---

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 November 30, 2005

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). 
YES X    NO

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 December 31, 2005, was 90,593,102.

---



---

# 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

---

PART I  FINANCIAL
INFORMATION

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

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

|                                         |  | Three months ended November 30, |   | Nine months ended November 30,
|---------------------------------------- |  | ------------------------------- | - | ------------------------------
|                                        
|                                         |  | 2005                            |   | 2004                          
|                                        
|Revenue                                  |  |                                 |   |                               
|Product license                          |  | $   75,510                      |   | $   91,580                    
|Product support                          |  | 94,430                          |   | 81,031                        
|Services                                 |  | 42,314                          |   | 37,755                        
|                                        
|Total revenue                            |  | 212,254                         |   | 210,366                       
|                                        
|Cost of revenue                          | 
|Cost of product license                  |  | 1,732                           |   | 578                           
|Cost of product support                  |  | 9,062                           |   | 8,508                         
|Cost of services                         |  | 32,871                          |   | 28,574                        
|                                        
|Total cost of revenue                    |  | 43,665                          |   | 37,660                        
|                                        
|Gross margin                             |  | 168,589                         |   | 172,706                       
|                                        
|Operating expenses                       | 
|Selling, general, and administrative     |  | 107,330                         |   | 102,377                       
|Research and development                 |  | 27,226                          |   | 26,987                        
|Amortization of acquisition-related      | 
|intangible assets                        |  | 1,684                           |   | 1,501                         
|                                        
|Total operating expenses                 |  | 136,240                         |   | 130,865                       
|                                        
|Operating income                         |  | 32,349                          |   | 41,841                        
|Interest and other expenses              |  | (406                            | ) | (22                           
|Interest income                          |  | 4,194                           |   | 1,909                         
|                                        
|Income before taxes                      |  | 36,137                          |   | 43,728                        
|Income tax provision                     |  | 7,869                           |   | 9,183                         
|                                        
|Net income                               |  | $   28,268                      |   | $   34,545                    
|                                        
|Net income per share                     | 
|Basic                                    |  | $0.31                           |   | $0.38                         
|                                        
|Diluted                                  |  | $0.31                           |   | $0.37                         
|                                        
|Weighted average number of shares (000s) | 
|Basic                                    |  | 90,410                          |   | 90,621                        
|                                        
|Diluted                                  |  | 92,288                          |   | 93,235                        
|                                        

(See accompanying notes)

3

---

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

|                                                                 |  | November 30,2005 |   | February 28,2005 |  
|---------------------------------------------------------------- |  | ---------------- | - | ---------------- | -
|                                                                
|Assets                                                           |  |                  |   | (Note 1)         |  
|Current assets                                                   |  |                  |   |                  |  
|Cash and cash equivalents                                        |  | $257,130         |   | $   378,348      |  
|Short-term investments                                           |  | 226,129          |   | 144,552          |  
|Accounts receivable                                              |  | 156,618          |   | 189,602          |  
|Prepaid expenses and other current assets                        |  | 16,954           |   | 18,941           |  
|Deferred tax assets                                              |  | 991              |   | 3,856            |  
|                                                                
|                                                                 |  | 657,822          |   | 735,299          |  
|Fixed assets, net                                                |  | 75,387           |   | 73,566           |  
|Intangible assets, net                                           |  | 23,619           |   | 27,234           |  
|Other assets                                                     |  | 6,364            |   | 6,378            |  
|Goodwill                                                         |  | 226,903          |   | 221,490          |  
|                                                                
|                                                                 |  | $990,095         |   | $1,063,967       |  
|                                                                
|Liabilities                                                      | 
|Current liabilities                                              | 
|Accounts payable                                                 |  | $  25,558        |   | $     30,705     |  
|Accrued charges                                                  |  | 26,100           |   | 31,047           |  
|Salaries, commissions, and related items                         |  | 56,179           |   | 91,010           |  
|Income taxes payable                                             |  | 1,483            |   | 21,148           |  
|Deferred revenue                                                 |  | 170,068          |   | 217,153          |  
|                                                                
|                                                                 |  | 279,388          |   | 391,063          |  
|Deferred income taxes                                            |  | 15,968           |   | 17,083           |  
|                                                                
|                                                                 |  | 295,356          |   | 408,146          |  
|                                                                
|Stockholders Equity                                             | 
|Capital stock                                                    | 
|Common shares and additional paid-in capital                     | 
|(November 30, 2005 - 90,220,829; February 28, 2005 - 91,070,967) |  | 274,869          |   | 252,561          |  
|Treasury shares                                                  | 
|(November 30, 2005 - 37,640; February 28, 2005 - 46,375)         |  | (915             | ) | (1,199           | )
|Deferred stock-based compensation                                |  | (307             | ) | (277             | )
|Retained earnings                                                |  | 414,805          |   | 402,020          |  
|Accumulated other comprehensive income                           |  | 6,287            |   | 2,716            |  
|                                                                
|                                                                 |  | 694,739          |   | 655,821          |  
|                                                                
|                                                                 |  | $990,095         |   | $1,063,967       |  
|                                                                

(See accompanying notes)

4

---

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

|                                                                      |  | Three months ended November 30, |   | Nine months ended November 30, |  
|--------------------------------------------------------------------- |  | ------------------------------- | - | ------------------------------ | -
|                                                                     
|                                                                      |  | 2005                            |   | 2004                           |  
|                                                                     
|Cash flows from operating activities                                  |  |                                 |   |                                |  
|Net income                                                            |  | $   28,268                      |   | $   34,545                     |  
|Non-cash items                                                        | 
|Depreciation and amortization                                         |  | 7,304                           |   | 7,658                          |  
|Amortization of deferred stock-based compensation                     |  | 192                             |   | 109                            |  
|Amortization of other deferred compensation                           |  | --                              |   | --                             |  
|Deferred income taxes                                                 |  | 2,106                           |   | (1,329                         | )
|Loss on disposal of fixed assets                                      |  | 82                              |   | 89                             |  
|                                                                     
|                                                                      |  | 37,952                          |   | 41,072                         |  
|Change in non-cash working capital                                    | 
|Decrease (increase) in accounts receivable                            |  | (16,851                         | ) | (14,405                        | )
|Decrease in prepaid expenses and other current assets                 |  | 862                             |   | 3,980                          |  
|Increase (decrease) in accounts payable                               |  | 4,470                           |   | 3,864                          |  
|Decrease in accrued charges                                           |  | (352                            | ) | (2,346                         | )
|Increase (decrease) in salaries, commissions, and related items       |  | (1,919                          | ) | 8,580                          |  
|Increase (decrease) in income taxes payable                           |  | 502                             |   | 7,630                          |  
|Decrease in deferred revenue                                          |  | (15,900                         | ) | (10,051                        | )
|                                                                     
|Net cash provided by operating activities                             |  | 8,764                           |   | 38,324                         |  
|                                                                     
|Cash flows from investing activities                                  | 
|Maturity of short-term investments                                    |  | 86,244                          |   | 75,897                         |  
|Purchase of short-term investments                                    |  | (216,233                        | ) | (125,460                       | )
|Additions to fixed assets                                             |  | (6,157                          | ) | (4,261                         | )
|Additions to intangible assets                                        |  | (216                            | ) | (242                           | )
|Decrease in other assets                                              |  | 235                             |   | --                             |  
|Acquisition costs, net of cash and cash equivalents                   |  | (4,677                          | ) | (49,706                        | )
|                                                                     
|Net cash used in investing activities                                 |  | (140,804                        | ) | (103,772                       | )
|                                                                     
|Cash flows from financing activities                                  | 
|Issue of common shares                                                |  | 9,015                           |   | 13,548                         |  
|Purchase of treasury shares                                           |  | --                              |   | --                             |  
|Repurchase of shares                                                  |  | (24,435                         | ) | (7,965                         | )
|                                                                     
|Net cash provided by (used in) financing activities                   |  | (15,420                         | ) | 5,583                          |  
|                                                                     
|Effect of exchange rate changes on cash                               |  | (522                            | ) | 9,020                          |  
|                                                                     
|Net increase (decrease) in cash and cash equivalents                  |  | (147,982                        | ) | (50,845                        | )
|Cash and cash equivalents, beginning of period                        |  | 405,112                         |   | 364,782                        |  
|                                                                     
|Cash and cash equivalents, end of period                              |  | 257,130                         |   | 313,937                        |  
|Short-term investments, end of period                                 |  | 226,129                         |   | 125,430                        |  
|                                                                     
|Cash, cash equivalents, and short-term investments, 
   end of period |  | $ 483,259                       |   | $ 439,367                      |  
|                                                                     

(See accompanying notes)

5

---

COGNOS INCORPORATEDCONDENSED 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 consistent basis. The consolidated
balance sheet as at February 28, 2005 has been extracted from the audited consolidated
financial statements at that date. 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, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
preparation of these unaudited consolidated financial statements 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, 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 state fairly
the results for the periods presented. Actual results could differ from these estimates
and the operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

6

---

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

| | Services
revenue from education, consulting, and other services is recognized at the time such
services are rendered. Many of the Corporations sales include both software and
services. Where the service is (1) not essential to the functionality of any other
element of the transaction and (2) 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,
the software element is accounted for separately from the service element. Where 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
required by SOP 97-2, the Corporation establishes VSOE for each element of a contract
with multiple obligations (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 and for product support elements based on the renewal rates
offered to customers; the remaining arrangement fee is then assigned to the license
element of the contract.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation recognizes revenue for resellers, value added resellers, original equipment
manufacturers, and strategic system integrators (collectively third-parties)
in a similar manner to revenue for end-users. The Corporation recognizes revenue on
physical transfer of the master copy to third-parties 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 third-parties. If a third-party is newly
formed, undercapitalized or in financial difficulty, or if uncertainties about the number
of copies to be sold by the third-party 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 applies Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees (APB 25) in accounting for its stock
option, stock purchase, and restricted share unit plans. Where the exercise price of
stock options is equal to the market price of the stock on the trading day preceding the
date of grant, no compensation cost has been recognized in the financial statements for
its stock option and stock purchase plans. However, for certain options assumed on the
acquisition of Adaytum, Inc., based on purchase accounting methodology, compensation cost
has been recognized in the financial statements. For restricted share units, the fair
value of each unit is calculated at the date of grant. Compensation cost relating to the
restricted share unit plan is recognized in the financial statements over the vesting
period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

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

| | If
the fair values of the options granted had been recognized as compensation expense on a
straight-line basis over the vesting period of the grant in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-basedCompensation (SFAS 123), stock-based
compensation costs would have reduced net income, basic net income per share, and diluted
net income per share as indicated in the table below (000s, except per share amounts):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 |  | Three months endedNovember 30, | Nine months endedNovember 30,
| | ----------------------------------------------- |  | ------------------------------ | -----------------------------
| |                                                
| |                                                 |  | 2005                           |                              
| |                                                
| | Net income:                                     |  |                                |                              
| | As reported                                     |  | $28,268                        |                              
| | Add: Stock-based employee                       | 
| | compensation included above                     |  | 192                            |                              
| | Less: Stock-based employee                      |  |                                |                              
| | compensation using fair value     based method  |  | (4,450                         | )                            
| |                                                
| | Pro forma                                       |  | $24,010                        |                              
| |                                                
| | Basic net income per share:                     | 
| | As reported                                     |  | $0.31                          |                              
| | Add: Stock-based employee                       | 
| | compensation included above                     |  | --                             |                              
| | Less: Stock-based employee                      |  |                                |                              
| | compensation using fair value
     based method |  | (0.04                          | )                            
| |                                                
| | Pro forma                                       |  | $0.27                          |                              
| |                                                
| | Diluted net income per share:                   | 
| | As reported                                     |  | $0.31                          |                              
| | Add: Stock-based employee                       | 
| | compensation included above                     |  | --                             |                              
| | Less: Stock-based employee                      | 
| | compensation using fair value     based method  |  | (0.05                          | )                            
| |                                                
| | Pro forma                                       |  | $0.26                          |                              
| |                                                
| | Weighted average number of shares:              | 
| | Basic                                           |  | 90,410                         |                              
| |                                                
| | Diluted                                         |  | 92,288                         |                              
| |                                                

