---

---

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 August 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 September 28, 2006, was 89,882,907.

---

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# 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 6.                       
|                              
|Signature                     

2

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PART I  FINANCIAL
INFORMATION

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

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

|                                               | Three months endedAugust 31, |           | Six months endedAugust 31, |          
|---------------------------------------------- | ---------------------------- | --------- | -------------------------- | ---------
|                                              
|                                               | 2006                         |           | 2005                       |          
|                                              
|Revenue                                        |                              |           |                            |          
|Product license                                |                              | $  78,005 |                            | $  78,649
|Product support                                |                              | 103,262   |                            | 92,062   
|Services                                       |                              | 48,623    |                            | 41,331   
|                                              
|Total revenue                                  |                              | 229,890   |                            | 212,042  
|                                              
|Cost of revenue                                |                             
|Cost of product license                        |                              | 1,445     |                            | 1,409    
|Cost of product support                        |                              | 11,384    |                            | 8,914    
|Cost of services                               |                              | 39,805    |                            | 32,705   
|                                              
|Total cost of revenue                          |                              | 52,634    |                            | 43,028   
|                                              
|Gross margin                                   |                              | 177,256   |                            | 169,014  
|                                              
|Operating expenses                             |                             
|Selling, general, and administrative           |                              | 117,981   |                            | 109,327  
|Research and development                       |                              | 33,869    |                            | 29,520   
|Amortization of acquisition-related intangible |                             
|assets                                         |                              | 1,702     |                            | 1,637    
|                                              
|Total operating expenses                       |                              | 153,552   |                            | 140,484  
|                                              
|Operating income                               |                              | 23,704    |                            | 28,530   
|Interest and other income, net                 |                              | 6,216     |                            | 3,051    
|                                              
|Income before taxes                            |                              | 29,920    |                            | 31,581   
|Income tax provision                           |                              | 6,160     |                            | 6,681    
|                                              
|Net income                                     |                              | $  23,760 |                            | $  24,900
|                                              
|Net income per share                           |                             
|Basic                                          |                              | $0.26     |                            | $0.27    
|                                              
|Diluted                                        |                              | $0.26     |                            | $0.27    
|                                              
|Weighted average number of shares (000s)       |                             
|Basic                                          |                              | 89,718    |                            | 90,740   
|                                              
|Diluted                                        |                              | 90,221    |                            | 92,806   
|                                              

(See Accompanying notes)

3

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COGNOS INCORPORATEDCONSOLIDATED BALANCE SHEETS
(US$000s, U.S. GAAP)
(Unaudited)

|                                                               | August 31,2006 |               | February 28,2006 |              
|-------------------------------------------------------------- | -------------- | ------------- | ---------------- | -------------
|                                                              
|Assets                                                         |                |               |                  |              
|Current assets                                                 |               
|Cash and cash equivalents                                      |                | $    417,499  |                  | $    398,634 
|Short-term investments                                         |                | 200,585       |                  | 152,368      
|Accounts receivable                                            |                | 144,598       |                  | 216,850      
|Income taxes receivable                                        |                | 7,162         |                  | 1,363        
|Prepaid expenses and other current assets                      |                | 25,604        |                  | 31,978       
|Deferred tax assets                                            |                | 11,828        |                  | 12,936       
|                                                              
|                                                               |                | 807,276       |                  | 814,129      
|Fixed assets, net                                              |                | 77,963        |                  | 75,821       
|Intangible assets, net                                         |                | 18,928        |                  | 22,125       
|Other assets                                                   |                | 6,356         |                  | 6,096        
|Deferred tax assets                                            |                | 6,780         |                  | 6,928        
|Goodwill                                                       |                | 225,709       |                  | 225,709      
|                                                              
|                                                               |                | $ 1,143,012   |                  | $ 1,150,808  
|                                                              
|Liabilities                                                    |               
|Current liabilities                                            |               
|Accounts payable                                               |                | $      24,603 |                  | $      33,975
|Accrued charges                                                |                | 33,112        |                  | 30,799       
|Salaries, commissions, and related items                       |                | 66,827        |                  | 73,229       
|Income taxes payable                                           |                | 7,173         |                  | 6,009        
|Deferred income taxes                                          |                | 5,908         |                  | 4,118        
|Deferred revenue                                               |                | 212,473       |                  | 246,562      
|                                                              
|                                                               |                | 350,096       |                  | 394,692      
|Deferred income taxes                                          |                | 32,676        |                  | 30,344       
|                                                              
|                                                               |                | 382,772       |                  | 425,036      
|                                                              
|Stockholders Equity                                           |               
|Capital stock                                                  |               
|Common shares and additional paid-in capital                   |               
|(August 31, 2006 - 89,729,851; February 28, 2006 - 89,826,706) |                | 460,536       |                  | 439,680      
|Treasury shares                                                |               
|(August 31, 2006 - 124,854; February 28, 2006 - 55,970)        |                | (3,705        | )                | (1,563       
|Retained earnings                                              |                | 298,463       |                  | 283,168      
|Accumulated other comprehensive income                         |                | 4,946         |                  | 4,487        
|                                                              
|                                                               |                | 760,240       |                  | 725,772      
|                                                              
|                                                               |                | $ 1,143,012   |                  | $ 1,150,808  
|                                                              

(See accompanying notes)

4

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

|                                                                        | Three months endedAugust 31, |            | Six months endedAugust 31, |           
|----------------------------------------------------------------------- | ---------------------------- | ---------- | -------------------------- | ----------
|                                                                       
|                                                                        | 2006                         |            | 2005                       |           
|                                                                       
|Cash flows from operating activities                                    |                              |            |                            |           
|Net income                                                              |                              | $   23,760 |                            | $   24,900
|Non-cash items                                                          |                             
|Depreciation and amortization                                           |                              | 7,360      |                            | 7,240     
|Amortization of deferred stock-based compensation                       |                              | 4,586      |                            | 4,558     
|Deferred income taxes                                                   |                              | (413       | )                          | 1,735     
|Loss on disposal of fixed assets                                        |                              | 377        |                            | 186       
|                                                                       
|                                                                        |                              | 35,670     |                            | 38,619    
|Change in non-cash working capital                                      |                             
|Decrease (increase) in accounts receivable                              |                              | (4,865     | )                          | (1,871    
|Increase in income tax receivable                                       |                              | (1,485     | )                          | (4,307    
|Decrease (increase) in prepaid expenses and 
      other current assets |                              | 522        |                            | (586      
|Decrease in accounts payable                                            |                              | (2,969     | )                          | (981      
|Increase (decrease) in accrued charges                                  |                              | (352       | )                          | 2,629     
|Increase (decrease) in salaries, commissions, and related items         |                              | 6,230      |                            | 5,615     
|Increase (decrease) in income taxes payable                             |                              | 4,206      |                            | 2,959     
|Decrease in deferred revenue                                            |                              | (20,836    | )                          | (12,821   
|                                                                       
|Net cash provided by operating activities                               |                              | 16,121     |                            | 29,256    
|                                                                       
|Cash flows from investing activities                                    |                             
|Maturity of short-term investments                                      |                              | 264,354    |                            | 118,610   
|Purchase of short-term investments                                      |                              | (191,486   | )                          | (96,140   
|Additions to fixed assets                                               |                              | (4,544     | )                          | (6,161    
|Additions to intangible assets                                          |                              | (370       | )                          | (196      
|Increase in other assets                                                |                              | (488       | )                          | (365      
|Acquisition costs, net of cash and cash equivalents                     |                              | --         |                            | --        
|                                                                       
|Net cash provided by (used in) investing activities                     |                              | 67,466     |                            | 15,748    
|                                                                       
|Cash flows from financing activities                                    |                             
|Issue of common shares                                                  |                              | 576        |                            | 5,802     
|Purchase of treasury shares                                             |                              | (2,545     | )                          | (177      
|Repurchase of shares                                                    |                              | --         |                            | (23,694   
|                                                                       
|Net cash used in financing activities                                   |                              | (1,969     | )                          | (18,069   
|                                                                       
|Effect of exchange rate changes on cash                                 |                              | (1,297     | )                          | 751       
|                                                                       
|Net increase in cash and cash equivalents                               |                              | 80,321     |                            | 27,686    
|Cash and cash equivalents, beginning of period                          |                              | 337,178    |                            | 377,426   
|                                                                       
|Cash and cash equivalents, end of period                                |                              | 417,499    |                            | 405,112   
|Short-term investments, end of period                                   |                              | 200,585    |                            | 96,140    
|                                                                       
|Cash, cash equivalents, and short-term investments,
    end of period   |                              | $ 618,084  |                            | $ 501,252 
|                                                                       

(See accompanying notes)

5

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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited) 
(All amounts in U.S. 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

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

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 stock-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 stock-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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

---

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

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and six months ended August 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 threemonths endedAugust 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 stock-based
compensation expense over the requisite service period of its awards with service
conditions only and the graded attribution method for its performance-based awards.
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, 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 INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited) 
(All amounts in U.S. dollars, unless otherwise stated) 
(In accordance with U.S. GAAP)

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

| |                                     | Three months
            endedAugust 31, | Six months
         endedAugust 31,
| | ----------------------------------- | ---------------------------------------- | -----------------------------------
| |                                    
| |                                     | 2006                                     | 2005                               
| |                                    
| |                                     | ($000s)                                 
| | Compensation cost recognized        |                                          |                                    
| | Cost of Product Support             |                                          | $     65                           
| | Cost of Services                    |                                          | 159                                
| | Selling, General and Administrative |                                          | 5,100                              
| | Research and Development            |                                          | 433                                
| |                                    
| | Total                               |                                          | 5,757                              
| | Tax benefit recognized              |                                          | (528                               
| |                                    
| | Net Stock-based Compensation Cost   |                                          | $5,229                             
| |                                    

| | 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
        endedAugust 31, | Six months
        endedAugust 31,
| | ------------------------------------ | ----------------------------------
| |                                     
| | 2006                                 |                                   
| |                                     
| | Risk-free interest rates             |                                   
| | Expected volatility                  |                                   
| | Dividend yield                       |                                   
| | Expected life of options (years)     |                                   

| | 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 INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited) 
(All amounts in U.S. dollars, unless otherwise stated) 
(In accordance with U.S. GAAP)

