UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

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

For the Quarterly Period Ended May 31, 2006

OR

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

Commission File Number 0-16006

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

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

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

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

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

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

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

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

COGNOS INCORPORATED

INDEX

PAGE
PART I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Statements of Income for the three months ended May 31, 2006 and May 31, 2005	3
	Consolidated Balance Sheets as of May 31, 2006 and February 28, 2006	4
	Consolidated Statements of Cash Flows for the three months ended May 31, 2006 and May 31, 2005	5
	Condensed Notes to the Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	49
Item 4.	Controls and Procedures	50
PART II – OTHER INFORMATION
Item 1a.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
Signature		59

2

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

	Three months ended May 31,
	2006	2005
Revenue
Product license	$  73,735	$  71,146
Product support	100,181	88,505
Services	43,124	40,424
Total revenue	217,040	200,075
Cost of revenue
Cost of product license	1,757	1,222
Cost of product support	11,227	8,996
Cost of services	37,516	32,297
Total cost of revenue	50,500	42,515
Gross margin	166,540	157,560
Operating expenses
Selling, general, and administrative	117,592	105,715
Research and development	33,279	29,765
Amortization of acquisition-related intangible assets	1,701	1,637
Total operating expenses	152,572	137,117
Operating income	13,968	20,443
Interest and other income, net	5,011	2,780
Income before taxes	18,979	23,223
Income tax provision	4,441	2,851
Net income	$  14,538	$  20,372
Net income per share
Basic	$0.16	$0.22
Diluted	$0.16	$0.22
Weighted average number of shares (000s)
Basic	89,893	91,078
Diluted	90,825	93,897

(See accompanying notes)

3

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

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

(See accompanying notes)

4

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

	Three months ended May 31,
	2006		2005
Cash flows from operating activities
Net income	$   14,538		$   20,372
Non-cash items
Depreciation and amortization	7,240		7,165
Stock-based compensation	5,157		4,082
Deferred income taxes	5,181		(3,827	)
Loss on disposal of fixed assets	139		87
	32,255		27,879
Change in non-cash working capital
Decrease in accounts receivable	81,140		46,835
Increase in income tax receivable	(4,307	)	(2,001	)
Decrease in prepaid expenses and other current assets	6,891		1,423
Decrease in accounts payable	(7,027	)	(8,043	)
Increase (decrease) in accrued charges	1,600		(8,003	)
Decrease in salaries, commissions, and related items	(14,825	)	(36,133	)
Decrease in income taxes payable	(3,355	)	(15,942	)
Decrease in deferred revenue	(19,732	)	(10,825	)
Net cash provided by (used in) operating activities	72,640		(4,810	)
Cash flows from investing activities
Maturity of short-term investments	112,615		127,925
Purchase of short-term investments	(232,636	)	(101,983	)
Additions to fixed assets	(6,371	)	(4,756	)
Additions to intangible assets	(326	)	(245	)
Decrease in other assets	269		245
Acquisition costs, net of cash and cash equivalents	--		131
Net cash provided by (used in) investing activities	(126,449	)	21,317
Cash flows from financing activities
Issue of common shares	12,935		11,784
Repurchase of shares	(24,998	)	(25,254	)
Net cash used in financing activities	(12,063	)	(13,470	)
Effect of exchange rate changes on cash	4,416		(3,959	)
Net decrease in cash and cash equivalents	(61,456	)	(922	)
Cash and cash equivalents, beginning of period	398,634		378,348
Cash and cash equivalents, end of period	337,178		377,426
Short-term investments, end of period	273,006		118,610
Cash, cash equivalents, and short-term investments, end of period	$ 610,184		$ 496,036

(See accompanying notes)

5

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)

1. Basis of Presentation

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

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

2. Revenue Recognition

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

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

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

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

6

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

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

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

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

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

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

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

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

7

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

3. Stock-Based Compensation

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

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

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

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

8

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

	Impact of Change for Adoption of FAS 123R
	For the three months ended May 31, 2005		For the year ended
			February 28, 2006		February 28, 2005
Consolidated Statement of Income
Operating Income	$(3,914	)	$(18,820	)	$(17,138	)
Net income	(3,453	)	(16,226	)	(15,130	)
Net income per share (basic)	$(0.04	)	$(0.18	)	$(0.17	)
Net income per share (diluted)	$(0.03	)	$(0.18	)	$(0.17	)

