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******UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549      .
                                    FORM 10-K

(Mark One)

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

                   For the fiscal year ended December 31, 2004
                                       OR
     [ ]  TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
EXCHANGE ACT OF 1934

         For the transition period for _____________ to _______________.

                           Commission File No. 0-15997

                               FILENET CORPORATION
             (Exact name of Registrant as specified in its charter)

             Delaware                                        95-3757924
   (State or other jurisdiction of                       (I.R.S. Employer
   incorporation or organization)                       Identification No.)

      3565 Harbor Boulevard
      Costa Mesa, California                                  92626
(Address of principal executive offices)                   (Zip Code)

       Registrant's telephone number, including area code: (714) 327-3400

        Securities Registered Pursuant to Section 12(b) of the Act: None

 Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.01
 par value**

     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 disclosure of delinquent filers pursuant
to  Item  405 of  Regulation  S-K is  not  contained  herein,  and  will  not be
contained,  to the best of the  Registrant's  knowledge,  in definitive proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [x]

     Indicate by check mark whether the  registrant is an  accelerated  filer as
defined by Rule 12b-2 of the Securities Exchange Act of 1934: Yes [x] No [ ]

     Based on the closing sale price of $31.57 on June 30, 2004,  the  aggregate
market value of the 39,366,950  shares of common stock of the Registrant held by
non-affiliates of the Registrant on such day was $1,242,814,612. For purposes of
such calculation,  only executive officers,  board members and beneficial owners
of more than 10% of our outstanding common stock are deemed to be affiliates.

     The  number of shares  outstanding  of the  Registrant's  common  stock was
40,669,006 at March 14, 2005.

                       **DOCUMENTS INCORPORATED BY REFERENCE**

     Portions of the Registrant's definitive proxy statement, to be delivered in
connection  with the  Registrant's  2005  Annual  Meeting of  Stockholders,  are
incorporated by reference into Part III of this Report.

******FILENET CORPORATION

                         2004 ANNUAL REPORT ON FORM 10-K
                      For the Year Ended December 31, 2004

                                TABLE OF CONTENTS

                                                                            Page
                                     PART I**
Item 1.  Business..............................................................3
Item 2.  Properties...........................................................19
Item 3.  Legal Proceedings....................................................19
Item 4.  Submission of Matters to a Vote of Security Holders..................20

                                     **PART II**

Item 5.  Market for the Registrant's Common Stock and Related Stockholder
         Matters..............................................................20
Item 6.  Selected Financial Data..............................................21
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations................................................22
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...........39
Item 8.  Financial Statements and Supplementary Data..........................41
Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure.................................................41
Item 9a. Controls and Procedures..............................................41

                                    **PART III**

Item 10.  Directors and Executive Officers of the Registrant..................43
Item 11.  Executive Compensation..............................................43
Item 12.  Security Ownership of Certain Beneficial Owners and Management and
          Related Stockholder Matters.........................................43
Item 13.  Certain Relationships and Related Transactions......................43
Item 14.  Principal Accountant Fees and Services..............................43

                                     **PART IV**

Item 15.  Exhibits, Financial Statement Schedule..............................44
          Signatures..........................................................47

                                       2
**Forward-Looking Statements**

     In  addition to  historical  information,  this Annual  Report on Form 10-K
contains forward-looking statements within the meaning of the Private Securities
Litigation  Reform Act of 1995,  Section 21E of the  Securities  Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is subject to the safe harbors created by those sections.  These forward-looking
statements involve risks and uncertainties, including those discussed herein and
in the notes to our financial  statements  for the year ended December 31, 2004,
certain sections of which are  incorporated  herein by reference as set forth in
Items 7 and 8 of this  report.  The actual  results  that we achieve  may differ
materially  from any  forward-looking  statements,  which  reflect  management's
opinions  only as of the date hereof.  We undertake no  obligation  to revise or
publicly  release  the  results  of  any  revisions  to  these   forward-looking
statements.  Readers should carefully review the section entitled "Risk Factors"
and other  documents we file from time to time with the  Securities and Exchange
Commission. Our business,  financial condition,  operating results and prospects
can be impacted by a number of factors,  including  but not limited to those set
forth in the section  entitled "Risk Factors" and elsewhere in this report,  any
one of which could  cause our actual  results to differ  materially  from recent
results or from our anticipated future results.

                                     **PART I****Item 1   *Business***

     FileNet  Corporation  ("FileNet")  was  incorporated  on July 30, 1982.  We
develop,   market,   sell  and  support  a  software  platform  and  application
development  framework for Enterprise  Content  Management and Business  Process
Management.  Enterprise  Content Management ("ECM") refers to the broad range of
functions used by organizations  including businesses and governmental  agencies
to manage all types of content  associated with their business  processes and to
control  and  track  the  information  or  content  that  is  important  to  the
organization's  operations.  This  information may be used  internally,  such as
sales contracts or product diagrams, or externally,  such as content provided to
customers through a Web site.

     The  content  our  software  manages  includes,  but is not limited to: Web
pages, word processing documents, spreadsheets, HTML, XML, PDF, document images,
email  messages  and  other  electronic  content.  Business  Process  Management
("BPM"),  refers to processing,  communicating and gathering  information within
the organization  and from third parties in order to make appropriate  decisions
during a business  transaction,  such as processing payments or applications for
services or products.  Our software  offers  customers the ability to configure,
design,  build  and  deploy  ECM and BPM  solutions  to meet the  needs of their
particular  business or organization.  These solutions allow customers to manage
content  throughout  their  organizations,  and  automate and  streamline  their
critical  and  everyday  decision-making  to enhance  the  performance  of their
business.

     We operate  globally and sell our  products  and services to our  customers
through a direct sales force, system integrators,  independent  software vendors
and value added resellers.  We invest  significantly  in product  development to
improve our existing products and to expand our product offerings. We also offer
professional  services for the  implementation  of our  software,  as well as 24
hours a day, 7 days a week technical  support and services to our customers on a
global basis.