8

---

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

| | For
purposes of computing pro forma net income, the fair value of the options granted during
the three and nine-month periods ended November 30, 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:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  |  |                                |                               |      |   |      |   |      |  
| | -------------------------------- |  | ------------------------------ | ----------------------------- | ---- | - | ---- | - | ---- | -
| |                                  |  | Three months endedNovember 30, | Nine months endedNovember 30,
| |                                 
| |                                  |  | 2005                           |                               | 2004 |   | 2005 |   | 2004 |  
| |                                 
| | Risk-free interest rates         |  | 4.1                            | %                             | 3.2  | % | 3.8  | % | 3.2  | %
| | Expected volatility              |  | 33.0                           | %                             | 51.0 | % | 33.1 | % | 51.0 | %
| | Dividend yield                   |  | 0.0                            | %                             | 0.0  | % | 0.0  | % | 0.0  | %
| | Expected life of options (years) |  | 3.6                            |                               | 4.3  |   | 3.8  |   | 4.3  |  

| | For
purposes of the pro forma disclosures, the expected volatility assumptions used by the
Corporation prior to this fiscal year have been based solely on the historical volatility
of the Corporations common stock over the most recent period commensurate with the
estimated expected life of the Corporations stock options. Beginning in fiscal year
2006, the Corporation has modified this approach to consider other relevant factors,
including implied volatility in market traded options on the Corporations common
stock and the impact of unusual fluctuations not reasonably expected to recur on the
historical volatility of the Corporations common stock. The Corporation will
continue to monitor these and other relevant factors in developing the expected
volatility assumption used to value future awards.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | Goodwill
|-- |  | --------

| | During
the three and nine months ended November 30, 2005, there were increases to goodwill of
$6,415,000 and $5,413,000, respectively. The increase was the result of the acquisition
of Databeacon Inc. (Databeacon) and Digital Aspects Holdings Ltd. (Digital
Aspects) and adjustments to the restructuring plan adopted as a result of the
acquisition of Frango AB (Frango) (See Note 11 Acquisitions).
For the three and nine months ended November 30, 2004, there were additions to goodwill
of $50,560,000 relating to the acquisition of Frango.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

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

| |                                                                  |         |                                |                               |          |  |          |   |          | 
| | ---------------------------------------------------------------- | ------- | ------------------------------ | ----------------------------- | -------- |  | -------- | - | -------- | 
| |                                                                  |         | Three months endedNovember 30, | Nine months endedNovember 30,
| |                                                                 
| |                                                                  |         | 2005                           |                               | 2004     |  | 2005     |   | 2004     | 
| |                                                                 
| |                                                                  | ($000s) | ($000s)                       
| | Beginning balance                                                |         | $220,488                       |                               | $172,323 |  | $221,490 |   | $172,323 | 
| | Additions  to  goodwill  related
to    current year acquisitions |         | 6,069                          |                               | 50,560   |  | 6,069    |   | 50,560   | 
| | Adjustments  to goodwill  from prior    years acquisitions       |         | 346                            |                               | --       |  | (656     | ) | --       | 
| |                                                                 
| | Closing balance                                                  |         | $226,903                       |                               | $222,883 |  | $226,903 |   | $222,883 | 
| |                                                                 

|5. |  | Intangible
Assets
|-- |  | -----------------

| |                           |  | As at November 30,2005 | As at February 28,2005 
| | ------------------------- |  | ---------------------- | -----------------------
| |                          
| |                           |  | Cost                   | AccumulatedAmortization
| |                          
| |                           |  | ($000s)                | ($000s)                
| |                           |  |                        |                        
| | Acquired technology       |  | $ 41,611               |                        
| | Contractual relationships |  | 9,654                  |                        
| | Trademarks and patents    |  | 5,259                  |                        
| |                           |  |                        |                        
| |                           |  | 56,524                 |                        
| |                           |  |                        |                        
| |                           |  | (32,905                | )                      
| |                           |  |                        |                        
| | Net book value            |  | $ 23,619               |                        
| |                           |  |                        |                        

| | During
the three and nine months ended November 30, 2005, acquired technology and contractual
relationships increased by $1,192,000 and $46,000, respectively, resulting from the
acquisition of Databeacon and Digital Aspects (See Note 11 Acquisitions). During the
three months ended November 30, 2005 and November 30, 2004, there were additions to
trademarks and patents in the amount of $217,000 and $241,000, respectively, and $662,000
and $770,000 in the nine months ended November 30, 2005 and November 30, 2004,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

COGNOS INCORPORATEDCONDENSED 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 intangible assets is included in income as amortization of
acquisition-related intangibles and selling, general, and administrative expenses. The
following table sets forth the allocations:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                 |         |                                |                               |        |  |        |  |        | 
| | ------------------------------- | ------- | ------------------------------ | ----------------------------- | ------ |  | ------ |  | ------ | 
| |                                 |         | Three months endedNovember 30, | Nine months endedNovember 30,
| |                                
| |                                 |         | 2005                           |                               | 2004   |  | 2005   |  | 2004   | 
| |                                
| |                                 | ($000s) | ($000s)                       
| | Amortization of                 |        
| | acquisition-related intangibles |         | $1,684                         |                               | $1,501 |  | $4,958 |  | $3,965 | 
| | Selling, general, and           |        
| | administrative expenses         |         | 171                            |                               | 171    |  | 557    |  | 448    | 
| |                                
| | Closing balance                 |         | $1,855                         |                               | $1,672 |  | $5,515 |  | $4,413 | 
| |                                

| | The
estimated amortization expense related to intangible assets is as follows ($000s):
| | --------------------------------------------------------------------------------------

| |  | 2006 (Q4) |  | $1,927 | 
| |  | --------- |  | ------ | 
| |  | 2007      |  | 7,466  | 
| |  | 2008      |  | 6,812  | 
| |  | 2009      |  | 3,288  | 
| |  | 2010      |  | 2,506  | 
| |  | 2011      |  | 1,620  | 

|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 has not made any significant indemnification payments
as a result of these clauses and, in accordance with Financial Accounting Standards Board
(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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

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

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

| | The
Corporation provides for income taxes in its quarterly unaudited financial statements
based on the then current estimated effective tax rate for the full fiscal year. The
estimated effective tax rate is adjusted upon resolution of tax assets or exposures in
the quarter that the resolution occurs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Corporation estimates its effective tax rate for fiscal year 2006 to be 22%, exclusive of
any one-time events. This estimated effective tax rate was reduced for the three-month
period ended November 30, 2005 to 21.8% due to adjustments relating to various tax audits
and prior year tax provisions. The effective tax rate for the nine-month period ended
November 30, 2005 was adjusted to 18.6%. In addition to the tax adjustments noted above,
the effective tax rate was adjusted for the recognition of benefits resulting from (i) a
tax court decision that allowed corporations to claim investment tax credits on
stock-based compensation for research and development personnel relating to fiscal years
2004 and 2005 and (ii) a change in tax withholding legislation relating to one of the
Corporations subsidiaries. For the three and nine-month periods ended November 30,
2004, the Corporation estimated its effective tax rate for fiscal 2005 to be 21%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Corporation issued 301,000 common shares for proceeds of $9,015,000, and 1,067,000 common
shares for proceeds of $27,568,000 during the three and nine months ended November 30,
2005, respectively. The Corporation issued 625,000 common shares for proceeds of
$13,548,000 and 1,727,000 common shares for $32,820,000 during the three and nine months
ended November 30, 2004, respectively. The issuance of shares in fiscal 2006 and
2005 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 and nine months ended November 30, 2005, the
Corporation repurchased 651,000 shares at a value of $24,435,000 and 1,917,000 shares at
a value of $73,383,000, respectively, in the open market under its share repurchase
program. The Corporation did not repurchase shares under its restricted share unit plan
during the three months ended November 30, 2005. During the nine-month period ended
November 30, 2005, the Corporation repurchased 5,000 shares valued at $177,000 under its
restricted share unit plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the three and nine months ended November 30, 2004, the Corporation repurchased 217,000
shares at a value of $7,965,000 and 804,000 shares at a value of $27,820,000
respectively, in the open market under its share repurchase program. The Corporation did
not repurchase shares under its restricted share unit plan during the three months ended
November 30, 2004. During the nine-month period ended November 30, 2004, the Corporation
repurchased 10,000 shares at a value of $335,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

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

| | 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 endedNovember 30, | Nine months endedNovember 30,
| | ----------------------------------- |  | ------------------------------ | -----------------------------
| |                                    
| |                                     |  | 2005                           |                              
| |                                    
| | Basic Net Income per Share          |  |                                |                              
| | Net income                          |  | $28,268                        |                              
| |                                    
| | Weighted average number of shares   |  |                                |                              
| | outstanding                         |  | 90,410                         |                              
| |                                    
| | Basic net income per share          |  | $0.31                          |                              
| |                                    
| | Diluted Net Income per Share        | 
| | Net income                          |  | $28,268                        |                              
| |                                    
| | Weighted average number of shares   |  |                                |                              
| | outstanding                         |  | 90,410                         |                              
| | Dilutive effect of stock options    |  | 1,878                          |                              
| |                                    
| | Adjusted weighted average number of |  |                                |                              
| | shares outstanding                  |  | 92,288                         |                              
| |                                    
| | Diluted net income per share        |  | $0.31                          |                              
| |                                    

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

13

---

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

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

| |                                          |  |                                |                               |         |  |         |   |         | 
| | ---------------------------------------- |  | ------------------------------ | ----------------------------- | ------- |  | ------- | - | ------- | 
| |                                          |  | Three months endedNovember 30, | Nine months endedNovember 30,
| |                                         
| |                                          |  | 2005                           |                               | 2004    |  | 2005    |   | 2004    | 
| |                                         
| | Net income                               |  | $28,268                        |                               | $34,545 |  | $80,812 |   | $82,269 | 
| | Other comprehensive income (loss):       | 
| | Foreign currency translation adjustments |  | 1,589                          |                               | 5,373   |  | 4,358   |   | 5,040   | 
| | Change in net unrealized gain (loss) on  | 
| | derivative instruments                   |  | 82                             |                               | --      |  | (787    | ) | --      | 
| |                                         
| | Comprehensive income                     |  | $29,939                        |                               | $39,918 |  | $84,383 |   | $87,309 | 
| |                                         

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

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

|11. |  | Acquisitions
|--- |  | ------------

| | Fiscal
2006 Acquisitions
| | ------------------------

| | In
September 2005, the Corporation acquired Databeacon and Digital Aspects. Databeacon was a
mid-market business analytics and reporting company, based in Ottawa, Canada. The
Corporation purchased Databeacon primarily to expand its research and development
workforce in the Ottawa area. Digital Aspects was an early stage business intelligence
company based in the United Kingdom. The Corporation purchased Digital Aspects primarily
to incorporate its software, which assists in real time access to corporate data, into
the Corporations product suite.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
acquisitions were accounted for using the purchase method of accounting in accordance
with SFAS No. 141, BusinessCombinations(SFAS 141).
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aggregate purchase consideration for Databeacon and Digital Aspects was approximately
$4,878,000 paid in cash and deferred consideration of $888,000, which was included in
accrued charges on the balance sheet at the date of acquisition. Included in the
Databeacon share purchase agreement was $436,000 of restricted share units granted to
employees of Databeacon. The Digital Aspects agreement stipulates that the shareholders
of Digital Aspects will receive a maximum of $750,000 in contingent consideration over a
two-year period ending September 30, 2007 if certain performance thresholds are met. Both
the restricted share units and the contingent consideration are conditioned on the
continued tenure of these employees and therefore will be accounted for as compensation
expense as earned. Direct costs associated with these acquisitions were approximately
$537,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

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

| | Neither
the purchase of Databeacon nor Digital Aspects involved the write-off of any in-process
research and development.
| | -------------------------------------------------------------------------------------------------------------------------

| | Of
the aggregate purchase price for Databeacon and Digital Aspects, $1,238,000 was allocated
to intangible assets, subject to amortization. Of this amount, $1,192,000 was allocated
to acquired technology and $46,000 was allocated to contractual relationships. Neither
intangible asset is expected to have any residual value. The amortization period for both
the acquired technology and the contractual relationships is five years. The weighted
average amortization for these intangible assets acquired is five years. The fair values
of the Databeacon intangible assets were assigned using the discounted cashflow method,
which discounts the present value of the free cashflows expected to be generated by the
assets. The acquired technology associated with the Digital Aspects acquisition was
valued based on the estimated cost to develop the technology internally. The amortization
periods were determined using the estimated economic useful life of the asset.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the allocation of the purchase price, $6,069,000 was assigned to goodwill. This
represents the excess of the aggregate purchase price paid for Databeacon and Digital
Aspects over the fair value of the net tangible and identifiable intangible assets
acquired. Goodwill will not be amortized but will be subject to annual impairment testing
in accordance with the Corporations accounting policy. The goodwill is not
deductible for tax purposes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