	Impact of Change for Adoption of FAS 123R
	February 28, 2006		February 28, 2005
Consolidated Balance Sheet
Deferred income tax asset	$     6,792		$     6,018
Stockholders' equity:
Common shares and additional paid-in
capital	159,738		142,962
Deferred stock-based compensation	501		277
Retained Earnings	(153,447	)	(137,221	)
	$     6,792		$     6,018

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

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

9

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

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

	Three months ended May 31,
	2006		2005
	($000s)
Compensation cost recognized
Cost of Product Support	$     96		$   114
Cost of Services	187		207
Selling, General and Administrative	4,304		2,870
Research and Development	491		891
Total	5,078		4,082
Tax benefit recognized	(931	)	(461	)
Net Stock-based Compensation Cost	$4,147		$3,621

Stock Options

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

	Three months ended May 31,
	2006		2005
Risk-free interest rates	4.7	%	4.2	%
Expected volatility	33	%	35	%
Dividend yield	0	%	0	%
Expected life of options (years)	3.7		3.7

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

10

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

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

	Number of Awards (000s)		Weighted average exercise price (in $)	Aggregate intrinsic value(1) ($000s)	Weighted-average remaining contractual term (in years)
Outstanding, March 1, 2006	11,255		$32.60	$75,347	3.3
Granted	76		38.88
Cancelled	(138	)	33.97
Exercised	(513	)	23.43
Outstanding, May 31, 2006	10,680		33.97	19,145	3.1
Exercisable, May 31, 2006	6,687		33.01	16,024	2.9
Unvested, May 31, 2006	3,993		35.58	3,121	3.5

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

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

	Number of Awards (in 000s)		Weighted-average grant date fair value (in $)
Unvested at March 1, 2006	4,594		$11	.17
Granted	76		9	.60
Vested	(577	)	12	.20
Forfeited	(100	)
Unvested at May 31, 2006	3,993		11	.26

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

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

11

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

Restricted Share Unit Plan

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

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

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

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

	Restricted Share Units		Weighted average Grant Day Fair Value(1)		Weighted Average Remaining Contract Term (in years)		Aggregate Intrinsic Value
	(000s)						($000)
Outstanding, March 1, 2006	43		$37	.05	2	.6	$1,630
Granted – vesting conditions only	12		38	.58
Granted – performance conditions	178		30	.66
Vested	(9	)	30	.48
Forfeited	--
Outstanding, May 31, 2006	224		$31	.68	4	.4	$6,856

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

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

12

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

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

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

Employee Stock Purchase Plan

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

Deferred Share Plan for Non-employee Directors

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

13

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

4. Intangible Assets

	As at May 31, 2006			As at February 28, 2006
	Cost		Accumulated Amortization	Cost		Accumulated Amortization	Amortization Rate
	($000s)			($000s)
Acquired technology	$41,611		$29,531	$ 41,611		$28,194	20	%
Contractual relationships	9,654		3,689	9,654		3,328	12.5	%
Trademarks and patents	6,049		3,587	5,724		3,342	20	%
	57,314		$36,807	56,989		$34,864
Accumulated amortization	(36,807	)		(34,864	)
Net book value	$20,507			$22,125

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

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

	Three months ended May 31,
	2006	2005
	($000s)
Amortization of acquisition-related intangibles	$1,701	$1,637
Selling, general, and administrative expenses	242	185
Total	$1,943	$1,822

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

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

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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. Goodwill

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

	Three months ended May 31,
	2006	2005
	($000s)
Beginning balance	$225,709	$221,490
Adjustments	--	(131	)
Closing balance	$225,709	$221,359

6. Commitments and Contingencies

Legal Proceedings

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

Customer Indemnification

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

7. Income Taxes

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

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

8. Stockholders’ Equity

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

Net Income per Share

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

	Three months ended May 31,
	2006	2005
Basic Net Income per Share
Net income	$14,538	$20,372
Weighted average number of shares outstanding	89,893	91,078
Basic net income per share	$0.16	$0.22

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)

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

9. Comprehensive Income

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

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

	Three months ended May 31,
	2006		2005
Net income	$14,538		$20,372
Other comprehensive income (loss):
Foreign currency translation adjustments	1,381		590
Change in net unrealized loss on derivative instruments	(172	)	(236	)
Comprehensive income	$15,747		$20,726

10. Segmented Information

The Corporation operates in one business segment as one reporting unit — computer software solutions.