                                       3
**Available Information**

     Our filings with the  Securities  and Exchange  Commission,  including  our
Annual Reports on Form 10-K,  Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those  filings,  pursuant to Sections 13(a) and 15(d)
of the  Securities  Exchange  Act of  1934,  are  available  free of  charge  at
*www.filenet.com*,  when such reports are available at the Securities and Exchange
Commission Web site.

**Fiscal 2004 Developments and Strategy**

     During  fiscal 2004, we continued  our  development  efforts to enhance and
integrate the  capabilities  of our FileNet P8  architecture  and we focused our
marketing  resources on communicating the advantages of this architecture to the
market. FileNet P8 provides our customers with the ability to configure, design,
build and deploy a variety  of ECM and BPM  solutions  to meet a broad  range of
content  management  and  business  process  management  needs  within  a single
scalable  framework.  Offshore  development  augments  our  current  development
capacity with a low cost and high quality  alternative to internal  development.
During fiscal 2003, we acquired the  technology  of the Shana  Corporation  that
brought us  advanced  eForms  management  technology.  During  fiscal  2002,  we
acquired  the  technology  of eGrail,  which  brought us  advanced  Web  content
management technology.

     FileNet P8 provides the following capabilities:

     o    ability to run on various operating systems, databases and application
          servers;

     o    a unified architecture for content types;

     o    unified  object  oriented   Application   Programming   Interfaces  to
          facilitate rapid application development;

     o    common user and management interface across the entire architecture;

     o    portal and enterprise application integration capabilities to leverage
          a customer's existing applications; and

     o    enhanced Business Process  Management  capabilities  including process
          simulation  and  analytics  allowing  customers  to optimize  business
          processes on a real-time basis.

     We have  packaged  our ECM  capabilities  into eight  FileNet  suites  that
include the Business  Process  Manager,  Content  Manager,  Web Content Manager,
Image Manager,  Forms Manager,  Records Manager,  Team Collaboration Manager and
Email  Manager.  Each suite  provides  specific  functionality  to meet customer
requirements.  When our customers purchase a FileNet suite they have the ability
to add on additional FileNet  capabilities as needed,  allowing them flexibility
to acquire  only the  functionality  they need.  The  integration  of the suites
allows  for a lower  total  cost of  ownership  by  reducing  support  costs and
application development times.

     We  intend  to  continue  to  leverage  our  development  capabilities  and
substantial worldwide distribution and service network to deliver on our unified
platform  strategy.  We also intend to continue  our  strategy of  investing  in
product enhancements,  new product developments, new partnerships, and strategic
acquisitions.

                                       4
**Markets and Customers**

     We believe the FileNet P8 architecture  offers our customers the ability to
scale  their  ECM and BPM  solutions  to the  enterprise-level  and  offers  the
flexibility to manage demanding content challenges,  complex business processes,
integration with an organization's  existing systems and analysis of content and
related   processes  to  enable  an  informed   approach  to  improve   business
performance.  The FileNet P8  architecture  is designed to provide our customers
with a way to manage and analyze  their  enterprise  content,  which can provide
greater process control and consistency throughout the enterprise.

     Our  customers  include  many  of the  Global  2000  organizations  and are
typically those  enterprises and government  agencies that have complex business
processes  that  capture,  manage,  store and share large  volumes of electronic
content.  As of December 31, 2004,  our software has been  licensed to more than
four thousand customers worldwide.

     Our software  provides  customers the ability to create  solutions that are
effective  for a  variety  of  applications  such as  mortgage  loan  servicing,
regulatory  compliance,  customer  relationship  management,   insurance  claims
processing,  accounts payable and receivable, or for any business operation that
processes  significant  amounts  of  electronic  content  in  an  organization's
day-to-day  operations.  Additionally,  our software products can address ad hoc
business  processes at the  enterprise,  departmental,  and workgroup  levels to
improve overall business performance,  and can integrate with  industry-standard
productivity and enterprise  applications such as Lotus Notes, Microsoft Office,
SAP, Siebel, and others.

     We market our products in more than 90 countries around the world through a
direct  sales force and through  our  ValueNet  business  partner  program.  The
ValueNet program brings together  value-added  resellers,  independent  software
vendors,  system  integrators,  consultants  and service  providers to deliver a
broad range of solutions and services to our customers  worldwide.  Furthermore,
our strategic alliances with other industry leaders contribute to our efforts in
product development,  customer  satisfaction,  and worldwide market penetration.
More than 250 firms operate under the ValueNet  program and combine our software
products  with  industry-specific,  value-added  services  and  applications  to
provide turnkey ECM/BPM  solutions for customers.  Solutions  developed from our
software are  applicable  in a variety of  industries,  however our key vertical
markets  are   insurance,   financial   services,   government,   manufacturing,
telecommunications, and utilities.

     Using our standard  software  products,  customers build  applications that
address the requirements unique to their particular  business.  Very often these
applications  can involve a significant  change in the way a customer  operates.
Consequently,  our sales  cycle,  or the time from initial  customer  contact to
completed  product  sale,  can be lengthy,  and our  quarterly  sales  typically
include a mix of medium sized sales with a smaller  number of large  orders.  We
typically  ship our products  within a short period of time after  acceptance of
orders, which is common in the computer software industry.

     Our global  customer  support  operation  offers  software  maintenance and
technical support services for our products  worldwide.  These technical support
programs  offer a wide range of services  including the right to new versions of
our software,  extended phone support coverage, on-site technical consultants, a
technical account management program, and software development kit support.

     Our   professional   services   operation  offers  business  and  technical
consulting  services  and  training to both  end-users  of our  products  and to
ValueNet partners on our standard software products. These professional services
are marketed by our direct sales force and through the ValueNet business partner
program,  with a focus on FileNet centric  enterprise system  implementation and
assistance in delivering ECM/BPM solutions.