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

| | In
accordance with SFAS 141, the total consideration paid for these acquisitions was
allocated to the assets and liabilities based upon their estimated fair value at the date
of acquisition, as noted below: ($000s)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                              |  | Databeacon Inc. and
Digital Aspects Holdings Ltd.
| | ---------------------------- |  | -------------------------------------------------
| | Assets acquired:             |  |                                                  
| | Cash                         |  | $   201                                          
| | Accounts receivable, net     |  | 68                                               
| | Intangibles assets           |  | 1,238                                            
| | Deferred tax assets          |  | 422                                              
| | Other assets                 |  | 344                                              
| |                             
| |                              |  | 2,273                                            
| |                             
| | Liabilities assumed:         | 
| | Accrued charges              |  | 1,914                                            
| | Deferred revenue             |  | 229                                              
| | Deferred tax liabilities     |  | 433                                              
| |                             
| |                              |  | 2,576                                            
| |                             
| | Net assets acquired          |  | (303                                             
| | Goodwill                     |  | 6,069                                            
| |                             
| | Purchase price               |  | $5,766                                           
| |                             
| | Purchase price consideration | 
| | Cash                         |  | $4,878                                           
| | Deferred consideration       |  | 888                                              
| |                             
| |                              |  | $5,766                                           
| |                             

| | The
purchase price allocation for these acquisitions is not yet finalized including the
valuation of the tax assets and liabilities and, as a result, there may be unresolved
contingencies, purchase price allocation issues, or additional liabilities that could
result in a material adjustment to the acquisition cost allocation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal
2005 Acquisitions
| | ------------------------

| | The
Corporation undertook a restructuring plan in conjunction with the acquisition of Frango
in September 2004. In accordance with Emerging Issues Task Force No. 95-3, Recognition
of Liabilities in Connection with a Business Combination, 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 are expected to be paid during fiscal 2006. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---

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

| | The
following table sets forth the activity in the Corporations restructuring accrual
for the nine-month period ended November 30, 2005: ($000s)
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| |                                     |  | Employee separations |   | Other    restructuring  accruals |   | Total accrual |  
| | ----------------------------------- |  | -------------------- | - | -------------------------------- | - | ------------- | -
| |                                    
| | Balance as at February 28, 2005     |  | $ 2,913              |   | $2,261                           |   | $ 5,174       |  
| | Adjustments to accrual              |  | (88                  | ) | (444                             | ) | (532          | )
| | Cash payments during the first nine | 
| | months of fiscal 2006               |  | (1,933               | ) | (712                             | ) | (2,645        | )
| | Foreign exchange adjustment         |  | (289                 | ) | (193                             | ) | (482          | )
| |                                    
| | Balance as at November 30, 2005     |  | $    603             |   | $   912                          |   | $ 1,515       |  
| |                                    

|12. |  | Comparative
Results
|--- |  | -------------------

| | Certain
of the prior periods figures have been reclassified in order to conform to the
presentation adopted during the current fiscal year. This change in presentation does not
affect previously reported assets, liabilities, or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
December 2004, the FASB issued SFAS No. 123 (Revised), Share-based Payment(SFAS
123R) which is a revision of SFAS 123 and supersedes APB 25 and SFAS No. 148,
Accounting for Stock-based Compensation  Transition and Disclosure. This
revised standard addresses the accounting for share-based payment transactions in which a
company receives employee 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 the
new standard, companies will no longer be able to account for share-based compensation
transactions using the intrinsic method in accordance with APB 25. Instead, companies
will be required to account for such transactions using a fair value method and recognize
the expense in the consolidated statement of income. SFAS 123R will be effective for
fiscal years beginning after June 15, 2005. Early adoption is permitted. The Corporation
is currently examining the changes contemplated by the new rules and has yet to determine
which transitional provision it will follow. The impact on the Corporations
financial statements of applying one of the acceptable fair value based methods of
accounting for stock options is disclosed in Note 3 Stock-based Compensation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

COGNOS INCORPORATEDCONDENSED 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) released SEC
Staff Accounting Bulletin No. 107, Share-Based Payment (SAB
107). SAB 107 provides the SEC staff position regarding the application of SFAS
123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R
and certain SEC rules and regulations, and provides the staffs views regarding the
valuation of share-based payment arrangements for public companies. SAB 107 also
highlights the importance of disclosures made related to the accounting for share-based
payment transactions. The Corporation is currently evaluating SAB 107 and will be
incorporating it as part of its adoption of SFAS 123R.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FASB has recently issued two FASB Staff Positions (FSP) to assist in
the implementation of SFAS 123R. The first, FSP FAS 123(R)-2, is a practical accommodation
to the application of grant date as defined by SFAS 123R. The second, FSP FAS 123(R)-3, is
a transition election to accounting for the tax effects of share-based payments. More
specifically, it offers a simplified method of determining the opening balance of the pool
of excess tax benefits available to absorb tax deficiencies recognized subsequent to the
adoption of SFAS 123R. The Corporation will evaluate the implications of these two FSPs in
its adoption of SFAS 123R.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections(SFAS 154) which supersedes APB Opinion 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 Corporation does not expect the adoption of
SFAS 154 to have a material impact on its consolidated results of operations and
financial condition.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. |  | Canadian Generally
Accepted Accounting Principles
|--- |  | -------------------------------------------------

| | The
Corporations consolidated financial statements have been prepared in accordance with
U.S. GAAP. As the Corporation is a reporting issuer in each of the provinces of Canada and
is incorporated under the Canada Business Corporations Act (CBCA), it
historically has been required to prepare Canadian GAAP financial statements for its
shareholders. Recent amendments to provincial securities laws and the CBCA allow the
Corporation to report solely under U.S. GAAP to its shareholders provided that a
reconciliation between U.S. GAAP and Canadian GAAP is included in the notes to the
consolidated financial statements for two years following the adoption of the amendment.
Accordingly, the Corporation will include the reconciliations for fiscal 2005 and fiscal
2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

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

| | The
following summarizes the more significant differences that would result if Canadian GAAP
had been applied in the preparation of these consolidated financial statements:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Condensed Consolidated Balance Sheets
| | -------------------------------------

| | $000s, as at                                              | November 30, 2005 | February 28, 2005
| | --------------------------------------------------------- | ----------------- | -----------------
| |                                                          
| | U.S.GAAP                                                  | Adjustments       | CanadianGAAP     
|
| | Current assets                                            |                   | $657,822         
| | Fixed assets, net                                         |                   | 75,387           
| | Intangible assets, net                                    |                   | 23,619           
| | Other assets                                              |                   | 6,364            
| | Goodwill                                                  |                   | 226,903          
| |                                                          
| | Total Assets                                              |                   | $990,095         
| |                                                          
| | Current liabilities                                       |                   | $279,388         
| | Deferred income taxes                                     |                   | 15,968           
| | Common shares and   additional paid-in
           capital |                   | 274,869          
| | Treasury shares                                           |                   | (915             
| | Deferred stock-based   compensation                       |                   | (307             
| | Retained earnings                                         |                   | 414,805          
| | Accumulated other 
   comprehensive income                |                   | 6,287            
| |                                                          
| | Total Liabilities and    Stockholders Equity             |                   | $990,095         
| |                                                          

19

---

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

| | Reconciliation of Consolidated Net Income
| | -----------------------------------------

| | Three Months EndedNovember 30,                                            | Nine months endedNovember 30,
| | ------------------------------------------------------------------------- | -----------------------------
| |                                                                          
| | $000s except per share amounts                                            | 2005                         
| |                                                                          
| | Net income under U.S. GAAP                                                |                              
| | Amortization of acquired in-process technology                            |                              
| | Deferred taxes on acquired in-process technology
            amortization |                              
| | Stock-based compensation                                                  |                              
| | Tax impact of stock-based compensation                                    |                              
| |                                                                          
| | Net income under Canadian GAAP                                            |                              
| |                                                                          
| | Net income per share under Canadian GAAP                                  |                              
| | Basic                                                                     |                              
| |                                                                          
| | Diluted                                                                   |                              
| |                                                                          
| | Weighted average number of shares (000s)                                  |                              
| | Basic                                                                     |                              
| |                                                                          
| | Diluted                                                                   |                              
| |                                                                          
|

| | There
are no significant differences with respect to the consolidated statement of cash flows
between U.S. GAAP and Canadian GAAP.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | The
most significant differences between U.S. and Canadian GAAP, in terms of the impact on
the Corporations financial statements, relate to in-process research and
development and stock-based compensation. A description of these differences and others
is presented below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A.       Acquired
in-process technology
| | ---------------------------------------

| | Canadian
GAAP requires capitalization of the value assigned to acquired in-process technology and
amortization of this value over its estimated useful life. Under U.S. GAAP, this value is
written off immediately. The impact of this difference was to decrease net income by
$83,000 and $250,000 for the three months ended November 30, 2005 and November 30, 2004,
respectively, compared to U.S. GAAP. For the nine-month periods ended November 30, 2005
and November 30, 2004, the impact of this difference was to decrease net income by
$583,000 and $750,000, respectively, compared to U.S. GAAP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

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

| | B.                 Stock-based compensation
| | -------------------------------------------

| | Under
U.S. GAAP, companies may choose between the intrinsic value method and the fair value
method of accounting for stock-based compensation. The Corporation has elected to account
for stock-based compensation using the intrinsic value method in accordance with APB 25
and to disclose the pro forma effect of recording compensation expense under the fair
value method. This disclosure can be found in Note 3 to these unaudited consolidated
financial statements. For Canadian GAAP purposes, companies are required to use the fair
value method of accounting for stock-based compensation. The impact of this difference
for the three months ended November 30, 2005 and November 30, 2004 was to decrease income
before taxes by $4,863,000 and $4,989,000, respectively, compared to U.S. GAAP. For the
nine months ended November 30, 2005 and November 30, 2004, the impact of this
difference was to decrease income before taxes by $13,168,000 and $12,275,000,
respectively, compared to U.S. GAAP.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
adoption of a fair value method of stock-based compensation for Canadian GAAP purposes, a
cumulative adjustment of $132,798,000 was made to additional paid in capital with an
offsetting entry of $77,770,000 to retained earnings and $55,028,000 to deferred
stock-based compensation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C.                 Deferred
income taxes related to acquired in-process technology and stock-based
          compensation
| | -------------------------------------------------------------------------------------------------------------------------

| | The
above noted difference relating to the capitalization of in-process technology created an
additional deferred income tax liability for Canadian GAAP purposes as the capitalization
of the in-process technology created a temporary difference. The amortization of this
balance decreased the income tax provision by $32,000 and $100,000 for the three months
ended November 30, 2005 and November 30, 2004, respectively, compared to U.S. GAAP. The
amortization of this balance decreased the income tax provision by $232,000 and $300,000
for the nine months ended November 30, 2005 and November 30, 2004, respectively, compared
to U.S. GAAP.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
expensing of stock-based compensation creates a deferred tax asset for Canadian GAAP
purposes as this expense is deductible in certain jurisdictions when the options are
exercised. Under U.S. GAAP, the reduction in the tax liability is treated as part of the
purchase price component of the stock options and added to paid-in capital. The expensing
of stock-based compensation reduced the Canadian GAAP tax provision by $605,000 and
$580,000 for the three months ended November 30, 2005 and November 30, 2004,
respectively, as compared to U.S. GAAP. For the nine months ended November 30, 2005
and November 30, 2004, the reduction to the tax provision was $1,638,000 and
$1,434,000, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D.                 Derivative
financial instruments
| | ---------------------------------------------------

| | Under
Canadian GAAP, derivative financial instruments that qualify for hedge accounting
treatment may be recognized on the balance sheet only to the extent that cash has been
paid and or received together with adjustments necessary to offset recognized gains or
losses arising on the hedged items. Under U.S. GAAP, such derivative financial
instruments are recognized on the balance sheet at fair value with a corresponding charge
or credit recorded in OCI for any portion not recognized in income. At November 30,
2005 and February 28, 2005, there was $1,135,000 and $348,000, respectively,
included in accumulated other comprehensive income related to the net unrealized loss on
the Corporations cash flow hedges. For Canadian GAAP, this amount was removed and
applied against the accrued liability related to the hedge.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

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

| | E.       Investment tax credits
| | -------------------------------

| | In
addition to the above differences affecting net income, Canadian GAAP requires that
investment tax credits be deducted from operating expense whereas, under U.S. GAAP, these
amounts are deducted from the income tax provision. The impact of this difference was to
increase net income before taxes and the income tax provision by $4,243,000 and
$4,411,000 for the three months ended November 30, 2005 and November 30, 2004,
respectively, with no resulting impact on net income, compared to U.S. GAAP. For the nine
months ended November 30, 2005 and November 30, 2004, the impact was to increase net
income before taxes and the income tax provision by $14,006,000 and $12,005,000,
respectively, compared to U.S. GAAP.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

Item 2.

