinable:    A fee is fixed or determinable if it is a fixed
amount of money or an amount that can be determined at the commencement of the
contract, and is payable on Cognos standard payment terms. Fees are generally considered
fixed or determinable unless a significant portion (more than 10%) of the licensing fee
is due more that 12 months after delivery, in which case revenue is recognized
when payment becomes due from the customer. In addition, we only consider the fee
to be fixed or determinable if the fee is not subject to refund or adjustment. Our
typical end user and reseller license agreements do not allow for refunds, returns
or adjustments to the licensing fee. However, in the rare circumstance where this
might occur and a refund, return or adjustment is agreed upon, revenue is recognized upon
the expiration of the rights of exchange or return. For resellers, if they are
newly formed, undercapitalized, or in financial difficulty, or if uncertainties
about the number of copies to be sold by the reseller exist, fees are not considered
fixed or determinable. If the arrangement fee is not fixed or determinable, we
recognize the revenue as amounts become due and payable.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Collectibility
is probable:    We extend credit to credit worthy customers in order to
facilitate our business. Credit is extended through the process of risk
identification, evaluation, and containment. In practical terms, this process will take
the form of: customer credit checks; established credit limits for customers
(where necessary); and predetermined terms of sale. Collection is deemed probable
if we expect that the customer will be able to pay amounts under the arrangement as payments
become due. If we determine that collection is not probable, we defer the revenue and
recognize the revenue upon cash collection.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under  the residual method
prescribed by SOP 97-2, a portion of the arrangement fee is first allocated to
undelivered elements included in the arrangement (i.e., PCS and services) based on VSOE
of fair value, with the remainder of the arrangement fee being allocated to the delivered
elements of the arrangement. Our contracts commonly include product license, PCS, and
services (e.g., education and consulting). Each product license arrangement requires
careful analysis to ensure that each of the individual elements in the transaction has
been identified, along with VSOE of the fair value of each element. If VSOE of fair value
cannot be established for the undelivered elements of a product license agreement, the
entire amount of revenue from the arrangement is deferred and recognized over the period
that these elements are delivered.

Services  revenue primarily
consists of implementation services related to the installation of our products and
training revenues. Our software is ready to use by the customer upon receipt. While many
of our customers may choose to configure the software to fit their specific needs, our
implementation services do not involve significant customization to or development of the
underlying software code. Substantially all of our services arrangements are billed on a
time and materials basis and, accordingly, are recognized as the services are performed.
The fair value of the services portion of the arrangement is established according to our
standard price list, which includes quantity discounts,
and is based on our history of separate sales using such price lists.

42

---

Our customers typically
pre-pay PCS for the first year in connection with a new product license. In such cases,
an amount equal to VSOE of fair value for PCS is deferred and recognized ratably over the
term of the initial PCS contract, typically 12 months. PCS is renewable by the customer
on an annual basis thereafter. We use two methods to determine VSOE of fair value for PCS
in a multi-element arrangement: stated price and the price when an element is sold
separately. If a stated rate (either a stated renewal rate or a stated rate for the first
year PCS bundled with the software license) is included in a contract (i.e., the first
method), that rate is used to account for the PCS provided to that customer, provided
that the rate is substantive and consistent with our customary pricing
practices. Historically,  there has been a high correlation
between the amounts allocated to PCS in the initial software licensing arrangement for such
arrangements and the amounts at which PCS is renewed.
The second method is
the price charged when the same element is sold separately. We account for PCS using the
first method when a stated PCS rate is included in a contract. For all other contracts,
we establish VSOE of fair value for PCS based upon the price charged when PCS is sold
separately (i.e., the second method).

Our customer experience has
shown that our contractual arrangements have historically used two forms of contract
terms regarding PCS; contracts which include a stated PCS rate (either a stated renewal
rate or a stated rate for the first year PCS bundled with the software license); and
contracts which do not state a PCS rate. For contracts which include a stated renewal
rate, we use that contractually stated renewal rate to allocate arrangement consideration
to the undelivered PCS at the inception of the arrangement and recognize such
consideration ratably over the PCS term provided that the stated rate is substantive and consistent with
our customary pricing practices.
Historically,
there has been a high correlation between the amounts allocated
to PCS in the initial software licensing arrangement for such arrangements and the amounts at which PCS
is renewed.

For contracts that state a
first year PCS rate, we use that stated rate to allocate arrangement consideration to the
undelivered PCS at the inception of the arrangement and recognize such consideration
ratably over the PCS term, provided that it is consistent with our customary pricing
practices. Our customer experience based on our continual monitoring of the process has
been that this stated rate is typically the rate at which PCS will be renewed
and is a substantive rate.
Historically,
there has been a high correlation between the amounts allocated
to PCS in the initial software licensing arrangement for such arrangements and the amounts at which PCS
is renewed.
If our
renewals history began to indicate that renewals were not highly correlated to the first
year PCS amounts that we use to allocate revenue to PCS at the inception of the
arrangement, then we would not be able to establish VSOE of fair value for PCS for such
contracts and revenue attributable to the software license and PCS would be recognized
ratably over the PCS period.

For contracts which do not
state a PCS rate, we allocate a consistent percentage of the license fee to PCS in the first
year of such arrangements based on a substantive rate at which our customer experience indicates customers will
typically agree to renew PCS. Historically, there has been a high correlation
between the mean of amounts allocated to PCS in the initial software licensing arrangement for
such arrangements and the mean of amounts at which PCS is renewed.