                                       5
**Industry Segments and Geographic Information**

     For the purposes of Statement of Financial  Accounting  Standards  ("SFAS")
No. 131,  "Disclosures About Segments of an Enterprise and Related Information,"
we have provided a breakdown of our sales,  gross profits and other  information
using the management approach in Note 13 of the "Notes to Consolidated Financial
Statements" under Item 8, "Financial  Statements and Supplementary  Data." Using
the management  approach,  our principle  reportable  operating segments include
Software,  Customer Support, and Professional Services and Education.  A summary
of our sales by geographic  location is incorporated herein by reference in Note
13 of the "Notes to Consolidated  Financial Statements" under Item 8, "Financial
Statements and Supplementary Data."

**Software Products

FileNet P8**

     The  FileNet  P8   architecture   offers  our  customers   enterprise-level
scalability  and flexibility to handle  demanding  content  challenges,  complex
business processes, integration to existing systems, and analysis of content and
related   processes  to  enable  an  informed   approach  to  improve   business
performance.  The FileNet P8  architecture  provides a framework for  functional
expansion  to  provide  enhanced  content  and  process   management  across  an
enterprise  through  eight  pre-packaged  suites,  each  emphasizing a different
aspect of the ECM/BPM  solution set, with  functions  grouped in a logical order
that are  designed  to meet a  customer's  individual  needs.  Each suite can be
implemented by a customer  individually,  but remains  expandable to include all
FileNet ECM and BPM  capabilities.  Solutions that are developed from FileNet P8
are designed to manage content;  allowing organizations to capture, create, use,
analyze,  and activate that content in order to make decisions  faster and bring
control and consistency to business  processes,  improve  efficiency and address
compliance requirements.

**FileNet Suites*****Business Process Manager***

     FileNet Business Process Manager is designed to help organizations increase
process  performance,  reduce cycle times, and improve  productivity by managing
the  flow of work  through  automating,  streamlining,  and  optimizing  complex
processes associated with business operations. The operations of many businesses
involve  gathering  information and making decisions based on that  information,
and many of these  decisions,  or the steps leading up to them, can be automated
to  increase  efficiency  and  create  a more  standardized  approach  to  these
decisions  throughout the business  organization.  Examples of customer business
processes  that may benefit from our Business  Process  Manager  suite  include:
insurance   companies  that  have  automated  policy   underwriting  and  claims
processing  decisions,  financial  services  companies that have streamlined the
loan  origination  and servicing  processes,  and government  agencies that have
automated case  management and tax processing  functions.  The Business  Process
Manager can provide an interface for gathering  necessary  information to either
make  decisions  based on automated  criteria or direct that  information to the
appropriate  decision-maker in an efficient and consistent basis.  Additionally,
the Business Process Manager suite provides real-time and historical tracking of
processes combined with analysis and simulation  capabilities allowing customers
to optimize their processes.  This product is standards based,  flexible and can
be customized to a wide range of industry requirements.

                                       6
***Content Manager***

     FileNet  Content  Manager is designed to combine  content  management  with
process management  capabilities to help organizations  manage complex documents
to control, share, and access critical business information.  Content Manager is
designed to assist with all steps in the content life cycle,  from  creation and
tracking to storing and controlling access to relevant information. It activates
content by allowing an organization to make content available to the right place
at the right time - to support the business decision-making process at any level
in the  organization.  The Content  Manager's  secure and  scalable  environment
integrates directly with desktop and business applications so business users can
collaborate on the creation and management of content,  while controlling access
as necessary.

***Image Manager***

     FileNet Image Manager is designed to be highly  scalable and provides rapid
access for  end-users  to fixed  objects,  or content that is not intended to be
modified, such as scanned documents, faxes, email and rich media. It is designed
to securely and permanently store large volumes of critical business information
and to safeguard  critical content from disaster and misuse while making it more
accessible  to  thousands  of users.  Among other  applications,  FileNet  Image
Manager has been used by organizations  such as municipal court systems to scan,
track and provide access to important case documents.

***Forms Manager***

     FileNet  Forms  Manager is  designed  to provide  customers  the ability to
design,  deploy and process  electronic forms (eForms) across their  enterprise.
FileNet Forms Manager enables customers to transform cumbersome paper forms into
fully interactive  eForms that directly connect to their business  applications.
FileNet Forms  Manager  provides a rich and intuitive  design  environment  that
enables  general  business  users to  create,  deploy  and  process  eForms  and
associated  data without  extensive Web  development  or JavaScript  experience.
FileNet Forms Manager can integrate with a customer's existing infrastructure to
enable  forms to be widely  accessible  by  supporting  a variety  of  operating
systems and browsers.  It enables users to view forms in a business  process and
supports  digital  signatures  and  tracking for audit trails to help in meeting
regulatory compliance requirements.

***Records Manager***

     FileNet  Records  Manager is designed to support  the entire  lifecycle  of
business  records  and prove  adherence  to policy by  leveraging  FileNet  P8's
content  and  process  capabilities  to automate  and  streamline  records-based
activities, reduce unnecessary end user participation and support enforcement of
regulatory  compliance.   FileNet  Records  Manager's  ZeroClick  technology  is
designed to enforce records  management  policies at the server technology layer
by setting rules for the correct handling of records.  This enables customers to
reduce the potential for user-related error by reducing end-user involvement and
automating the management of business records,  helping to ensure  best-practice
records management.

***Email Manager***

     FileNet Email Manager is designed to allow organizations with large numbers
of email  users to  effectively  manage  email  content  for  improved  business
decision-making  and adherence to regulatory  compliance  requirements.  FileNet
Email Manager is a server-based  email management  solution that integrates with
popular  corporate  email systems like  Microsoft  Exchange and Lotus Notes mail
servers and desktop applications such as Microsoft Office. FileNet Email Manager
allows  organizations  to  manage  email  content  as a part of a  comprehensive
Enterprise Content Management infrastructure. FileNet Email Manager provides the
ability to use  captured  email  content to initiate and play a role in business
processes. In addition, FileNet Email Manager can help simplify and automate the

                                       7

process of  capturing  email  messages as business  records to support  proof of
compliance as well as easy storage and retrieval of email messages.