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

| |                              | Number ofAwards(000s) | Weighted-averageexerciseprice(in $) | Aggregateintrinsicvalue(1)($000s) | Weighted-averageremainingcontractualterm(in years)
| | ---------------------------- | --------------------- | ----------------------------------- | --------------------------------- | --------------------------------------------------
| |                             
| | Outstanding, March 1, 2006   |                       | 11,255                              |                                   | $32.60                                            
| | Granted                      |                       | 326                                 |                                   | 33.40                                             
| | Cancelled                    |                       | (261                                | )                                 | 33.96                                             
| | Exercised                    |                       | (534                                | )                                 | 23.57                                             
| |                             
| | Outstanding, August 31, 2006 |                       | 10,786                              |                                   | 33.85                                             
| |                             
| | Exercisable, August 31, 2006 |                       | 7,738                               |                                   | 33.23                                             
| | Unvested, August 31, 2006    |                       | 3,048                               |                                   | 35.42                                             

| | (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
          $32.52 for the Corporations stock on the NASDAQ on February 28, 2006 and
          August 31, 2006, respectively.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Number
 of Awards(in 000s)  | Weighted-average
  grantdate fair value(in $)
| | --------------------------- | ---------------------------------------------
| |                            
| | Unvested at March 1, 2006   |                                              
| | Granted                     |                                              
| | Vested                      |                                              
| | Forfeited                   |                                              
| |                            
| | Unvested at August 31, 2006 |                                              
| |                            

| | The
weighted-average grant date fair value of options granted during the six month period
ended August 31, 2006 was $10.85 for a total fair value of $3,538,000. Options with a fair
value of $20,455,000 completed vesting during the six month period ended August 31, 2006.
The total intrinsic value of options exercised during the six month period ended August
31, 2006 was $8,170,000. 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 six month period ended August 31, 2006 was $876,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

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

| | As
of August 31, 2006, there was $33,693,000 of total unrecognized compensation cost related
to nonvested stock options; that cost is expected to be recognized over a weighted-average
period of 1.9 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 service 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

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

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

| |                                   | RestrictedShareUnits | Weighted-AverageGrant DayFair Value | Weighted-AverageRemainingContractualTerm(in years) | AggregateIntrinsicValue
| | --------------------------------- | -------------------- | ----------------------------------- | -------------------------------------------------- | -----------------------
| |                                  
| |                                   | (000s)               |                                     |                                                    | ($000)                 
| | Outstanding, March 1, 2006        |                      | 43                                  |                                                    | $37.05                 
| | Granted  service conditions only |                      | 12                                  |                                                    | 38.58                  
| | Granted  performance  conditions |                      | 178                                 |                                                    | 32.03                  
| | Vested                            |                      | (12                                 | )                                                  | 30.46                  
| | Forfeited                         |                      | --                                  |                                                   
| |                                  
| | Outstanding, August 31, 2006      |                      | 221                                 |                                                    | $32.77                 
| |                                  

| | The
weighted-average grant date fair value of RSUs granted with service conditions only during
the six month period ended August 31, 2006 was $38.58. The fair value of the
Corporations stock at August 31, 2006 was $32.52. The total intrinsic value of RSUs
that vested during the six month period ended August 31, 2006 was $414,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of August 31, 2006, there was $5,716,000 of total unrecognized compensation cost related
to nonvested RSUs; that cost is expected to be recognized over a weighted-average period
of 2.0 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, after the end of the quarter, the Board of Directors of the Corporation decided to replace the annual
key employee stock option award with an award of RSUs. As a result, the Corporation
advised the trustee of these RSU grants to purchase approximately 437,000 shares in the
third quarter of fiscal year 2007 in order to fulfill this RSU award. In addition, the
Corporation expects to purchase up to 216,000 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 $100,000 and $274,000 of ESPP compensation expense in the three and
six month periods ended August 31, 2006, respectively and $36,687 and $174,511 for the
three and six months ended August 31, 2005, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

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

| | 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 and/or shares which must be
 attained within three (3)
years of the director commencing service on the Board. At August 31, 2006, the Corporation
had a liability of $3,393,000 in relation to the DSU Plan based on the value of the
Corporations stock at that date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                           | As at August 31,2006 |   | As at February 28,2006  | 
| | ------------------------- | -------------------- | - | ----------------------- | 
| |                          
| |                           | Cost                 |   | AccumulatedAmortization | 
| |                          
| |                           | ($000s)              |   | ($000s)                
| | Acquired technology       | $ 41,611             |   | $ 30,928                | 
| | Contractual relationships | 9,654                |   | 3,991                   | 
| | Trademarks and patents    | 6,420                |   | 3,838                   | 
| |                           |                      |   |                         | 
| |                           | 57,685               |   | $38,757                 | 
| |                           |                      |   |                         | 
| | Accumulated Amortization  | (38,757              | ) |                         | 
| |                           |                      |   |                         | 
| | Net book value            | $ 18,928             |   |                         | 
| |                           |                      |   |                         | 

| | During
the three months ended August 31, 2006 and August 31, 2005, there were additions to
trademarks and patents in the amount of $371,000 and $200,000, respectively, and $696,000
and $445,000 in the six months ended August 31, 2006 and August 31, 2005, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

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

| | 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 ended August 31, |        | Six months ended August 31,
| | ----------------------------------------------- | ----------------------------- | ------ | ---------------------------
| |                                                
| |                                                 | 2006                          | 2005   |                            
| |                                                
| |                                                 | ($000s)                       |        | ($000s)                    
| | Amortization of acquisition-related intangibles | $1,702                        | $1,637 |                            
| | Selling, general, and administrative expenses   | 248                           | 201    |                            
| |                                                
| | Total                                           | $1,950                        | $1,838 |                            
| |                                                

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

| | 2007 (Q3 to Q4) | $3,832
| | --------------- | ------
| | 2008            | 7,030 
| | 2009            | 3,502 
| | 2010            | 2,716 
| | 2011            | 1,811 
| | 2012            | 37    

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

| | During
the three and six months ended August 31, 2006, there were no changes to goodwill. During
the three and six months ended August 31, 2005, there were reductions to goodwill of
$871,000 and $1,002,000, respectively, resulting from adjustments to the accounts
receivable in the purchase price allocation for Frango AB (Frango).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                   | Three months ended August 31, |           | Six months endedAugust 31,
| | ----------------- | ----------------------------- | --------- | --------------------------
| |                  
| |                   | 2006                          | 2005      |                           
| |                  
| |                   | ($000s)                       |           | ($000s)                   
| | Beginning balance | $225,709                      | $ 221,359 |                           
| | Adjustments       | --                            | (871)     |                           
| |                  
| | Closing balance   | $225,709                      | $ 220,488 |                           
| |                  

15

---

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

|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 and Disclosure 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation estimates its effective tax rate for fiscal 2007 to be 23.5%, exclusive of any
one-time events. This estimated effective tax rate was reduced for the three and six-month
periods ended August 31, 2006 to 20.6% and 21.7%, respectively due to adjustments related
to a modification of an intercompany commercial arrangement and an election in respect of
the functional currency of a subsidiary. For the three and six months ended August 31,
2005, the Corporation estimated its effective tax rate for fiscal 2006 to be 22%,
exclusive of any one-time events. This estimated effective tax rate was reduced for the
three-month period ended August 31, 2005 to 21.2% due to adjustments relating to various
tax audits and prior period tax provisions. The effective tax rate for the six month
period ended August 31, 2005 was adjusted to 17.4% due to the adjustments in the quarter
as well as the recognition of one-time benefits in the previous quarter 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---

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

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

| | The
Corporation issued 19,000 common shares for proceeds of $576,000, and 239,000 common
shares for proceeds of $5,802,000 during the three-month periods ended August 31, 2006,
and August 31, 2005, respectively. The Corporation issued 556,000 common shares for
proceeds of $13,511,000 and 766,000 common shares for $17,586,000 during the six months
ended August 31, 2006 and August 31, 2005, respectively. The issuance of shares
in fiscal 2007 and 2006 was pursuant to the Corporations stock purchase plan and the
exercise of stock options by employees, officers and directors.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation repurchases shares under a share repurchase program and under a restricted
share unit plan. During the three months ended August 31, 2006, the Corporation did not
repurchase any shares under its share repurchase program. During the six months ended
August 31, 2006, the Corporation repurchased 652,000 shares at a value of $24,998,000 in
the open market under the Corporations share repurchase program. During the three
and six month periods ended August 31, 2006, the Corporation repurchased 80,000 shares
valued at $2,545,000 under its restricted share unit plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the three and six-months ended August 31, 2005, the Corporation repurchased 649,000 shares
at a value of $23,694,000 and 1,266,000 shares at a value of $48,948,000, respectively, in
the open market under its share repurchase program. During the three and six-month periods
ended August 31, 2005, the Corporation repurchased 5,000 shares valued at $177,000 under
its restricted share unit plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 endedAugust 31, |         | Six months endedAugust 31,
| | ----------------------------------------------------------- | ---------------------------- | ------- | --------------------------
| |                                                            
| |                                                             | 2006                         | 2005    |                           
| |                                                            
| | Basic Net Income per Share                                  |                              |         |                           
| | Net income                                                  | $23,760                      | $24,900 |                           
| |                                                            
| | Weighted average number of shares
     outstanding          | 89,718                       | 90,740  |                           
| |                                                            
| | Basic net income per share                                  | $0.26                        | $0.27   |                           
| |                                                            
| | Diluted Net Income per Share                               
| | Net income                                                  | $23,760                      | $24,900 |                           
| |                                                            
| | Weighted average number of shares
     outstanding          | 89,718                       | 90,740  |                           
| | Dilutive effect of stock options                            | 503                          | 2,066   |                           
| |                                                            
| | Adjusted weighted average number of shares
     outstanding | 90,221                       | 92,806  |                           
| |                                                            
| | Diluted net income per share                                | $0.26                        | $0.27   |                           
| |                                                            

17

---

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

|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 ($000s):
| | ----------------------------------------------------------------

| |                                          | Three months endedAugust 31, |         | Six months endedAugust 31,
| | ---------------------------------------- | ---------------------------- | ------- | --------------------------
| |                                         
| |                                          | 2006                         | 2005    |                           
| |                                         
| | Net income                               | $23,760                      | $24,900 |                           
| | Other comprehensive income (loss):      
| | Foreign currency translation adjustments | (1,246)                      | 2,179   |                           
| | Change in net unrealized loss on        
| | derivative instruments                   | 496                          | (633)   |                           
| |                                         
| | Comprehensive income                     | $23,010                      | $26,446 |                           
| |                                         