We allocate arrangement
consideration to PCS included in a software licensing arrangement based upon
contemporaneous evidence of stand-alone prices and the application of controlled
processes. These controlled processes include making judgments about the amount of
arrangement consideration to allocate to PCS in contracts which do not state a PCS rate.
Such judgments include continual monitoring of customer acceptance of renewal rates by
other customers of the same customer class and evaluating customer tolerance for rate
changes from a business standpoint at the time the initial license arrangement is
established. On an historical basis, the contemporaneous evidence used has enabled us to
establish the first year deferral consistent with the amount at which PCS has actually
been renewed in the second and subsequent years. We use these renewals, which represent
separate contemporaneous sales of PCS, as a basis to establish VSOE of fair value. Our
process has historically provided experience to establish VSOE for PCS due to our
continual monitoring of the process. If there are changes in the customersacceptance
of renewal rates or tolerance for rate change or our related ability to monitor and
evaluate those changes, we may no longer be able to establish VSOE of fair value for PCS
and accordingly revenue attributable to the software license and PCS would be recognized
ratably over the PCS period.

We stratify our customers
into three classes in determining VSOE of fair value for PCS. The classifications are
based on the amount of software license business (i.e., software license revenues),
life-to-date, that has previously been obtained from the respective customers. For each
class of customer, a range of prices exists which represents VSOE of fair value for PCS
for that class of customer based upon substantive renewals and our experience that there is a high
correlation between the mean of amount allocated to PCS in the initial software licensing
arrangement for such arrangements and the mean of amounts at which PCS is renewed.

43

---

When a PCS rate in
individual arrangements is stated below the lower limits of our acceptable ranges by
customer class, we allocate an amount for PCS equal to the low end of the applicable
range by customer class. This adjustment allocates additional revenue from license
revenue to deferred PCS revenue which is amortized over the life of the PCS contract,
which is typically one year. If the stated PCS rate is above the reasonable range, no
adjustment is made and the deferred PCS revenue is measured at the contracted percentage.

In determining VSOE of fair
value for PCS, we conduct our analysis on the basis of customer classes as described
above. We do not consider other factors, such as: geographic regions or locations; type
and nature of products; distribution channel (i.e. direct and resellers); stage
of licensed product life cycle; other arrangement elements; overall economics; term of
the license arrangement; or other factors. We do not differentiate our pricing policies
based on these factors and our customer experience has indicated no difference in
customer renewal behavior based on these factors. While our renewal experience has not
shown differences in renewal behavior based on these discriminate factors, it is possible
that changes related to these factors or our related ability to monitor and evaluate
those changes could occur. In such circumstances, we may come to the determination that
we can no longer substantiate VSOE of fair value for PCS for some or all of our software
license agreements and revenue related to software licenses and PCS in such agreements
would be recognized ratably over the PCS period.

We recognize revenue for
resellers, value added resellers, original equipment manufacturers, and strategic system
integrators (collectively resellers) in a similar manner to our
recognition of revenue for end-users.

Stock-based  Compensation  Effective
March 1, 2006, we adopted FAS 123R to account for our stock option, stock purchase,
deferred share and restricted share unit plans. We elected to implement FAS 123R using
the modified retrospective method of transition provided by FAS 123R and, accordingly,
financial statement amounts for all prior periods presented herein reflect results as if
the fair value method of expensing had been applied from the original effective date of
FAS 123, the predecessor to FAS 123R.

Under this standard, companies are
required to account for share-based transactions using a fair value method and recognize
the expense in the consolidated statements of income. We previously accounted for
share-based compensation transactions using the intrinsic value method in accordance with
APB 25 and provided the pro forma disclosures prescribed by FAS 123. Except for certain
acquisition-related options, the exercise price of all stock options is equal to the
closing market price of the stock on the trading day preceding the date of grant. Accordingly,
with the exception of this acquisition-related compensation and awards granted under our
deferred share and restricted share unit plans, no compensation cost had been recognized
in the financial statements prior to fiscal 2007.

In order to calculate the fair value
of share-based payment awards, we use a binomial lattice model. This model requires the
input of subjective assumptions, including stock price volatility, the expected exercise
behavior and forfeiture rate. Expected volatilities are based on the historical volatility
of our stock, implied volatilities from traded options on our stock and other relevant
factors. We use historical data to estimate option exercise and employee termination
within the valuation model: separate groups of employees that have similar exercise
behavior and turnover rates are considered separately for valuation purposes. The expected
life of options granted is derived from the output of the option valuation model and
represents the period of time that options granted are expected to be outstanding. The
risk-free rate for periods within the contractual life of the option are determined by the
US Treasury yields and the Government of Canada benchmark bond yields for U.S. dollar and
Canadian dollar options, respectively, in effect at the time of the grant.

44

---

The assumptions used in calculating
the fair value of share-based payment awards represent managements best estimates,
but these estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change or we use different assumptions, our stock-based
compensation expense could be materially different in the future. Further, the liability
incurred as a result of our performance-based restricted share units and our deferred
share unit plans is based on the fair value of our stock on the balance sheet date. If the
value of our stock were to change significantly, our stock-based compensation expense
could be significantly different in the future. We are also required to estimate the
forfeiture rate and only recognize the expense for those shares expected to vest. If our
actual forfeiture rate is materially different from our estimate, our stock-based
compensation expense could be significantly different from what we have recorded in the
period such determination is made.

Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We regularly review our
accounts receivable and use our judgment to assess the collectibility of specific accounts
and, based on this assessment, an allowance is maintained for 100% of all accounts over
360 days and specific accounts deemed to be uncollectible. For those receivables not
specifically identified as uncollectible, an allowance is maintained for 2% of those
receivables at May 31, 2006. In order to determine the percentage used, we analyze, on an
annual basis, the geographical aging of the accounts, the nature of the receivables (i.e.
license, maintenance, consulting), our historical collection experience, and current
economic conditions.

In the past, changes in these factors
have resulted in adjustments to our allowance for doubtful accounts. These adjustments
have been accounted for as changes in estimates, the effect of which has not been
significant on our results of operations and financial condition. As these factors change,
the estimates made by management will also change, which will impact our provision for
doubtful accounts in the future. Specifically, if the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make payments, an
additional provision for doubtful accounts may be required.

