---

UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

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

For the Quarterly
Period Ended May 31, 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

The number of shares outstanding of
the registrants only class of Common Stock as of June 20, 2005, was 91,023,499.

---



---

# COGNOS INCORPORATED

# INDEX

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

2

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PART I  FINANCIAL
INFORMATION

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

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

|                                                      |  | Three months ended May 31,
|----------------------------------------------------- |  | --------------------------
|                                                      |  | 2005                      
|                                                     
|Revenue                                               |  |                           
|Product license                                       |  | $   71,146                
|Product support                                       |  | 88,505                    
|Services                                              |  | 40,424                    
|                                                     
|Total revenue                                         |  | 200,075                   
|                                                     
|Cost of revenue                                       | 
|Cost of product license                               |  | 1,222                     
|Cost of product support                               |  | 8,882                     
|Cost of services                                      |  | 32,090                    
|                                                     
|Total cost of revenue                                 |  | 42,194                    
|                                                     
|Gross margin                                          |  | 157,881                   
|                                                     
|Operating expenses                                    | 
|Selling, general, and administrative                  |  | 103,013                   
|Research and development                              |  | 28,874                    
|Amortization of acquisition-related intangible assets |  | 1,637                     
|                                                     
|Total operating expenses                              |  | 133,524                   
|                                                     
|Operating income                                      |  | 24,357                    
|Interest and other expenses                           |  | (339                      
|Interest income                                       |  | 3,119                     
|                                                     
|Income before taxes                                   |  | 27,137                    
|Income tax provision                                  |  | 3,312                     
|                                                     
|Net income                                            |  | $   23,825                
|                                                     
|Net income per share                                  | 
|Basic                                                 |  | $0.26                     
|                                                     
|Diluted                                               |  | $0.25                     
|                                                     
|Weighted average number of shares (000s)              | 
|Basic                                                 |  | 91,078                    
|                                                     
|Diluted                                               |  | 93,897                    
|                                                     

(See accompanying notes)

3

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

|                                                    |  | May 31,2005 |   | February 28,2005 |  
|--------------------------------------------------- |  | ----------- | - | ---------------- | -
|                                                   
|Assets                                              |  |             |   | (Note 1)         |  
|Current assets                                      | 
|Cash and cash equivalents                           |  | $377,426    |   | $   378,348      |  
|Short-term investments                              |  | 118,610     |   | 144,552          |  
|Accounts receivable                                 |  | 138,974     |   | 189,602          |  
|Prepaid expenses and other current assets           |  | 17,150      |   | 18,941           |  
|Deferred tax assets                                 |  | 2,238       |   | 3,856            |  
|                                                   
|                                                    |  | 654,398     |   | 735,299          |  
|Fixed assets, net                                   |  | 71,377      |   | 73,566           |  
|Intangible assets, net                              |  | 25,657      |   | 27,234           |  
|Other assets                                        |  | 6,107       |   | 6,378            |  
|Goodwill                                            |  | 221,359     |   | 221,490          |  
|                                                   
|                                                    |  | $978,898    |   | $1,063,967       |  
|                                                   
|Liabilities                                         | 
|Current liabilities                                 | 
|Accounts payable                                    |  | $  21,982   |   | $     30,705     |  
|Accrued charges                                     |  | 22,051      |   | 31,047           |  
|Salaries, commissions, and related items            |  | 52,574      |   | 91,010           |  
|Income taxes payable                                |  | 2,657       |   | 21,148           |  
|Deferred revenue                                    |  | 200,852     |   | 217,153          |  
|                                                   
|                                                    |  | 300,116     |   | 391,063          |  
|Deferred income taxes                               |  | 11,561      |   | 17,083           |  
|                                                   
|                                                    |  | 311,677     |   | 408,146          |  
|                                                   
|Stockholders Equity                                | 
|Capital stock                                       | 
|Common shares and additional paid-in capital        | 
|(May 31, 2005  90,981,065;                         | 
|February 28, 2005  91,070,967)                     |  | 262,896     |   | 252,561          |  
|Treasury shares                                     | 
|(May 31, 2005  36,978; February 28, 2005  46,375) |  | (894        | ) | (1,199           | )
|Deferred stock-based compensation                   |  | (109        | ) | (277             | )
|Retained earnings                                   |  | 402,258     |   | 402,020          |  
|Accumulated other comprehensive income              |  | 3,070       |   | 2,716            |  
|                                                   
|                                                    |  | 667,221     |   | 655,821          |  
|                                                   
|                                                    |  | $978,898    |   | $1,063,967       |  
|                                                   

(See accompanying notes)

4

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

|                                                                  |  | Three months ended May 31, |  
|----------------------------------------------------------------- |  | -------------------------- | -
|                                                                 
|                                                                  |  | 2005                       |  
|                                                                 
|Cash flows from operating activities                              |  |                            |  
|Net income                                                        |  | $  23,825                  |  
|Non-cash items                                                    | 
|Depreciation and amortization                                     |  | 7,165                      |  
|Amortization of deferred stock-based compensation                 |  | 168                        |  
|Amortization of other deferred compensation                       |  | --                         |  
|Deferred income taxes                                             |  | (3,889                     | )
|Loss on disposal of fixed assets                                  |  | 87                         |  
|                                                                 
|                                                                  |  | 27,356                     |  
|Change in non-cash working capital                                | 
|Decrease in accounts receivable                                   |  | 46,835                     |  
|Decrease in prepaid expenses and other current assets             |  | 1,423                      |  
|Decrease in accounts payable                                      |  | (8,043                     | )
|Decrease in accrued charges                                       |  | (8,003                     | )
|Decrease in salaries, commissions, and related items              |  | (36,133                    | )
|Decrease in income taxes payable                                  |  | (17,943                    | )
|Decrease in deferred revenue                                      |  | (10,825                    | )
|                                                                 
|Net cash provided by (used in) operating activities               |  | (5,333                     | )
|                                                                 
|Cash flows from investing activities                              | 
|Maturity of short-term investments                                |  | 127,925                    |  
|Purchase of short-term investments                                |  | (101,983                   | )
|Additions to fixed assets                                         |  | (4,756                     | )
|Additions to intangible assets                                    |  | (245                       | )
|Decrease in other assets                                          |  | 245                        |  
|Acquisition costs, net of cash and cash equivalents               |  | 131                        |  
|                                                                 
|Net cash provided by investing activities                         |  | 21,317                     |  
|                                                                 
|Cash flows from financing activities                              | 
|Issue of common shares                                            |  | 12,307                     |  
|Repurchase of shares                                              |  | (25,254                    | )
|                                                                 
|Net cash provided by (used in) financing activities               |  | (12,947                    | )
|                                                                 
|Effect of exchange rate changes on cash                           |  | (3,959                     | )
|                                                                 
|Net increase (decrease) in cash and cash equivalents              |  | (922                       | )
|Cash and cash equivalents, beginning of period                    |  | 378,348                    |  
|                                                                 
|Cash and cash equivalents, end of period                          |  | 377,426                    |  
|Short-term investments, end of period                             |  | 118,610                    |  
|                                                                 
|Cash, cash equivalents, and short-term investments, end of period |  | $496,036                   |  
|                                                                 

(See accompanying notes)

5

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

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

| | The
accompanying unaudited consolidated financial statements have been prepared by the
Corporation in United States (U.S.) dollars and in accordance with generally
accepted accounting principles (GAAP) in the U.S. with respect to interim
financial statements, applied on a 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 Recognitionas amended by SOP No. 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 each element of the contract based on vendor specific
objective evidence (VSOE) of the fair value of the elements 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, and that 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