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

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

18

---

COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited) 
(All amounts in U.S. 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 six month period ended August 31, 2006: ($000s)
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| |                                                          | Employeeseparations | Otherrestructuringaccruals | Totalaccrual
| | -------------------------------------------------------- | ------------------- | -------------------------- | ------------
| |                                                         
| | Balance as at February 28, 2006                          | $  277              | $  481                     | $  758      
| | Cash payments during the first six months of fiscal 2007 | (220)               | (132)                      | (352)       
| | Adjustment                                               | (13)                | --                         | (13)        
| | Foreign exchange adjustment                              | 17                  | 29                         | 46          
| |                                                         
| | Balance as at August 31, 2006                            | $    61             | $  378                     | $  439      
| |                                                         

|12. | Subsequent
Events
|--- | -----------------

| | On
September 7, 2006, in order to streamline the organization and improve its operating
margin on a long term basis, the Corporation announced a restructuring plan. The plan
includes a planned reduction of approximately 210 personnel or 6% of the
Corporations global workforce, focused primarily on management and
non-revenue-generating positions. The Corporation expects to substantially complete the activities
relating to the plan within the Corporations fiscal year 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of this plan, and in accordance with FASB Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, the Corporation expects to incur
approximately $28,000,000 in total pre-tax charges in the third quarter of fiscal year
2007. The plan is not yet finalized and as a result the Corporation could incur additional
liabilities. Substantially all of the expected pre-tax charges are one-time employee
terminations benefits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

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

|13. | New
Accounting Pronouncements
|--- | -----------------------------

| |  | In  September
2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when quantifying Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 requires companies to evaluate the
materiality of identified unadjusted errors on each financial statement and related
financial statement disclosure using both the rollover approach and the iron curtain
approach. The rollover approach quantifies misstatements based on the amount of the error
in the current year financial statement whereas the iron curtain approach quantifies
misstatements based on the effects of correcting the misstatement existing in the balance
sheet at the end of the current year, irrespective of the misstatements year(s) of
origin. Financial statements would require adjustment when either approach results in
quantifying a misstatement that is material. Correcting prior year financial statements
for immaterial errors would not require previously filed reports to be amended. SAB 108
is effective for interim periods of the first fiscal year ending after November 15, 2006.
The Corporation is currently evaluating the impact of SAB 108 on its consolidated results
of operation and financial position.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The Corporation is currently evaluating the impact of FIN 48 on
its 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. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

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

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

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 (Annual Report) for the fiscal year ended
February 28, 2006 (fiscal 2006). Certain statements made in this
MD&A, including in the Outlook section, 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; our products, including Cognos 8 Business
Intelligence (Cognos 8) and Cognos Planning and their contributions to
our revenues and earnings; market trends; new and existing product innovations and
developments; operational performance; our
sales force structure and model; our anticipated hiring needs and our use of
subcontractors; the impact of our relationship with 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; the charges from and the impact of
our margin improvement plan on our financial results, our expected payments under the
plan, and our expected time frame for completion of our restructuring activities; our
effective tax rate; our plans with respect to our share repurchase program; 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 and the expansion of
larger software vendors including enterprise resource planning software vendors, into our
markets; the strength of the Canadian and U.S. dollars and their effects; our plans to
retain earnings to reinvest in Cognos; drivers of growth in the business intelligence
(BI) market; our ability to meet our working capital needs; 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; our ability to achieve our
expected cost savings from our margin improvement plan; 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 in this quarterly report, our Annual Report and in other periodic
reports filed with the Securities and Exchange Commission (SEC) and the
Canadian Securities Administrators. 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.

22

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# Discussion of Non-GAAP
Financial Measures

In addition to our GAAP results,
Cognos discloses adjusted operating margin percentage, net income and net income per
share, referred to respectively as non-GAAP operating margin
percentage, non-GAAP net income, and non-GAAP net
income per diluted share. These items, which are collectively referred to as
Non-GAAP Measures, exclude the impact of stock-based compensation and
the amortization of acquisition-related intangible assets. From time to time, subject to
the review and approval of the audit committee of the Board of Directors, management may
make other adjustments for expenses and gains that it does not consider reflective of core
operating performance in a particular period and may modify the Non-GAAP Measures by
excluding these expenses and gains. For example, the charges related to the restructuring
plan announced September 7, 2006 will be excluded as part of Non-GAAP Measures for our
fiscal third quarter ending November 30, 2006 and fiscal year ending February 28,
2007. The costs related to the restructuring plan have not been excluded from our Non-GAAP
Measures discussed in this MD&A as no cost related to this restructuring plan were
incurred during the quarter.

Management defines its core operating
performance to be the revenues recorded in a particular period and the expenses incurred
within that period which management has the capability of directly affecting in order to
drive operating income. Non-cash stock-based compensation and amortization of
acquisition-related intangible assets are excluded from our core operating performance
because the decisions which gave rise to these expenses were not made to drive revenue in
a particular period, but rather were made for our long term benefit over multiple periods.
While strategic decisions, such as the decisions to issue stock-based compensation or to
acquire a company, are made to further our long term strategic objectives and do impact
our income statement under GAAP, these items affect multiple periods and management is not
able to change or affect either item within any particular period. Therefore, management
excludes these impacts in its planning, monitoring, evaluation and reporting of our
underlying revenue-generating operations for a particular period.

23

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Prior to the adoption of FAS 123R on
March 1, 2006, the beginning of our fiscal year 2007, managements practice was to
exclude stock-based compensation internally to evaluate performance. With the adoption of
FAS 123R, management concluded that the Non-GAAP Measures could provide relevant
disclosure to investors as contemplated by Staff Accounting Bulletin 107. As of the
beginning of our current fiscal year, management also began excluding amortization of
acquisition-related intangible assets when assessing appropriate adjustments for non-GAAP
presentations. While both of these items are recurring and affect GAAP net income,
management does not use them to assess the business operational performance for any
particular period because: each item affects multiple periods and is unrelated to business
performance in a particular period; management is not able to change either item in any
particular period; and neither item contributes to the operational performance of the
business for any particular period.

In the case of stock-based
compensation, as disclosed in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2006 (2006 Form 10-K), our compensation strategy is to use
stock-based compensation as a key tool for ensuring that key employees and
executives are engaged and motivated to remain at the Company for the long term. It
is aimed at long term employee retention, rather than to motivate or reward operational
performance for any particular period. Thus, stock-based compensation expense varies for
reasons that are generally unrelated to operational performance in any particular period.
As further discussed in our 2006 Form 10-K, we use annual cash bonus payouts for
executives and other employees to motivate and reward annual operational performance in
the areas of revenue and operating margin achievement. Since the beginning of fiscal year
2007, operating margin achievement has been measured on a non-GAAP basis, excluding
stock-based compensation and amortization of acquisition-related intangible assets
expenses.

Management views amortization of
acquisition-related intangible assets, such as the amortization of an acquired
companys research and development efforts, customer lists and customer
relationships, as items arising during the time that preceded the acquisition. It is a
cost that is determined at the time of the acquisition. While it is continually viewed for
impairment, amortization of the cost is a static expense, one that is typically not
affected by operations during any particular period and does not contribute to operational
performance in any particular period.

The restructuring plan reflects a
fundamental realignment of our business, including significant personnel reductions within
higher levels of management. The restructuring charges are excluded in our Non-GAAP
measures because they are significantly different in magnitude and character from routine
personnel adjustments that management makes when monitoring and conducting the
Companys core operations during any particular period.  The restructuring
decision and related expenses are not related to operating performance for any particular
period, and are not subject to change by management in any particular period. 
Instead, the restructuring is intended to align our business model and expense structure
to our position in the market we are experiencing, and expect to experience, over the long
term.

Management also uses these Non-GAAP
Measures to operate the business because the excluded expenses are not under the control
of, and accordingly are not used in evaluating the performance of, operations personnel
within their respective areas of responsibility. In the case of stock-based compensation
expense, the award of stock options is governed by the human resources and compensation
committee of the Board of Directors. With respect to acquisition-related intangible assets
and charges associated with the restructuring plan, these charges arise from acquisitions
and a restructuring that are the result of strategic decisions which are not the
responsibility of most levels of operational management. The restructuring charges, like
our stock-based compensation charges and amortization of acquisition-related intangible
assets, are excluded in managements internal evaluations of our operating results
and are not considered for management compensation purposes.

24

---

Ultimately, stock-based compensation,
amortization of acquisition-related intangible assets and restructuring expenses are
incurred to further our long-term strategic objectives, rather than to achieve operational
performance objectives for any particular period. As such, supplementing GAAP disclosure
with non-GAAP disclosure using the Non-GAAP Measures provides management with an
additional view of operational performance by excluding expenses that are not directly
related to performance in any particular period. Further, management considers this
supplemental information to be beneficial to shareholders because it shows our operating
performance without the impact of charges that are largely unrelated to the performance of
our underlying revenue-generating operations during the period in which the charges are
recorded.  Including such disclosure in our filings also provides investors with
greater transparency on period-to-period performance and the manner in which management
views, conducts and evaluates the business.

Because the Non-GAAP Measures are not
calculated in accordance with GAAP, they are used by management as a supplement to, and
not an alternative to, or superior to, financial measures calculated in accordance with
GAAP. There are a number of limitations on the Non-GAAP Measures, including the following:

| |  | The Non-GAAP Measures do not have standardized meanings and may not be comparable to
similar non-GAAP measures used or reported by other software companies.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Non-GAAP Measures do not reflect all costs associated with our operations determined
in accordance with GAAP. For example:
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | Non-GAAP operating margin performance and non-GAAP net income do not include stock-based
compensation expense related to equity awards granted to our workforce. Cognos stock
incentive plans are important components of our employee incentive compensation
arrangements and are reflected as expenses in our GAAP results under FAS 123R. While we
include the dilutive impact of such equity awards in weighted average shares outstanding,
the expense associated with stock-based awards is excluded from our non-GAAP Measures.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Although amortization of acquisition-related intangible assets does not directly impact
our current cash position, such expense represents the declining value of the technology
or other intangible assets that we have acquired. These assets are amortized over their
respective expected economic lives or impaired, if appropriate. The expense associated
with this decline in value is excluded from our non-GAAP disclosures and therefore our
Non-GAAP Measures do not include the costs of acquired intangible assets that supplement
our research and development.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | With respect to periods beginning with the third quarter of fiscal 2007, the restructuring
charges primarily represent severance charges associated with our operating margin
improvement plan announced September 7, 2006. These charges are a significant
expense from a GAAP perspective and the costs associated with the restructuring would be
operational in nature absent the restructuring plan. Most of the charges are cash
expenditures which are excluded from our Non-GAAP Measures.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Excluded expenses for stock-based compensation and amortization of acquisition-related
intangible assets will recur and will impact our GAAP results. The Non-GAAP Measures
should not be construed as an inference that the excluded items are unusual, infrequent or
non-recurring.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

---

As a result of these limitations,
management recognizes that the Non-GAAP Measures should not be considered in isolation or
as an alternative to our results as reported under GAAP. Management compensates for theses
limitations by relying on the Non-GAAP Measures only as a supplement to our GAAP results.