Accounting for Income Taxes
 As an entity which operates globally, we calculate our income tax liabilities
in each of the jurisdictions in which we conduct business. Our tax rate is therefore
affected by the relative profitability of our operations in various geographic regions. We
are subject to ongoing tax examinations and assessments in various jurisdictions.
Accordingly, we may incur additional tax expense based upon our assessment of the probable
outcomes of such matters. In addition, when applicable, we adjust the previously recorded
tax expense to reflect examination results. Our ongoing assessments of the probable
outcome of the examinations and related tax positions require judgment and can materially
increase or decrease our effective tax rate as well as impact our operating results.

We record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be realized.
Although we have considered forecasted taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, there is no assurance
that the valuation allowance will not need to be adjusted to cover changes in deferred tax
assets that may not be realized.

Our valuation allowance pertains
primarily to net operating loss carryforwards. A portion of these loss carryforwards
resulted from acquisitions. In the event we were to subsequently determine that we would
be able to realize deferred tax assets related to acquisitions in excess of the net
purchase price allocated to those deferred tax assets, we would record a credit to
goodwill.

If we were to determine that we would
be able to realize deferred tax assets unrelated to acquisitions in excess of the net
recorded amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Should we determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment to the
deferred tax asset would reduce income in the period such determination was made.

45

---

We provide for withholding taxes on
the undistributed earnings of our foreign subsidiaries where applicable. The ultimate tax
liability related to the undistributed earnings could differ materially from the
liabilities recorded in our financial statements. These differences could have a material
effect on our income tax liabilities and our net income.

Business Combinations We
account for acquisitions of companies in accordance with Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinations. We allocate the
purchase price to tangible assets, intangible assets, and liabilities based on fair values
with the excess of purchase price amount being allocated to goodwill.

Historically, our acquisitions have
resulted in the recognition of significant amounts of goodwill and acquired intangible
assets. In order to allocate a purchase price to these intangible assets and goodwill, we
make estimates and judgments based on assumptions about the future income producing
capabilities of these assets and related future expected cash flows. We also make
estimates about the useful life of the acquired intangible assets. Should different
conditions prevail, we could incur write-downs of goodwill, write-downs of intangible
assets, or changes in the estimation of useful life of those intangible assets. In the
past, we have made adjustments to the valuation allowance on deferred tax assets related
to loss carry forwards acquired through acquisitions and the restructuring accrual related
to acquisitions. These adjustments did not affect our result of operations. Instead, these
adjustments were applied to goodwill.

In accordance with SFAS No.142,
Goodwill and Other Intangible Assets (SFAS 142), goodwill is not
amortized, but is subject to annual impairment testing which is discussed in greater
detail below under Impairment of Goodwill and Long-lived Assets.

Intangible assets currently include
acquired technology, contractual relationships, and trademarks and patents. Acquired
technology is initially recorded at fair value based on the present value of the estimated
net future income-producing capabilities of the software products acquired. Acquired
technology is amortized over its estimated useful life on a straight-line basis.
Contractual relationships represent contractual and separable relationships that we have
with certain customers and partners that we acquired through acquisitions. These
contractual relationships were initially recorded at their fair value based on the present
value of expected future cash flows and are amortized over their estimated useful life.
Trademarks and patents are initially recorded at cost. Cost includes legal fees and other
expenses incurred in order to obtain these assets. They are amortized over their estimated
useful life on a straight-line basis.

In accordance with SFAS 142, we
continuously evaluate the remaining useful life of our intangible assets being amortized
to determine whether events or circumstances warrant a revision to the estimated remaining
amortization period.

Other estimates associated with the
accounting for acquisitions include restructuring costs. Restructuring costs primarily
relate to involuntary employee separations and accruals for vacating duplicate premises.
Restructuring costs associated with the pre-acquisition activities of an entity acquired
are accounted for in accordance with Emerging Issues Task Force No. 95-3, Recognition
of Liabilities in Connection with a Business Combination(EITF
95-3). To calculate restructuring costs accounted for under EITF 95-3,
management estimates the number of employees that will be involuntarily terminated and the
associated costs and the future costs to operate and sublease duplicate facilities once
they are vacated. Changes to the restructuring plan could result in material adjustments
to the restructuring accrual.

46

---

Impairment of Goodwill and
Long-lived Assets In accordance with SFAS 142, goodwill is subject to annual
impairment tests, or on a more frequent basis if events or conditions indicate that
goodwill may be impaired. Goodwill is tested for impairment at a level of reporting
referred to as a reporting unit. The Corporation as a whole is considered one reporting
unit. Quoted market prices in active markets are considered the best evidence of fair
value. Therefore, the first step of our annual test is to compare the fair value of our
shares on The Nasdaq Stock Market to the carrying value of our net assets. If we determine
that our carrying value exceeds our fair value, we would conduct a second step to the
goodwill impairment test. The second step compares the implied fair value of the goodwill
(determined as the excess fair value over the fair value assigned to our other assets and
liabilities) to the carrying amount of goodwill. To date, we have not needed to perform
the second step in testing goodwill impairment. If the carrying amount of goodwill were to
exceed the implied fair value of goodwill, an impairment loss would be recognized.

We evaluate all of our long-lived
assets, including intangible assets other than goodwill and fixed assets, periodically for
impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-lived Assets(SFAS 144). SFAS 144 requires that long-lived
assets be evaluated for impairment when events or changes in facts and circumstances
indicate that their carrying value may not be recoverable. Events or changes in facts or
circumstances can include a strategic change in business direction, decline or
discontinuance of a product line, a reduction in our customer base, or a restructuring. If
one of these events or circumstances indicates that the carrying value of an asset may not
be recoverable, the amount of impairment will be measured as the difference between the
carrying value and the fair value of the impaired asset as calculated using a net
realizable value methodology. An impairment will be recorded as an operating expense in
the period of the impairment and as a reduction in the carrying value of that asset.