***Team Collaboration***

     FileNet Team  Collaboration  Manager is designed to promote more  effective
and efficient group  decision-making  by removing barriers between people,  data
and  processes.  FileNet Team  Collaboration  Manager  provides  the  contextual
framework and collaboration  tools,  including discussion forums, live meetings,
and  interactive  polls,  to  enable  group  members  to share  information  and
participate  in  processes to  facilitate  group  decision-making.  FileNet Team
Collaboration  Manager captures all related content and streamlines processes to
promote   knowledge   exchange   and  improve   decision-making,   and  enforces
corporate-best practice execution and regulatory compliance.  Team collaboration
increases team  interaction  through the capturing and sharing of ideas,  issues
and comments from team members; shortens exception/resolution cycle times with a
complete  record  of  decision-making  processes;  increases  project  speed and
provides an audit trail to support decisions.

***Web Content Manager***

     FileNet  Web Content  Manager is  designed to combine Web site  development
capabilities  with integrated  process  capabilities  for managing the creation,
approval and  publication  of Web content.  FileNet Web Content  Manager  allows
centralized control of Web site content and appearance while allowing particular
content to be  directly  created  and updated by  organization  members  without
specialized  Web  expertise,  through the use of controlled  templates and other
tools. Web Content Manager can control Web content across  distributed sites and
provides integrated process management  capabilities to help ensure accurate Web
content publication.

**FileNet ECM Development Tools**

     The FileNet P8 architecture includes the following technology for aiding in
the development of ECM and BPM solutions:

***Content Engine*** provides software services for managing content and other
business-related  data,  collectively  referred  to as  objects.  In addition to
managing documents and any customer defined objects,  the Content Engine manages
a broad range of  enterprise  content  including  workflow  definitions,  stored
searches,   publishing  templates,   entry  templates,  Web  content  management
templates, analytics reports, and simulation scenarios.

***Process Engine*** is the component for design, execution and tracking of processes.
It manages processes and their associations with documents,  data, and lifecycle
information  residing  in the  Content  Engine.  It also  tracks and records the
status of work in progress.  The Process  Engine  drives  processes,  associates
information, manages work-to-do, sends notifications,  sets milestones, provides
reporting  and  tracking   capabilities,   and  provides  the  most   up-to-date
information to all participants.

***FileNet P8  Workplace***  is an  end-user  application  that  provides a  Web-based
interface  to the FileNet P8  platform.  It is designed to allow users to locate
business  content,  initiate  new  transactions,  check  status and track a wide
variety of  processes  and  information  across  multiple  storage  locations or
systems. A customizable environment,  FileNet P8 Workplace is designed to enable
employees,  partners  and  customers to manage work  processes  through a simple
interface.

                                       8
***Content Provider for FileNet P8 Workplace***  provides  virtual content  management
("VCM") access to content stored in third party  repositories  including content
management  repositories  from IBM, EMC, and OpenText among others,  through the
FileNet  P8  Workplace.  It  is  designed  to  eliminate  the  need  for  custom
integrations,  which  can be  expensive,  time  consuming  and  require  ongoing
maintenance for customers.  FileNet's VCM  capabilities are provided as a result
of a reseller business agreement with FileNet partner,  Venetica, who in October
of 2004 was acquired by IBM.

***Java2 Platform  Enterprise  Edition  ("J2EE")  Support*** provides J2EE application
components  and  system  components  that  operate  in  J2EE  Platform  Products
(application  servers)  such as BEA  WebLogic  and IBM  WebSphere.  In addition,
FileNet applications leverage the J2EE application model to offer developers the
ability  to  build  multi-tier   applications   that  deliver  the  scalability,
accessibility, and manageability required by enterprise applications.

***Web  Application  Toolkit***  provides a framework for developing web  applications
that run in a J2EE  environment.  The  toolkit  is used by  several  FileNet  P8
applications,  including  Workplace,  Solution  Templates,  and the Web  Content
Manager.

***Image Services Resource Adapter ("ISRA")*** is designed to enable  organizations to
connect content stored in the FileNet Image Manager's Image Services  repository
to custom J2EE  applications.  The ISRA delivers the  functionality  required to
access Image Services content within a J2EE Web application. It was specifically
designed  for  Image  Services   customers  who  have  standardized  on  a  Java
development and implementation environment for Web applications.

***Portal Integrations*** provide commonly required content and process  functionality
within 3rd party portal products.  FileNet  provides portal  integration for BEA
WebLogic, IBM WebSphere and mySAP portals. Additionally,  customers and partners
can create their own  portlets  using  FileNet's  Java  Application  Programming
Interfaces.  In  addition,  FileNet  makes  available  the  source  code for the
portlets so that  customers and partners can modify and extend the  capabilities
if desired.

**Stand-Alone Products**

     In  addition  to the FileNet P8 product  suites and  development  tools the
following   FileNet  software   products  are  available  to  our  customers  as
stand-alone products.

***FileNet eProcess Services*** is a Web  browser-based  process  management  product.
eProcess  Services  enables an  organization  to create and manage  high-volume,
mission-critical automated business processes in a dynamic Web environment.  Our
Web-based user interface, built-in eProcess applications, Web server components,
and XML  architecture  provide scalable  connectivity of business  processes for
employees, business partners, and customers.

***FileNet Web Services*** combines a full-featured,  Web browser-based  client system
that allows access to content without the need to locally  download  information
or  content.  FileNet  Web  Services  also  combines a  comprehensive  Web-based
application development tool kit, and Web server components,  and is designed to
support complex and mission  critical ECM and BPM activities.  This  application
provides a complete set of content management  functionality,  allowing users to
check in, check out, search and browse, share, revise, and change properties for
content stored in a repository, all from a Web browser.