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COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
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 United States
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, Share-based Payment,
(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 endedMay 31,
| | --------------------------------------------------------------------- |  | -------------------------
| |                                                                      
| |                                                                       |  | 2005                     
| |                                                                      
| | Net income:                                                           |  |                          
| | As reported                                                           |  | $23,825                  
| | Add:
Stock-based employee compensation included above                 |  | 168                      
| | Less:
Stock-based employee compensation using fair value based method |  | (3,621                   
| |                                                                      
| | Pro forma                                                             |  | $20,372                  
| |                                                                      
| | Basic net income per share:                                           | 
| | As reported                                                           |  | $0.26                    
| | Add: Stock-based employee compensation included above                 |  | --                       
| | Less:
Stock-based employee compensation using fair value based method |  | (0.04                    
| |                                                                      
| | Pro forma                                                             |  | $0.22                    
| |                                                                      
| | Diluted net income per share:                                         |  |                          
| | As reported                                                           |  | $0.25                    
| | Add: Stock-based employee compensation
included above                 |  | --                       
| | Less:
Stock-based employee compensation using fair value based method |  | (0.03                    
| |                                                                      
| | Pro forma                                                             |  | $0.22                    
| |                                                                      
| | Weighted average number of shares:                                    | 
| | Basic                                                                 |  | 91,078                   
| |                                                                      
| | Diluted                                                               |  | 93,897                   
| |                                                                      

8

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COGNOS INCORPORATEDCONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) (All amounts in United States
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-month period ended May 31, 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 endedMay 31, |  
| | -------------------------------- |  | ------------------------- | -
| |                                 
| |                                  |  | 2005                      |  
| |                                 
| |                                  |  | Binomial Lattice          |  
| | Risk-free interest rates         |  | 4.2                       | %
| | Expected volatility              |  | 35                        | %
| | Dividend yield                   |  | 0                         | %
| | Expected life of options (years) |  | 3.7                       |  

| | For
purposes of the pro forma disclosures, the expected volatility assumptions used by the
Corporation prior to this fiscal period 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 months ended May 31, 2005, there was a reduction to goodwill of $131,000
resulting from fair value adjustments to accounts receivable in the purchase price
allocation for Frango AB (Frango). For the three months ended May 31, 2004,
there were no adjustments to goodwill.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                   |  | Three months ended May 31,
| | ----------------- |  | --------------------------
| |                  
| |                   |  | 2005                      
| |                  
| |                   |  | ($000s)                   
| | Beginning balance |  | $221,490                  
| | Adjustments       |  | (131                      
| |                  
| | Closing balance   |  | $221,359                  
| |                  

9

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

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

| |                           |  | As at May 31,2005 | As at February 28,2005 
| | ------------------------- |  | ----------------- | -----------------------
| |                          
| |                           |  | Cost              | AccumulatedAmortization
| |                          
| |                           |  | ($000s)           | ($000s)                
| | Acquired technology       |  | $ 40,419          |                        
| | Contractual relationships |  | 9,608             |                        
| | Trademarks and patents    |  | 4,842             |                        
| |                           |  |                   |                        
| |                           |  | 54,869            |                        
| |                           |  |                   |                        
| |                           |  | (29,212           | )                      
| |                           |  |                   |                        
| | Net book value            |  | $ 25,657          |                        
| |                           |  |                   |                        

| | During
the three months ended May 31, 2005 and May 31, 2004, there were additions to trademarks
and patents in the amount of $245,000 and $70,000, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of intangible assets was $1,822,000 and $1,372,000 in the quarters ended May 31, 2005
and May 31, 2004, respectively. For the three months ended May 31, 2005, $1,637,000 is
included in amortization of acquisition-related intangible assets and $185,000 is included
in selling, general, and administrative expenses. For the three months ended May 31, 2004,
$1,236,000 is included in amortization of acquisition-related intangible assets and
$136,000 is included in selling, general, and administrative expenses. The estimated
amortization expense related to intangible assets is as follows ($000s):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2006 (Q2 to Q4) |  | $5,435 | 
| |  | --------------- |  | ------ | 
| |  | 2007            |  | 7,145  | 
| |  | 2008            |  | 6,491  | 
| |  | 2009            |  | 2,966  | 
| |  | 2010            |  | 2,184  | 
| |  | 2011            |  | 1,436  | 

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

10

---

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

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

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

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

| | The
Corporation estimates its effective tax rate for the fiscal year to be 21%, exclusive of
any one-time events. This estimated effective tax rate was reduced for the three-month
period ended May 31, 2005 to 12% due to the recognition of one-time benefits resulting
from (i) a tax court decision that allowed corporations to claim investment tax credits on
stock-based compensation for research and development personnel relating to fiscal years
2004 and 2005 and (ii) a change in tax withholding legislation relating to one of the
Corporations subsidiaries. For the three months ended May 31, 2004, the Corporation
estimated its effective tax rate for fiscal 2005 to be 21% and no adjustment was made.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Corporation issued 527,000 common shares, for proceeds of $12,307,000 during the three
months ended May 31, 2005, and issued 635,000 shares for proceeds of $10,289,000 during
the three months ended May 31, 2004. The issuance of shares in the three months ended May
31, 2005 was pursuant to the Corporations stock purchase plan and the exercise of
stock options by employees, officers, and directors. The issuance of shares in the three
months ended May 31, 2004 was pursuant to the Corporations stock purchase plan and
the exercise of stock options by employees and officers. During the three months ended May
31, 2005 and May 31, 2004, the Corporation repurchased 617,000 shares at a value of
$25,254,000 and 300,000 shares at a value of $9,989,000, respectively. The shares
repurchased during both periods were made in the open market under the Corporations
share repurchase program.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

COGNOS INCORPORATED 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)
(All amounts in United States 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 endedMay 31,
| | ------------------------------------------------------ |  | -------------------------
| |                                                       
| |                                                        |  | 2005                     
| |                                                       
| | Basic Net Income per Share                             |  |                          
| | Net income                                             |  | $23,825                  
| |                                                       
| | Weighted average number of shares outstanding          |  | 91,078                   
| |                                                       
| | Basic net income per share                             |  | $0.26                    
| |                                                       
| | Diluted Net Income per Share                           | 
| | Net income                                             |  | $23,825                  
| |                                                       
| | Weighted average number of shares outstanding          |  | 91,078                   
| | Dilutive effect of stock options                       |  | 2,819                    
| |                                                       
| | Adjusted weighted average number of shares outstanding |  | 93,897                   
| |                                                       
| | Diluted net income per share                           |  | $0.25                    
| |                                                       

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

12

---

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

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

| |                                                              |  | Three months endedMay 31,
| | ------------------------------------------------------------ |  | -------------------------
| |                                                             
| |                                                              |  | 2005                     
| |                                                             
| | Net Income                                                   |  | $23,825                  
| | Other comprehensive income (loss):                           | 
| | Foreign currency translation adjustments                     |  | 590                      
| | Change  in  net  unrealized  loss  on derivative instruments |  | (236                     
| |                                                             
| | Comprehensive income                                         |  | $24,179                  
| |                                                             

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

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

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

| | 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 plan is not yet finalized 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

COGNOS INCORPORATED 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)
(All amounts in United States 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 three-month period ended May 31, 2005: ($000s)
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| |                                                       |  | Employeeseparations | Otherrestructuringaccruals | Total accrual
| | ----------------------------------------------------- |  | ------------------- | -------------------------- | -------------
| |                                                      
| | Balance as at February 28, 2005                       |  | $2,913              |                            | $2,261       
| | Cash payments during the first quarter of fiscal 2006 |  | (735                | )                          | (148         
| | Foreign exchange adjustment                           |  | (191                | )                          | (129         
| |                                                      
| | Balance as at May 31, 2005                            |  | $1,987              |                            | $1,984       
| |                                                      

|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 different 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The Corporation is currently evaluating SAB 107 and will be incorporating it
as part of its adoption of SFAS 123R.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

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

| | In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections(SFAS 154) which supersedes APB Opinion No. 20, Accounting Changesand
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 has had
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 providing 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