# NEW
ACCOUNTING
PRONOUNCEMENTS

In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109(FIN 48). This
Interpretation clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This Interpretation prescribes that a company should
use a more-likely-than-not recognition threshold based on the technical merits of the tax
position taken. Tax positions that meet the more-likely-than-not recognition threshold
should be measured in order to determine the tax benefit to be recognized in the financial
statements. FIN 48 is effective in fiscal years beginning after December 15, 2006. We are
currently evaluating the impact of FIN 48 on our consolidated results of operations and
financial condition.

In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Instruments  an Amendment of SFAS
No. 140 (SFAS 156). This Statement amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized servicing assets
and servicing liabilities. This Statement is effective for fiscal years beginning after
September 15, 2006. We do not expect the adoption of SFAS 156 to have a material impact on
our consolidated results of operations and financial condition.

In February 2006, the FASB issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments  an Amendment to
SFAS Nos. 133 and 140(SFAS 155). SFAS 155 permits fair value
remeasurement for any hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation and clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133. This statement
also establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation and clarifies that
concentrations of credit risk in the form of subordination are not embedded derivatives.
In addition, SFAS 155 amends SFAS No. 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This Statement is
effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. We do not expect the
adoption of SFAS 155 to have a material impact on our consolidated results of operations
and financial condition.

47

---

In May 2005, the FASB issued SFAS No.
154, Accounting Changes and Error Corrections(SFAS 154)
which supersedes APB No. 20, Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements
for the accounting for and reporting of changes in accounting principles. The statement
requires the retroactive application to prior periods financial statements of
changes in accounting principles, unless it is impracticable to determine either the
period specific effects or the cumulative effect of the change. SFAS 154 does not change
the guidance for reporting the correction of an error in previously issued financial
statements or the change in an accounting estimate. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS 154 did not have a material impact on our consolidated results
of operations and financial condition.

48

---

|Item 3. |  | Quantitative and Qualitative Disclosure about Market Risk
|------- |  | ---------------------------------------------------------

Market risk represents the risk of
loss that may impact our financial position due to adverse changes in financial market
prices and rates. Our market risk exposure is primarily a result of fluctuations in
interest rates and foreign currency exchange rates. We do not hold or issue financial
instruments for trading purposes.

# Interest Rate Risk

Our exposure to market rate risk for
changes in interest rates relates primarily to our investment portfolio. The investment of
cash is regulated by our investment policy of which the primary objective is security of
principal. Among other selection criteria, the investment policy states that the term to
maturity of investments cannot exceed two years in length. We do not use derivative
financial instruments in our investment portfolio.

Interest income on our cash, cash
equivalents, and short-term investments is subject to interest rate fluctuations, but we
believe that the impact of these fluctuations does not have a material effect on our
financial position due to the short-term nature of these financial instruments. We have no
long-term debt. Our interest income and interest expense are most sensitive to the general
level of interest rates in Canada and the United States. Sensitivity analysis is used to
measure our interest rate risk. For the quarter ending May 31, 2006, a 100 basis-point
adverse change in interest rates would have had a $0.01 impact on diluted earnings per
share and would not have had a material effect on our consolidated financial position or
cash flows.

# Foreign Currency Risk

We operate internationally.
Accordingly, a substantial portion of our financial instruments are held in currencies
other than the U.S. dollar. Our policy with respect to foreign currency exposure, as it
relates to financial instruments, is to manage financial exposure to certain foreign
exchange fluctuations with the objective of neutralizing some of the impact of foreign
currency exchange movements. Sensitivity analysis is used to measure our foreign currency
exchange rate risk. As of May 31, 2006, a 10% adverse change in foreign exchange rates
versus the U.S. dollar would have decreased our reported cash, cash equivalents, and
short-term investments by approximately two percent.

Also, as we conduct a substantial
portion of our business in foreign currencies other than the U.S. dollar, our results are
affected, and may be affected in the future, by exchange rate fluctuations of the U.S.
dollar relative to the Canadian dollar, to various European currencies, and, to a lesser
extent, other foreign currencies. Revenues and expenses generated in foreign currencies
are translated at exchange rates during the month in which the transaction occurs. We
cannot predict the effect foreign exchange fluctuations will have on our results going
forward; however, if significant foreign exchange losses are experienced, they could have
a material adverse effect on our business, results of operations, and financial condition.

49

---

|Item  4. |  | Controls and Procedures
|-------- |  | -----------------------

|a) |  | Evaluation
of disclosure controls and procedures.
|-- |  | -------------------------------------------------

Under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief Financial
Officer, we have evaluated the disclosure controls and procedures as of the end of the
period covered by this quarterly report and as of the filing date.

The Corporations disclosure
policy and disclosure controls require that all information on a particular matter be
accumulated and evaluated prior to filing any reports or disclosing any material
information. At the deadline for filing our Annual Report on Form 10-K, the Corporation
was undergoing a review by the Staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the Staff). The review was focused on the
manner in which the Corporation allocates revenue for post-contract customer support
(PCS) in customer contracts having multiple elements such as PCS and license.

An evaluation of the facts associated
with the Staffs review resulted in a decision to delay the filing of our Annual
Report on Form 10-K for the fiscal year ended February 28, 2006 as well as our Quarterly
Report on Form 10-Q for the period ended May 31, 2006 until completion of the review. On
July 20, 2006, the Staff informed the Corporation that it had concluded its review and
that it would not object to the Corporations revenue recognition accounting as
defined in SOP 97-2. The Corporations revenue recognition policy is described in the
Critical Accounting Estimates section contained in Item 2 and
Note 2 to the Condensed Notes to the Consolidated Financial Statements
of this Quarterly
Report on Form 10-Q.

Based upon our evaluation of the
disclosure controls and procedures as of the end of the period covered by this quarterly
report and as of the filing date, the Chief Executive Officer and Chief Financial Officer
conclude that the disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934) are effective at a reasonable assurance
level as of May 31, 2006 and the date of this filing to ensure that information required
to be disclosed in our filings and submissions under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms and that the information required to be
disclosed is accumulated and communicated to our principal executive and principal
financial officers as appropriate to allow timely decisions regarding disclosure.

|b) |  | Changes
in internal controls
|-- |  | ----------------------------

There have been no changes in our
internal controls over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) during our most recently completed fiscal quarter that have materially
affected, or are reasonably likely to materially effect, our internal control over
financial reporting.