***FileNet  Content  Services*** is a repository  for creating,  accessing,  managing,
securing,  and updating  electronic  documents and content.  Content Services is
designed to allow a business to manage  enterprise  content  from  creation,  to
secure delivery, to revise and re-use.

                                       9
***FileNet  WorkFlo  Services***  is  FileNet's  eProcess  workflow  engine.   WorkFlo
Services,  combined with eProcess  Services,  is designed to enable customers to
automate and access critical business processes and associated content.  WorkFlo
Services  can be used to  create  applications  that  reflect  the way  business
processes are performed within the particular customer's organization,  and is a
critical  enabling  technology for the automation of business  processes via the
Web. It allows  organizations to control and modify their work processes to meet
their evolving needs,  and integrates the flow of information  between  software
applications  within a company's business  processes.  WorkFlo Services supports
multiple client, server and applications development environments,  such as Java
and COM, and integrates with leading  business process  re-engineering  products
for reduced implementation time.

***FileNet  Integrated  Document  Management ("IDM") Desktop*** is a Microsoft Windows
client software  application  designed to allow users to view,  manage,  revise,
share,  and  distribute  content  across  an  enterprise  for ad hoc or  mission
critical use. IDM Desktop  allows users to manage  content  directly from within
Microsoft Office and Lotus Notes applications.

***FileNet  Image  Services***  is an  image  and  object  server  designed  to  allow
businesses to manage the  high-speed  acquisition,  distribution,  and access of
content and objects of all types.

***FileNet  Report  Manager*** is an online  statement and report  management  system.
Report Manager is designed to allow organizations the ability to capture,  store
and  access  legacy  print data  streams  within ECM  applications  by  storing,
accessing,  mining,  and analyzing  computer-generated  reports,  statements and
forms.

***FileNet  Capture***  addresses  document and content  capture  needs.  Available in
high-volume  Capture  Professional or small department Capture Desktop versions,
Capture is designed to acquire digital and paper-based  content into FileNet ECM
repositories for enterprise-wide use and online access.

***FileNet  Application  Connector Products*** are built to provide content management
and business process  management  integration with leading  Enterprise  Business
solutions like those from SAP and Siebel.

***FileNet  Application  Connector  for SAP R/3*** is a document  management  and data
archiving  solution  certified  by  SAP,  designed  for  use  with  the  SAP R/3
Enterprise Resource Planning ("ERP") application suite.

***FileNet  Application  Connector for Siebel 7*** provides Siebel certified  document
management for use with the Siebel 7 Customer  Relationship  Management  ("CRM")
application.

**Customer Support**

     We operate service and support  organizations  on a global basis to provide
post-sales  services to ensure  successful  implementation  of our  products and
customer  satisfaction.  Due to the highly  configurable nature of our software,
our product sales are coupled with  contracts for continuing  support  services.
Our support offering also includes right to new versions.

     Our  worldwide   Customer   Service  and  Support   organization   provides
comprehensive  support  capabilities  including  electronic and real-time  phone
support and global call tracking for customers and partners on support programs.
System  engineers  deliver support  coverage on multiple  platforms with 24-hour
call  handling.  Our Web site  offers  the  ability  to open  cases,  search our
knowledge base and review related status reports.

     Support  programs may be customized  and enhanced  with optional  fee-based
services.  These options include after hours phone coverage,  on-site  technical
consultants  to assist with  upgrades  and FileNet  product  installations,  and
FileNet  Software   Development  Kit  support  for  development  teams  building
applications using our products.

                                       10

     Our manufacturing facilities in Costa Mesa, California and Dublin, Ireland,
conduct software manufacturing and distribution, localization, integration, test
and quality control.

**Professional Services and Education**

     Our  worldwide  professional  services  organization  provides  consulting,
implementation,  development and other technical  services and training services
to our licensed customers and authorized  ValueNet Partners.  These services are
provided through in-house employees and through a network of qualified partners.
Our  worldwide   professional   services  organization  offers  a  comprehensive
methodology to help customers design, install,  integrate,  customize and deploy
our  software.   These   services  range  from  the  management  of  large-scale
implementations  of our  products  to  fixed  price  standard  services  such as
software installation and standard  implementation  packages, but do not include
modifications  to the standard  software.  Our educational  curriculum  includes
training courses for end users, application developers and system administrators
through online media-based and/or instructor-led training.

**Research and Development**

     The  industry  in which  we  compete  is  subject  to  rapid  technological
developments,  evolving industry standards, changes in customer requirements and
competitive  new  products and  features.  As a result,  our  success,  in part,
depends on our ability to continue  to timely and cost  effectively  enhance our
existing  products and to develop and  introduce new products that meet customer
needs while reducing total cost of ownership.

     To achieve  these  objectives  we have made and expect to  continue to make
substantial  investments  in research  and  development,  through  internal  and
offshore   development   activities,   third  party  licensing   agreements  and
potentially  through technology  acquisitions.  Our development efforts focus on
our FileNet P8 ECM platform as we continue to develop and enhance our enterprise
content and process  management  capabilities.  The focus of these efforts is to
create  functionality  in Enterprise  Content  Management  and Business  Process
Management  technology that provide a richer competitive product offering to our
customers.  Expenditures for research and development were $ 78.2 million; $77.1
million and $71.7 million for the years ended December 31, 2004, 2003, and 2002,
respectively.

     Additionally, we license and embed third party software that is designed to
expand the  functionality  of our products  through a variety of agreements with
the  producers of this  software.  We expect to continue to look for  technology
acquisitions that offer us additional product know-how or domain knowledge where
appropriate  and will continue to embed third party  technology that expands our
product line.

**Competition**

     The market for our  products is highly  competitive  and  competition  will
continue to intensify as the ECM and BPM market consolidates.  We compete with a
large number of Enterprise Content Management, Web content management,  business
process  management,   workflow,   document  imaging,  and  electronic  document
management  companies.  IBM is the largest  company that competes  directly with

                                       11

us in the content and process  management  market. Documentum,  a key competitor
in the Content Management market, was acquired  by  the EMC Corporation, a large
storage technology company, during 2003. EMC is now a  competitor offering  both
content  management  and  storage  management  capabilities.   Numerous  smaller
software  vendors  also compete in  each  product  area.   We  also  experience
competition from systems integrators who configure  hardware and  software  into
customized systems.