# COGNOS INCORPORATED

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

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

FORWARD-LOOKING
STATEMENTS/SAFE HARBOR

Managements Discussion and
Analysis of Financial Condition and Results of Operations (MD&A)
should be read in conjunction with the unaudited Consolidated Financial Statements and
Notes included in Item 1 of this Quarterly Report and can also be read in conjunction with
the audited Consolidated Financial Statements and Notes, and MD&A contained in our
Annual Report on Form 10-K for the fiscal year ended February 28, 2005 (fiscal
2005). MD&A contains forward-looking statements including statements
concerning drivers of revenue growth; our plans to improve performance and execution; the
effect of foreign currency fluctuations, changes in accounting principles and changes in
actual or assumed tax liabilities; our expectations regarding tax exposure; product demand
and growth opportunities; business outlook and business momentum; industry trends,
including standardization, greater investment within the Office of Finance, and the
emergence of CPM; purchasing environment; larger transactions and changes in buying cycle;
new product introductions/development and customer reaction and acceptance of such
products, including Cognos 8 Business Intelligence (Cognos 8) and the impact of Cognos 8 on
our business, financial performance, customers, and industry; revenue contributions of
Cognos 8 in the fourth quarter of fiscal 2006; market positioning and conditions, business
model and technology strategies and execution; the growth, strategic importance, benefits,
and acceptance of corporate performance management, business intelligence and solution
standardization; our use of subcontractors and direct and indirect sales channels;
increases in enterprise-wide deployments; expense monitoring and management; our
anticipated capital requirements and working capital needs; and the timing of certain payments
in connection with prior acquisitions. 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, our ability to transition to 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 opportunities; our ability to maintain or accurately forecast
revenue growth or to anticipate and accurately forecast a decline in revenue from any of
our products or services, particularly our license revenues as a result of the release of
Cognos 8; our ability to compete in an intensely competitive market; our ability to
develop and introduce new products or enhancements on schedule and that respond to customer
requirements and rapid technological change; new product introductions and enhancements by
competitors; our ability to select and implement appropriate business models, plans and
strategies and to execute on them; the incursion of enterprise resource planning and other
software companies into the BI and software market; continued BI market consolidation and
other competitive changes in the BI market; our ability to identify, hire, train,
motivate, and retain highly qualified management/other key personnel and our ability to
manage changes and transitions in management/other key personnel; the impact of global
economic conditions on our business; fluctuations in our quarterly and annual operating
results; currency fluctuations; fluctuations in our tax exposure; 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 of foreign jurisdictions; the impact of natural disasters
on overall global economic conditions; and our ability to identify, pursue, and complete
acquisitions with desired business results; as well as the risk factors discussed below
and in other periodic reports filed with the SEC. 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.

23

---

# ABOUTCOGNOS

Cognos is a global leader in business
intelligence (BI) and corporate performance management
(CPM) software solutions. Our solutions help improve 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.

Our customers can strategically apply
our software solutions across their extended enterprise to address their need for CPM. By
allowing timely analysis of data from disparate systems, CPM enables organizations to
measure execution against business strategy to ensure that the two are aligned at all
levels. Our solution for CPM allows users to effectively manage the full business cycle
with planning, budgeting, consolidation, reporting, analysis, and scorecarding products.

Our revenue is derived primarily from
the licensing of our software and the provision of related services. 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 THEQUARTER

Our financial results for the quarter
were below our expectations. We attribute this shortfall to our execution and forecasting
against large sales opportunities and our management of the transition to our new Cognos 8
platform.

Although our financial performance for
the quarter was below our expectations, it was a strategically important quarter for us.
On September 14, 2005, we launched Cognos 8 and it was made generally available on
November 18, 2005, delivering more than $14 million in license revenue for the quarter. This major new product release offers a complete range of BI
functionality, including reporting, analysis, dashboarding, scorecarding, and event
management, now on a single, proven services-oriented architecture. With Cognos 8, we
believe our product portfolio is the most comprehensive and technologically advanced in
the BI industry.

24

---

# Operating Performance

Revenue for the three-month period
ended November 30, 2005 was $212.3 million, an increase of 1% from $210.4 million for the
corresponding period last year. This increase in revenue for the quarter was attributable
to increases in product support and services revenue which increased 17% and 12%,
respectively, compared to the same period last fiscal year and was mostly offset by a
decrease in license revenue from $91.6 million in the third quarter of fiscal 2005 to
$75.5 million, or 18%. The decrease in license revenue for the quarter was primarily
attributable to our poor execution against large sales opportunities and confusion in the
market regarding the availability of Cognos 8.

Our operating margin for the quarter
ended November 30, 2005 was 15.2% compared to 19.9% a year ago. The decrease in operating
margin was primarily attributable to revenue only increasing by 1% while cost of revenue and operating expenses
increased 7% in total due to increases in staffing costs and costs associated with the Cognos 8
launch activities. In order to take advantage of the Cognos 8 opportunity and our market
opportunities surrounding BI standardization and the Office of Finance, we have continued
to invest in personnel in customer facing positions and in research and development, as well as investing in
our distribution channels. Also contributing to the decrease in operating margin for the
quarter were fluctuations in foreign currency, with revenue declining 2.5% and costs
decreasing by 0.9% due to the impact of foreign exchange.

Net income for the three-month period
ended November 30, 2005 was $28.3 million or $0.31 per share compared to net income of
$34.5 million or $0.37 per share for the same period last year. The decline in net income
for the quarter is attributed to the factors mentioned above partially offset by an
increase in interest income.

Our balance sheet remains strong, as
we ended the quarter with $483.3 million in cash, cash equivalents, and short-term
investments. This represents a decrease of $18.0 million from August 31, 2005 primarily
attributable to cash payments for the repurchase of our shares on the open market
partially offset by our cash flow from operations.

We signed 7 contracts in excess of $1
million during the quarter compared with 15 in the same period last fiscal year. The
number of contracts greater than $200,000 decreased by 9% while contracts greater than
$50,000 increased 4%, compared to the corresponding period last year. As the number of
large sales opportunities increases, specifically with regard to our customers
standardization agenda, our sales cycles have become longer as these larger transactions
typically require greater scrutiny, a more extensive proof of concept, and a longer
decision cycle by our customers because these transactions are more complex and represent
a larger proportion of the customers investment budgets. Although we concluded fewer
large transactions this quarter, 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.

# Outlook for the balance
of the fiscal year

Our fourth quarter of fiscal 2006 will
mark the first full quarter of Cognos 8 availability. We believe that we are well
positioned to benefit from licensing revenue from new customers as well as provide
existing customers with the opportunity to add to their current reporting and analysis
capabilities. Given the positive response we have seen for Cognos 8 from the marketplace
and the products general availability for a full quarter, we believe that Cognos 8
will make a significant contribution to our fourth quarter revenue.

25

---

We continue to see a healthy market
for our other products. In particular, our performance management business, led by Cognos
Planning, continues to grow. Cognos 8 and Cognos Planning are the foundational drivers of
our product strategy and we believe that the strength of these two products gives us
reason to be confident in our business and our opportunity going forward.

However, given the results for the
quarter, we are taking several actions to address our performance shortfall experienced in
the quarter. First, we will take a cautious stance and will not be making any significant
sales force hires until we see better conversion of sales opportunities to revenue.
Second, starting in the fourth quarter, we will direct our sales representatives, through
incentives, to sharpen their focus on medium-size transactions and avoid overdependence on
larger contracts. Third, in fiscal 2007, we will be adapting our customer engagement model
to more clearly separate sales activities between new and existing sales opportunities.
Finally, we will continue to invest in professional services, as we believe the
availability and positioning of services is a key determinant in the timing of closure for
large transactions.

In the first nine months of fiscal
2006, the Canadian dollar has strengthened compared to the U.S. dollar. If that trend
continues, it will continue to put pressure on our business and operating margin
percentage as a disproportionate amount of our expenses are incurred in Canadian dollars.
Accordingly, we will continue to manage our spending in an effort to mitigate this effect.

In the future, we will continue to
focus on bringing innovative new products to market and we continue to develop new
releases of our products.

26

---

# RESULTS OFOPERATIONS

|                                  |                                |           |                               | Percentage Change
|--------------------------------- | ------------------------------ | --------- | ----------------------------- | -----------------
|                                  |                                |           |                               |                  
|($000s, except per share amounts) | Three months endedNovember 30, |           | Nine months endedNovember 30, |                  
|                                 
|                                  |                                | 2005      |                               | 2004             
|                                 
|Revenue                           |                                | $212,254  |                               | $210,366         
|Cost of revenue                   |                                | 43,665    |                               | 37,660           
|                                  |                                |           |                              
|Gross margin                      |                                | 168,589   |                               | 172,706          
|Operating expenses                |                                | 136,240   |                               | 130,865          
|                                  |                                |           |                              
|Operating income                  |                                | $  32,349 |                               | $  41,841        
|                                 
|Gross margin percentage           |                                | 79.4      | %                             | 82.1             
|Operating margin percentage       |                                | 15.2      | %                             | 19.9             
|                                 
|Net income                        |                                | $  28,268 |                               | $  34,545        
|                                  |                                |           |                              
|Basic net income per share        |                                | $0.31     |                               | $0.38            
|                                  |                                |           |                              
|Diluted net income per share      |                                | $0.31     |                               | $0.37            
|                                  |                                |           |                              

Revenue for the quarter ended November
30, 2005 was $212.3 million, a 1% increase from revenue of $210.4 million for the same
quarter last year. Net income for the current quarter was $28.3 million, compared to net
income of $34.5 million for the same quarter last year. Diluted net income per share was
$0.31 for the current quarter, compared to diluted net income per share of $0.37 for the
same quarter last year. Basic net income per share was $0.31 and $0.38 for the quarters
ended November 30, 2005 and November 30, 2004, respectively.

Revenue for the nine months ended
November 30, 2005 was $624.4 million, a 10% increase from revenue of $569.2 million for
the same period last year. Net income for the current nine-month period was $80.8 million,
compared to net income of $82.3 million for the same period last year. Diluted net income
per share was $0.87 for the current nine-month period, compared to diluted net income per
share of $0.89 for the same period last year. Basic net income per share was $0.89 and
$0.91 for the nine-month periods ended November 30, 2005 and November 30, 2004,
respectively.

27

---

Gross margin for the three months
ended November 30, 2005 was $168.6 million, a decrease of 2% over gross margin of $172.7
million for the same quarter last year. Gross margin percentage was 79% for the quarter
ended November 30, 2005, as compared to 82% for the corresponding quarter last fiscal
year. Gross margin for the nine months ended November 30, 2005 was $495.8 million, an
increase of 7% over gross margin of $463.2 million for the same period last year. Gross
margin percentage for the nine months ended November 30, 2005 was 79% as compared to 81%
for the corresponding period last year. The decrease in gross margin percentage is
primarily attributable to a shift in revenue mix from license revenue to our other lower
margin revenue sources. We do not believe this shift in revenue mix is an emerging trend
and we expect our gross margin percentage to improve as license revenue increases due to
the Cognos 8 product cycle.

Total operating expenses for the
quarter ended November 30, 2005 were $136.2 million, a 4% increase from operating expenses
of $130.9 million for the same quarter last year. The operating margin for the quarter
ended November 30, 2005 was 15.2% as compared to 19.9% for the corresponding quarter of
the previous fiscal year. Total operating expenses for the nine months ended November 30,
2005 were $406.2 million, a 12% increase from operating expenses of $364.1 million for the
same period last year. The operating margin for the nine months ended November 30, 2005
was 14.4% as compared to 17.4% for the same period last year. The decrease in operating
margin for the three and nine-month periods ended November 30, 2005 is primarily
attributable to revenue increasing by 1% and 10%, respectively, while cost of revenue
and operating expenses in total
have grown by 7% and 14%, respectively. Operating expenses have grown primarily due to
increases in staff-related costs and costs associated with the launch of Cognos 8. Also
contributing to the decrease in operating margin were fluctuations in foreign currency
with revenue and costs declining 2.5% and 0.9%, respectively, for the three months ended
November 30, 2005 and increasing 0.1% and 2.1%, respectively, for the nine-month period
then ended due to the impact of foreign exchange. For the three months ended November 30,
2005, the increase in operating expenses was partially offset by an adjustment to our
estimated annual management bonus accrual to reflect our current expectations for revenue
and operating margin for the fiscal year.

The decrease in net income for the
three and nine months ended November 30, 2005, as compared to the same periods in the
prior fiscal year, was the result of the factors discussed above partially offset by an
increase in interest 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.