50

---

PART II  OTHER
INFORMATION

Item 1A.    Risk Factors

# Certain Factors That May
Affect Future Results

This report contains forward-looking
statements, including statements regarding the future success of our business and
technology strategies, our research and development, our future market opportunities, our
revenues, and our intellectual property. These statements are neither promises nor
guarantees, but involve known and unknown risks and uncertainties that may cause our
actual results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or achievements
expressed in or implied by these forward-looking statements. These risks include risks
related to our revenue growth, operating results, industry, products including the
integration and customer acceptance of Cognos 8, and litigation, as well as the other
factors discussed below and elsewhere in this report. Readers should not place undue
reliance on any such forward-looking statements, which speak only as of the date they were
made. Except to the extent required by applicable law, we disclaim any obligation to
publicly update or revise any such statements to reflect any change in our expectations or
in events, conditions, or circumstances on which any such statements may be based, or that
may affect the likelihood that actual results will differ from those set forth in the
forward-looking statements.

Our dependence on larger
transactions is increasing and the length of time required to complete a sales cycle has
become more lengthy, complex, and unpredictable.

As existing and potential customers
seek to standardize on a single BI vendor and as our business continues to evolve toward
larger transactions at the enterprise level and larger transactions account for a greater
proportion of our business, the presence or absence of one or more of these large
transactions in a particular period may have a material positive or negative effect on our
revenue in that period. For example, in fiscal years 2006 and 2005, we closed 585 and 535
contracts greater than $200,000, representing 32% and 33% of our revenue for these
periods, respectively, compared to 394 contracts greater than $200,000, representing 27%
of our revenue for fiscal 2004. These significant transactions represent significant
business and financial decisions for our customers and require a considerable effort on
the part of customers to assess alternative products and require additional levels of
management approvals before being concluded. They are also often more complex than smaller
transactions. These factors generally lengthen the typical sales cycle and increase the
risk that the customers purchasing decision may be postponed or delayed from one
period to another subsequent or later period or that the customer will alter his
purchasing requirements. The sales effort and service delivery scope for larger
transactions also require additional resources to execute the transaction. These factors,
along with any other foreseen or unforeseen event, could result in lower than anticipated
revenue for a particular period or in the reduction of estimated revenue in future
periods.

51

---

We face intense and
increasing competition and we may not compete successfully.

We face substantial and increased
competition throughout the world. We expect our competitors to continue to improve the
performance of their current products and to introduce new products (or integrated
products) or new technologies. The software market may continue to consolidate by merger
or acquisition and larger software vendors, including ERP software vendors, may continue
to expand their product offering into our markets. For example, ERP vendor, Oracle
Corporation, acquired Siebel Systems, Inc. in January 2006 and also acquired one of its
major ERP competitors, PeopleSoft, Inc. in 2005. In addition, Microsoft has increased its
presence in our markets and has announced that it will continue expansion into business
intelligence. As our competitors continue to merge or partner with other of our
competitors or ERP vendors or if we were to become the subject of an unsolicited
acquisition initiative by another enterprise, such changes in the competitive landscape
could adversely affect our ability to compete either because of an improvement in one of
our competitors competitive position or due to distraction caused by an unsolicited
acquisition. Entry or expansion of other large software vendors, including ERP vendors,
into this market may establish competitors which have larger existing customer bases and
substantially greater financial and other resources with which to pursue research and
development, manufacturing, marketing, and distribution of their products. Their current
customer base and relationships may also provide them with a competitive advantage. New
product announcements or introductions by our competitors, including the continuing
emergence of open source software offerings, could cause a decline in sales, a reduction
in the sales price, or a loss of market acceptance of our existing products. To the extent
that we are unable to effectively compete against our current and future competitors, our
ability to sell products could be harmed. Any erosion of our competitive position could
have a material adverse effect on our business, results of operations, and financial
condition.

The introduction of Cognos
8 and other new products could erode revenue from existing products and a delay in the
release schedule for a product may have a material adverse impact on our financial
results.

We may develop technology or a product
that constitutes a marked advance over both our own products and those of our competitors.
We believe Cognos 8 is an example of such a product. With the introduction of such a
product, we may experience a decline in revenues of our existing products that is not
fully matched by the new products revenue. For example, customers may delay making
purchases of a new product to permit them to make a more thorough evaluation of the
product, or until the views of the industry analysts and the marketplace become widely
available. In addition, some customers may hesitate migrating to a new product out of
concerns regarding the complexity of migration and product infancy issues on performance.
In addition, we may lose existing customers who choose a competitors product rather
than upgrade or migrate to our new product. This could result in a temporary or permanent
revenue shortfall and materially affect our business. A delay in our release schedule for
a new product or a major release may also result in us not being able to recognize revenue
as previously anticipated during a particular period and it may delay the purchase of the
product by customers. Despite our efforts to minimize the impact of these events, these
events could result in a temporary or permanent revenue shortfall and materially affect
our business and financial results. For example, in the third quarter of fiscal year 2006,
we believe confusion in the market regarding the availability of Cognos 8 had a negative
impact on our overall performance for the quarter.

Currency fluctuations may
adversely affect us.

A substantial portion of both our
revenues and expenditures are generated in currencies other than the U.S. dollar, such as
the Canadian dollar and the euro. Fluctuations in the exchange rate between the U.S.
dollar and other currencies, particularly the euro and the Canadian dollar, may have a
material adverse effect on our business, financial condition, and operating results as we
report in U.S. dollars. For example, the Canadian dollar has continued to strengthen
during the first quarter of fiscal 2007, leading to higher than anticipated expenses when
reported in U.S. dollars. Please see further discussion on foreign currency risk included
in Item 3, Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q.