# ABOUT
COGNOS

Cognos is a global leader in business
intelligence (BI) and corporate performance management
(CPM) software solutions. Our solutions help our customers improve
their business performance by enabling planned performance management through the
consistent reporting and analysis of data derived from various sources. Management
believes that organizations that use our software gain valuable insights that can be used
to improve operational effectiveness, enhance customer satisfaction, reduce corporate
response times and, ultimately, increase revenues and profits. Our integrated software
solutions consist of our suite of BI components, performance management applications, and
analytical applications.

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 delivered solid results for the
second quarter of fiscal 2007. Overall revenue growth was 8% driven by growth in both
product support and professional services revenue. We saw strength in large
deals and a good balance in license revenue across our product portfolio as our BI and Office
of Finance solutions both contributed to our performance during the quarter. In addition, we exited the quarter
with a strong
balance sheet.

Looking forward to the second half of
fiscal year 2007, we feel our solutions are strong, and our recent actions to improve
margins while at the same time increasing the number of sales personnel, position us well
to take full advantage of the opportunities in front of us.

On March 1, 2006, we adopted 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.

26

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# Operating Performance

Revenue for the three-month period
ended August 31, 2006 was $229.9 million, an increase of 8% from $212.0 million for the
corresponding period last year. License revenue decreased 1% to $78.0 million, compared
with $78.6 million in the second quarter last fiscal year. License revenue was down
slightly due to a combination of factors including sales representatives hiring taking
place later in the quarter than anticipated and a slow start to the quarter as the SEC
review created a distraction both internally and with our customers. Product support
revenue increased 12% to $103.3 million as we expand our customer base and continue to
experience solid renewal rates. Services revenue also contributed to the growth in revenue
during the quarter increasing 18% to $48.6 million from $41.3 million for the same quarter
last year.

Net income for the three-month period
ended August 31, 2006 was $23.8 million or $0.26 per diluted share compared to net income
of $24.9 million or $0.27 per diluted share for the same period last year, representing a
decrease of 5%. The decrease in net income for the quarter is primarily due to the
unfavorable effect of foreign currency, predominantly the stronger Canadian dollar, and a
shift in sales mix from our higher margin license revenue towards our lower margin product
support and services revenue. The decrease in net income was partially offset by an
increase in interest and other income.

Non-GAAP net income for the three
months ended August 31, 2006 was $30.0 million and non-GAAP net income per diluted share
was $0.33 compared to non-GAAP net income of $29.9 million and non-GAAP net income per
diluted share of $0.32 for the corresponding period last year. The Non-GAAP Measures
presented herein, including non-GAAP net income, exclude the impact of stock-based
compensation and the amortization of acquisition-related intangible assets. Management
uses the Non-GAAP Measures to measure core operating performance in individual periods.
Managements use of the Non-GAAP Measures is further discussed in the section
entitled Discussion of Non-GAAP Financial Measures and a reconciliation
between the Non-GAAP Measures and GAAP is in the section entitled Non-GAAP
Financial Measures.

Our balance sheet remains strong,
ending the quarter with $618.1 million in cash, cash equivalents, and short-term
investments. This represents an increase of $7.9 million from May 31, 2006.

We signed 10 contracts in excess of
one million dollars during the quarter, compared with 9 contracts in the corresponding
period last year. The number of contracts greater than $200,000 decreased slightly while
contracts greater than $50,000 increased 9% compared to the corresponding period last
year. Average license order size for orders greater than $50,000 was $181,000 for the
three months ended August 31, 2006, compared to $172,000 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.

# Recent Announcements

During the quarter, we released the
second maintenance release of Cognos 8, our recently released enterprise software that
facilitates all BI activity, including production and business reporting, dashboarding,
query, analysis, metrics management and interactive scorecarding. This new release, which
is provided free of charge to supported Cognos 8 users, offers enhanced quality,
upgradeability and performance.

27

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We also recently previewed Cognos 8
Go! Mobile, a new BI solution that will bring decision-support information directly to
mobile device users for right-time decision making. Cognos 8 Go! Mobile follows the recent
announcement of Cognos Go! Search Service and represents Cognos next milestone in
making BI accessible to more people and enabling higher adoption of business intelligence
for enhanced decision making and improved organizational performance.

On September 7, 2006, in order to
streamline our organization and improve our operating margin on a long term basis, we
announced a restructuring plan. The plan includes a planned reduction of approximately 210
personnel or 6% of our global workforce, focused primarily on management and
non-revenue-generating positions. We will continue to increase our investment
 in customer facing resources.
We expect to substantially complete the activities relating to the plan within our fiscal
year 2007.

# Outlook for the balance
of the fiscal year

Our outlook for the balance of fiscal
year 2007 is based on our internal sales forecast (which management believes to be reasonable)
and assumes continued growth in the BI market, continued strength of the Canadian dollar and the euro
compared to the U.S. dollar, and no significant changes in the economy.

We continue to expect revenue to
increase for the full fiscal year as compared to fiscal 2006. We believe that the BI
market remains strong and with the general availability of Cognos 8 and its second
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. We have received a positive
response to Cognos 8 since its release and 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.

As part of the restructuring plan
mentioned above and in accordance with FASB Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities(FAS 146), we expect to
incur approximately $28.0 million in total pre-tax charges in the third quarter of fiscal
year 2007. Substantially all of the expected pre-tax charges are one-time employee
termination benefits.

The Canadian dollar continues to be
strong compared to the U.S. dollar. This has put pressure on our business and operating
margin percentage as a disproportionate amount of our expenses are incurred in Canadian
dollars.

28

---

# 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 requisite service period of
our awards with service conditions only and the graded attribution method for our
performance-based awards. 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 and six months ended August 31, 2006 and 2005 is as follows:

|                                    | Three months endedAugust 31, |         | Six months endedAugust 31,
|----------------------------------- | ---------------------------- | ------- | --------------------------
|                                   
|                                    | 2006                         | 2005    |                           
|                                   
|                                    | ($000s)                     
|Compensation cost recognized        |                              |         |                           
|Cost of Product Support             | $     65                     | $   117 |                           
|Cost of Services                    | 159                          | 194     |                           
|Selling, General and Administrative | 5,100                        | 3,253   |                           
|Research and Development            | 433                          | 994     |                           
|                                   
|Total                               | 5,757                        | 4,558   |                           
|Tax benefit recognized              | (528)                        | (572)   |                           
|                                   
|Net Stock-based Compensation Cost   | $5,229                       | $3,986  |                           
|                                   

29

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# GAAP Operating Performance

|                                 | Percentage Change           
|-------------------------------- | ----------------------------
|                                 |                             
|(000s, except per share amounts) | Three months endedAugust 31,
|                                
|                                 | 2006                        
|                                
|Revenue                          |                             
|Cost of revenue                  |                             
|                                 |                             
|Gross margin                     |                             
|Operating expenses               |                             
|                                 |                             
|Operating income                 |                             
|                                 |                             
|Gross margin percentage          |                             
|Operating margin percentage      |                             
|                                 |                             
|Net income                       |                             
|                                 |                             
|Net income per share             |                             
|Basic                            |                             
|                                 |                             
|Diluted                          |                             
|                                 |                             

Revenue for the quarter ended August
31, 2006 was $229.9 million, an 8% increase from revenue of $212.0 million for the same
quarter last year. Net income for the current quarter was $23.8 million, compared to net
income of $24.9 million for the same quarter last year, a decrease of 5%. Diluted net
income per share was $0.26 for the current quarter, compared to diluted net income per
share of $0.27 for the same quarter last year. Basic net income per share was $0.26 and
$0.27 for the quarters ended August 31, 2006 and August 31, 2005, respectively.

Revenue for the six months ended
August 31, 2006 was $446.9 million, an 8% increase from revenue of $412.1 million for the
same period last year. Net income for the current six-month period was $38.3 million,
compared to net income of $45.3 million for the same period last year, a decrease of 15%.
Diluted net income per share was $0.42 for the current six-month period, compared to
diluted net income per share of $0.48 for the same period last year. Basic net income per
share was $0.43 and $0.50 for the six-month periods ended August 31, 2006 and August
31, 2005, respectively.

Gross margin for the three months
ended August 31, 2006 was $177.3 million, an increase of 5% over gross margin of $169.0
million for the same quarter last year. Gross margin percentage was 77% for the quarter
ended August 31, 2006, compared to 80% for the corresponding quarter last fiscal year.
Gross margin for the six months ended August 31, 2006 was $343.8 million, an increase of
5% over gross margin of $326.6 million for the same period last year. Gross margin
percentage for the six months ended August 31, 2006 was 77% compared to 79% for the
corresponding period last year. The decrease in gross margin percentage is attributable to
a shift in revenue mix towards lower margin services revenue.

30

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Total operating expenses for the
quarter ended August 31, 2006 were $153.6 million, a 9% increase from operating expenses
of $140.5 million for the same quarter last year. The operating margin for the quarter
ended August 31, 2006 was 10.3% compared to 13.5% for the corresponding quarter of the
previous fiscal year. Total operating expenses for the six months ended August 31, 2006
were $306.1 million, a 10% increase from operating expenses of $277.6 million for the same
period last year. Included in operating expenses for the quarter were $1.8 million of
expenses related to a review of our Annual Report on Form 10-K for the period ended
February 28, 2005 by the Staff of the Division of Corporation Finance of the Securities
and Exchange Commission. Operating margin for the six months ended August 31, 2006 was
8.4% compared to 11.9% for the same period last year. The decrease in operating margin for
the three and six month periods ended August 31, 2006 is primarily attributable to
fluctuations in foreign currency, predominantly the Canadian dollar which continues to be
strong compared to the U.S. dollar, and a shift in revenue mix from our higher margin
license revenue towards our lower margin product support and services revenue. Also
contributing to the decline in operating margin was a growth in our infrastructure and
head count which along with the foreign exchange impact resulted in our expenses growing
at a faster rate than our revenues.