28

---

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

|                    | Three Months Ended November 30,2005 over 2004 | Nine months ended November 30,2005 over 2004 |          
|------------------- | --------------------------------------------- | -------------------------------------------- | ---------
|                   
|                    | GrowthExcludingForeignExchange                | ForeignExchange                              | NetChange
|                   
|Revenue             |                                               | 3                                            | .4%      
|Cost of Revenue and |                                              
|Operating Expenses  |                                               | 7                                            | .7       
|Operating Income    |                                               | (13                                          | .8)      
|                   

Growth excluding foreign exchange is a
non-GAAP measure. We disclose this non-GAAP or pro forma measure of growth to provide
greater insight into our ongoing operating performance. Pro forma measures should not be
considered an alternative to measurements required by accounting principles generally
accepted in the United States. Pro forma measures are unlikely to be comparable to pro
forma information provided by other issuers.

29

---

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

|                                        |  | Percentage of Revenue                           |   | Percentage Change                             
|--------------------------------------- |  | ----------------------------------------------- | - | ----------------------------------------------
|                                        |  |                                                 |  
|                                        |  | Three months ended
                November 30, |   | Nine months ended
                November 30,
|                                        | 
|                                        |  | 2005                                            |   | 2004                                          
|                                       
|Revenue                                 |  | 100.0                                           | % | 100.0                                         
|                                        | 
|Cost of revenue                         |  | 20.6                                            |   | 17.9                                          
|                                        | 
|Gross margin                            |  | 79.4                                            |   | 82.1                                          
|                                        | 
|Operating expenses                      | 
|Selling, general, and    administrative |  | 50.6                                            |   | 48.7                                          
|Research and development                |  | 12.8                                            |   | 12.8                                          
|Amortization of acquisition-            | 
|related intangible assets               |  | 0.8                                             |   | 0.7                                           
|                                        | 
|Total operating expenses                |  | 64.2                                            |   | 62.2                                          
|                                        | 
|Operating income                        |  | 15.2                                            |   | 19.9                                          
|Interest expense                        |  | (0.2                                            | ) | 0.0                                           
|Interest income                         |  | 2.0                                             |   | 0.9                                           
|                                        | 
|Income before taxes                     |  | 17.0                                            |   | 20.8                                          
|Income tax provision                    |  | 3.7                                             |   | 4.4                                           
|                                        | 
|Net income                              |  | 13.3                                            | % | 16.4                                          
|                                        | 

* not meaningful

# REVENUE

|                |  |                                |  | Percentage Change            
|--------------- |  | ------------------------------ |  | -----------------------------
|                |  |                                | 
|($000s)         |  | Three months endedNovember 30, |  | Nine months endedNovember 30,
|               
|                |  | 2005                           |  | 2004                         
|               
|Product License |  | $  75,510                      |  | $  91,580                    
|Product Support |  | 94,430                         |  | 81,031                       
|Services        |  | 42,314                         |  | 37,755                       
|               
|Total Revenue   |  | $212,254                       |  | $210,366                     
|               

Our total revenue was $212.3 million
for the quarter ended November 30, 2005, an increase of $1.9 million or 1%, compared to
the quarter ended November 30, 2004. Our total revenue was $624.4 million for the nine
months ended November 30, 2005, an increase of $55.2 million or 10%, compared to the nine
months ended November 30, 2004.

30

---

Our total revenue was derived
primarily from our suite of BI products, principally Cognos ReportNet, the newly released
Cognos 8, and Cognos Planning. Contributing to a lesser extent were PowerPlay,
Impromptu®, DecisionStream, Cognos Controller, Cognos Metrics Manager,
Cognos Analytic Applications, Cognos Visualizer, Cognos Finance, and NoticeCast®.

Industry Trends and
Geographic Information

We believe that the growth in the BI
market continues to be driven by three main factors: (1) a desire by enterprises to
standardize on one BI platform, (2) the increased investment within 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 to make sense of the enormous amount of data from those
applications. 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 the recent increased
attention on compliance and transparency. Organizations are looking to replace
spreadsheet-based applications and legacy systems with integrated planning, consolidation,
and financial reporting solutions that reduce the effort and cost of compliance. Further,
these organizations are looking to leverage these solutions as an efficient and dependable
platform to move beyond compliance to achieve best practices, specifically in the area of
rolling plans, planning standardization, and reduced time to close. This focus allows the
Office of Finance to extend beyond managing pure financial goals towards overall
performance goals, governance, and CPM. We believe that our planning and consolidation
products help improve the accuracy, transparency, and timeliness of financial information
and, as a result, we are seeing increased demand for these products.

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

We signed 7 contracts greater than $1
million during the quarter, as compared to 15 during the corresponding period last year.
The number of contracts greater than $200,000 decreased 9% while the number of contracts
greater than $50,000 increased 4% during the quarter. Although our metrics for larger
contracts are down this quarter, we expect the trend towards larger contracts to continue
as a result of the growing importance of standardization and the deepening strategic
importance of performance management within our customers businesses. We believe
that order size is an indication of enterprisescale investment in our products by
our customers which is creating a foundation for future growth.

31

---

Management uses the following summary
of key revenue indicators to track order size:

Key Revenue Indicators

|                                                    | Three months endedNovember 30, | Nine months endedNovember 30,
|--------------------------------------------------- | ------------------------------ | -----------------------------
|                                                   
|                                                    | 2005                           | 2004                         
|                                                   
|Orders (License, Support, Services)                 |                                |                              
|Transactions greater than $1 million                |                                | 7                            
|Transactions greater than $200,000                  |                                | 115                          
|Transactions greater than $50,000                   |                                | 737                          
|Average selling price (License orders only) ($000s) |                               
|Greater than $50,000                                |                                | $157                         

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

The overall change in total revenue
from our three revenue categories in the quarter ended November 30, 2005 from November 30,
2004 was as follows: an 18% decrease in product license revenue, a 17% increase in product
support revenue, and a 12% increase in services revenue. The change for the same
categories for the nine months ended November 30, 2005 from November 30, 2004 was as
follows: a 3% decrease in license revenue and a 19% increase in both product support
revenue and services revenue.

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

Revenue by Geography

|             |  |                                |  | Percentage Change            
|------------ |  | ------------------------------ |  | -----------------------------
|             |  |                                | 
|($000s)      |  | Three months endedNovember 30, |  | Nine months endedNovember 30,
|            
|             |  | 2005                           |  | 2004                         
|            
|The Americas |  | $122,171                       |  | $121,503                     
|Europe       |  | 72,972                         |  | 69,308                       
|Asia/Pacific |  | 17,111                         |  | 19,555                       
|            
|Total        |  | $212,254                       |  | $210,366                     
|            

32

---

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 endedNovember 30, | Nine months endedNovember 30,
|------------ | ------------------------------ | -----------------------------
|            
|             | 2005                           | 2004                         
|            
|The Americas |                                | 57                           
|Europe       |                                | 34                           
|Asia/Pacific |                                | 8                            
|            
|Total        |                                | 100                          
|            

The percentage change of our revenue
in Europe, Asia/Pacific and, to a 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 nine months ended November 30, 2005 by
geographic area between change attributable to growth and change due to fluctuations in
the value of the U.S. dollar.

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

|             | Three Months Ended November 30,2005 over 2004 | Nine months ended November 30,2005 over 2004 |          
|------------ | --------------------------------------------- | -------------------------------------------- | ---------
|            
|             | GrowthExcludingForeignExchange                | ForeignExchange                              | NetChange
|            
|The Americas |                                               | (0                                           | .4)%     
|Europe       |                                               | 14                                           | .0       
|Asia/Pacific |                                               | (10                                          | .2)      
|Total        |                                               | 3                                            | .4       

Growth excluding foreign exchange is a
non-GAAP measure. We disclose this non-GAAP or pro forma measure of revenue growth to
provide greater insight into our ongoing operating performance. Pro forma measures should
not be considered an alternative to measurements required by accounting principles
generally accepted in the United States. Pro forma measures are unlikely to be comparable
to pro forma information provided by other issuers.

For the three months ended November
30, 2005, our strong performance in Europe was offset by the impact of a stronger U.S.
dollar and weaker performance in North America and Asia/Pacific. Our growth rate for the
quarter was over 3% with foreign exchange reducing it to approximately 1%. For the nine
months ended November 30, 2005, the growth rate of our revenue was mostly attributable to
increases in volume of transactions as there was only a slight impact from fluctuations in
foreign currencies. For the nine months ended November 30, 2005, we experienced moderate
revenue growth in the Americas and stronger revenue growth in Europe and Asia/Pacific as a
result of our investment in our sales and distribution channels in all three geographic
areas, including the addition of the Frango sales operations in Europe and Asia/Pacific.
Any change in the valuation of the U.S. dollar relative to other currencies will impact
our revenue in the future.

33

---

# Product License Revenue

|                            |                                |         |                               | Percentage Change
|--------------------------- | ------------------------------ | ------- | ----------------------------- | -----------------
|                            |                                |         |                               |                  
|($000s)                     | Three months endedNovember 30, |         | Nine months endedNovember 30, |                  
|                           
|                            |                                | 2005    |                               | 2004             
|                           
|Product license revenue     |                                | $75,510 |                               | $91,580          
|Percentage of total revenue |                                | 35.6    | %                             | 43.5             

Product license revenue was $75.5
million in the quarter ended November 30, 2005, a decrease of $16.1 million or 18% from
the quarter ended November 30, 2004; and was $225.3 million for the nine months ended
November 30, 2005, a decrease of $7.7 million or 3% compared to the corresponding period
in the prior fiscal year. The decrease in product license revenue during the three and
nine months ended November 30, 2005 as compared to the same periods in the prior
fiscal year is primarily attributable to our poor execution against large sales
opportunities and confusion in the market regarding the availability of Cognos 8. Product
license revenue accounted for 36% of total revenue in the three months ended November 30,
2005 compared to 44% for the corresponding quarter in the prior fiscal year, and 36% and
41% for the nine months ended November 30, 2005 and November 30, 2004, respectively.

The breadth of our solution allows us
to develop long-term strategic relationships with our customers which, in turn, enables us
to generate additional software licensing and ongoing maintenance renewals as our
customers take advantage of more of the benefits our broad solution offers. These
relationships are a significant asset as approximately 71% and 69% of our license revenue
came from existing customers in the three and nine-month periods ended November 30, 2005,
respectively.

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 third quarter of
fiscal 2006 and 2005, respectively. For the nine-month periods ended November 30, 2005 and
November 30, 2004, direct sales accounted for 71% and 73% of our license revenue,
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
investing 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.

34

---

# Product Support Revenue

|                            |                                |         |                               | Percentage Change
|--------------------------- | ------------------------------ | ------- | ----------------------------- | -----------------
|                            |                                |         |                               |                  
|($000s)                     | Three months endedNovember 30, |         | Nine months endedNovember 30, |                  
|                           
|                            |                                | 2005    |                               | 2004             
|                           
|Product support revenue     |                                | $94,430 |                               | $81,031          
|Percentage of total revenue |                                | 44.5    | %                             | 38.5             

Product support revenue was $94.4
million in the quarter ended November 30, 2005, an increase of $13.4 million or 17% from
the quarter ended November 30, 2004; and was $275.0 million in the nine months ended
November 30, 2005, an increase of $43.0 million or 19% 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 decreased product support revenue by approximately 3% for the
quarter and increased product support revenue by approximately 1% for the nine-month
period ended November 30, 2005.

Product support revenue accounted for
44% and 39% of our total revenue in the quarters ended November 30, 2005 and November 30,
2004, respectively, and was 44% and 41% of total revenue in the nine months ended November
30, 2005 and November 30, 2004, respectively.

# Services Revenue

|                            |                                |         |                               | Percentage Change
|--------------------------- | ------------------------------ | ------- | ----------------------------- | -----------------
|                            |                                |         |                               |                  
|($000s)                     | Three months endedNovember 30, |         | Nine months endedNovember 30, |                  
|                           
|                            |                                | 2005    |                               | 2004             
|                           
|Services revenue            |                                | $42,314 |                               | $37,755          
|Percentage of total revenue |                                | 19.9    | %                             | 17.9             

Services revenue (training,
consulting, and other revenue) was $42.3 million in the quarter ended November 30, 2005,
an increase of $4.6 million or 12% from the quarter ended November 30, 2004; and was
$124.1 million in the nine months ended November 30, 2005, an increase of $19.9 million or
19% compared to the corresponding period in the prior fiscal year. Services revenue
accounted for 20% and 18% of our total revenue for the three months ended November 30,
2005 and November 30, 2004, respectively, and accounted for 20% and 18% for the nine
months ended November 30, 2005 and November 30, 2004, respectively.

The increase in services revenue for
both the three and nine months ended November 30, 2005 was primarily attributable to an
increase in consulting revenue as we delivered on our contract commitments. As our
business moves more towards larger enterprise-wide deployments and applications-based
software, our customers require an increased level of technical expertise and support to
meet their specific needs. Exchange rate fluctuations decreased services revenue by
approximately 2% for the quarter and increased services revenue by approximately 1% for
the nine-month period ended November 30, 2005.