COGNOS INCORPORATED 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)
(All amounts in United States 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               |  | May 31, 2005 | February 28, 2005
| | -------------------------- |  | ------------ | -----------------
| |                           
| |                            |  | U.S. GAAP    |                  
| |                           
| | Current assets             |  | $654,398     |                  
| | Fixed assets, net          |  | 71,377       |                  
| | Intangible assets, net     |  | 25,657       |                  
| | Other assets               |  | 6,107        |                  
| | Goodwill                   |  | 221,359      |                  
| |                           
| | Total Assets               |  | $978,898     |                  
| |                           
| | Current liabilities        |  | $300,116     |                  
| | Deferred income taxes      |  | 11,561       |                  
| | Common shares and          | 
| | additional paid-in capital |  | 262,896      |                  
| | Treasury shares            |  | (894         | )                
| | Deferred stock-based       | 
| | compensation               |  | (109         | )                
| | Retained earnings          |  | 402,258      |                  
| | Accumulated other          | 
| | comprehensive income       |  | 3,070        |                  
| |                           
| | Total Liabilities and      | 
| | Stockholders Equity       |  | $978,898     |                  
| |                           

16

---

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

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

| |                                                               |  | Three
Months Ended May 31,
| | ------------------------------------------------------------- |  | --------------------------
| |                                                              
| | $000s except per share amounts                                |  | 2005                      
| |                                                              
| | Net income under U.S. GAAP                                    |  | $23,825                   
| | Amortization of acquired in-process technology                |  | (250                      
| | Deferred taxes on acquired in-process technology amortization |  | 100                       
| | Stock-based compensation                                      |  | (3,914                    
| | Tax impact of stock-based compensation                        |  | 461                       
| |                                                              
| | Net income under Canadian GAAP                                |  | $20,222                   
| |                                                              
| | Net income per share under Canadian GAAP                      | 
| | Basic                                                         |  | $0.22                     
| |                                                              
| | Diluted                                                       |  | $0.22                     
| |                                                              
| | Weighted average number of shares (000s)                      | 
| | Basic                                                         |  | 91,078                    
| |                                                              
| | Diluted                                                       |  | 93,897                    
| |                                                              

| | 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
$250,000 for both the three months ended May 31, 2005 and May 31, 2004, compared to U.S.
GAAP.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

COGNOS INCORPORATED 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)
(All amounts in United States 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 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 May 31, 2005 and May 31, 2004 was to decrease income before taxes by
$3,914,000 and $3,651,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 common shares and 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 $100,000 for both the three months ended May
31, 2005 and May 31, 2004, 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 $461,000 and
$427,000 for the three months ended May 31, 2005 and May 31, 2004, respectively, as
compared to U.S. GAAP.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 May 31, 2005 and
February 28, 2005, there was $584,000 and $348,000, respectively, included in OCI
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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 to be deducted from the income tax provision. The impact of this difference
was to increase net income before taxes and the income tax provision by $5,500,000 and
$3,014,000 for the three months ended May 31, 2005 and May 31, 2004, respectively, with no
resulting impact to net income, compared to U.S. GAAP.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

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 future
revenues and earnings; drivers of revenue growth; 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; purchasing environment; larger
transactions and changes in buying cycle; new product introductions/development and
customer reaction and acceptance of such products, including the Cognos ReportNet product
and Cognos 8 Business Intelligence; market positioning and conditions, business model and
technology strategies and execution; the growth, strategic importance and acceptance of
corporate performance management, business intelligence and solution standardization; our
deployment of resources to expand our direct and indirect sales activities; our
relationships with system integrators and the importance of those relationships; our use
of subcontractors; increases in enterprise-wide deployments; and our anticipated capital
requirements and working capital needs. 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 maintain or accurately
forecast revenue growth or to anticipate and accurately forecast a decline in revenue from
any of our products or services; a continuing increase in the number of larger customer
transactions and the potential for a related lengthening of sales cycles; our ability to
compete in an intensely competitive market; our ability to develop and introduce new
products and enhancements on schedule 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; our ability to identify, hire, train, motivate, and retain highly
qualified management and other key personnel; continued BI market consolidation and other
competitive changes in the BI market; fluctuations in our quarterly and annual operating
results; currency fluctuations; fluctuations in our tax exposure; the impact of global
economic conditions on our business; 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; our ability to identify, pursue, and complete
acquisitions with desired business results; and the existence of regulatory barriers to
integration; 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.

19

---

# ABOUT
COGNOS

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,
analytical applications, and performance management 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 for BI and CPM
solutions. These related services include product support, education, and consulting. We
generally license software and provide services subject to terms and conditions consistent
with industry standards. For an annual fee, customers may contract with us for product
support, which includes product and documentation enhancements, as well as tele-support
and web-support.

# OVERVIEW OF THE
QUARTER

We posted solid results for the first
quarter of fiscal 2006 including 15% growth in revenue and 18% growth in net income
compared to the first quarter of the prior fiscal year. The quarter was marked by modest
license revenue growth, consistently strong support renewal performance and a strong
quarter for professional services. We continued to prudently manage expenses in what is
seasonally our most challenging quarter.

# Operating Performance

Revenue for the three month period
ended May 31, 2005 was $200.1 million, an increase of 15% from $173.6 million for the
corresponding period last year. The increase in revenue during the first quarter of fiscal
2006 is partially attributable to increased product support, as we expand our customer base and
continue to experience solid renewal rates. Services revenue also contributed to this
growth as we delivered on our commitments from the fourth quarter of fiscal 2005. In
addition, license revenue increased 8% to $71.1 million, compared with $66.1 million in
the first quarter of fiscal 2005.

Net income for the three month period
ended May 31, 2005 was $23.8 million or $0.25 per share compared to net income of $20.1
million or $0.22 per share for the same period last year. The increase in net income for
the quarter is due to increased gross margin resulting from the overall increase in
revenue combined with higher interest revenue on our investment portfolio and a lower tax
rate for the quarter when compared to the same period last fiscal year. This increase was
partially offset by increased ongoing expenses resulting from our acquisition of Frango and our
investments in head count and systems to support our future growth.

Our balance sheet remains strong,
ending the quarter with $496.0 million in cash, cash equivalents, and short-term
investments. This represents a decrease of $26.9 million from February 28, 2005, primarily
attributable to cash payments for compensation related to our fiscal 2005 performance,
certain tax liabilities, and the repurchase of our shares on the open market.

20

---

We signed six contracts in excess of
one million dollars during the quarter, compared with eight contracts in the corresponding
period last year. This decline was a result of us closing fewer large transactions late in
the quarter. There is no single reason for this as each customer situation was unique. The
number of contracts greater than $200,000 and greater than $50,000 signed during the
quarter continues to increase. The number of contracts greater than $200,000 and $50,000
increased 14% and 17%, respectively, compared to the corresponding period last year. We
believe this increase is evidence of the continuing growth and deepening strategic
importance of BI within our customers businesses.

# Economic and Market
Factors

Our growth in revenue is primarily
attributable to the growing market for BI and CPM which is driven by three main market
factors: (1) a desire by enterprises to standardize on one BI platform, (2) systems
investment within the Office of Finance driven by the increasing importance of compliance
and transparency, and (3) a growing focus on CPM.

In our view, BI and CPM continue to
be leading priorities within IT and Finance budgets and businesses want to standardize on
one BI platform. As organizations place increased attention on compliance and
transparency, they want to replace spreadsheet-based applications and legacy systems with
single instance planning, consolidation, and financial reporting solutions that reduce the
effort and cost of compliance. Further, CPM is a growing segment in the software industry,
blending BI with planning, budgeting, and scorecarding to provide management performance
visibility and support for the corporate decision-making process.

# Outlook for the balance of the fiscal
year

We believe that BI standardization,
the systems investment within the Office of Finance, and CPM will continue to be among the
key driving forces of our revenue growth for the remainder of this fiscal year. As an
organization, we will continue to focus on building stronger relationships with our
customers and our partners in order to capitalize on these trends. To further our revenue
growth, we expect to also deliver innovative new products to the market. Specifically, in
the third quarter of fiscal 2006, we expect to release a new generation of our Enterprise
Business Intelligence Series, Cognos 8 Business Intelligence, which includes Cognos
ReportNet, PowerPlay, Cognos Metrics Manager, and DecisionStream. This new release will
continue to expand the capability of our new platform and allow our customers to expand
their BI deployment. In the upcoming months, we also
expect to launch new releases of Cognos Controller and Cognos Planning.