52

---

Economic conditions could
adversely affect our revenue growth and ability to forecast revenue.

The revenue growth and profitability
of our business depends on the overall demand for BI and CPM products and services.
Because our sales are primarily to major corporate customers in the high technology,
telecommunications, financial services (including insurance), pharmaceutical, utilities,
and consumer packaged goods industries, our business depends on the overall
economic conditions and the economic and business conditions within these industries. A
weakening of one or more of the global economy, the information technology industry, or
the business conditions within the industries listed above may cause a decrease in our
software license revenues. A decrease in demand for computer software caused, in part, by
a continued weakening of the economy, domestically or internationally, may result in a
decrease in revenues and growth rates.

We may not be able to hire,
integrate, retain, or incent key personnel essential to our business or we may not be able
to manage changes and transitions in our key personnel.

We believe that our success depends on
our ability to hire, retain, and incent senior management and other key employees to
develop, market, and support our products and manage our business. The loss of any one of
their services could have a material adverse effect on our business. Our success is also
highly dependent on our continuing ability to hire, integrate, and retain highly qualified
personnel as well as our ability to train and develop personnel. The failure to attract
and retain or to train and develop key personnel could adversely affect our future growth
and profitability. Changes in senior management or other key personnel can also cause
temporary disruption in our operations during transition periods.

If we do not respond
effectively to rapid technological change, our products may become obsolete.

The markets for our products are
characterized by: rapid and significant technological change; frequent new product
introductions and enhancements; changing customer demands; and evolving industry
standards. We cannot provide assurance that our products and services will remain
competitive in light of future technological change or that we will be able to respond to
market demands and developments or new industry standards. If we are unable to identify a
shift in market demand or industry standards quickly enough, we may not be able to develop
products to meet those new demands or standards, or to bring them to market in a timely
manner. In addition, failure to respond successfully to technological change may render
our products and services obsolete and thus harm our ability to attract and retain
customers. Even if we do respond to technological changes, our solutions may be less
appealing to customers than those of our competitors, or our customers may not accept our
new products and services.

Our sales forecasts may
not match actual revenues in a particular period.

The basis of our business budgeting
and planning process is the estimation of revenues that we expect to achieve in a
particular quarter and is based on a common industry practice known as the
pipeline system. Under this system, information relating to sales prospects,
the anticipated date when a sale will be completed and the potential dollar amount of the
sale are tracked and analyzed to provide a pipeline of future business. These
pipeline estimates are not necessarily reliable predictors of revenues in a particular
quarter because of, among other things, the events identified in these risk factors, as
well as the subjective nature of the estimates themselves. In particular, a slowdown in
technology spending or a deterioration in economic conditions is likely to result in the
delay or cancellation of prospective orders in our pipeline. Also, an increase in the
complexity and importance of large transactions and the resulting increase in time to
complete these large transactions makes forecasting more difficult. A variation from our
historical or expected conversion rate of the pipeline could adversely affect our budget
or planning and could consequently materially affect our operating results and our stock
price could suffer.

53

---

We operate internationally
and face risks attendant to those operations.

We earn a significant portion of our
total revenues from international sales generated through our foreign direct and indirect
operations. These sales operations face risks arising from local political, legal and
economic factors such as the general economic conditions in each country or region,
varying regulatory requirements, compliance with international and local trade, labor and
other laws, and reduced intellectual property protections in certain jurisdictions. We may
also face difficulties in managing our international operations, collecting receivables in
a timely fashion, and repatriating earnings. Any of these factors, either individually or
in combination, could materially impact our international operations and adversely affect
our business as a whole.

Our total revenue and
operating results may fluctuate, which could result in fluctuations in the price of our
common stock.

We have experienced revenue growth
from our products in the past. We cannot, however, provide assurance that revenue from
these products will continue to grow, or grow at previous rates or rates projected by
management. For example, our rate of revenue growth between fiscal years 2006 and 2005 was
lower than the rate of growth between fiscal years 2005 and 2004. Anticipated revenue may
be reduced by any one, or a combination of, unforeseen market, economic, or competitive
factors some of which are discussed in this section. We have experienced and in the future
may experience a shortfall in revenue or earnings or otherwise fail to meet public market
expectations, which could materially and adversely affect our business and result in
fluctuations in the market price of our common stock.

Our quarterly and annual
operating results may vary between periods.

Historically, our quarterly operating
results have varied from quarter to quarter, and we anticipate this pattern will continue.
We typically realize a larger percentage of our annual revenue and earnings in the fourth
quarter of each fiscal year, and lower revenue and earnings in the first quarter of the
following fiscal year. As well, in each quarter we typically close a larger percentage of
sales transactions near the end of that quarter. As a result, it is difficult to
anticipate the revenue and earnings that we will realize in any particular quarter until
near the end of the quarter. Some of the causes of this difficulty are explained in other
risk factors  in particular those entitled Our sales forecasts may not
match actual revenues in a particular period, Our dependence on larger
transactions is increasing and the length of time required to complete a sales cycle has
become lengthy, complex and unpredictableandOur expenses may not
match anticipated revenues.

Our expenses may not match
anticipated revenues.

We base our operating expenses on
anticipated revenue trends. Since a high percentage of these expenses are relatively fixed
in the short term, a delay in completing license transactions could cause significant
variations in operating results from quarter to quarter and could result in operating
losses. If these expenses precede, or are not subsequently followed by, increased
revenues, our business, financial condition, or results of operations could be materially
and adversely affected. For example, in fiscal year 2006, our revenues were lower than
expected while our expenses were in line with our projections. This resulted in a lower
operating margin for the fiscal year.

54

---

Making and integrating
acquisitions could impair our operating results.