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)

11. Liabilities in Connection with Acquisition

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

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

	Employee separations		Other restructuring accruals		Total accrual
Balance as at February 28, 2006	$  277		$481		$  758
Cash payments during the first quarter of fiscal 2007	(229	)	(46	)	(275	)
Adjustment	(13	)	--		(13	)
Foreign exchange adjustment	27		25		52
Balance as at May 31, 2006	$    62		$460		$  522

12. New Accounting Pronouncements

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

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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)

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

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

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

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Item 2.

COGNOS INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

FORWARD-LOOKING STATEMENTS/SAFE HARBOR

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

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

20

ABOUT COGNOS

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

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

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

OVERVIEW OF THE QUARTER

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

Operating Performance

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

21

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

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

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

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

SEC Review

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

Executive Appointment

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

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Recent Announcements

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

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

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

Outlook for the balance of the fiscal year

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

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

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

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

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

23

RESULTS OF OPERATIONS

Recently Adopted Accounting Principle

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

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

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

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

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

		Three months ended May 31,
		2006		2005
	($000s)
Compensation cost recognized
Cost of Product Support		$     96		$   114
Cost of Services		187		207
Selling, General and Administrative		4,304		2,870
Research and Development		491		891
Total		5,078		4,082
Tax benefit recognized		(931	)	(461	)
Net Stock-based Compensation Cost		$4,147		$3,621

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Operating Performance

(000s, except per share amounts)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Revenue	$217,040		$200,075		8.5	%
Cost of revenue	50,500		42,515		18.8
Gross margin	166,540		157,560		5.7
Operating expenses	152,572		137,117		11.3
Operating income	$  13,968		$  20,443		(31.7	)
Gross margin percentage	76.7	%	78.8	%
Operating margin percentage	6.4	%	10.2	%
Net income	$  14,538		$  20,372		(28.6	)%
Basic net income per share	$0.16		$0.22
Diluted net income per share	$0.16		$0.22

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

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

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

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

	Three Months Ended May 31, 2006 over 2005
	Growth Excluding Foreign Exchange		Foreign Exchange		Net Growth
Revenue	8	.4%	0	.1%	8	.5%
Cost of Revenue and Operating Expenses	10	.6%	2	.4%	13	.0%
Operating Income	(10	.4)%	(21	.3)%	(31	.7)%

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

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

	Percentage of Revenue				Percentage Change
	Three months ended May 31,				Three months ended May 31,
	2006		2005		2005 to 2006
Revenue	100	.0%	100	.0%	8	.5%
Cost of revenue	23	.3	21	.2	18	.8
Gross margin	76	.7	78	.8	5	.7
Operating expenses
Selling, general, and administrative	54	.2	52	.9	11	.2
Research and development	15	.3	14	.9	11	.8
Amortization of acquisition-related intangible assets	0	.8	0	.8	3	.9
Total operating expenses	70	.3	68	.6	11	.3
Operating income	6	.4	10	.2	(31	.7)
Interest and other income, net	2	.3	1	.4	80	.3
Income before taxes	8	.7	11	.6	(18	.3)
Income tax provision	2	.0	1	.4	55	.8
Net income	6	.7%	10	.2%	(28	.6)%

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REVENUE

($000s)	Three months ended May 31,		Percentage Change Three months ended May 31,
	2006	2005	2005 to 2006
Product License	$  73,735	$  71,146	3.6	%
Product Support	100,181	88,505	13.2
Services	43,124	40,424	6.7
Total Revenue	$217,040	$200,075	8.5

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

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

Industry Trends and Geographic Information

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

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

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

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

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

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

Key Revenue Indicators

	Three months ended May 31,
	2006	2005
Orders (License, Support, Services)
Transactions greater than $1 million	13	6
Transactions greater than $200,000	118	104
Transactions greater than $50,000	728	668
Average selling price (License Orders Only) ($000s)
Greater than $50,000	$186	$175