Our outlook for the balance of fiscal
2006 remains positive. In our view, our position in the market, our product offering, and
our opportunity remain healthy.

21

---

# RESULTS OFOPERATIONS

|(000s, except per share amounts) | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|-------------------------------- | ------------------------- | ------------------------------------------
|                                
|                                 | 2005                      | 2004                                      
|                                
|Revenue                          |                           | $200,075                                  
|Cost of revenue                  |                           | 42,194                                    
|                                 |                          
|Gross margin                     |                           | 157,881                                   
|Operating expenses               |                           | 133,524                                   
|                                 |                          
|Operating income                 |                           | $  24,357                                 
|                                 |                           |                                           
|Gross margin percentage          |                           | 78.9                                      
|Operating margin percentage      |                           | 12.2                                      
|                                 |                           |                                           
|Net income                       |                           | $  23,825                                 
|                                 |                          
|Basic net income per share       |                           | $0.26                                     
|                                 |                          
|Diluted net income per share     |                           | $0.25                                     
|                                 |                          

Revenue for the quarter ended May 31,
2005 was $200.1 million, a 15% increase from revenue of $173.6 million for the same
quarter last year. Net income for the current quarter was $23.8 million, compared to net
income of $20.1 million for the same quarter last year. Diluted net income per share was
$0.25 for the current quarter, compared to diluted net income per share of $0.22 for the
same quarter last year. Basic net income per share was $0.26 and $0.22 for the quarters
ended May 31, 2005 and May 31, 2004, respectively.

Gross margin for the quarter ended
May 31, 2005 was $157.9 million, an increase of 12% over gross margin of $140.3 million
for the same quarter last year. Gross margin percentage was 79% for the quarter ended May
31, 2005 as compared to 81% for the corresponding quarter last fiscal year. Total
operating expenses for the quarter ended May 31, 2005 were $133.5 million, a 15% increase
from operating expenses of $116.2 million for the same quarter last year. Operating income
for the quarter ended May 31, 2005 was $24.4 million, compared to operating income of
$24.1 million in the same quarter last year. The operating margin for the quarter ended
May 31, 2005 was 12% as compared to 14% for the comparative quarter of the previous fiscal
year.

The increase in net income for the
quarter is due to increased gross margin resulting from the overall increase in revenue
combined with higher interest revenue on our investment portfolio and a lower tax rate for
the quarter when compared to the same period last fiscal year. This increase was partially
offset by increased ongoing expenses resulting from our acquisition of Frango and our investments in
head count and systems to support our future growth.

22

---

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

|                                       | Three Months Ended May 31,2005 over 2004
|-------------------------------------- | ----------------------------------------
|                                      
|                                       | Growth ExcludingForeign Exchange        
|                                      
|Revenue                                |                                         
|Cost of Revenue and Operating Expenses |                                         
|Operating Income                       |                                         

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

|                                                      | Percentage of Revenue     | Percentage Change        
|----------------------------------------------------- | ------------------------- | -------------------------
|                                                     
|                                                      | Three months endedMay 31, | Three months endedMay 31,
|                                                      | 2005                      |                          
|                                                     
|Revenue                                               |                           | 100.0                    
|                                                      |                          
|Cost of revenue                                       |                           | 21.1                     
|                                                      |                          
|Gross margin                                          |                           | 78.9                     
|                                                      |                          
|Operating expenses                                    |                          
|Selling, general, and administrative                  |                           | 51.5                     
|Research and development                              |                           | 14.4                     
|Amortization of acquisition-related intangible assets |                           | 0.8                      
|                                                      |                          
|Total operating expenses                              |                           | 66.7                     
|                                                      |                          
|Operating income                                      |                           | 12.2                     
|Interest and other expenses                           |                           | (0.2                     
|Interest income                                       |                           | 1.6                      
|                                                      |                          
|Income before taxes                                   |                           | 13.6                     
|Income tax provision                                  |                           | 1.7                      
|                                                      |                          
|Net income                                            |                           | 11.9                     
|                                                      |                          

23

---

REVENUE

|($000s)         | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------- | ------------------------- | ------------------------------------------
|               
|                | 2005                      | 2004                                      
|               
|Product License |                           | $  71,146                                 
|Product Support |                           | 88,505                                    
|Services        |                           | 40,424                                    
|                |                          
|Total Revenue   |                           | $200,075                                  
|                |                          

Our total revenue was $200.1 million
for the quarter ended May 31, 2005, an increase of $26.5 million or 15% compared to the
quarter ended May 31, 2004. Our total revenue was derived primarily from our suite of BI
products, principally Cognos ReportNet, PowerPlay®, and Cognos Planning.
Contributing to a lesser extent were Impromptu®, Cognos DecisionStream, Cognos Metrics
Manager, Cognos Analytic Applications, Cognos Controller, Cognos Visualizer, Cognos
Finance, and NoticeCast®.

Industry Trends and
Geographic Information

Our growth in revenue is primarily
attributable to the growing market for BI and CPM which is driven by three main market
factors: (1) a desire by enterprises to standardize on one BI platform, (2) systems
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 and understand the data from those applications. In particular,
businesses want to standardize on one BI platform to reduce the number of platforms and
vendors they support and better align their operations with their strategy. The breadth
and depth of functionality of Cognos ReportNet, our web-based query and reporting
solution, make it the solution of choice. We also believe that Cognos ReportNet combined
with Cognos PowerPlay offer companies a single platform for driving their performance
throughout their organization.

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 want 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 want 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 and towards overall performance
goals and CPM. We believe that our planning and consolidation products help improve the
accuracy, transparency, and timeliness of financial information 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, budgeting, and scorecarding to provide
management performance visibility and support for the corporate decision-making process.
We believe that our market-leading BI, planning, and scorecarding products, along with the
recent addition of Cognos Controller, our consolidation product, 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.

24

---

Although, compared to the same period
last year, contracts greater than $1 million decreased during the quarter, we are still
experiencing an increase in the number of contracts greater than $200,000 and $50,000. We
are seeing an increase in enterprise-wide deployments of BI products and a strengthening
of our relationships with some of the worlds largest companies, and with our
strategic partners. We believe that the growth in license orders greater than $50,000 that
we are experiencing is an indication of enterprisescale investment in our products
by our customers which has created a foundation for future growth. Management uses the
following summary of key revenue indicators to track order size:

Key Revenue Indicators

|                                                    | Three months ended May 31,
|--------------------------------------------------- | --------------------------
|                                                   
|                                                    | 2005                      
|                                                   
|Orders (License, Support, Services)                 |                           
|Transactions greater than $1 million                |                           
|Transactions greater than $200,000                  |                           
|Transactions greater than $50,000                   |                           
|Average selling price (License Orders Only) ($000s) |                           
|Greater than $50,000                                |                           

The overall change in total revenue
from our three revenue categories in the quarter ended May 31, 2005 from May 31, 2004
was as follows: an 8% increase in product license revenue, an 18% increase in product
support revenue, and a 23% increase in 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 period.

|($000s)      | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------ | ------------------------- | ------------------------------------------
|            
|             | 2005                      | 2004                                      
|            
|The Americas |                           | $115,516                                  
|Europe       |                           | 66,461                                    
|Asia/Pacific |                           | 18,098                                    
|             |                          
|Total        |                           | $200,075                                  
|             |                          

25

---

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

|             | Three months endedMay 31,
|------------ | -------------------------
|            
|             | 2005                     
|            
|The Americas |                          
|Europe       |                          
|Asia/Pacific |                          
|             |                          
|Total        |                          
|             |                          

The growth rates of our revenue in
Europe, Asia/Pacific and, to a much lesser extent, in the Americas were affected by
foreign exchange rate fluctuations. The following table breaks down the year-over-year
percentage change in revenue for the quarter ending May 31, 2005 by geographic area
between change attributable to growth and change due to fluctuations in the value of the
U.S. dollar.

|             | Three Months Ended May 31,2005 over 2004
|------------ | ----------------------------------------
|            
|             | Growth ExcludingForeign Exchange        
|            
|The Americas |                                         
|Europe       |                                         
|Asia/Pacific |                                         
|Total        |                                         

The growth rate of our revenue in the
Americas during the three months ended May 31, 2005 was mostly attributable to increases
in volume and size of transactions as there was only a slight impact from fluctuations in
foreign currencies, predominantly the Canadian dollar. We experienced moderate revenue growth in the Americas and our
revenue in Europe and Asia/Pacific continues to grow as we invest in our sales and
distribution channels in all three geographic regions. As indicated by the above table, the weakening of
the U.S. dollar in relation to various currencies in Europe and Asia/Pacific positively
impacted the growth rates in those regions for the quarter although to a lesser extent
than the corresponding period last year. Changes in the valuation of the U.S. dollar
relative to other currencies will continue to impact our revenue in the future.