35

---

# COST OFREVENUE

# Cost of Product License

|                              |                                |        |                               | Percentage Change
|----------------------------- | ------------------------------ | ------ | ----------------------------- | -----------------
|                              |                                |        |                               |                  
|($000s)                       | Three months endedNovember 30, |        | Nine months endedNovember 30, |                  
|                             
|                              |                                | 2005   |                               | 2004             
|                             
|Cost of product license       |                                | $1,732 |                               | $578             
|Percentage of license revenue |                                | 2.3    | %                             | 0.6              

The cost of product license revenue
was $1.7 million, an increase of $1.2 million or 200% in the quarter ended November 30,
2005, and was $4.4 million, an increase of $2.6 million or 150% in the nine months ended
November 30, 2005 compared to the corresponding periods in the prior fiscal year. These
costs represented 2% of product license revenue for the three and nine months ended
November 30, 2005, as compared to 1% of product license revenue for both comparative
periods in the prior fiscal year.

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 November 30,2004 to 2005
|--------------------------- | --------------------------------------------------
|                           
|                            | Threemonths                                       
|                           
|Royalty cost                |                                                   
|Other                       |                                                   
|                           
|Total year-over-year change |                                                   
|                           

The increase in these costs for both
the three and nine months ended November 30, 2005 was the result of increases in royalties
related to suppliers whose technology is included in our product offerings.

# Cost of Product Support

|                              |                                |        |                               | Percentage Change
|----------------------------- | ------------------------------ | ------ | ----------------------------- | -----------------
|                              |                                |        |                               |                  
|($000s)                       | Three months endedNovember 30, |        | Nine months endedNovember 30, |                  
|                             
|                              |                                | 2005   |                               | 2004             
|                             
|Cost of product support       |                                | $9,062 |                               | $8,508           
|Percentage of support revenue |                                | 9.6    | %                             | 10.5             

36

---

The cost of product support revenue
was $9.1 million, an increase of $0.6 million or 7% in the quarter ended November 30,
2005, and was $26.7 million, an increase of $4.0 million or 18% in the nine months ended
November 30, 2005 compared to the corresponding periods in the prior fiscal year. The cost
of product support represented 10% of total product support revenue for all four periods
presented.

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

|($000s)                     | Year-over-year Changefrom November 30,2004 to 2005
|--------------------------- | --------------------------------------------------
|                           
|                            | Threemonths                                       
|                           
|Staff-related costs         |                                                   
|Other                       |                                                   
|                           
|Total year-over-year change |                                                   
|                           

The increase in the cost of product
support for the three and nine-month periods ended November 30, 2005 was primarily the
result of increases in staff-related costs to service our growing customer base. The
average number of employees within the support organization increased 15% and 17% in the
three and nine months ended November 30, 2005, respectively, as compared to the same
periods last year. The unfavorable effect of fluctuations of foreign currencies,
especially the Canadian dollar, relative to the U.S. dollar increased cost of product
support by approximately 4% for the nine months ended November 30, 2005 as compared to the
same period last year. Currency fluctuations did not have an impact for the quarter ending
November 30, 2005.

# Cost of Services

|                               |                                |         |                               | Percentage Change
|------------------------------ | ------------------------------ | ------- | ----------------------------- | -----------------
|                               |                                |         |                               |                  
|($000s)                        | Three months endedNovember 30, |         | Nine months endedNovember 30, |                  
|                              
|                               |                                | 2005    |                               | 2004             
|                              
|Cost of services               |                                | $32,871 |                               | $28,574          
|Percentage of services revenue |                                | 77.7    | %                             | 75.7             

The cost of services revenue was $32.9
million, an increase of $4.3 million or 15% in the quarter ended November 30, 2005 and was
$97.5 million, an increase of $16.0 million or 20% in the nine months ended November 30,
2005 compared to the corresponding periods in the prior fiscal year. The cost of services
represented 78% and 79% of services revenue for the three and nine months ended November
30, 2005, respectively, as compared to 76% and 78% for the corresponding periods in the
prior fiscal year.

37

---

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 November 30,2004 to 2005
|----------------------------- | --------------------------------------------------
|                             
|                              | Threemonths                                       
|                             
|Staff-related costs           |                                                   
|Services purchased externally |                                                   
|Other                         |                                                   
|                             
|Total year-over-year change   |                                                   
|                             

The increase in cost of services for
the three and nine month periods ended November 30, 2005 was primarily attributable to
increases in staff-related costs and services purchased externally to meet our services
commitments. Subcontractors are currently an important part of our services offering and
are engaged to fill excess demand that cannot be met by internal Cognos service
consultants. This demand can be in the form of increased volume or requirements for
industry specialization. While we have recently hired new employees in this area, we will
continue to engage subcontractors as required. The average number of employees within the
services organization increased 17% and 21% in the three and nine months ended November
30, 2005, respectively, as compared to the same periods last year. The effect of
fluctuations of foreign currencies had a slight impact on cost of services, decreasing
these costs by approximately 2% for the three months ended November 30, 2005, and
increasing them by approximately 1% for the nine-month period then ended, as compared to
the same periods last year, as a portion of these services are provided in currencies
other than the U.S. dollar.

# OPERATINGEXPENSES

# Selling, General, and
Administrative

|                            |                                |          |                               | Percentage Change
|--------------------------- | ------------------------------ | -------- | ----------------------------- | -----------------
|                            |                                |          |                               |                  
|($000s)                     | Three months endedNovember 30, |          | Nine months endedNovember 30, |                  
|                           
|                            |                                | 2005     |                               | 2004             
|                           
|Selling, general, and       |                                |          |                               |                  
|administrative              |                                | $107,330 |                               | $102,377         
|Percentage of total revenue |                                | 50.6     | %                             | 48.7             

Selling, general, and administrative
(SG&A) expenses were $107.3 million, an increase of $5.0 million or
5% in the quarter ended November 30, 2005, and were $316.6 million, an increase of $33.2
million or 12% in the nine months ended November 30, 2005 compared to the corresponding
periods in the prior fiscal year. These costs represented 51% of total revenue for both
the three and nine months ended November 30, 2005, respectively, as compared to 49% and
50% for the corresponding periods in the prior fiscal year.

38

---

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 November 30,2004 to 2005
|----------------------------- | --------------------------------------------------
|                             
|                              | Threemonths                                       
|                             
|Staff-related costs           |                                                   
|Professional services         |                                                   
|Travel & living               |                                                   
|Staff development             |                                                   
|Facilities                    |                                                   
|Services purchased externally |                                                   
|Other                         |                                                   
|                             
|Total year-over-year change   |                                                   
|                             

The increase in SG&A expenses for
the three months ended November 30, 2005 is attributable to increased professional
services and travel and living expenses offset by a decrease in facilities and
staff-related costs. The decrease in staff-related costs was a result of lower commissions
and a year-to-date adjustment of $2.4 million to our estimated annual bonus accrual to
reflect the current expectation for revenue and operating margin for the fiscal year. The
increase in SG&A expenses for the nine months ended November 30, 2005 was the result
of increases in staff-related costs resulting from higher headcount compared to the same
period last year. The average number of employees within SG&A increased by 6% and 10%
in the three and nine months ended November 30, 2005, respectively, when compared to the
corresponding periods in the prior fiscal year. Contributing to the increase for the nine
months ended November 30, 2005 was spending in targeted areas such as professional
services and staff development for the launch of Cognos 8 and to take advantage of market
opportunities in BI standardization and in the Office of Finance. Also contributing were
planned increases in travel and living, and facilities costs. The effect of fluctuations
of foreign currencies relative to the U.S. dollar decreased SG&A expenses by
approximately 2% for the three months ended November 30, 2005 and increased these expenses
by approximately 1% for the nine months then ended, when compared to the corresponding
periods in the prior fiscal year.

39

---

# Research and Development

|                            |                                |         |                               | Percentage Change
|--------------------------- | ------------------------------ | ------- | ----------------------------- | -----------------
|                            |                                |         |                               |                  
|($000s)                     | Three months endedNovember 30, |         | Nine months endedNovember 30, |                  
|                           
|                            |                                | 2005    |                               | 2004             
|                           
|Research and development    |                                | $27,226 |                               | $26,987          
|Percentage of total revenue |                                | 12.8    | %                             | 12.8             

Research and development
(R&D) expenses were $27.2 million, an increase of $0.2 million or
1% in the quarter ended November 30, 2005, and were $84.6 million, an increase of $7.9
million or 10% for the nine months ended November 30, 2005 compared to the corresponding
periods in the prior fiscal year. R&D costs were 13% and 14% of revenue for the three
and nine months ended November 30, 2005, respectively, as compared to 13% of revenue for
both of the corresponding periods in the prior fiscal year.

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 November 30,2004 to 2005
|--------------------------- | --------------------------------------------------
|                           
|                            | Threemonths                                       
|                           
|Staff-related costs         |                                                   
|Computers                   |                                                   
|Other                       |                                                   
|                           
|Total year-over-year change |                                                   
|                           

The increase in R&D expenses for
the three months ended November 30, 2005 is mainly attributable to increased computer
costs offset by a decrease in staff-related costs. The decrease in staff-related costs was
a result of a year-to-date adjustment of $2.3 million to our estimated annual bonus
accrual to reflect current expectation for revenue and operating margin for the fiscal
year. The increase in R&D expenses for the nine months ended November 30, 2005 was the
result of increases in staff-related costs resulting from higher compensation, as well as
associated benefits, as compared to the previous fiscal year, driven by the increase in
personnel. Also contributing to the increase in R&D costs for the nine months ended
November 30, 2005 was the integration of Frangos R&D operations. The average
number of employees within R&D increased by 10% and 9% for the three and nine months
ended November 30, 2005, respectively, 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 2% and 5% for the three and nine months ended November 30, 2005,
respectively, when compared to the corresponding periods of the prior fiscal year.

40

---

We continue to invest significantly in
R&D activities for our next generation of BI solutions which are the foundation of our
CPM vision. In September 2005, we launched Cognos 8. Cognos 8 offers a complete range of
BI functionality, including reporting, analysis, dashboarding, scorecarding, and event
management, on a single, services-oriented architecture.

In the future, we will continue to
focus on bringing innovative new products to market and we continue to develop new
releases of our products.

We currently do not have any software
development costs capitalized on our balance sheet. Software development costs are
expensed as incurred unless they meet generally accepted accounting criteria for deferral
and amortization. Software development costs incurred prior to the establishment of
technological feasibility do not meet these criteria, and are expensed as incurred.
Capitalized costs would be amortized over a period not exceeding 36 months. No costs were
deferred in the three and nine months ended November 30, 2005 and November 30, 2004. 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.

# Amortization of
Acquisition-related Intangible Assets

|                    |                                |        |                               | Percentage Change
|------------------- | ------------------------------ | ------ | ----------------------------- | -----------------
|                    |                                |        |                               |                  
|($000s)             | Three months endedNovember 30, |        | Nine months endedNovember 30, |                  
|                   
|                    |                                | 2005   |                               | 2004             
|                   
|Amortization of     |                                |        |                               |                  
|acquisition-related |                               
|intangible assets   |                                | $1,684 |                               | $1,501           

Amortization of acquisition-related
intangible assets was $1.7 million, an increase of $0.2 million or 12% for the quarter
ended November 30, 2005 and was $5.0 million, an increase of $1.0 million or 25% for the
nine months ended November 30, 2005 compared to the corresponding periods in the prior
year. The increase in this expense in the three and nine months ended November 30, 2005
was due to the amortization of acquired technology and contractual relationships as a
result of the acquisition of Frango in September 2004 and Databeacon Inc.
(Databeacon) and Digital Aspects Holdings Ltd. (Digital
Aspects) in September 2005.

# Net Interest and Other
Income

|                              |                                |        |                               | Percentage Change
|----------------------------- | ------------------------------ | ------ | ----------------------------- | -----------------
|                              |                                |        |                               |                  
|($000s)                       | Three months endedNovember 30, |        | Nine months endedNovember 30, |                  
|                             
|                              |                                | 2005   |                               | 2004             
|                             
|Net interest and other income |                                | $3,788 |                               | $1,887           

Net interest income was $3.8 million,
an increase of $1.9 million or 101% in the quarter ended November 30, 2005 and was
$9.6 million, an increase of $4.6 million or 93% in the nine months ended
November 30, 2005 compared to the corresponding periods in the prior fiscal year. The
change in net interest and other income is as follows:

41

---

|($000s)                                 | Year-over-year Changefrom November 30,2004 to 2005
|--------------------------------------- | --------------------------------------------------
|                                       
|                                        | Threemonths                                       
|                                       
|Increase in interest revenue            |                                                   
|Increase in interest and other expenses |                                                   
|                                       
|Total year-over-year change             |                                                   
|                                       

The increase in interest revenue
during the three and nine months ended November 30, 2005 was attributable to an increase
in the average portfolio size accompanied by an increase in the average yield on
investments as compared to the corresponding periods in the prior fiscal year. The
increase in interest and other expenses is mainly attributable to the amortization of the
premium on our cash flow hedges as compared to the same period in the prior fiscal year.