We have acquired and, if appropriate,
will continue to seek to acquire additional products or businesses that we believe are
complementary to ours. Acquisitions involve a number of other risks, including: diversion
of managements attention; disruption of our ongoing business; difficulties in
integrating and retaining all or part of the acquired business and its personnel;
assumption of disclosed and undisclosed liabilities; dealing with unfamiliar laws, customs
and practices in foreign jurisdictions; and the effectiveness of the acquired
companys internal controls and procedures. The individual or combined effect of
these risks could have a material adverse effect on our business. As well, in paying for
an acquisition, we may deplete our cash resources or dilute our shareholder base by
issuing additional shares. Furthermore, there is the risk that our valuation assumptions
and our models for an acquired product or business may be erroneous or inappropriate due
to foreseen or unforeseen circumstances and thereby cause us to overvalue an acquisition
target. There is also the risk that the contemplated benefits of an acquisition may not
materialize as planned or may not materialize within the time period or to the extent
anticipated.

New accounting
pronouncements or guidance may require us to change the way in which we account for our
operational or business activities.

The Financial Accounting Standards
Board (FASB), the SEC, and other bodies that have jurisdiction over the
form and content of our accounts are constantly discussing and interpreting proposals and
existing pronouncements designed to ensure that companies best display relevant and
transparent information relating to their respective businesses. The pronouncements and
interpretations of pronouncements by FASB, the SEC, and other bodies may have the effect
of requiring us to account for revenues and/or expenses in a different manner. For
example, beginning with the first quarter of fiscal 2007, we were required to expense the
fair value of stock options. As a result, we reported increased expenses in our income
statement and a reduction of our net income and earnings per share.

55

---

Our intellectual property
may be misappropriated or we may have to defend ourselves against other parties
claims.

We rely on various intellectual
property protections, including contractual provisions, patents, copyright, trademark, and
trade secret laws, to preserve our intellectual property rights. Despite our precautions,
our intellectual property may be misappropriated causing us to lose potential revenue and
competitive advantage. As well, we may ourselves from time to time become subject to
claims by third parties that our technology infringes their intellectual property rights.
In either case, we may incur expenditures to police, protect, and defend our interests and
may become involved in litigation that could divert the attention of our management.
Responding to such claims could result in substantial expense and result in damages,
royalties, or injunctive relief, or require us to enter into licensing agreements on
unfavorable terms, or redesign or stop selling affected products which could materially
disrupt the conduct of our business.

We may face liability
claims if our software products or services fail to perform as intended.

The sale, servicing, and support of
our products entails the risk of product liability, performance or warranty claims, which
may be substantial in light of the use of our products in business-critical applications.
A successful product liability claim could seriously disrupt our business and adversely
affect our financial results. Software products are complex and may contain errors or
defects, particularly when first introduced, or when new versions or enhancements are
released, or when configured to individual customer requirements. Although we currently
have in place procedures and staff to exercise quality control over our products and
respond to defects and errors found in current versions, new versions, or enhancements of
our products, defects and errors may still occur. If there are defects and errors found in
Cognos 8, it could disrupt our business, impact our sales and adversely affect our
financial results. We also attempt to contractually limit our liability in accordance with
industry practices. However, defects and errors in our products, including Cognos 8, could
inhibit or prevent customer deployment and cause us to lose customers or require us to pay
penalties or damages.

Natural or other disasters
and hostilities or terrorist attacks may disrupt our operations.

Natural or other disasters like the
hurricanes in the southeastern United States in 2005, and hostilities or terrorist
attacksmay disrupt our operations or those of our customers,
distributors, and suppliers, which could adversely affect our business, financial
condition, or results of operations. The threat of future outbreak or continued escalation
of hostilities involving the United States or other countries could adversely affect the
growth rate of our software license revenue and have an adverse effect on our business,
financial condition, or results of operations.

We may have exposure to
greater or lower than anticipated tax liabilities.

We are subject to income taxes and
non-income taxes in a variety of jurisdictions and our tax structure is subject to review
by both domestic and foreign taxation authorities. The determination of our worldwide
provision for income taxes and other tax liabilities requires significant judgment.
Although we believe our estimates are reasonable, the ultimate tax outcome may differ from
the amounts recorded in our financial statements and may materially affect our financial
results, positively or negatively, in the fiscal year for which such determination is
made. For example, our effective tax rate for fiscal year 2006 was lower than anticipated
due to the recognition of benefits resulting from a tax court decision that allowed us to
claim investment tax credits on stock-based compensation for research and development
personnel relating to fiscal years 2004 and 2005 and other tax adjustments.

56

---

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

|PURCHASES OF EQUITY
SECURITIES
|------------------------------
|                              
|                              
|
|                              
|
|                              
|March 1 to March 31, 2006     
|April 1 to April 30, 2006     
|May 1 to May 31, 2006         
|                              
|Total                         
|                              

On October 6, 2005, Cognos announced
that it had adopted a stock repurchase program which commenced on October 10, 2005 and
ends on October 9, 2006 (the 2005 Stock Repurchase Program). The
program allows Cognos to repurchase up to 4,000,000 common shares (which is less than 5%
of the common shares outstanding on that date) provided that no more than $100,000,000 is
expended in total under the program. During the quarter ended May 31, 2006, Cognos
repurchased 652,476 shares at an average price of $38.31 under the 2005 Stock Repurchase
Program.

|Item  5. |  | Other Information
|-------- |  | -----------------

|1.01 |  | Entry
into Material Definitive Agreements
|---- |  | -----------------------------------------

# Executive Compensation
Plans

On July 31, 2006, the Corporation
entered into compensation plans for the fiscal year ending February 28, 2007
(Compensation Plans) with each of its executive officers Messrs. Rob
Ashe (President and Chief Executive Officer), Peter Griffiths (SVP, Products), Neal Hill
(SVP, Corporate Development), John Jussup (SVP, Chief Legal Officer & Corporate
Secretary), David Laverty (SVP, Global Marketing and Chief Marketing Officer), Tom Manley
(SVP, Finance and Administration & Chief Financial Officer) and Anthony Sirianni
(SVP, Field Operations) (collectively, Executives).