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

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

Revenue by Geography

($000s)	Three months ended May 31,		Percentage Change Three months ended May 31,
	2006	2005	2005 to 2006
The Americas	$129,913	$115,516	12	.5%
EMEA	72,225	66,461	8	.7
Asia/Pacific	14,902	18,098	(17	.7)
Total	$217,040	$200,075	8	.5

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

Revenue by Geography as a Percentage of Total Revenue

	Three months ended May 31,
	2006		2005
The Americas	59.8	%	57.7	%
EMEA	33.3		33.2
Asia/Pacific	6.9		9.1
Total	100.0	%	100.0	%

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

Year-over-year Percentage Change in Revenue by Geography

	Three Months Ended May 31, 2006 over 2005
	Growth Excluding Foreign Exchange		Foreign Exchange		Net Growth
The Americas	10	.8%	1	.7%	12	.5%
EMEA	10	.6%	(1	.9)%	8	.7%
Asia/Pacific	(14	.9)%	(2	.8)%	(17	.7)%
Total	8	.4%	0	.1%	8	.5%

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

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

Product License Revenue

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Product license revenue	$73,735		$71,146		3	.6%
Percentage of total revenue	34.0	%	35.6	%

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

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

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

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

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Product Support Revenue

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Product support revenue	$100,181		$88,505		13	.2%
Percentage of total revenue	46.1	%	44.2	%

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

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

Services Revenue

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Services revenue	$43,124		$40,424		6.7	%
Percentage of total revenue	19.9	%	20.2	%

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

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

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

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COST OF REVENUE

Cost of Product License

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Cost of product license	$1,757		$1,222		43	.8%
Percentage of license revenue	2.4	%	1.7	%

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

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

($000s)	Year-over-year Change from May 31,
	2005 to 2006
Royalty cost	$458
Other	77
Total year-over-year change	$535

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

Cost of Product Support

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Cost of product support	$11,227		$8,996		24	.8%
Percentage of support revenue	11.2	%	10.2	%

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

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

($000s)	Year-over-year Change from May 31,
	2005 to 2006
Staff-related costs	$  875
Computer-related costs	842
Other	514
Total year-over-year change	$2,231

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

Cost of Services

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Cost of services	$37,516		$32,297		16	.2%
Percentage of service revenue	87.0	%	79.9	%

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

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

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($000s)	Year-over-year Change from May 31,
	2005 to 2006
Staff-related costs	$2,320
Services purchased externally	1,270
Travel & Living	1,072
Other	557
Total year-over-year change	$5,219

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

OPERATING EXPENSES

Selling, General, and Administrative

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Selling, general, and administrative	$117,592		$105,715		11.2	%
Percentage of total revenue	54.2	%	52.8	%

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

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

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($000s)	Year-over-year Change from May 31,
	2005 to 2006
Staff-related costs	$7,645
Professional services	2,182
Travel & Living	2,020
Other	30
Total year-over-year change	$11,877

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

Research and Development

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Research and development	$33,279		$29,765		11	.8%
Percentage of total revenue	15.3	%	14.9	%

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

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

($000s)	Year-over-year Change from May 31,
	2005 to 2006
Staff-related costs	$2,254
Other	1,260
Total year-over-year change	$3,514

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

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

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

Amortization of Acquisition-related Intangible Assets

($000s)	Three months ended May 31,		Percentage Change Three months ended May 31,
	2006	2005	2005 to 2006
Amortization of acquisition-related
intangible assets	$1,701	$1,637	3	.9%

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

Interest and Other Income, Net

($000s)	Three months ended May 31,		Percentage Change Three months ended May 31,
	2006	2005	2005 to 2006
Interest and other income, net	$5,011	$2,780	80	.3%

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

($000s)	Year-over-year Change from May 31,
	2005 to 2006
Increase in interest revenue	$2,777
Loss on foreign exchange	(390	)
Increase in interest expenses	(156	)
Total year-over-year change	$2,231

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

Income Tax Provision

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Income tax provision	$4,441		$2,851		55	.8%
Effective tax rate	23.4	%	12.3	%

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

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LIQUIDITY AND CAPITAL RESOURCES