# Income Tax Provision

|                   |                                |        |                               | Percentage Change
|------------------ | ------------------------------ | ------ | ----------------------------- | -----------------
|                   |                                |        |                               |                  
|($000s)            | Three months endedNovember 30, |        | Nine months endedNovember 30, |                  
|                  
|                   |                                | 2005   |                               | 2004             
|                  
|Tax expense        |                                | $7,869 |                               | $9,183           
|Effective tax rate |                                | 21.8   | %                             | 21.0             

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 nine months ended November 30, 2005, we recorded an
income tax provision of $7.9 million and $18.4 million, respectively, representing an
effective income tax rate of 22% and 19%, respectively. Comparatively, in the three and
nine months ended November 30, 2004, we recorded an income tax provision of $9.2 million
and $21.9 million, respectively, representing an effective income tax rate of 21% for both
periods. We estimate our effective tax rate for the current fiscal year will be 22%,
exclusive of any in period adjustments. For the three-month period ended November 30,
2005, this estimated effective tax rate was reduced by 0.2% due to adjustments relating to
various tax audits and prior year tax provisions. For the nine-month period ended November
30, 2005, the estimated effective tax rate was reduced to approximately 19% by, in
addition to adjustments relating to various tax audits and prior year tax provisions,
adjustments related to the recognition of benefits resulting from (i) a tax court decision
that allowed corporations to claim investment tax credits on stock-based compensation for
research and development personnel relating to fiscal years 2004 and 2005 and (ii) a
change in tax withholding legislation relating to one of the Corporations
subsidiaries.

42

---

# LIQUIDITY AND
CAPITAL
RESOURCES

|($000s)                                              |  | As atNovember 30,2005 | As atFebruary 28,2005 | PercentageChange
|---------------------------------------------------- |  | --------------------- | --------------------- | ----------------
|                                                    
|Cash and cash equivalents                            |  | $257,130              |                       | $378,348        
|Short-term investments                               |  | 226,129               |                       | 144,552         
|                                                     | 
|Cash, cash equivalents, and short-term   investments |  | $483,259              |                       | $522,900        
|Working capital                                      |  | 378,434               |                       | 344,236         

|($000s)                         |  | Nine months endedNovember 30, | Percentage ChangeNine months endedNovember 30,
|------------------------------- |  | ----------------------------- | ----------------------------------------------
|                               
|                                |  | 2005                          |                                               
|                               
|Net cash provided by (used in): |  |                               |                                               
|Operating activities            |  | $   32,243                    |                                               
|Investing activities            |  | (103,739                      | )                                             
|Financing activities            |  | (45,992                       | )                                             

|                             |  | As atNovember 30,2005 | As atNovember 30,2004 |   
|---------------------------- |  | --------------------- | --------------------- | --
|                            
|Days sales outstanding (DSO) |  | 66                    |                       | 61

* not meaningful

# Cash, Cash Equivalents,
and Short-term Investments

As of November 30, 2005, we held
$483.3 million in cash, cash equivalents, and short-term investments, a decrease of $39.6
million from February 28, 2005. This decrease is primarily attributable to share
repurchases of $73.4 million partially offset by cash flow from operations of $32.2
million. Cash and cash equivalents include investments which are highly liquid and held to
maturity. Cash equivalents typically include commercial paper and term deposits,
bankers acceptances and bearer deposit notes issued by major North American 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 and corporate bonds.

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.

43

---

# Working Capital

Working capital represents our current
assets less our current liabilities. As of November 30, 2005, working capital was $378.4
million, an increase of $34.2 million from February 28, 2005. The increase in working
capital can be attributed to a net decrease in current liabilities, especially salaries,
commissions and related items and deferred revenue. Offsetting this increase were
decreases in accounts receivable.

Days sales outstanding (DSO) was 66
days at November 30, 2005 as compared to 61 days as at November 30, 2004. We calculate our
days sales outstanding ratio based on ending accounts receivable balances and quarterly
revenue.

# Long-term Liabilities

As at November 30, 2005 and February
28, 2005, we had no long-term liabilities.

# Cash Provided by
Operating Activities

Cash provided by operating activities
(after changes in non-cash working capital items) for the nine months ended November 30,
2005 was $32.2 million, a decrease of $68.6 million compared to the comparative period
last year. The decrease is primarily attributable to changes in working capital, most
notably the decrease of salaries, commissions, and related items and income taxes,
compared to the same period last year.

# Cash Used in Investing
Activities

Cash used in investing activities was
$103.7 million for the nine months ended November 30, 2005, an increase of $79.4 million
compared to the prior fiscal year. During the nine months ended November 30, 2005, we had a
net increase in short-term investments. In the nine months ended November 30, 2005, our
purchase of short-term investments, net of maturities, were $81.6 million. In comparison,
during the nine months ended November 30, 2004, our proceeds on maturity of short-term
investments, net of purchases, were $38.2 million in order to finance the Frango
acquisition. In addition, during the nine months ended November 30, 2005, we spent $17.1
million on fixed asset additions as compared to $12.0 million in the corresponding period
last year. The additions for both periods related primarily to computer equipment and
software, office furniture and leasehold improvements.

Fiscal 2006 Acquisitions

In September 2005, we acquired
Databeacon and Digital Aspects. Databeacon was a mid-market business analytics and
reporting company, based in Ottawa, Canada. We purchased Databeacon primarily to expand
our research and development workforce in the Ottawa area. Digital Aspects was an early
stage business intelligence company based in the United Kingdom. We purchased Digital
Aspects primarily to incorporate its software, which assists in real time access to
corporate data, into our product suite.

The aggregate purchase consideration
for Databeacon and Digital Aspects was approximately $4,878,000 paid in cash and deferred
consideration of $888,000, which was included in accrued charges on the balance sheet at
the date of acquisition. Included in the Databeacon share purchase agreement was $436,000
of restricted share units to employees of Databeacon. The Digital Aspects agreement
stipulates that the shareholders of Digital Aspects will receive a maximum of $750,000 in
contingent consideration over a two-year period ending September 30, 2007 if certain
performance thresholds are met. Both the restricted share units and the contingent
consideration are conditioned on the continued tenure of these employees and therefore
will be accounted for as compensation expense as earned. Direct costs associated with
these acquisitions were approximately $537,000.

44

---

Neither the purchase of Databeacon nor
Digital Aspects involved the write-off of any in-process research and development.

Of the aggregate purchase price for
the Databeacon and Digital Aspects acquisition, $1,238,000 was allocated to intangible
assets, subject to amortization. Of this amount, $1,192,000 was allocated to acquired
technology and $46,000 was allocated to contractual relationships. Neither intangible
asset is expected to have any residual value. The amortization period for both the
acquired technology and the contractual relationships is five years. The fair values of
the Databeacon intangible assets were assigned using the discounted cashflow method, which
discounts the present value of the free cashflows expected to be generated by the assets.
The acquired technology associated with the Digital Aspects acquisition was valued based
on the estimated cost to develop the technology internally. The amortization periods were
determined using the estimated economic useful life of the asset. In the allocation of
the purchase price, $6,069,000 was assigned to goodwill.

The purchase price allocation for
these acquisitions is not yet finalized including the valuation of the tax assets and
liabilities and, as a result, there may be unresolved contingencies, purchase price
allocation issues, or additional liabilities that could result in a material adjustment to
the acquisition cost allocation.

Fiscal 2005

On September 29, 2004, we completed a
tender offer for the shares of Frango AB, a Swedish public company based in Stockholm
having global operations. Frango specialized in consolidation and financial reporting
solutions. We acquired Frango primarily to add Frangos consolidation and financial
reporting software to our product suite and also to access Frangos workforce and
distribution channels in Europe and Asia, all part of our broader strategy to lead the CPM
market. The acquisition of Frango further strengthened our product offering to the Office
of Finance, a key entry point with our customers. The aggregate purchase consideration was
$53.1 million paid in cash. Direct costs associated with the acquisition were $1.9
million.

The in-process research and
development was valued at an immaterial amount, and therefore the purchase of Frango did
not involve the write-off of any in-process research and development.

Of the total purchase price, $8.8
million was allocated to intangible assets, subject to amortization. Of this amount, $7.0
million was allocated to acquired technology and $1.8 million was allocated to contractual
relationships. Neither intangible asset is expected to have any residual value. The
amortization period for the acquired technology is five years whereas the amortization
period for the contractual relationships is approximately eight years. The weighted
average amortization for these intangible assets acquired is approximately six years. In
the allocation of the purchase price, $51.8 million was assigned to goodwill.

# Cash Provided by (Used
in) Financing Activities

Cash used in financing activities was
$46.0 million for the nine months ended November 30, 2005, an increase in financing
activities of $50.7 million compared to the same period of the prior fiscal year. We
issued 1,067,000 common shares for proceeds of $27.6 million, during the nine months ended
November 30, 2005, compared to the issue of 1,727,000 shares for proceeds of $32.8 million
during the corresponding period in the prior fiscal year. The issuance of shares in the
nine months ended November 30, 2005 was pursuant to our stock purchase plan and the
exercise of stock options by employees, officers, and directors.

45

---

We repurchase shares on the open
market under a share repurchase program and under a restricted share unit plan. During the
nine months ended November 30, 2005, we repurchased 1,917,000 shares for a total
consideration of $73.4 million under the share repurchase program and 5,000 shares for
$0.2 million under the restricted share unit plan. Comparatively, for the nine months
ended November 30, 2004 we repurchased 804,000 shares at a value of $27.8 million under
the share repurchase program and 10,000 shares for $0.3 million under the restricted share
unit plan. Purchases made under the share repurchase program were part of distinct open
market share repurchase programs under the rules of, and approved by, 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 in the twelve month
period no more than 5% of the issued and outstanding shares of the Corporation on the date
the plan is adopted. These programs do not commit the Corporation to make any share
repurchases. Purchases can be made on The Nasdaq National 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 share repurchase programs.

# Contracts and Commitments

We have an unsecured credit facility
subject to annual renewal. The credit facility permits us to borrow funds or issue letters
of credit or guarantee up to Cdn $12.5 million (U.S. $10.7 million), subject to certain
covenants. As of November 30, 2005 and 2004, there were no direct borrowings under this
facility.

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

During fiscal 2005, the Corporation
entered into cash flow hedges in order to offset the risk associated with the effects of
certain foreign currency exposures related to an intercompany loan and the corresponding
interest payments between subsidiaries with different functional currencies. As of
November 30, 2005, the Corporation had cash flow hedges, with maturity dates between
February 28, 2006 and January 14, 2008, to exchange the U.S. dollar equivalent of $70.9
million in foreign currency. The estimated fair value of these contracts at November 30,
2005 was not material. 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.

In connection with the acquisition of
Frango, we undertook a restructuring plan in conjunction with the business combination.
The restructuring primarily relates to involuntary employee separations of approximately
20 employees of Frango and accruals for vacating leased premises of Frango. During the
nine-month period ended November 30, 2005, the total cash payments made in relation to the
accrual were $2.6 million, and cash payments remaining at November 30, 2005 were $1.5
million. The remaining accrual is included in the balance sheet as accrued charges and
salaries, commissions, and related items. All amounts excluding lease payments are
expected to be paid during fiscal 2006. Outstanding balances for the lease payments will
be paid over the lease term unless settled earlier.

46

---

Our contractual obligations have not
changed materially from those included in our Annual Report on Form 10-K for the year
ended February 28, 2005.

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
ACCOUNTINGESTIMATES

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. Actual results may differ
from these estimates under different assumptions, conditions, and experience.

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

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

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

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

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

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

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

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 based on vendor specific objective evidence with the remainder
of the arrangement fee being allocated to the delivered elements of the arrangement.
Cognos contracts commonly include product license, product support, and services (e.g.
education, consulting, etc.). Each product license arrangement requires careful analysis
to ensure that all of the individual elements in the transaction have been identified,
along with the fair value of each element.