     Large  infrastructure  vendors  such as Oracle  Corporation  and  Microsoft
Corporation  have  developed  products or plan to offer  products in the content
management market. Software vendors such as Tibco Software,  Inc., Savvion, Inc.
and  Pegasystems,  Inc.,  each with a different  core product  foundation,  have
approached the business process  management  market from their individual market
segments  and may  compete  more  intensely  with us in the  future.  It is also
possible that new  competitors  or alliances  among  competitors  may emerge and
rapidly acquire  significant  market share. We also expect that competition will
increase as a result of ongoing software industry consolidations.

     We believe that the principal  competitive factors affecting the market for
our  software  products  and  services  include  vendor and product  reputation;
product quality, performance and price; the availability of software products on
multiple  platforms;   product  scalability;   product  integration  with  other
enterprise applications;  software functionality and features;  software ease of
use; and the quality of professional  services,  customer  support  services and
training.  The relative  importance  of each of these  factors  depends upon the
specific customer involved.

     Certain of our  competitors  and  potential  competitors  may have  greater
resources,  larger sales and  marketing  teams,  broader  product lines and more
experience  developing software than we do. Increased  competition may result in
price  reductions,  reduced gross margins and loss of market share, any of which
could have a material  adverse  effect on our business,  financial  condition or
results of operations.

**Trademarks**

     FileNet  and  ValueNet  are  registered  trademarks  of  FileNet.   WorkFlo
Services, OSAR, Watermark, Panagon, Acenza, Brightspire, Document Warehouse, and
FileNet  Workgroup  also are  trademarks  or  registered  trademarks  of FileNet
Corporation that may be referenced in this Form 10K. All other brands or product
names are trademarks of their respective companies.

**Patents**

     As of  December  31,  2004,  FileNet  Corporation  has one  issued and nine
pending U.S. patent applications.  Our subsidiary, 3565 Acquisition LLC, has one
issued  U.S.  patent  and  three  pending  U.S.  patent  applications.   Another
subsidiary, FileNet Nova Scotia, has one issued U.S. patent and two pending U.S.
patent applications.  We have applied for and may in the future apply for patent
protection in foreign countries.

**Employees**

     As of December 31, 2004 we had 1,607 full-time employees, of which 400 were
employed in research and  development;  433 in sales;  97 in  marketing;  187 in
education and professional  services; 258 in customer support; 64 in operations;
and 168 in administration.  No employees are represented by labor unions, and we
have never  experienced a work stoppage.  We believe that we enjoy good employee
relations.

                                       12
**Risk Factors That May Affect Future Results**

     Except for the historical  information  and discussions  contained  herein,
statements   contained  in  this  Form  10-K  may  constitute  "forward  looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995. These statements are based on current expectations and assumptions that
involve a number of risks,  uncertainties  and other  factors  that could  cause
actual results to differ  materially from recent results or from our anticipated
future  results.  We operate in a rapidly  changing  economic and  technological
environment that presents numerous risks. Prospective and existing investors are
strongly urged to carefully consider the various cautionary statements and risks
set forth in this  annual  report and our other  public  filings.  Many of these
risks are beyond our control and are driven by factors  that we cannot  predict.
The following discussion highlights some of these risks:

     ***Our quarterly operating results may fluctuate in future periods and are not
predictable and, as a result,  we may fail to meet expectations of investors and
analysts, causing our stock price to fluctuate or decline***. Our operating results
have fluctuated in the past and we anticipate our future operating  results will
continue to fluctuate due to many factors,  some of which are largely beyond our
control.  Consequently,  our prior  operating  results should not necessarily be
considered indicative of future operating results.

Factors that may cause our operating results to fluctuate,  include, but are not
limited to, the following:

     o    the tendency to realize a substantial percentage of our revenue in the
          last weeks, or even days, of each quarter;

     o    the potential for delays or deferrals of customer orders;

     o    information technology spending trends;

     o    the discretionary  nature of our customers' budget and purchase cycles
          and the absence of long-term customer purchase commitments;

     o    the size, complexity and timing of individual transactions;

     o    the length of our sales cycle;

     o    the level of software sales and price competition;

     o    the timing of new software  introductions and software enhancements by
          us and our competitors;

     o    general domestic and international economic and political conditions;

     o    seasonality in technology purchases, and

     o    a significant  portion of our expenses are personnel related and fixed
          and cannot be adjusted  quickly in  response to actual or  anticipated
          revenue trends.

     The  decision  to  implement  our  products  is subject to each  customer's
resources and budget  availability.  Our quarterly sales generally include a mix
of medium sized orders,  along with several large  individual  orders,  and as a
result,  the loss or delay of an individual large order could have a significant
impact on our quarterly  operating results and revenue.  Our operating  expenses
are based on projected  revenue trends and are generally fixed.  Therefore,  any
shortfall from projected revenue may cause significant fluctuations in operating
results  from  quarter to  quarter.  As a result of these  factors,  revenue and
operating  results  for any  quarter  are  subject to  fluctuations  and are not
predictable with any significant degree of accuracy.  Therefore, we believe that
period-to-period  comparisons of our results of operations  should not be relied
upon as indications of future  performance.  Moreover,  such factors could cause
our operating  results in a given quarter to be below the expectations of public
market  analysts and  investors.  In either case,  the price of our common stock
could decline materially.