Product License Revenue

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2005                      | 2004                                      
|                           
|Product license revenue     |                           | $71,146                                   
|Percentage of total revenue |                           | 35.6                                      

26

---

Product license revenue was $71.1
million in the quarter ended May 31, 2005, an increase of $5.1 million or 8% over the
corresponding period last year. The increase in product license revenue during the quarter
reflects the continued strength of our product offering to the BI market and the Office of
Finance, including Cognos ReportNet and Cognos Planning. Exchange rate fluctuations
relative to the U.S. dollar also positively impacted license revenue by approximately 2%
during the quarter compared to the prior fiscal year. Product license revenue accounted
for 36% of total revenue for the three months ended May 31, 2005 as compared to 38% for
the comparative quarter of the previous fiscal year.

The breadth of our solution is also
allowing us to develop long-term strategic relationships with our customers which, in
turn, enables us to generate additional software licensing and ongoing maintenance
renewals. These relationships are a significant asset as approximately 68% of our license
revenue came from existing customers in the three-month period ended May 31, 2005.

We license our software through our
direct sales force and third-party channels including resellers, value-added resellers,
and OEMs. Total product license revenue for the quarter from direct sales was $48.6
million compared to $48.5 million in the corresponding period last fiscal year. Direct
sales accounted for approximately 68% and 73% of our license revenue for the first quarter
of fiscal 2006 and 2005, 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 important, we believe that our
relationships with systems integrators will help us succeed in the large enterprise market
as the role of systems integrators in large standardization environments is increasing. We
are also expending resources developing our indirect sales activities in order to have
coverage in every market. We will continue to commit management time and financial
resources to developing relationships with systems integrators and direct and indirect
international sales and support channels.

Product Support Revenue

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2005                      | 2004                                      
|                           
|Product support revenue     |                           | $88,505                                   
|Percentage of total revenue |                           | 44.2                                      

Product support revenue was $88.5
million in the quarter ended May 31, 2005, an increase of $13.7 million or 18% compared to
the corresponding period in the prior fiscal year. The increase was the result of the
strong rate of renewal of our support contracts and the expansion of our customer base.
Exchange rate fluctuations also favorably impacted product support revenue by
approximately 3% during the quarter.

Product support revenue accounted for
44% of our total revenue in the quarter ended May 31, 2005 as compared to 43% for the
comparative quarter of the previous fiscal year.

27

---

Services Revenue

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2005                      | 2004                                      
|                           
|Services revenue            |                           | $40,424                                   
|Percentage of total revenue |                           | 20.2                                      

Services revenue (training,
consulting, and other revenue) was $40.4 million in the quarter ended May 31, 2005, an
increase of $7.7 million or 23% compared to the corresponding period in the prior fiscal
year. Services revenue accounted for 20% of our total revenue for the three months ended
May 31, 2005 as compared to 19% for the comparative quarter of the previous fiscal year.

The increase was primarily
attributable to an increase in consulting revenue as we delivered on our commitments on
contracts entered into in the fourth quarter of fiscal 2005. Exchange rate fluctuations
also favorably impacted services revenue by approximately 3% for the quarter.

COST
OFREVENUE

Cost of Product License

|($000s)                       | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------- | ------------------------- | ------------------------------------------
|                             
|                              | 2005                      | 2004                                      
|                             
|Cost of product license       |                           | $1,222                                    
|Percentage of license revenue |                           | 1.7                                       

For the three months ended May 31,
2005, the cost of product license revenue was $1.2 million, an increase of $0.6 million or
97% compared to the corresponding period in the prior fiscal year. These costs represented
2% of product license revenue for the quarter ended May 31, 2005, as compared to 1% of
product license revenue for the quarter ended May 31, 2004.

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:

28

---

|($000s)                     | Year-over-yearChangefrom May 31,
|--------------------------- | --------------------------------
|                           
|                            | 2004 to2005                     
|                           
|Royalty cost                |                                 
|Other                       |                                 
|                           
|Total year-over-year change |                                 
|                           

The increase in these costs was the
result of increases in royalties with our technology OEM suppliers.

Cost of Product Support

|($000s)                       | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------- | ------------------------- | ------------------------------------------
|                             
|                              | 2005                      | 2004                                      
|                             
|Cost of product support       |                           | $8,882                                    
|Percentage of support revenue |                           | 10.0                                      

The cost of product support revenue was
$8.9 million, an increase of $1.7 million or 24% in the quarter ended May 31, 2005
compared to the corresponding period in the prior fiscal year. The cost of product support
represented 10% of total product support revenue for both the quarters ended May 31, 2005
and May 31, 2004.

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

|($000s)                     | Year-over-yearChangefrom May 31,
|--------------------------- | --------------------------------
|                           
|                            | 2004 to2005                     
|                           
|Staff-related costs         |                                 
|Other                       |                                 
|                           
|Total year-over-year change |                                 
|                           

The increase in the cost of product
support for the three months ended May 31, 2005 was primarily the result of increases in
staff-related costs to service our growing customer base. Contributing further to the
increase was the addition of Frango staff into our support organization. The average
number of employees within the support organization increased 19% from one year ago. The
unfavorable effect of fluctuations of foreign currencies relative to the U.S. dollar
increased cost of product support by approximately 8% for the quarter.

29

---

Cost of Services

|($000s)                       | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------- | ------------------------- | ------------------------------------------
|                             
|                              | 2005                      | 2004                                      
|                             
|Cost of services              |                           | $32,090                                   
|Percentage of service revenue |                           | 79.4                                      

The cost of services was $32.1
million, an increase of $6.6 million or 26% in the quarter ended May 31, 2005 compared to
the corresponding period in the prior fiscal year. The cost of services increased as a
percentage of services revenue, representing 79% for the quarter ended May 31, 2005
as compared to 78% for the corresponding period in the prior fiscal year.

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

|($000s)                       |  | Year-over-year    Change     from May 31,
|----------------------------- |  | -----------------------------------------
|                             
|                              |  | 2004 to2005                              
|                             
|Staff-related costs           |  | $2,816                                   
|Services purchased externally |  | 3,042                                    
|Staff development costs       |  | 600                                      
|Other                         |  | 157                                      
|                             
|Total year-over-year change   |  | $6,615                                   
|                             

The increase in cost of services for
the three months ended May 31, 2005 was primarily attributable to increases in
staff-related costs, including the addition of Frango personnel and the recent investment
in additional staff, and services purchased externally. 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 fill any gaps by engaging subcontractors. Also
contributing to the increase were increases in staff development costs. The average number
of employees within the services organization increased 24% from the previous fiscal year.
The unfavorable effect of fluctuations of foreign currencies increased cost of services by
approximately 2% for the quarter as a portion of these services are provided in currencies
other than the U.S. dollar.

30

---

# OPERATING
EXPENSES

# Selling, General, and
Administrative

|($000s)                              | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------------------------------ | ------------------------- | ------------------------------------------
|                                    
|                                     | 2005                      | 2004                                      
|                                    
|Selling, general, and administrative |                           | $103,013                                  
|Percentage of total revenue          |                           | 51.5                                      

Selling, general, and administrative
(SG&A) expenses were $103.0 million, an increase of $12.4 million or 14%
in the quarter ended May 31, 2005, compared to the corresponding period in the prior
fiscal year. These costs decreased as a percentage of revenue, representing 51% for the
three months ended May 31, 2005 compared to 52% for the corresponding period in the prior
fiscal year.