47

---

We allocate revenue to each
undelivered element based on its respective fair value, with the fair value determined by
the price charged when that element is sold separately. The fair value of the services
portion of the arrangement is established according to our standard price list. Quantity
discounts are built into this price list and reflect fees charged when services are sold
separately from a product license. We determine the fair value of the product support
portion of the arrangement based on the product support renewal rate if product support is
negotiated separately and the rate is reflective of the expected renewal rate for the
first support period not covered by the arrangement. If product support is not separately
negotiated in the agreement, product support is separated based on a percentage of
negotiated product license fees that is consistent with similar transactions. If evidence
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.

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

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

For substantially all of our software
arrangements, we defer revenue for the fair value of the product support and services to
be provided to the customer 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 third-parties 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The fee is fixed or determinable:      A fee is fixed or readily 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 and determinable unless a significant portion (more than 10%) of the licensing fee
is due more that 12 months after delivery. 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 third-party license agreement does not allow for refunds, returns, or
adjustments. However, in the rare circumstances where this might occur and these
provisions are agreed upon, revenue is recognized upon the expiration of the rights of
exchange or return. For third-parties, if they are newly formed, undercapitalized, or in
financial difficulty, or if uncertainties about the number of copies to be sold by the
partner exist, fees are not considered fixed and determinable. If the arrangement fee is
not fixed or determinable, we recognize the revenue as amounts become due and payable.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

---

| |  | 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our customers typically pre-pay
product support for the first year in connection with a new product license, and the
related revenue is deferred and recognized ratably over the term of the initial product
support contract. Product support is renewable by the customer on an annual basis
thereafter. Rates for product support, including subsequent renewal rates, are typically
established based upon a specified percentage of net product license fees as set forth in
the arrangement. Services revenue primarily consists of implementation services related to
the installation of our products and training revenue. 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.

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 November 30, 2005. 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
employ tax planning strategies which, by their nature, involve complicated transactions.
Those transactions are subject to review or audit by taxation authorities and the ultimate
tax outcome bears a measure of uncertainty. We must therefore make estimates and judgments
based on our knowledge and understanding of local and international tax legislation in
determining our worldwide tax provision and it may take a considerable period of time for
the ultimate tax outcome to be known. In the past, we have made adjustments as a result of
these changes in circumstance. These adjustments have been accounted for as changes in
estimates. The effect of these changes has not been significant on our results of
operations and financial condition. We believe our estimates are reasonable, however, we
will continue to adjust our estimates as circumstances change. Therefore, the ultimate tax
outcome could differ materially from the amounts recorded in our financial statements.
These differences could have a material effect on our financial position and our net
income in the period such determination is made.

49

---

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 increased to cover additional deferred
tax assets that may not be realized.

Our valuation allowance pertains
primarily to net operating loss carryforwards resulting 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.

50

---

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.

51

---

# NEW
ACCOUNTING
PRONOUNCEMENTS

In December 2004, the FASB issued SFAS
No. 123 (Revised), Share-based Payment(SFAS 123R) which is a
revision of SFAS 123 and supersedes Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees, (APB 25)
and SFAS No. 148, Accounting for Stock-based Compensation  Transition and
Disclosure. This revised standard addresses the accounting for share-based payment
transactions in which a company receives employee 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 the new standard, companies will no longer be able to account for
share-based compensation transactions using the intrinsic method in accordance with APB
25. Instead, companies will be required to account for such transactions using a fair
value method and recognize the expense in the consolidated statement of income. SFAS 123R
will be effective for fiscal years beginning after June 15, 2005. Early adoption is
permitted. We are currently examining the changes contemplated by the new rules and we
have yet to determine which transitional provision we will follow. The impact on our
financial statements of applying one of the acceptable fair value based methods of
accounting for stock options is disclosed in Note 3 of the Condensed Notes to the
Consolidated Financial Statements.

In March 2005, the Securities and
Exchange Commission (SEC) released SEC Staff Accounting Bulletin No.
107, Share-Based Payment (SAB 107). SAB 107 provides the
SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive
guidance related to the interaction between SFAS 123R and certain SEC rules and
regulations, as well as provides the staffs views regarding the valuation of
share-based payment arrangements for public companies. SAB 107 also highlights the
importance of disclosures made related to the accounting for share-based payment
transactions. We are currently evaluating SAB 107 and we will be incorporating it as part
of our adoption of SFAS 123R.

The FASB has recently issued two FASB
Staff Positions (FSP) to assist in the implementation of SFAS 123R. The
first, FSP FAS 123(R)-2, is a practical accommodation to the application of grant date as
defined by SFAS 123R. The second, FSP FAS 123(R)-3, is a transition election to accounting
for the tax effects of share-based payments. More specifically, it offers a simplified
method of determining the opening balance of the pool of excess tax benefits available to
absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R. The
Corporation will evaluate the implications of these two FSPs in its adoption of SFAS 123R.

In May 2005, the FASB issued SFAS No.
154, Accounting Changes and Error Corrections(SFAS 154)
which supersedes APB Opinion 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.
We do not expect the adoption of SFAS 154 to have a material impact on our
consolidated results of operations and financial condition.

52

---

# 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, and future market opportunities. 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 introduction of Cognos 8, and litigation, as well as the other factors
discussed below and elsewhere in this report. Readers should not place undue reliance on
any such forward-looking statements, which speak only as of the date they were made.
Except to the extent required by applicable law, we disclaim any obligation to publicly
update or revise any such statements to reflect any change in our expectations or in
events, conditions, or circumstances on which any such statements may be based, or that
may affect the likelihood that actual results will differ from those set forth in the
forward-looking statements.

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

As 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. 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 its
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. For example, in the third quarter of fiscal year 2006, we closed seven contracts
greater than $1 million, compared to 15 in the third quarter of fiscal year 2005,
resulting in lower than expected license revenue.

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 enterprise resource planning
(ERP) software vendors, may continue to expand their product offering
into our markets. For example, ERP vendor, Oracle Corporation, has recently announced that
it will acquire Siebel Systems, Inc. and has also recently acquired one of its major ERP
competitors, PeopleSoft, Inc. If one or more of our competitors merges or partners with
another of our competitors or ERP vendors or if we were to become the subject of an
unsolicited acquisition initiative by another enterprise, any such change 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 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.

53

---

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

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

Currency fluctuations may
adversely affect us.

A substantial portion of both our
revenues and expenditures are generated in currencies other than the U.S. dollar, such as
the Canadian dollar and the euro. Fluctuations in the exchange rate between the U.S.
dollar and other currencies, particularly the euro and the Canadian dollar, may have a
material adverse effect on our business, financial condition, and operating results as we
report in U.S. dollars. For example, the Canadian dollar has continued to strengthen
during fiscal 2006, leading to higher than anticipated expenses when reported in U.S.
dollars. Please see further discussion on foreign currency risk included in the
Quantitative and Qualitative Disclosure on Market Risk in Item 3 of 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 revenues and growth rates.

54

---

We may not be able to
hire, integrate, or retain 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
senior management and other key employees to develop, market, and support our products and
manage our business. The loss of their services could have a material adverse effect on
our business. Our success is also highly dependent on our continuing ability to hire,
integrate, and retain highly qualified personnel as well as our ability to train and
develop personnel. The failure to attract and retain or to train and develop key personnel
could adversely affect our future growth and profitability. Changes in senior management
or other key personnel can also cause temporary disruption in our operations during
transition periods.

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

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

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 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.

55

---

Our total revenue and
operating results may fluctuate, which could affect 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. 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 the market price of our common stock.

Our quarterly and annual
operating results may vary between periods.

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

Our expenses may not match
anticipated revenues.

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

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

Natural or other disasters like the
recent effects of hurricanes in the United States, and hostilities or terrorist
attacks may 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.

56

---

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 or
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.

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 quarter or quarters for which such determination
is made. For example, in the second and third quarter of fiscal 2006, the estimated
effective tax rate for the year was reduced due to adjustments relating to various tax
audits and prior year tax provisions and, in the first quarter of fiscal 2006, the
estimated effective tax rate for the fiscal year was adjusted downward for the recognition
of one-time benefits resulting from (i) a tax court decision that allowed corporations to
claim investment tax credits on stock-based compensation for research and development
personnel relating to fiscal years 2004 and 2005 and (ii) a change in tax withholding
legislation relating to one of our subsidiaries.

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.

57

---

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.

Our share price may
fluctuate.

The market price of our common shares
may be volatile and could be subject to wide fluctuations due to a number of events or
factors, including: actual or anticipated fluctuations in our results of operations;
changes in estimates of our future results of operations by us or securities analysts;
announcements of technological innovations or new products by us or our competitors; or
general industry changes in the BI and CPM tools or related markets.

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

The FASB and other bodies that have
jurisdiction over the form and content of our accounts are constantly discussing proposals
designed to ensure that companies best display relevant and transparent information
relating to their respective businesses. The effect of the pronouncements of FASB 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 fiscal years starting after June 15,
2005, a new FASB pronouncement will require us to expense the fair value of stock options.
As a result, we will likely report increased expenses in our income statement and a
reduction of our net income and earnings per share. The impact on Cognos current
financial statements of applying a fair value method of accounting for stock options is
disclosed in Note 3 of the Condensed Notes to the Consolidated Financial Statements.

58

---

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

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

# Interest Rate Risk

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

Interest income on our cash, cash
equivalents, and short-term investments is subject to interest rate fluctuations, but we
believe that the impact of these fluctuations does not have a material effect on our
financial position due to the short-term nature of these financial instruments. We have no
long-term debt. Our interest income and interest expense are most sensitive to the general
level of interest rates in Canada and the United States. Sensitivity analysis is used to
measure our interest rate risk. For the three and nine months ending November 30, 2005, a
100 basis-point adverse change in interest rates would not have had a material effect on
our consolidated financial position, earnings, 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 November 30, 2005, 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.

59

---

|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 November 30, 2005.
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.

60

---

PART II  OTHER
INFORMATION

|Item  1A. |  | Risk
Factors
|--------- |  | ------------

Please see the disclosure set forth
herein under the heading Certain Factors that May Affect Future Results.

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

|PURCHASES OF EQUITY
SECURITIES   
|---------------------------------
|                                 
|                                 
|
|                                 
|
|                                 
|September 1 to September 30, 2005
|October 1 to October 31, 2005    
|November 1 to November 30, 2005  
|                                 
|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 Shareholders of the
Corporation 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 may be
exchanged for one common share of Cognos. The common shares for which the restricted share
units may be exchanged will be purchased on the open market by a trustee appointed and
funded by Cognos. During the quarter ended November 30, 2005, Cognos did not repurchase
any shares under the restricted share unit plan.

On October 6, 2004, Cognos announced
that it had adopted a stock repurchase program authorizing the repurchase of up to
4,530,256 common shares (not more than 5% of the common shares outstanding on that date)
up to a maximum of $50,000,000 between October 9, 2004 and October 8, 2005 (the
2004 Stock Repurchase Program). On June 22, 2005, the Board of
Directors of Cognos approved additional purchases up to a total of $100,000,000 with no
increase in the number of shares. During the quarter ended November 30, 2005, Cognos
repurchased 314,600 shares at an average price of $38.10 under the 2004 Stock Repurchase
Program.

61

---

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 November 30, 2005, Cognos
repurchased 336,272 shares at an average price of $37.02 under the 2005 Stock Repurchase
Program.

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

|a) |  | Exhibits |  |                                                                                                                                                                                                                                                 | 
|-- |  | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|   |  | 3.1      |  | Articles of Incorporation and Amendments thereto
(incorporated by reference to Exhibit 3.1 of Cognos 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 Cognos (incorporated by
reference to Exhibit 3.2 of Cognos Form 10-K filed for
the year ended February 28, 1997)                                                                                                                    | 
|   |  | 10.32    |  | Amended and Restated Cognos Employee
Stock Purchase Plan, amended as of November 21, 2005                                                                                                                                                       | 
|   |  | 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                                                                   | 
|   |  | 99.1     |  | Managements Discussion and
Analysis of Financial Condition and Results of Operations  Canadian Supplement                                                                                                                                     | 

62

---

# 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)                                                                                                                                           
|               
|January 5, 2006 |  | /s/ Tom Manley                                                                                                                                         
|                |  |                                                                                                                                                        
|Date            |  | Tom ManleySenior Vice President, Finance &
Administration and    Chief Financial Officer (Principal Financial
    Officer and Chief Accounting Officer)

63

---

EXHIBIT INDEX

|EXHIBIT NO. | DESCRIPTION |                                                                                                                                                                                                     | PAGE |   
|----------- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --
|           
|10.32       |             | Amended and Restated Cognos Employee
Stock Purchase Plan, amended as of November 21, 2005                                                                                                           |      | 65
|           
|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  |      | 69
|           
|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 |      | 70
|           
|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                       |      | 71
|           
|99.1        |             | Managements Discussion and Analysis of Financial
Condition and Results of Operations  Canadian Supplement                                                                                         |      | 72
|           

64