On September 7, 2006, in order to
streamline our organization and improve our operating margin on a long term basis, we
announced a restructuring plan. The plan includes a planned reduction of approximately 210
personnel or 6% of our global workforce, focused primarily on management and
non-revenue-generating positions. We will continue to increase our investment
 in customer facing resources.
We expect to substantially complete the activities relating to the plan within our fiscal
year 2007. As part of this plan, and in accordance with FAS 146, we expect to incur approximately
$28.0 million in total pre-tax charges in the third quarter of fiscal year 2007.
Substantially all of the expected pre-tax charges are one-time employee termination
benefits.

The decrease in net income for the
three and six months ended August 31, 2006, compared to the same periods in the prior
fiscal year, is primarily due to the unfavorable effect of foreign currency, predominantly
the stronger Canadian dollar, and a shift in revenue mix from our higher margin license revenue towards our
 lower margin product support and services
revenue. The decrease in net income was partially offset by an increase in interest and
other income.

We operate internationally and, as a
result, a substantial portion of our business is conducted in foreign currencies.
Accordingly, our results are affected 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. The following table breaks down the year-over-year percentage
change in revenue and expenses between change attributable to growth and change
attributable to fluctuations in the value of the U.S. dollar.

31

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# Year-over-year Percentage
Change in Revenue and Expenses

|                                          | Three Months Ended August 31,2006 over 2005 |                 | Six Months Ended August 31,2006 over 2005
|----------------------------------------- | ------------------------------------------- | --------------- | -----------------------------------------
|                                          |                                            
|                                          | GrowthExcludingForeignExchange              | ForeignExchange | NetChange                                
|                                         
|Revenue                                   |                                             | 6               | .2%                                      
|Cost of Revenue and Operating
   Expenses |                                             | 8               | .4                                       
|Operating Income                          |                                             | (9              | .3)                                      

# Non-GAAP Financial Measures

|                                        | Percentage Change           
|--------------------------------------- | ----------------------------
|                                        |                             
|(000s, except per share amounts)        | Three months endedAugust 31,
|                                       
|                                        | 2006                        
|                                       
|Non-GAAP Operating Income               |                             
|Non-GAAP Operating Margin               |                             
|Non-GAAP Net Income                     |                             
|Non-GAAP Net Income   per Diluted Share |                             

Non-GAAP operating margin for the
quarter ended August 31, 2006 was 13.6% compared to 16.4% for the corresponding quarter of
the previous fiscal year. Non-GAAP operating margin for the six months ended August 31,
2006 was 11.6% compared to 14.8% for the same period last year. The decrease in non-GAAP
operating margin for the three and six-month periods ended August 31, 2006 is primarily
attributable to fluctuations in foreign currency, predominantly the Canadian dollar which
continues to be strong compared to the U.S. dollar, and a shift in revenue mix from our
higher margin license revenue towards our lower margin product and services revenue. Also
contributing to the decline in non-GAAP operating margin was growth in our infrastructure
and head count which resulted in our expenses growing faster than our revenues.

Non-GAAP net income for the current
quarter was $30.0 million, compared to $29.9 million for the same quarter last year.
Non-GAAP net income per diluted share was $0.33 for the current quarter, compared to
non-GAAP net income per diluted share of $0.32 for the same quarter last year. Non-GAAP
net income for the current six-month period was $49.8 million, compared to $54.9 million
for the same period last year. Non-GAAP net income per diluted share was $0.55 for the
current six-month period, compared to non-GAAP net income per diluted share of $0.59 for
the same period last year.

32

---

The decrease in non-GAAP net income
for the three and six months ended August 31, 2006, compared to the same periods in the
prior fiscal year, is primarily due to the unfavorable effect of foreign currency,
predominantly the stronger Canadian dollar, and a shift in sales mix towards lower margin
services revenue. The decrease in non-GAAP net income was partially offset by an increase
in interest and other income.

The following tables reflect
Cognos Non-GAAP Measures reconciled to GAAP results:

|                                                         | Three months endedAugust 31, | Six months endedAugust 31,
|-------------------------------------------------------- | ---------------------------- | --------------------------
|                                                        
|                                                         | 2006                         | 2005                      
|                                                        
|Operating Income                                         |                              |                           
|GAAP Operating Income                                    | $ 23,704                     | $ 28,530                  
|Plus:                                                   
|Amortization of acquisition-related intangible assets    | 1,702                        | 1,637                     
|Stock-based compensation expense                         | 5,757                        | 4,558                     
|                                                        
|Non-GAAP Operating Income                                | $ 31,163                     | $ 34,725                  
|                                                        
|Operating Margin Percentage                             
|GAAP Operating Margin Percentage                         | 10.3%                        | 13.5%                     
|Plus:                                                   
|Amortization of acquisition-related intangible assets    | 0.8                          | 0.8                       
|Stock-based compensation expense                         | 2.5                          | 2.1                       
|                                                        
|Non-GAAP Operating Margin Percentage                     | 13.6%                        | 16.4%                     
|                                                        
|Net Income                                              
|GAAP Net Income                                          | $ 23,760                     | $ 24,900                  
|Plus:                                                   
|Amortization of acquisition-related intangible assets    | 1,702                        | 1,637                     
|Stock-based compensation expense                         | 5,757                        | 4,558                     
|Less:                                                   
|Income tax effect of amortization of acquisition-related
|intangible assets                                        | (646)                        | (624)                     
|Income tax effect of stock-based compensation expense    | (528)                        | (572)                     
|                                                        
|Non-GAAP Net Income                                      | $ 30,045                     | $ 29,899                  
|                                                        
|Net Income per diluted share                            
|GAAP Net Income per diluted share                        | $0.26                        | $0.27                     
|Plus:                                                   
|Amortization of acquisition-related intangible assets    | 0.02                         | 0.02                      
|Stock-based compensation expense                         | 0.06                         | 0.05                      
|Less:                                                   
|Income tax effect of amortization of acquisition-related
|intangible assets                                        | (0.01)                       | (0.01)                    
|Income tax effect of stock-based compensation expense    | --                           | (0.01)                    
|                                                        
|Non-GAAP Net Income per diluted share                    | $0.33                        | $0.32                     
|                                                        
|Shares used in computing diluted net income per share    | 90,221                       | 92,806                    

33

---

# Percentage of Revenue
Table

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 compared to the indicated prior period.

|                                                          | Percentage of Revenue        | Percentage Change         
|--------------------------------------------------------- | ---------------------------- | --------------------------
|                                                          |                             
|                                                          | Three months endedAugust 31, | Six months endedAugust 31,
|                                                         
|                                                          | 2006                         | 2005                      
|                                                         
|Revenue                                                   |                              | 100                       
|                                                          |                             
|Cost of revenue                                           |                              | 22                        
|                                                          |                             
|Gross margin                                              |                              | 77                        
|                                                          |                             
|Operating expenses                                        |                             
|Selling, general, and administrative                      |                              | 51                        
|Research and development                                  |                              | 14                        
|Amortization of acquisition-related
    intangible assets |                              | 0                         
|                                                          |                             
|Total operating expenses                                  |                              | 66                        
|                                                          |                             
|Operating income                                          |                              | 10                        
|Interest and other income, net                            |                              | 2                         
|                                                          |                             
|Income before taxes                                       |                              | 13                        
|Income tax provision                                      |                              | 2                         
|                                                          |                             
|Net income                                                |                              | 10                        
|                                                          |                             

34

---

REVENUE

|                | Percentage Change           
|--------------- | ----------------------------
|                |                             
|($000s)         | Three months endedAugust 31,
|               
|                | 2006                        
|               
|Product License |                             
|Product Support |                             
|Services        |                             
|                |                             
|Total Revenue   |                             
|                |                             

Our total revenue was $229.9 million
for the quarter ended August 31, 2006, an increase of $17.8 million or 8%, compared to the
quarter ended August 31, 2005. Our total revenue was $446.9 million for the six months
ended August 31, 2006, an increase of $34.8 million or 8%, compared to the six months
ended August 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 more than 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 August 31, 2006 from August
31, 2005 was as follows: a 1% decrease in product license revenue, a 12% increase in
product support revenue, and an 18% increase in services revenue. The increase for the
same categories for the six months was as follows: 1%, 13%, and 12%, respectively.

Industry Trends and
Geographic Information

We believe that 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 use 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 to 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 areas 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.

35

---

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
an increase in the number of large customer contracts, an 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 endedAugust 31, | Six months endedAugust 31,
|--------------------------------------------------- | ---------------------------- | --------------------------
|                                                   
|                                                    | 2006                         | 2005                      
|                                                   
|Orders (License, Support, Services)                 |                              |                           
|Transactions greater than $1 million                | 10                           | 9                         
|Transactions greater than $200,000                  | 120                          | 124                       
|Transactions greater than $50,000                   | 819                          | 754                       
|Average selling price (License orders only) ($000s)
|Greater than $50,000                                | 181                          | 172                       

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
our customers investment budgets.

36

---

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 compared to the prior fiscal period.

# Revenue by Geography

|             | Percentage Change           
|------------ | ----------------------------
|             |                             
|($000s)      | Three months endedAugust 31,
|            
|             | 2006                        
|            
|The Americas |                             
|EMEA         |                             
|Asia/Pacific |                             
|             |                             
|Total        |                             
|             |                             

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 endedAugust 31, | Six months endedAugust 31,
|------------ | ---------------------------- | --------------------------
|            
|             | 2006                         | 2005                      
|            
|The Americas | 59.7%                        | 57.8%                     
|EMEA         | 31.4                         | 31.9                      
|Asia/Pacific | 8.9                          | 10.3                      
|Total        | 100.0%                       | 100.0%                    
|            

The growth rates of our revenue in
EMEA, Asia/Pacific and, to a much lesser extent, in the Americas can be affected by
foreign exchange rate fluctuations. The following table breaks down the year-over-year
percentage change in revenue for the three and six months ended August 31, 2006 by
geographic area between change attributable to growth and change due to fluctuations in
the value of the U.S. dollar.