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

|($000s)                     |  | Year-over-year    Change     from May 31,
|--------------------------- |  | -----------------------------------------
|                           
|                            |  | 2004 to 2005                             
|                           
|Staff-related costs         |  | $  7,730                                 
|Facilities costs            |  | 1,532                                    
|Subcontractors              |  | 808                                      
|Other                       |  | 2,298                                    
|                           
|Total year-over-year change |  | $12,368                                  
|                           

The increase in SG&A expenses for
the three-month period ended May 31, 2005 was predominantly the result of increases in
staff related costs resulting from increases in compensation, as well as associated
benefits compared to the previous fiscal year, including the addition of Frango employees.
In addition, we incurred increased facilities and subcontractor costs. The average number
of employees within SG&A increased by 13% in fiscal 2005 from the previous fiscal
year. The unfavorable effect of fluctuations of foreign currencies relative to the U.S.
dollar increased SG&A expenses by approximately 4% during the quarter.

31

---

# Research and Development

|($000s)                     | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------- | ------------------------- | ------------------------------------------
|                           
|                            | 2005                      | 2004                                      
|                           
|Research and development    |                           | $28,874                                   
|Percentage of total revenue |                           | 14.4                                      

Research and development
(R&D) expenses were $28.9 million, an increase of $4.5 million or 19% in
the quarter ended May 31, 2005, compared to the corresponding period in the prior fiscal
year. R&D costs were 14% of revenue for both the quarters ended May 31, 2005 and May
31, 2004.

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    Change     from May 31,
|--------------------------- |  | -----------------------------------------
|                           
|                            |  | 2004 to 2005                             
|                           
|Staff-related costs         |  | $3,416                                   
|Other                       |  | 1,133                                    
|                           
|Total year-over-year change |  | $4,549                                   
|                           

The increase in R&D expenses for
the three months ended May 31, 2005 was predominantly the result of increases in staff
related costs resulting from increases in salaries as well as associated benefits as
compared to the previous fiscal year, including the integration of Frango employees. The
average number of employees within R&D increased by 7% from the previous fiscal year.
The unfavorable effect of fluctuations of foreign currencies relative to the U.S. dollar
increased R&D expenses by approximately 7% in the quarter.

During the quarter ended May 31,
2005, we continued to invest significantly in R&D activities for our next generation
of BI solutions which are the foundation of our CPM vision. We expect to make available
this new generation of our Enterprise Business Intelligence Series, Cognos 8 Business
Intelligence, in the third quarter of fiscal 2006. This offering will include query,
reporting, analysis, scorecarding, and notification off a single services oriented
architecture. It commenced its first round of beta trials on schedule during the first
quarter and advanced to general field beta trial in June. We are also investing in our
offerings to the Office of Finance and expect to launch new releases of Cognos Controller
and Cognos Planning in the coming months.

We currently do not have any software
development costs capitalized on our balance sheet. Software development costs are
expensed as incurred unless they meet generally accepted accounting criteria for deferral
and amortization. Software development costs incurred prior to the establishment of
technological feasibility do not meet these criteria, and are expensed as incurred.
Capitalized costs are amortized over a period not exceeding 36 months. No costs were
deferred in the quarters ended May 31, 2005 and May 31, 2004. Costs were not deferred in
the period because either no projects met the criteria for deferral or, if met, the period
between achieving technological feasibility and the general availability of the product
was short, rendering the associated costs immaterial.

32

---

# Amortization of
Acquisition-related Intangible Assets

|($000s)                                                   | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|--------------------------------------------------------- | ------------------------- | ------------------------------------------
|                                                         
|                                                          | 2005                      | 2004                                      
|                                                         
|Amortization of acquisition-related
    intangible assets |                           | $1,637                                    

Amortization of intangible assets was
$1.6 million, an increase of $0.4 million or 32% for the quarter ended May 31, 2005
compared to the corresponding period in the prior fiscal year. This increase was due to
the amortization of acquired technology and contractual relationships as a result of the
acquisition of Frango during the third quarter of fiscal 2005.

# Net Interest and Other
Income

|($000s)                       | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|----------------------------- | ------------------------- | ------------------------------------------
|                             
|                              | 2005                      | 2004                                      
|                             
|Net interest and other income |                           | $2,780                                    

Net interest and other income was
$2.8 million, an increase of $1.4 million or 109% in the quarter ended May 31, 2005
compared to the corresponding period in the prior fiscal year. The change in net interest
and other income is as follows:

|($000s)                                 |  | Year-over-year    Change     from May 31,
|--------------------------------------- |  | -----------------------------------------
|                                       
|                                        |  | 2004 to 2005                             
|                                       
|Increase in interest revenue            |  | $1,715                                   
|Increase in interest and other expenses |  | (268                                     
|                                       
|Total year-over-year change             |  | $1,447                                   
|                                       

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

33

---

# Income Tax Provision

|($000s)            | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------------ | ------------------------- | ------------------------------------------
|                  
|                   | 2005                      | 2004                                      
|                  
|Tax expense        |                           | $3,312                                    
|Effective tax rate |                           | 12.2                                      

As we operate globally, we calculate
our income tax provision in each of the jurisdictions in which we conduct business. Our
tax rate is therefore affected by the relative profitability of our operations in various
geographic regions. In the three months ended May 31, 2005, we recorded an income tax
provision of $3.3 million, representing an effective income tax rate of 12%.
Comparatively, in the three months ended May 31, 2004, we recorded an income tax provision
of $5.4 million, representing an effective income tax rate of 21%. We estimate our
effective tax rate for the current fiscal year to be 21%, exclusive of any one-time
events. This estimated effective tax rate was reduced for the three-month period ended May
31, 2005 to 12% due to the recognition of one-time benefits resulting from (i) a tax court
decision that allowed corporations to claim investment tax credits on stock-based
compensation for research and development personnel relating to fiscal years 2004 and 2005
and (ii) a change in tax withholding legislation relating to one of the Corporations
subsidiaries.

34

---

# LIQUIDITY AND
CAPITAL
RESOURCES

|($000s)                                            |  | As atMay 31,2005 | As atFebruary 28,2005 | Percentage Change
|-------------------------------------------------- |  | ---------------- | --------------------- | -----------------
|                                                  
|Cash and cash equivalents                          |  | $377,426         |                       | $378,348         
|Short-term investments                             |  | 118,610          |                       | 144,552          
|                                                   |  |                 
|Cash, cash equivalents, and short-term investments |  | $496,036         |                       | $522,900         
|Working capital                                    |  | 354,282          |                       | 344,236          



|($000s)                         | Three months endedMay 31, | Percentage ChangeThree months endedMay 31,
|------------------------------- | ------------------------- | ------------------------------------------
|                               
|                                | 2005                      | 2004                                      
|                               
|Net cash provided by (used in): |                           |                                           
|Operating activities            |                           | $ (5,333                                  
|Investing activities            |                           | 21,317                                    
|Financing activities            |                           | (12,947                                   



|                             |  | As atMay 31,2005 | As atMay 31,2004
|---------------------------- |  | ---------------- | ----------------
|                            
|Days sales outstanding (DSO) |  | 63               |                 

* not meaningful

# Cash, Cash Equivalents,
and Short-term Investments

As of May 31, 2005, we held $496.0
million in cash, cash equivalents, and short-term investments, a decrease of $26.9 million
from February 28, 2005. This decrease is primarily attributable to cash payments for
compensation related to our fiscal 2005 performance, certain tax liabilities, and the
repurchase of our shares on the open market. 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.

35

---

Working Capital

Working capital represents our
current assets less our current liabilities. As of May 31, 2005, working capital was
$354.3 million, an increase of $10.0 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 income taxes payable. Offsetting this
increase were decreases in accounts receivable and short-term investments.