The Human Resources and Compensation Committee of the
Board of Directors of the Corporation approved the terms of the compensation arrangements, such terms to become binding
subject to the company and the executive entering into a written agreement embodying the
terms. The company entered into these binding written agreements on July 31, 2006.


The Compensation Plans can be found
in exhibits 10.46 to 10.52of this Form 10-Q. Each of the Compensation Plans
outlines the Executives cash and equity-based compensation elements, the terms of
his equity-based compensation grants, a repayment and surrender provision and applicable
stock ownership guidelines.

|1.02 |  | Nasdaq
Proceedings
|---- |  | ------------------

On May 19, 2006, we received a Staff
Determination letter from The Nasdaq Stock Market stating that our common stock was
subject to delisting based upon our inability to satisfy Nasdaqs filing requirement
due to our failure to file our Annual Report on Form 10-K for the fiscal year ended
February 28, 2006 (the Annual Report) with the Securities and Exchange
Commission. On May 26, 2006, we requested a hearing before a Nasdaq Listing Qualifications
Panel (the Panel), an action which according to Nasdaqs rules prevents a
delisting event from occurring until the hearing is held before a Panel and the
Panels decision is issued. On June 29, 2006, we attended a hearing before the Panel
and presented what we believe was a definitive plan of compliance, which was intended to
provide the Panel with an understanding of the issues underlying the late Annual Report
and our plan to regain compliance with Nasdaqs filing requirement.

Subsequent to the June 29, 2006
hearing, on July 10, 2006, we received an Additional Staff Determination letter from
Nasdaq stating that the Quarterly Report for the period ended May 31, 2006 (the
Quarterly Report) was also considered late and thereby served as an additional
violation of Nasdaqs filing requirement. The Company responded to the Additional
Staff Determination letter on July 17, 2006, in which it noted that the plan of compliance
presented at the hearing also contemplated the filing of the Quarterly Report.

Nasdaq has yet to issue the
Panels decision letter in connection with the hearing; however, with the filing of
the Annual Report and the Quarterly Report with the SECs EDGAR filing system, we
believe that we have regained compliance with Nasdaqs filing requirement. We are
aware that the Nasdaq staff must perform its own internal review of the Annual and
Quarterly Reports to ensure they are complete for purposes of satisfying Nasdaqs
filing requirement, and then communicate the results of that review to the Panel. We are
not aware of any reason why the Nasdaq staff or the Panel would conclude that these
reports are not sufficient to satisfy Nasdaqs filing requirement.

57

---

|Item  6. |  | Exhibits
|-------- |  | --------

|a) |  | Exhibits
|-- |  | --------

| | 3  | .1  | Articles of Incorporation and Amendments thereto (incorporated by reference to Exhibit 3.1 of the Corporation's Form 10-Q filed for the quarter ended November 30, 2002 and Exhibit                | 
| | -- | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |    |     | 3.1 (i) of Cognos' Form 10-Q filed for the quarter ended May 31, 2004)                                                                                                                             | 
| | 3  | .2  | By-Laws of the Corporation (incorporated by reference to Exhibit 3.2 of the Corporation's Form 10-K filed for the year ended February 28, 1997)                                                    | 
| | 10 | .46 | FY07 Compensation Plan for Robert G. Ashe                                                                                                                                                          | 
| | 10 | .47 | FY07 Compensation Plan for Peter Griffiths                                                                                                                                                         | 
| | 10 | .48 | FY07 Compensation Plan for Neal Hill                                                                                                                                                               | 
| | 10 | .49 | FY07 Compensation Plan for John Jussup                                                                                                                                                             | 
| | 10 | .50 | FY07 Compensation Plan for David Laverty                                                                                                                                                           | 
| | 10 | .51 | FY07 Compensation Plan for Tom Manley                                                                                                                                                              | 
| | 10 | .52 | FY07 Compensation Plan for Anthony Sirianni                                                                                                                                                        | 
| | 31 | .1  | Certification of Chief Executive Officer Pursuant to Rule 13a - 14(a) and 15d - 14(a) of the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 
| | 31 | .2  | Certification of Chief Financial Officer Pursuant to Rule 13a - 14(a) and 15d - 14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 | 
| | 32 |     | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                      | 

58

---

# SIGNATURE

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|              |  | COGNOS INCORPORATED                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  | (Registrant)                                                                                                                                           
|             
|July 31, 2006 |  | /s/ Tom Manley                                                                                                                                         
|              |  |                                                                                                                                                        
|Date          |  | Tom ManleySenior Vice President, Finance &
Administration and    Chief Financial Officer (Principal Financial Officer and
    Chief Accounting Officer)

59

---

EXHIBIT INDEX

|EXHIBIT NO. | DESCRIPTION |                                                                                                                                                                                                  | PAGE |   
|----------- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | --
|           
|10          | .46         | FY07 Compensation Plan for Robert G. Ashe                                                                                                                                                        |      | 61
|           
|10          | .47         | FY07 Compensation Plan for Peter Griffiths                                                                                                                                                       |      | 65
|           
|10          | .48         | FY07 Compensation Plan for Neal Hill                                                                                                                                                             |      | 69
|           
|10          | .49         | FY07 Compensation Plan for John Jussup                                                                                                                                                           |      | 72
|           
|10          | .50         | FY07 Compensation Plan for David Laverty                                                                                                                                                         |      | 75
|           
|10          | .51         | FY07 Compensation Plan for Tom Manley                                                                                                                                                            |      | 78
|           
|10          | .52         | FY07 Compensation Plan for Anthony Sirianni                                                                                                                                                      |      | 82
|           
|31          | .1          | Certification of Chief Executive Officer Pursuant to Rule 13a - 14(a) and 15d-14(a)
of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |      | 84
|           
|31          | .2          | Certification of Chief Financial Officer Pursuant to Rule 13a - 14(a) and 15d-14(a) of the
Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |      | 85
|           
|32          |             | Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                    |      | 86

60