     ***The  markets in which we operate  are highly  competitive  and we cannot be
sure that we will be able to continue to compete effectively, which could result
in lost  market  share and  reduced  revenue***.  The  markets  we serve are highly
competitive and we expect competition to intensify with the consolidation of the
ECM market.  We have multiple  competitors and there may be future  competitors,

                                       13

some  of  which  have  or  may  have  substantially  greater  sales,  marketing,
development  and financial  resources.  As a consequence,  our present or future
competitors may be able to develop software  products  comparable or superior to
those  offered by us, offer lower priced  products or adapt more quickly than we
do to new technologies or evolving customer requirements.

     Other competitive risks include, but are not limited to:

     o    We  anticipate   significant  future  consolidation  as  the  software
          industry matures. Large  well-established  software firms like Oracle,
          IBM and Adobe  either  have  entered or may enter our market by adding
          content  management  features to their existing suite of products.  In
          addition,  large hardware or infrastructure firms may enter our market
          by acquiring our competitors to pursue revenue growth opportunities;

     o    Many of our competitors are also our  distribution  channel  partners.
          For example,  IBM competes with us in the content  management  market,
          but also  implements  our  software  solutions  through its IBM Global
          Services  business  unit. Our customers may view this type of vertical
          integration   of   software   development   and   system   integration
          capabilities as a key competitive advantage.

     o    We  cannot  predict  new  competitors   entering  our  market  through
          acquisitions  or other  alliances.  In order to be  successful  in the
          future, we must respond to technological change, customer requirements
          and competitors' current software products and innovations. We may not
          be able to compete  effectively  in our target  markets.  In addition,
          current and potential  competitors  have  established or may establish
          cooperative  relationships  among  themselves or with third parties to
          increase  the  ability of their  products  to address the needs of the
          markets we serve. Accordingly,  it is possible that new competitors or
          alliances among competitors may emerge and rapidly acquire significant
          market share.  Increased  competition may result in price  reductions,
          reduced  gross  margins and loss of market  share that could result in
          reduced revenue.

     ***A significant portion of our revenue is derived  internationally and we are
subject  to many risks  internationally,  which  could put our  revenue at risk.***
Historically,  we have  derived  approximately  30% of our  total  revenue  from
international  sales through our worldwide  network of subsidiaries  and channel
partners.  This  contribution  percentage  will  fluctuate  quarter to  quarter.
International  business is subject to certain risks  including,  but not limited
to, the following:

     o political and economic instability;

     o tariffs and trade barriers;

     o varying technical standards and requirements for localized products;

     o reduced protection for intellectual property rights in certain countries;

     o difficulties in staffing and maintaining foreign operations;

     o difficulties in managing foreign partners;

     o multiple overlapping tax regimes;

     o currency restrictions and currency exchange fluctuations;

     o the burden of complying  with a wide variety of complex  foreign laws,
       regulations and treaties;

     o spreading our management resources to cover multiple countries; or,

     o longer  collection  cycles and higher risk of  non-collection  and bad
       debt expense.

     Any of these factors could reduce the amount of revenue we realize from our
international operations in the future.

     ***The market for content management  solutions may not grow as we anticipate,
and may decline,  and our products may not gain  acceptance  within this market,
resulting  in reduced  revenue***.  Our future  financial  performance  will depend
primarily on the continued  growth of the markets for our software  products and
services as well as our ability to capture a larger share of those markets.  Our

                                       14

primary product offerings address the enterprise  content  management  solutions
market. This market is developing  rapidly,  and while we believe this market is
growing  and  will  continue  to  grow,  particularly  as  new  regulations  are
introduced   that  focus  on  controlling   the  flow  of   information   within
organizations to ensure compliance with disclosure and other obligations,  these
markets may not continue to grow as we anticipate, or our products and solutions
may  not  gain  acceptance  within  these  markets.  If the  markets  we  serve,
particularly the market for enterprise  content  management  solutions,  fail to
grow or grow more slowly than we  currently  anticipate,  or if our products and
solutions do not gain acceptance within these markets,  our business,  financial
condition and operating results would be harmed.

     ***We must develop and sell new  products to keep up with rapid  technological
change in order to achieve future revenue growth and  profitability***.  The market
for  our  software  and  services  is  characterized   by  rapid   technological
developments,  evolving industry standards, changes in customer requirements and
frequent new product introductions and enhancements.  Our ability to continue to
sell  products  will be  dependent  upon our  ability to continue to enhance our
existing  software and services  offerings,  develop and introduce,  in a timely
manner, new software products  incorporating  technological advances and respond
to customer requirements.  For example, three new product suites that we predict
will  address new  markets  include  Records  Manager,  E-Mail  Manager and Team
Collaboration  Manager.  The  Records  Manager  Suite was  released in the third
quarter of 2004 and provides  customers  with the  capability to  systematically
apply record  management  principles to content.  E-Mail Manager was released in
late  2004 and  allows  organizations  with  large  numbers  of  email  users to
effectively  manage email  content.  The Team  Collaboration  Manager Suite that
enables customers to initiate  collaborative  tasks at any point in a process is
expected to be available early 2005.

     We may  not be  successful  in  developing,  marketing  and  releasing  new
products  or  new  versions  of  our  products  that  respond  to  technological
developments,  evolving industry standards or changing customer requirements. We
may also  experience  technical  difficulties  that could  delay or prevent  the
successful development,  introduction, sale and implementation of these products
and enhancements.  In the past, we have experienced  delays in the release dates
of  enhancements  and  new  releases  to our  products  and  we  may  experience
significant  future  delays in  product  introduction.  From  time to time,  our
competitors  or  we  may  announce  new  software   products,   capabilities  or
technologies  that have the  potential  to replace or shorten the life cycles of
our existing software products.  Announcements of currently planned or other new
software  products may cause  customers to delay their  purchasing  decisions in
anticipation  of such software  products,  and such delays could have a material
adverse effect on our sales. In addition,  our ability to generate revenues from
the  sale  of  customer   support,   education  and  professional   services  is
substantially  dependent  on our ability to generate  new sales of our  software
products.