Days sales outstanding was 63 days at
May 31, 2005, which is within our expected range, as compared to 55 days as at May 31,
2004. We calculate our days sales outstanding based on ending accounts receivable balances
and quarterly revenue.

Long-term Debt

As at February 28, 2005 and May 31,
2005, we had no long-term debt.

Cash Used in Operating
Activities

Cash used in operating activities
(after changes in non-cash working capital items) for the three months ended May 31, 2005
was $5.3 million, as compared to cash provided by operating activities of $33.1 million in
the comparative period last year. This represents an increased use of $38.4 million and is
primarily attributable to changes in working capital compared to the same quarter last
year.

Cash Provided by
Investing Activities

Cash provided by investing activities
was $21.3 million for the three months ended May 31, 2005, a decrease of $49.7 million
compared to prior fiscal year. During the quarters ended May 31, 2005 and May 31, 2004, we
had a decrease in the net investment in short-term investments from the comparative
quarter in the prior fiscal year as many of the Corporations short-term investments
matured during the quarter. The decrease however was greater in the prior fiscal year. In
the quarter ended May 31, 2005, the proceeds on the maturity of our short-term investments
were in excess of purchases of short-term investments by $25.9 million. In comparison,
during the quarter ended May 31, 2004, our proceeds on the maturity of short-term
investments, net of investments, were $74.2 million.

During the three month periods ended
May 31, 2005 and May 31, 2004, we made fixed asset additions in the amount of $4.8 million
and $3.1 million, respectively. The fixed asset additions in both periods related
primarily to computer equipment and software, office furniture, and leasehold
improvements.

Cash Used in Financing
Activities

Cash used in financing activities was
$12.9 million for the three months ended May 31, 2005, a decrease in financing activities
of $13.2 million compared to the same period of the prior fiscal year. We issued 527,000
common shares, for proceeds of $12.3 million, during the three months ended May 31, 2005,
compared to the issue of 635,000 shares for proceeds of $10.3 million during the
corresponding period in the prior fiscal year. The issuance of shares in the three months
ended May 31, 2005 was pursuant to our stock purchase plan and the exercise of stock
options by employees, officers, and directors whereas the issuance of shares in the three
months ended May 31, 2004 was pursuant to our stock purchase plan and the exercise of
stock options by employees and officers.

We also paid $25.3 million during the
quarter to repurchase 617,000 shares on the open market. Comparatively, for the three
months ended May 31, 2004 we repurchased 300,000 shares at a value of $10.0 million. The
share repurchases made during both periods were part of distinct open market share
repurchase programs through The Nasdaq National Market or The Toronto Stock Exchange. The
share repurchase programs have historically been adopted in October of each year and run
for one year. They allow the Corporation to purchase no more than 5% of the issued and
outstanding shares of the Corporation on the date the plan is adopted. These programs do
not commit the Corporation to make any share repurchases. Purchases can be made on The
Nasdaq National Market or The Toronto Stock Exchange at prevailing open market prices and
are paid out of general corporate funds. All shares repurchased under the completed share
repurchase programs were cancelled and all shares repurchased under the current share
repurchase program will be cancelled.

36

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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. $10.0 million), subject to certain
covenants. As of May 31, 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 May 31,
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 $78.8 million in foreign
currency. The estimated fair value of these contracts at May 31, 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
quarter ended May 31, 2005, the total cash payments made in relation to the accrual were
$0.9 million, and cash payments remaining at May 31, 2005 were $4.0 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.

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.

37

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# CRITICAL
ACCOUNTING
ESTIMATES

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

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.

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

| |  | 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.

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Allowance for Doubtful Accounts
 We maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. We regularly review our accounts
receivable and use our judgment to assess the collectibility of specific accounts and,
based on this assessment, an allowance is maintained for 100% of all accounts over 360
days and specific accounts deemed to be uncollectible. For those receivables not
specifically identified as uncollectible, an allowance is maintained for 2% of those
receivables at May 31, 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.

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.

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

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

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

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

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

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

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.

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

# NEW
ACCOUNTING
PRONOUNCEMENTS

In 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
different 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 Stock-based Compensation.

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.

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.

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# 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, 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. 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.

We face intense competition and we
may not compete successfully.

We face substantial competition
throughout the world, primarily from software companies located in the United States,
Europe, and Canada. 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. If
one or more of our competitors merges or partners with another of our competitors 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. As well, competition may increase by the entry or expansion of other large
software vendors, including enterprise resource planning vendors, into this market. These
competitors may have substantially greater financial and other resources with which to
pursue research and development, manufacturing, marketing, and distribution of their
products. 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 and our
market share reduced. Any erosion of our competitive position could have a material
adverse effect on our business, results of operations, and financial condition.

The length of time required to
complete a sales cycle may be lengthy and unpredictable.

As our business continues to evolve
toward larger transactions at the enterprise level, 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 estimates in that period. These significant transactions
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 could 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 first quarter of fiscal year
2006, we closed six contracts greater than $1 million, compared to eight in the first
quarter of fiscal year 2005, which contributed to lower than expected growth in revenues.

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

The basis of our business budgeting
and planning process is the estimation of revenues that we expect to achieve in a
particular quarter and is based on a common industry practice known as the
pipeline system. Under this system, information relating to sales prospects,
the anticipated date when a sale will be completed and the potential dollar amount of the
sale are tracked and analyzed to provide a pipeline of future business. These
pipeline estimates are not necessarily reliable predictors of revenues in a particular
quarter because of, among other things, the events identified in these risk factors, as
well as the subjective nature of the estimates themselves. In particular, a slowdown in
technology spending or a deterioration in economic conditions is likely to result in the
delay or cancellation of prospective orders in our pipeline. 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.

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.
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.

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.

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.

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We may not be able to hire,
integrate, or retain key personnel essential to our business.

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.

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, The length of time required to
complete a sales cycle may be lengthy 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, 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.

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.

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

Natural or other disasters 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.

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, including but not limited to our acquisition of
Frango AB, 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.

If we introduce a new product,
revenue from existing products may be eroded.

We may develop technology or a product
that constitutes a marked advance over both our own products and those of our competitors,
such as in the case of Cognos 8 Business Intelligence. If we introduce 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. In addition, we may lose existing customers who choose a
competitors product rather than migrate to our new product. This could result in a
temporary or permanent revenue shortfall and materially affect our business.

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 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 the
Corporations 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.

46

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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. We also attempt to contractually limit
our liability in accordance with industry practices. However, defects and errors in our
products 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 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; general industry
changes in the BI and CPM tools or related markets; or other events or factors.

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 than the manner in which we have had experience. 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.

47

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

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

# Interest Rate Risk

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

Interest income on our cash, cash
equivalents, and short-term investments is subject to interest rate fluctuations, but we
believe that the impact of these fluctuations does not have a material effect on our
financial position due to the short-term nature of these financial instruments. We have no
long-term debt. Our interest income and interest expense are most sensitive to the general
level of interest rates in Canada and the United States. Sensitivity analysis is used to
measure our interest rate risk. For the quarter ending May 31, 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 May 31, 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, to various European currencies, and, to a lesser
extent, other foreign currencies. Revenues and expenses generated in foreign currencies
are translated at exchange rates during the month in which the transaction occurs. We
cannot predict the effect foreign exchange fluctuations will have on our results going
forward; however, if significant foreign exchange losses are experienced, they could have
a material adverse effect on our business, results of operations, and financial condition.

48

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

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

Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we have evaluated the disclosure controls and procedures as of a date within 90
days before the filing date of this quarterly report. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer conclude that the disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-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 controls
|-- |  | ----------------------------

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

49

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PART II  OTHER
INFORMATION

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

|PURCHASES OF EQUITY
SECURITIES
|------------------------------
|                              
|                              
|
|                              
|
|                              
|March 1 to March 31, 2005     
|April 1 to April 30, 2005     
|May 1 to May 31, 2005         
|                              
|Total                         
|                              

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 May 31, 2005, Cognos repurchased 616,870 shares at an
average price of $40.94 under the 2004 Stock Repurchase Program.