($000s)	As at May 31, 2006	As at February 28, 2006	Percentage Change
Cash and cash equivalents	$337,178	$398,634	(15	.4)%
Short-term investments	273,006	152,368	79	.2
Cash, cash equivalents, and short-term investments	$610,184	$551,002	10	.7
Working capital	429,509	419,437	2	.4

($000s)	Three months ended May 31,				Percentage Change Three months ended May 31,
	2006		2005		2005 to 2006
Net cash provided by (used in):
Operating activities	$   72,640		$   (4,810	)	*
Investing activities	(126,449	)	21,317		(693	.2)%
Financing activities	(12,063	)	(13,470	)	(10	.4)

	As at May 31, 2006	As at May 31, 2006
Days sales outstanding (DSO)	58	63

* not meaningful

Cash, Cash Equivalents, and Short-term Investments

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

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

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Working Capital

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

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

Long-term Debt

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

Net Cash Provided by Operating Activities

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

Net Cash Used in Investing Activities

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

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

Net Cash Used in Financing Activities

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

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

Contracts and Commitments

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

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

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

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

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

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

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

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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. These judgments may change based upon changes in business conditions. As a result, actual results may differ from these estimates under different assumptions, conditions, and experience.

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

• Revenue Recognition

• Allowance for Doubtful Accounts

• Accounting for Income Taxes

• Business Combinations

• Impairment of Goodwill and Long-lived Assets

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

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

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

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We evaluate each of these criteria as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

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

Interest Rate Risk

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

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

Foreign Currency Risk

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

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

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Item 4. Controls and Procedures

a) Evaluation of disclosure controls and procedures.

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

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

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

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

b) Changes in internal controls

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

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PART II — OTHER INFORMATION

Item 1A.    Risk Factors

Certain Factors That May Affect Future Results

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

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

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

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

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

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

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

Currency fluctuations may adversely affect us.

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

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

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

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

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

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

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

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

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

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We operate internationally and face risks attendant to those operations.

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

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

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

Our quarterly and annual operating results may vary between periods.

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

Our expenses may not match anticipated revenues.

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

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Making and integrating acquisitions could impair our operating results.

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

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

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

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

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

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

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

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

Natural or other disasters like the hurricanes in the southeastern United States in 2005, and hostilities or terrorist 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.

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

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

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

PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Number of Shares or Dollar Value of Shares that May Yet Be Purchased Under the Plans
				Restricted Share Unit Plan (# of shares)	Share Repurchase Program
March 1 to March 31, 2006	NIL	NIL	NIL	2,921,500	$63,408,187
April 1 to April 30, 2006	497,376	$38.40	497,376	2,921,500	$44,309,506
May 1 to May 31, 2006	155,100	$38.03	155,100	2,921,500	$38,410,441
Total	652,476	$38.31	652,476

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

Item 5. Other Information

1.01 Entry into Material Definitive Agreements

Executive Compensation Plans

On July 31, 2006, the Corporation entered into compensation plans for the fiscal year ending February 28, 2007 (“Compensation Plans”) with each of its executive officers Messrs. Rob Ashe (President and Chief Executive Officer), Peter Griffiths (SVP, Products), Neal Hill (SVP, Corporate Development), John Jussup (SVP, Chief Legal Officer & Corporate Secretary), David Laverty (SVP, Global Marketing and Chief Marketing Officer), Tom Manley (SVP, Finance and Administration & Chief Financial Officer) and Anthony Sirianni (SVP, Field Operations) (collectively, “Executives”). The Human Resources and Compensation Committee of the Board of Directors of the Corporation approved the terms of the compensation arrangements, such terms to become binding subject to the company and the executive entering into a written agreement embodying the terms. The company entered into these binding written agreements on July 31, 2006. The Compensation Plans can be found in exhibits 10.46 to 10.52 of this Form 10-Q. Each of the Compensation Plans outlines the Executive’s cash and equity-based compensation elements, the terms of his equity-based compensation grants, a repayment and surrender provision and applicable stock ownership guidelines.

1.02 Nasdaq Proceedings

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

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

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

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Item 6. Exhibits

a) Exhibits

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

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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)
July 31, 2006	/s/ Tom Manley
Date	Tom Manley Senior Vice President, Finance & Administration and     Chief Financial Officer (Principal Financial Officer and     Chief Accounting Officer)

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EXHIBIT INDEX

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

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