37

---

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

|             | Three Months Ended August 31,2006 over 2005 |                 | Six Months Ended August 31,2006 over 2005
|------------ | ------------------------------------------- | --------------- | -----------------------------------------
|             |                                            
|             | GrowthExcludingForeignExchange              | ForeignExchange | NetChange                                
|            
|The Americas |                                             | 10              | .6%                                      
|EMEA         |                                             | 2               | .3%                                      
|Asia/Pacific |                                             | (7              | .0)%                                     
|Total        |                                             | 6               | .2%                                      
|            

The growth rate of our revenue in the
Americas and EMEA during the six months ended August 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
as we closed several large contracts in the region last 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

|                            | Percentage Change           
|--------------------------- | ----------------------------
|                            |                             
|($000s)                     | Three months endedAugust 31,
|                           
|                            | 2006                        
|                           
|Product license revenue     |                             
|Percentage of total revenue |                             

Product license revenue was $78.0
million in the quarter ended August 31, 2006, a decrease of $0.6 million or 1% from the
quarter ended August 31, 2005; and was $151.7 million for the six months ended August 31,
2006, an increase of $1.9 million or 1% compared to the corresponding period in the prior
fiscal year. License revenue for the quarter was down slightly due to a combination of factors including sales representatives hiring taking place later in
the quarter than anticipated and a slow start to the quarter as the SEC review created a
distraction both internally and with our customers.  Product license revenue accounted for 34% of total revenue in the three
months ended August 31, 2006 compared to 37% for the corresponding quarter in the prior
fiscal year, and 34% and 36% for the six months ended August 31, 2006 and August 31, 2005,
respectively.

The breadth of our solution is also
allowing us to develop long-term strategic relationships with our customers which, in
turn, enables us to generate additional software licensing and ongoing maintenance
renewals. These relationships are a significant asset as approximately 69% of our license
revenue came from existing customers in the three-month period ended August 31, 2006.

38

---

We license our software through our
direct sales force and value-added resellers, system integrators, and OEMs. Direct sales
accounted for approximately 72% and 74% of our license revenue for the second 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 as the role of systems
integrators in these large standardization opportunities is increasing. We are also
expending resources developing our indirect sales activities in order to have coverage in
every desirable market. We will continue to commit management time and financial resources
to developing relationships with systems integrators and direct and indirect international
sales and support channels.

# Product Support Revenue

|                            | Percentage Change           
|--------------------------- | ----------------------------
|                            |                             
|($000s)                     | Three months endedAugust 31,
|                           
|                            | 2006                        
|                           
|Product support revenue     |                             
|Percentage of total revenue |                             

Product support revenue was $103.3
million in the quarter ended August 31, 2006, an increase of $11.2 million or 12% from the
quarter ended August 31, 2005; and was $203.4 million in the six months ended August 31,
2006, an increase of $22.9 million or 13% compared to the corresponding period in the
prior fiscal year. The increase in support revenue was the result of our strong renewal
rates on 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
45% and 43% of our total revenue in the quarters ended August 31, 2006 and August 31,
2005, respectively, and was 46% and 44% of total revenue in the six months ended August
31, 2006 and August 31, 2005, respectively.

39

---

# Services Revenue

|                            | Percentage Change           
|--------------------------- | ----------------------------
|                            |                             
|($000s)                     | Three months endedAugust 31,
|                           
|                            | 2006                        
|                           
|Services revenue            |                             
|Percentage of total revenue |                             

Services revenue (training,
consulting, and other revenue) was $48.6 million in the quarter ended August 31, 2006, an
increase of $7.3 million or 18% from the quarter ended August 31, 2005; and was $91.7
million in the six months ended August 31, 2006, an increase of $10.0 million or 12%
compared to the corresponding period in the prior fiscal year. Services revenue accounted
for 21% and 20% of our total revenue for the three months ended August 31, 2006 and August
31, 2005, respectively, and accounted for 20% for both the six months ended August 31,
2006 and August 31, 2005.

The increase in services revenue was
primarily attributable to an increase in consulting revenue as we move 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.

# COST OF
REVENUE

# Cost of Product License

|                              | Percentage Change           
|----------------------------- | ----------------------------
|                              |                             
|($000s)                       | Three months endedAugust 31,
|                             
|                              | 2006                        
|                             
|Cost of product license       |                             
|Percentage of license revenue |                             

The cost of product license revenue
was $1.4 million, a negligible difference in the quarter ended August 31, 2006, and was
$3.2 million, an increase of $0.6 million or 22% in the six months ended August 31, 2006,
compared to the corresponding periods in the prior fiscal year. These costs represented 2%
of product license revenue for the three and six months ended August 31, 2006, the same as
for both comparative periods in the prior fiscal year.

40

---

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

|($000s)                     | Year-over-year Changefrom August 31,2005 to 2006 |           
|--------------------------- | ------------------------------------------------ | ----------
|                           
|                            | Three months                                     | Six months
|                           
|Royalty cost                | $ (3)                                            | $455      
|Other                       | 39                                               | 116       
|                           
|Total year-over-year change | $36                                              | $571      
|                           

The increase in these costs for the
six months ended August 31, 2006 was the result of increases in royalties related to
suppliers whose technology is embedded in our software.

# Cost of Product Support

|                              | Percentage Change           
|----------------------------- | ----------------------------
|                              |                             
|($000s)                       | Three months endedAugust 31,
|                             
|                              | 2006                        
|                             
|Cost of product support       |                             
|Percentage of support revenue |                             

The cost of product support revenue
was $11.4 million, an increase of $2.5 million or 28% in the quarter ended August 31,
2006, and was $22.6 million, an increase of $4.7 million or 26% in the six months ended
August 31, 2006, compared to the corresponding periods in the prior fiscal year. The cost
of product support represented 11% of total product support revenue for both the three and
six months ended August 31, 2006, compared to 10% for the corresponding periods in the
prior fiscal year.

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:

41

---

|($000s)                     | Year-over-year Changefrom August 31,2005 to 2006 |           
|--------------------------- | ------------------------------------------------ | ----------
|                           
|                            | Three months                                     | Six months
|                           
|Staff-related costs         | $1,028                                           | $1,913    
|Computer-related costs      | 863                                              | 1,704     
|Other                       | 579                                              | 1,084     
|                           
|Total year-over-year change | $2,470                                           | $4,701    
|                           

The increase in the cost of product
support for the three and six month periods ended August 31, 2006 was primarily the result
of increases in staff-related costs  and
computer-related costs to service our growing customer base.
 The average number of employees within the support organization
increased 12% and 9% in the three and six months ended August 31, 2006, respectively
compared to the same periods last year. 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 7% and 6% for the three
and six months ended August 31, 2006, respectively, compared to the same periods last
year.

# Cost of Services

|                               | Percentage Change           
|------------------------------ | ----------------------------
|                               |                             
|($000s)                        | Three months endedAugust 31,
|                              
|                               | 2006                        
|                              
|Cost of services               |                             
|Percentage of services revenue |                             

The cost of services was $39.8
million, an increase of $7.1 million or 22% in the quarter ended August 31, 2006 and was
$77.3 million, an increase of $12.3 million or 19% in the six months ended August 31, 2006
compared to the corresponding periods in the prior fiscal year. The cost of services
represented 82% and 84% of services revenue for the three and six months ended August 31,
2006, respectively, compared to 79% for both the corresponding periods in the prior fiscal
year.

42

---

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:

|($000s)                       | Year-over-year Changefrom August 31,2005 to 2006 |           
|----------------------------- | ------------------------------------------------ | ----------
|                             
|                              | Three months                                     | Six months
|                             
|Staff-related costs           | $2,569                                           | $  4,872  
|Services purchased externally | 1,471                                            | 2,741     
|Travel and living             | 669                                              | 1,741     
|Other                         | 2,391                                            | 2,965     
|                             
|Total year-over-year change   | $7,100                                           | $12,319   
|                             

The increase in cost of services for
the three and six month periods ended August 31, 2006 was primarily attributable to
increases in staff-related costs. The average number of employees within the services
organization increased 9% and 8% in the three and six months ended August 31, 2006,
respectively, compared to the same periods last year. 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
 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 continue to supplement our skills by engaging
subcontractors. Other includes recruiting fees, staff development costs and direct selling
costs. The effect of fluctuations of foreign currencies had a 2% and 1% impact on cost of
services during the three and six months ended August 31, 2006, respectively.

# OPERATING
EXPENSES

# Selling, General, and
Administrative

|                                     | Percentage Change           
|------------------------------------ | ----------------------------
|                                     |                             
|($000s)                              | Three months endedAugust 31,
|                                    
|                                     | 2006                        
|                                    
|Selling, general, and administrative |                             
|Percentage of total revenue          |                             

Selling, general, and administrative
(SG&A) expenses were $118.0 million, an increase of $8.7 million or
8% in the quarter ended August 31, 2006, and were $235.6 million, an increase of $20.5
million or 10% in the six months ended August 31, 2006 compared to the corresponding
periods in the prior fiscal year. These costs represented 51% and 53% of total revenue for
the three and six months ended August 31, 2006, respectively, compared to 52% for both the
corresponding periods in the prior fiscal year.

43

---

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:

|($000s)                     | Year-over-year Changefrom August 31,2005 to 2006 |           
|--------------------------- | ------------------------------------------------ | ----------
|                           
|                            | Three months                                     | Six months
|                           
|Staff-related costs         | $ 8,056                                          | $15,707   
|Professional services       | 1,357                                            | 3,539     
|External contractors        | 1,340                                            | 2,005     
|Travel & living             | 426                                              | 2,446     
|Marketing                   | (742)                                            | (1,094)   
|Staff development           | (1,120)                                          | (352)     
|Other                       | (663)                                            | (1,720)   
|                           
|Total year-over-year change | $ 8,654                                          | $ 20,531  
|                           

The increase in SG&A expenses in
the three and six months ended August 31, 2006 was the result of increases in
staff-related costs resulting from higher compensation related expenses, as well as
associated benefits, compared to the same periods last year. The average number of
employees within SG&A increased by 4% in both the three and six months ended August
31, 2006, when compared to the corresponding periods in the prior fiscal year.
Contributing to the increase for both the three and six months ended August 31, 2006 were
increases in professional services, including expenses related to the SEC review, external
contractors and travel and living expenditures. This was partially offset by a decrease in
marketing and staff development. The unfavorable effect of fluctuations of foreign
currencies relative to the U.S. dollar increased SG&A expenses by approximately 3% and
2% for the three and six months ended August 31, 2006, respectively, when compared to the
corresponding periods in the prior fiscal year.