50

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|Item 4. |  | Submission
of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------

|a) |  | The
Corporation held its Annual and Special Meeting of Shareholders on June 23,
               2005.
|-- |  | ----------------------------------------------------------------------------------------------------

|b) |  | At
the Annual and Special Meeting, shareholders elected the persons listed below
               as directors of the Corporation and approved the appointment of Ernst &  Young
LLP as the Corporations independent auditors for the fiscal year
               ending February 28, 2006 and authorized the Audit Committee of the Board
to fix                their remuneration. Shareholders also approved (i) an amendment to
the Cognos                Incorporated 2003-2008 Stock Option Plan to increase the shares
of common stock                reserved for awards thereunder by 1.8 million shares, (ii)
an amendment to the                Cognos Incorporated 2002-2005 Restricted Share Unit
Plan to extend its term to                2015, to increase the number of authorized
shares to 3,000,000, and to delete                Section 4B, and (iii) an amendment to the
Cognos Employee Stock Purchase Plan to                extend its term to 2008. The voting
results of the meeting are presented in the                following table:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Voting Results Annual and Special Meeting of
ShareholdersJune 23, 2005

|                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                    
|Election of Directors                                                                                                                                               
|                                                                                                                                                                    
|Robert G. Ashe                                                                                                                                                      
|                                                                                                                                                                    
|John E. Caldwell                                                                                                                                                    
|                                                                                                                                                                    
|Paul D. Damp                                                                                                                                                        
|                                                                                                                                                                    
|Pierre Y. Ducros                                                                                                                                                    
|                                                                                                                                                                    
|Robert W. Korthals                                                                                                                                                  
|                                                                                                                                                                    
|John J. Rando                                                                                                                                                       
|                                                                                                                                                                    
|Bill V. Russell                                                                                                                                                     
|                                                                                                                                                                    
|James M. Tory                                                                                                                                                       
|                                                                                                                                                                    
|Renato Zambonini                                                                                                                                                    
|                                                                                                                                                                    
|Appointment of Auditors                                                                                                                                             
|                                                                                                                                                                    
|Amendment to the 2003-2008 Stock Option Plan to increase the
shares of common stock reserved for awards thereunder by 1.8 million shares                            
|                                                                                                                                                                    
|Amendment to the 2002-2005 Restricted Share Unit Plan to
extend its term to 2015, to increase the number of authorized shares to 3,000,000, and to delete Section 4B
|                                                                                                                                                                    
|Amendment to the Employee Stock Purchase Plan to extend its
term to 2008                                                                                            
|                                                                                                                                                                    

51

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

In order to provide more information
regarding the process of nominating directors to the Corporations Board of
Directors, the Corporation offered the following information in its Proxy Statement for
the most recent Annual and Special Meeting of Shareholders.

Director Nomination
Transparency

The Corporate Governance and
Nominating Committee (CGN Committee) of the Board assesses the need for
additional directors on a regular basis and retains advisors to assist it in that regard.
The CGN Committees objective is to have a Board of the highest caliber with diverse
backgrounds, experience, strengths and competencies. In evaluating the suitability of new
nominees (Nominees), the CGN Committee takes into account many factors,
including; understanding of the Corporations business, technology and marketplace;
general understanding of marketing, finance, law and other disciplines relevant to a large
publicly traded companys success; educational and professional background; personal
accomplishment and attributes; as well as cultural and gender diversity. The CGN Committee
evaluates each individual Nominee in the context of the overall Board and its current
competencies, with the objective of maintaining or augmenting its competencies and overall
strengths. The CGN Committee has identified the following criteria to guide the CGN
Committee in selecting Nominees:

| |  | Nominees
should have high ethical character, and personal and professional reputations that
complement and enhance the image and standing of the Corporation;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Each
Nominee should have the ability to exercise sound, independent business judgment;
|- |  | --------------------------------------------------------------------------------------

| |  | The
Committee should generally seek Nominees that include current and/or former executive
officers and/or directors of companies and leaders of major organizations, demonstrating
a public image and adherence to principles consistent with those of the Corporation;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
CGN Committee should seek Nominees who are recognized for their professional excellence
or as leaders in their respective fields, particularly in areas relevant to the
Corporation such as software, research and development, sales, marketing, finance, human
resources, governance and law;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Nominees
should, in the aggregate, have varied educational and professional backgrounds to provide
meaningful counsel to management;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

| |  | Nominees
should have a commitment to (a) prepare for, regularly attend, and actively participate
in, meetings of the Board and (b) understand the Corporation, its business, and its
industry;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Nominees
should understand and be committed to the Board/Committee Mandates of the Corporation
including the requirements of the Board Mandate that Directors should (a) generally not
serve on the Board of more than 6 publicly traded companies and should have sufficient
time to devote to the Corporation; (b) generally be under the age of 75; and (c) be
dedicated to attending the requisite Director continuing education;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
CGN Committee must adhere to any requirements applicable to the Corporation relating to
Director independence and financial literacy/expertise and should ensure that Nominees do
not have any real or apparent conflicts of interest in serving as a Director; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Where
possible, the CGN Committee should seek to satisfy the foregoing criteria while at the
same time fostering gender and cultural diversity on the Board.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The foregoing criteria may, from time
to time, be changed by the CGN Committee to reflect a change in circumstances.

52

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Shareholders wishing to suggest Nominees to the CGN Committee
may do so by submitting the
Nominees name, experience and other relevant information to the Cognos Corporate
Governance & Nominating Committee, C/O the Vice-President, Chief Legal Officer and
Secretary, 3755 Riverside Drive, P.O. Box 9707, Station T, Ottawa, Ontario, Canada, K1G
4K9. The Committee applies the same criteria to all Nominees irrespective of the source of
such Nominee.

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

|a) |  | Exhibits |  |                                                                                                                                                                                                                                                              | 
|-- |  | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|   |  | 3.1      |  | Articles of Incorporation and Amendments thereto
(incorporated by reference to Exhibit 3.1 of the  Corporations  Form 10-Q filed for the quarter ended November 30, 2002 and
Exhibit 3.1 (i) of Cognos Form 10-Q filed for the quarter ended May 31, 2004) | 
|   |  | 3.2      |  | By-Laws of the  Corporation  (incorporated  by reference  to
Exhibit 3.2 of the  Corporation's Form 10-K filed for the year ended February 28, 1997)                                                                                                        
|   |  | 31.1     |  | Certification  of Chief Executive  Officer Pursuant to
Rule 13a - 14(a) and 15d - 14(a) of the Securities   Exchange  Act  of  1934,  as  Adopted  Pursuant  to  Section  302  of
the Sarbanes-Oxley Act of 2002                                            
|   |  | 31.2     |  | Certification  of Chief Financial  Officer Pursuant to
Rule 13a - 14(a) and 15d - 14(a) of the Securities   Exchange  Act  of  1934,  as  Adopted  Pursuant  to  Section  302  of  the
Sarbanes-Oxley Act of 2002                                           
|   |  | 32       |  | Certification  of Chief Executive  Officer and Chief
Financial  Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                           
|   |  | 99.1     |  | Managements  Discussion  and  Analysis of  Financial
Condition  and Results of  Operations  Canadian Supplement                                                                                                                                           

53

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# SIGNATURE

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

|              |  | COGNOS INCORPORATED                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|              |  | (Registrant)                                                                                                                                           
|             
|June 30, 2005 |  | /s/ Tom Manley                                                                                                                                         
|              |  |                                                                                                                                                        
|Date          |  | Tom ManleySenior Vice President, Finance &
Administration and    Chief Financial Officer (Principal Financial Officer and
    Chief Accounting Officer)

54

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EXHIBIT INDEX

|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                         |  | PAGE  | 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | 
|           
|31.1        |  | Certification of Chief Executive Officer Pursuant
to Rule 13a - 14(a) and 15d - 14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002  |  | 56    | 
|           
|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 |  | 57    | 
|           
|32          |  | Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                       |  | 58    | 
|           
|99.1        |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations  Canadian Supplement                                                                                         |  | 59-61 | 
|           

55