# Research and Development

|                            | Percentage Change           
|--------------------------- | ----------------------------
|                            |                             
|($000s)                     | Three months endedAugust 31,
|                           
|                            | 2006                        
|                           
|Research and development    |                             
|Percentage of total revenue |                             

Research and development
(R&D) expenses were $33.9 million, an increase of $4.3 million or
15% in the quarter ended August 31, 2006, and were $67.1 million, an increase of $7.9
million or 13% for the six months ended August 31, 2006 compared to the corresponding
periods in the prior fiscal year. R&D costs were 15% of revenue for both the three and
six months ended August 31, 2006, compared to 14% of revenue for both of the corresponding
periods in the prior fiscal year.

44

---

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-year Changefrom August 31,2005 to 2006 |           
|--------------------------- | ------------------------------------------------ | ----------
|                           
|                            | Three months                                     | Six months
|                           
|Staff-related costs         | $2,665                                           | $4,919    
|Other                       | 1,684                                            | 2,944     
|                           
|Total year-over-year change | $4,349                                           | $7,863    
|                           

The increase in R&D expenses for
the three and six months ended August 31, 2006 was the result of increases in
staff-related costs resulting from higher compensation related expenses, as well as
associated benefits, compared to the previous fiscal year, driven by an increase in
personnel. The average number of employees within R&D increased by 7% for both the
three and six months ended August 31, 2006, when compared to the corresponding periods of
the prior fiscal year. The unfavorable effect of fluctuations of foreign currencies,
especially the Canadian dollar, relative to the U.S. dollar increased R&D expenses by
approximately 7% and 6% for the three and six months ended August 31, 2006, respectively,
when compared to the corresponding periods of the prior fiscal year.

We continue to invest significantly in
R&D activities for our next generation of BI solutions which are the foundation of our
CPM vision. During the quarter, we shipped the second maintenance release for Cognos 8.
This new version of Cognos 8 includes enhanced quality, upgradeability and performance. In
addition, we released Cognos 8 Workforce Performance during our second quarter. 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 also recently previewed Cognos 8
Go! Mobile, a new BI solution that will bring decision-support information directly to
mobile device users for right-time decision making. Cognos 8 Go! Mobile follows the recent
announcement of Cognos Go! Search and represents Cognos next milestone in making BI
accessible to more people and enabling higher adoption of business intelligence for
enhanced decision making and improved organizational performance. Cognos Go! Search,
announced in the previous quarter, is a new BI search capability that will enable users to
instantly find relevant, strategic enterprise information available through Cognos 8.

We currently do not have any software
development costs capitalized on our balance sheet. Software development costs are
expensed as incurred unless they meet the requirements of generally accepted accounting
principles 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 would be amortized over a period not exceeding 36 months. No
costs were deferred in the three and six months ended August 31, 2006 and August 31, 2005.
Costs were not deferred in the periods 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.

45

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# Amortization of
Acquisition-related Intangible Assets

|                                                         | Percentage Change           
|-------------------------------------------------------- | ----------------------------
|                                                         |                             
|($000s)                                                  | Three months endedAugust 31,
|                                                        
|                                                         | 2006                        
|                                                        
|Amortization of acquisition-related
   intangible assets |                             

Amortization of acquisition-related
intangible assets was $1.7 million, an increase of $0.1 million or 4% for the quarter
ended August 31, 2006 and was $3.4 million, an increase of $0.1 million or 4% for the six
months ended August 31, 2006 compared to the corresponding periods in the prior year. The
increase in this expense in the three and six months ended August 31, 2006 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.

On September 7, 2006, in order to
streamline our organization and improve our operating margin on a long term basis, we
announced a restructuring plan. The plan includes a planned reduction of approximately
210 personnel or 6% of our global workforce, focused primarily on management and
non-revenue-generating positions. We will continue to increase our investment in customer
facing resources. We expect to substantially complete the activities relating to the plan
within our fiscal year 2007. As part of this plan, and in with FAS 146, we expect to
incur approximately $28.0 million in operating expenses in the third quarter of fiscal
year 2007. Substantially all of the expected pre-tax charges are one-time employee
termination benefits.

# INTEREST AND
OTHER
INCOME,

NET

|                               | Percentage Change           
|------------------------------ | ----------------------------
|                               |                             
|($000s)                        | Three months endedAugust 31,
|                              
|                               | 2006                        
|                              
|Interest and other income, net |                             

Net interest income was $6.2 million,
an increase of $3.2 million or 104% in the quarter ended August 31, 2006 and was $11.2
million, an increase of $5.4 million or 93% in the six months ended August 31, 2006
compared to the corresponding periods in the prior fiscal year. The change in net interest
and other income is as follows:

46

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|($000s)                                 | Year-over-year Changefrom August 31,2005 to 2006 |           
|--------------------------------------- | ------------------------------------------------ | ----------
|                                       
|                                        | Three months                                     | Six months
|                                       
|Increase in interest revenue            | $3,108                                           | $5,494    
|Decrease in interest and other expenses | 514                                              | 749       
|Loss on foreign exchange                | (457)                                            | (847)     
|                                       
|Total year-over-year change             | $3,165                                           | $5,396    
|                                       

The increase in interest revenue
during the three and six months ended August 31, 2006 was attributable to an increase in
the average portfolio size accompanied by an increase in the average yield on investments
compared to the corresponding periods in the prior fiscal year.

# INCOME
TAX
PROVISION

|                     | Percentage Change           
|-------------------- | ----------------------------
|                     |                             
|($000s)              | Three months endedAugust 31,
|                    
|                     | 2006                        
|                    
|Income tax provision |                             
|Effective tax rate   |                             

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 and six months ended August 31, 2006, we recorded an
income tax provision of $6.2 million and $10.6 million, respectively, representing an
effective income tax rate of 21% and 22%, respectively. Comparatively, in the three and
six months ended August 31, 2005, we recorded an income tax provision of $6.7 million and
$9.5 million, respectively, representing an effective income tax rate of 21% and 17%,
respectively. We estimate our effective tax rate for the current fiscal year to be 23.5%,
exclusive of any one-time events. This estimated effective tax rate was reduced for the
three and six-month periods ended August 31, 2006 to 20.6% and 21.7%, respectively due to
adjustments related to a modification of an intercompany commercial arrangement and an
election in respect of the functional currency of a subsidiary. For the three and six
months ended August 31, 2005, the Corporation estimated its effective tax rate for fiscal
2006 to be 22%, exclusive of any one-time events. This estimated effective tax rate was
reduced for the three-month period ended August 31, 2005 to 21.1% due to adjustments
relating to various tax audits and prior period tax provisions. The effective tax rate for
the six-month period ended August 31, 2005 was adjusted to 17.4% due to the adjustments in
the quarter as well as the recognition of one-time benefits in the previous quarter
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.

47

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# LIQUIDITY AND
CAPITAL
RESOURCES

|($000s)                                            | As atAugust 31,2006 | As atFebruary 28,2006 | Percentage Change
|-------------------------------------------------- | ------------------- | --------------------- | -----------------
|                                                  
|Cash and cash equivalents                          |                     | $417,499              |                  
|Short-term investments                             |                     | 200,585               |                  
|                                                   |                    
|Cash, cash equivalents, and short-term investments |                     | $618,084              |                  
|Working capital                                    |                     | 457,180               |                  

|($000s)                         | Six months endedAugust 31, | Percentage ChangeSix months endedAugust 31,
|------------------------------- | -------------------------- | -------------------------------------------
|                               
|                                | 2006                       | 2005                                       
|                               
|Net cash provided by (used in): |                            |                                            
|Operating activities            |                            | $ 88,771                                   
|Investing activities            |                            | (58,983                                    
|Financing activities            |                            | (14,032                                    

|                             | As atAugust 31,2006 | As atAugust 31,2005 | 
|---------------------------- | ------------------- | ------------------- | 
|                            
|Days sales outstanding (DSO) |                     | 57                  | 

# Cash, Cash Equivalents,
and Short-term Investments

As at August 31, 2006, we held $618.1
million in cash, cash equivalents, and short-term investments, an increase of $67.1
million from February 28, 2006. This increase is primarily attributable to net income for
the period and the collection of accounts receivable which were seasonally high at the end
of fiscal 2006. 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.

48

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# Working Capital

Working capital represents our current
assets less our current liabilities. As of August 31, 2006, working capital was $457.2
million, an increase of $37.7 million from February 28, 2006. The increase in working
capital can be attributed to an increase in short-term investments and a net decrease in
current liabilities, especially accounts payable and deferred revenue. Offsetting this
increase were decreases in accounts receivable.

Days sales outstanding (DSO) was 57
days at August 31, 2006, compared to 60 days as at August 31, 2005. We calculate our days
sales outstanding ratio based on ending accounts receivable balances and quarterly
revenue.

# Long-term Liabilities

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

# Cash Provided by
Operating Activities

Cash provided by operating activities
(after changes in non-cash working capital items) for the six months ended August 31, 2006
was $88.8 million, an increase of $64.3 million compared to the same period last year. The
increase is primarily attributable to changes in working capital, most notably the
collection of accounts receivable and a reduction of the amount paid for year end bonuses,
commissions and income taxes, compared to the same period last year.

# Cash Provided by (Used
in) Investing Activities

Cash used in investing activities was
$59.0 million for the six months ended August 31, 2006, compared to cash provided by
investing activities of $37.1 million in the corresponding period last fiscal year. During
the six months ended August 31, 2006, we had a net increase in short-term investments,
while during the six months ended August 31, 2005, we had a net decrease in short-term
investments as many of our investments matured during this period. In the six months ended
August 31, 2006, our purchases of short-term investments, net of maturities, were $47.2
million. In comparison, during the six months ended August 31, 2005, our proceeds on
maturity of short-term investments, net of purchases, were $48.4 million. During both the
six months ended August 31, 2006 and August 31, 2005, we spent $10.9 million on fixed
asset additions. The additions for both periods related primarily to computer equipment
and software, office furniture and leasehold improvements.

# Cash Used in Financing
Activities

Cash used in financing activities was
$14.0 million for the six months ended August 31, 2006, a decrease in financing activities
of $17.5 million compared to the same period of the prior fiscal year. We issued 556,000
common shares for proceeds of $13.5 million, during the six months ended August 31, 2006,
compared to the issuance of 766,000 shares for proceeds of $17.6 million during the
corresponding period in the prior fiscal year. The issuance of shares in the six months
ended August 31, 2006 was pursuant to our stock purchase plan and the exercise of stock
options by employees, officers, and directors.

49

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We also paid $25.0 million during the
six months ended August 31, 2006 to repurchase 652,000 shares on the open market.
Comparatively, for the six months ended August 31, 2005 we repurchased 1,266,000 shares at
a value of $48.9 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% (10% in the 2005-2006 plan) 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.

From June 1, 2006 to August 3, 2006,
all of the directors and executives officers of Cognos along with certain of our employees
were prohibited from trading in our securities pursuant to a management cease trade order
issued by the Ontario Securities Commission and the Quebec Securities Commission in
connection with the delay in the filing of certain of our financial statements. During
this management cease trade order, we did not repurchase any of our shares in the open
market. We expect to resume repurchasing shares in the open market under our share
repurchase program.

It has been the Corporations
practice to make an annual grant of options to key employees following its annual meeting
of shareholders, typically held in late June. However, our annual meeting for June 2006
was postponed due to a review of our revenue recognition practices by the Staff of the
Division of Corporation Finance of the Securities and Exchange Commission. The review was
resolved without any objection by the Staff. However, on September 7, 2006, we announced
an operating margin improvement plan which would result in a reduction of our global
workforce by approximately 210 personnel. In light of this action and the prolonged delay
in granting stock options to employees, the Board of Directors of the Corporation
determined that it was imperative to accelerate the award of equity grants to employees in
September. Accordingly, we awarded 240,000 options and 436,192 RSUs on September 26, 2006.
We advised the trustee of these RSU grants and the trustee has purchased approximately
437,000 common shares to fulfill this RSU award.

# 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 August 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, we 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 at August 31, 2006,
we had cash flow hedges, with maturity dates between February 28, 2007 and January 14,
2008, to exchange the U.S. dollar equivalent of $74.4 million in foreign currency. At
August 31, 2006, we had an unrealized loss in the amount of $3.0 million in relation to
these contracts with an offsetting gain on the hedged loan. 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.

50

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We may enter into foreign exchange
contracts that we choose not to designate as a hedge for accounting purposes. We carry
these contracts at their fair value with any gain or loss included in income. At August
31, 2006, we had three such contracts to exchange the U.S. dollar equivalent of $5.8
million. We entered into these contracts to offset the foreign exchange risk on trade
account receivables that were not in the functional currency of the subsidiary which held
them. The estimated fair value of these contracts at August 31, 2006 was not material.

On September 7, 2006, in order to
streamline our organization and improve our operating margin on a long term basis, we
announced a restructuring plan. The plan includes a planned reduction of approximately 210
personnel or 6% of our global workforce, focused primarily on management and
non-revenue-generating positions. We will continue to increase our investment in customer facing resources.
We expect to substantially complete the activities relating to the plan within our fiscal
year 2007. As part of this plan, and in accordance with FAS 146, we expect to incur
approximately $28.0 million in total pre-tax charges in the third quarter of fiscal year
2007. We expect that $26.0 million will be paid in cash. The remaining $2.0 million in
pre-tax charges are expected to be non-cash expenses resulting primarily from employee
termination costs related to non-cash stock-based compensation costs.

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.

# 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.

51

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

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

| |  | Stock-based Compensation
| | - | ------------------------

| |  | 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 a 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.

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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

52

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| |  | 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 than 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 it is based on our history of separate sales
using such price lists.

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).

53

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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.

54

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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 123Rto 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 stock-based transactions using a fair value method and recognize
the expense in the consolidated statements of income. We previously accounted for
stock-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 stock-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.

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The assumptions used in calculating
the fair value of stock-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 August 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.

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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.

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.

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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.

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 September 2006, the SEC issued
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements
when quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 requires companies to evaluate the materiality of identified
unadjusted errors on each financial statement and related financial statement disclosure
using both the rollover approach and the iron curtain approach. The rollover approach
quantifies misstatements based on the amount of the error in the current year financial
statement whereas the iron curtain approach quantifies misstatements based on the effects
of correcting the misstatement existing in the balance sheet at the end of the current
year, irrespective of the misstatements year(s) of origin. Financial statements
would require adjustment when either approach results in quantifying a misstatement that
is material. Correcting prior year financial statements for immaterial errors would not
require previously filed reports to be amended. SAB 108 is effective for interim periods
of the first fiscal year ending after November 15, 2006. The Corporation is currently
evaluating the impact of SAB 108 on its consolidated results of operation and financial
position.

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.

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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.

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.

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|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. As a result, we do not expect
any material loss with respect to our investment portfolio. 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 three and six months ending August 31, 2006, a 100
basis-point adverse change in interest rates would have had a $0.01 and $0.02 impact on
diluted earnings per share, respectively, 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 August 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 one 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, 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 there is an adverse change in foreign exchange rates versus the U.S.
dollar, it could have a material adverse effect on our business, results of operations,
and financial condition.

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|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. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer conclude that the disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934)
effectively ensure that information required to be disclosed in our filings and
submissions under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure and is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.

|b) | Changes
in internal control over financial reporting
|-- | ----------------------------------------------------

There have been no changes in the
Corporations internal control 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 affect, the Corporations
internal control over financial reporting.

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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 continues and the time required to complete a sales cycle is
 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. In addition, during the first half of fiscal 2007, we
closed 23 contracts greater than $1 million, compared with 15 such contracts in the same
period last fiscal year. 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.

Our restructuring plan may
not achieve its intended results and may harm our business.

On September 7, 2006, in order to
streamline our organization and improve our operating margin on a
long term basis, we announced a restructuring plan. The plan includes a planned reduction of
approximately 210 personnel or
6% of our global workforce, focused primarily on management and non-revenue-generating
positions. Workforce reductions may have negatively impacted, and could continue to
negatively impact, our remaining employees, including those directly responsible for
sales, and could limit our ability to pursue new revenue opportunities. Further, any
failure to retain and effectively manage our remaining employees could increase our costs,
hurt our sales efforts, and impact the quality of our customer service. This could
continue to harm our business, results of operations and financial condition.

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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 or major releases could erode revenue from existing products and a delay in the
release schedule for a product or a major release 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. Customers may also delay making purchases of a new product in anticipation of the availability
 of a major release. 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.

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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 half 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.

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 our 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. In an effort to streamline our organization and improve our operating
margin, we recently announced a restructuring plan which resulting in a planned reduction
of approximately 210 personnel, or 6% of our workforce. This workforce reduction could
make it more difficult for us to retain the employees we have kept, or to attract new
employees in the future. In addition, changes in senior management or other key personnel
can also cause temporary disruption in our operations during such 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.

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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.

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, during the second quarter of fiscal 2007, our license revenue
declined 1% compared to the same period last fiscal year. 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.

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Our expenses may not match
anticipated revenues or we may fail to accurately predict our expenses.

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. In addition, we expect our restructuring plan to
result in a savings of approximately $13 million in the second half of fiscal 2007. If our
estimates are incorrect, it could result in a lower operating margin for future quarters
than we currently anticipate, which could result in lower earnings in these quarters.

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.

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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.

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

|PURCHASES OF EQUITY
SECURITIES
|------------------------------
|                              
|                              
|
|                              
|
|                              
|June 1 to June 30, 2006       
|July 1 to July 31, 2006       
|August 1 to August 31, 2006   
|                              
|Total                         
|                              

On September 25, 2002, the Board of
Directors of Cognos adopted a restricted share unit plan under which awards of restricted
share units can be granted to employees, officers and directors of Cognos up to an
aggregate of 2,000,000 restricted share units. On June 23, 2005, the Corporations
shareholders approved the extension of the term of the plan to September 30, 2015 and
increased the number of authorized shares to 3,000,000. Subject to the vesting provisions
set out in each participants award agreement, each restricted share unit can be
exchanged for one common share of Cognos. The common shares for which the restricted share
units may be exchanged are purchased on the open market by a trustee appointed and funded
by Cognos. During the quarter ended August 31, 2006, the trustee repurchased 80,000 shares
at an average price of $31.82 for the restricted share unit plan.

It has been the Corporations
practice to make an annual grant of options to key employees following its annual meeting
of shareholders, typically held in late June. However, the Corporations annual
meeting for June 2006 was postponed due to a review of the Corporations revenue
recognition practices by the Staff of the Division of Corporation Finance of the
Securities and Exchange Commission. The review was resolved without any objection by the
Staff and the Corporation. However, on September 7, 2006, the Corporation announced its
operating margin improvement plan which would result in a reduction of its global
workforce by approximately 210 personnel. In light of this action and the prolonged delay
in granting stock options to employees, the Board of Directors of the Corporation
determined that it was imperative to accelerate the award of equity grants to employees in
September. Accordingly, the Corporation awarded 240,000 options and 436,192 RSUs on
September 26, 2006. The Corporation advised the trustee of these RSU grants and the
trustee has purchased approximately 437,000 common shares to fulfill this RSU award.

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 August 31, 2006, Cognos did
not repurchase any shares under the 2005 Stock Repurchase Program. On September 22, 2006,
the Corporation announced that it had adopted a stock repurchase program which commenced
on October 10, 2006 and ends on October 9, 2007 (the 2006 Stock Repurchase
Program). The program, subject to regulatory approval, will allow Cognos to
repurchase up to 8,000,000 common shares (which is less than 10% of the common shares
outstanding on that date) provided that no more than $200,000,000 is expended in total
under the program.

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|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)                                                                                                                                  | 
| | 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                                                                                              | 

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# 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)                                                                                                                                           
|               
|October 4, 2006 |  | /s/ Tom Manley                                                                                                                                         
|                |  |                                                                                                                                                        
|Date            |  | Tom ManleySenior Vice President, Finance &
Administration and    Chief Financial Officer (Principal Financial Officer and
    Chief Accounting Officer)

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EXHIBIT INDEX

|EXHIBIT NO. | DESCRIPTION |                                                                                                                                                                                                                                  | PAGE |   
|----------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --
|           
|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       |      | 72
|           
|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 |      | 73
|           
|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    |      | 74

71