     ***We  are  dependent  upon  customers  concentrated  in  a  small  number  of
industries.  A significant  decline in one of those  industries  could result in
reduced  revenue***.  Our customers are  concentrated  in the insurance,  financial
services,   government,   manufacturing,    telecommunications   and   utilities
industries.  We may not be successful in obtaining  significant new customers in
different  industry  segments  and we  expect  that  sales  of our  products  to
customers in a limited number of industry  segments will continue to account for
a large  portion  of our  revenue in the  future.  If we are not  successful  at
obtaining  significant new customers or if a small number of customers cancel or
delay  their  orders for our  products,  then we could fail to meet our  revenue
objectives.  Consolidation  within the financial services and insurance industry
could  further  reduce  our  customers  and  future  prospects.  As  many of our
significant  customers are concentrated in a small number of industry  segments,
if business  conditions in one of those industry segments  decline,  then orders
for our products from that segment may decrease,  which could negatively  impact
our business,  financial  condition and operating results and cause the price of
our common stock to fall.

                                       15
***We must devote substantial  resources to software  development,  and we may
not realize  revenue from our  development  efforts for a substantial  period of
time***.  Introducing  new products that rapidly  address  changing  market demands
requires a continued  high level of investment in research and  development.  We
expect to invest approximately 19% of annual revenue in research and development
efforts in the near term.  The  majority of our  investment  in new and existing
market opportunities is made prior to our ability to generate revenue from these
new  opportunities.  These  investments of money and resources are made based on
our  prediction of new products and services that we anticipate the market needs
and will accept. As a result,  our operating results could be adversely affected
if our predictions of market demand are incorrect and we are not able to realize
the  level of  revenues  we  expect  from new  products  or if that  revenue  is
significantly delayed due to revenue recognition rules that require new products
be tested in the market to validate pricing and acceptance.

     ***We are increasing  our use of third party software  developers and may have
difficulty enforcing or managing our agreements with them, which could delay new
product  introductions  and  reduce  revenue***.  To  help  manage  costs,  we have
contracted   with  third  party   software   development   companies   overseas,
particularly in India,  where labor costs are lower, to perform a portion of our
software  development of specific products and software  localization work. As a
result,  we will become  increasingly  dependent on these third party developers
for continued  development and support of several of our key products. If any of
these third party developers were to terminate their  relationship  with us, our
efforts  to  develop  new  products  and  improve  existing  products  could  be
significantly  delayed  and  our  ability  to  provide  product  support  to our
customers  could be  impaired.  In  addition,  since the majority of these third
party  developers are located outside the United States,  our ability to enforce
our agreements with them may be limited.

     ***We must retain and attract key  executives  and personnel who are essential
to our business, which could result in increased personnel expenses***. Our success
depends to a  significant  degree upon the  continued  contributions  of our key
management, as well as other marketing, technical and operational personnel. The
loss of the services of one or more key employees could have a material  adverse
effect on our operating results.  We do not have employment  agreements with any
of  the  members  of our  United  States-based  senior  management.  We do  have
employment  contracts with members of our  international  management that commit
them to a notification period.

     We believe our future success will depend in large part upon our ability to
attract and retain additional highly skilled management,  technical,  marketing,
product  development  and  operational  personnel  and  consultants.   There  is
competition for such personnel;  particularly software developers,  professional
services consultants and other technical personnel.  We may not be successful in
attracting and retaining such personnel in the future.

     ***If our products  contain  errors or  performance  problems,  we could incur
unplanned  expenses  and delays  that could  result in  reduced  revenue,  lower
profits, and harmful publicity***.  Software,  services and products, as complex as
those we sell, are  susceptible to errors or  performance  problems,  especially
when first introduced or deployed.  Our software products are often intended for
use in applications that are critical to a customer's business. As a result, our
customers  may rely on the  effective  performance  of our software to a greater
extent than the market for software products generally. Despite internal testing
and testing by current and  potential  customers,  new products or  enhancements
often contain undetected errors or performance problems that are discovered only
after a product has been installed and used by customers.  Errors or performance
problems  could cause  delays in product  introduction  and  shipments  or could
require design  modifications,  either of which could lead to a loss in or delay
of revenue.  These problems  could cause a diversion of  development  resources,
harm our reputation or result in increased service or warranty costs, or require
the payment of monetary  damages.  While our license  agreements  with customers

                                       16

typically contain provisions designed to limit our exposure to potential product
liability  claims,  it is possible that such limitation of liability  provisions
may not be effective under the laws of certain jurisdictions.

     ***The limitation of liability  provisions contained in our license agreements
may not be effective as a result of existing or future  federal,  state or local
laws or ordinances or unfavorable  judicial  decisions***.  Our license  agreements
with our customers  typically contain provisions  designed to limit our exposure
to potential product liability claims. Although product liability claims to date
have been  immaterial,  the sale and support of our products entails the risk of
such claims,  which could be  substantial in light of our customers' use of such
products  in  mission-critical  applications.  If a  claimant  brings a  product
liability  claim  against  us, it could  have a material  adverse  effect on our
business, results of operations and financial condition. Even if our software is
not at fault,  we could  suffer  material  expense  and  material  diversion  of
management time in defending any such lawsuits.

     ***Acquisitions of companies or technologies  may result in disruptions to our
business and diversion of management attention,  which could cause our financial
performance to suffer***. As part of our business strategy,  we frequently evaluate
strategic  acquisition  opportunities.  We anticipate that our future growth may
depend in part on our ability to identify and acquire complementary  businesses,
technologies or product lines.  Acquisitions involve significant risks and could
divert  management's  attention  from the  day-to-day  operations of our ongoing
business.  Additionally,  such  acquisitions  may include  numerous other risks,
including, but not limited to, the following:

     o    difficulties  in the  integration  of  the  operations,  products  and
          personnel of the acquired companies;

     o    the incurrence of debt;

     o    liabilities  and risks that are not known or  identifiable at the time
          of the acquisition;

     o    difficulties in retaining the acquired company's customer base;

     o    valuations  of  acquired  assets  or  businesses  that are  less  than
          expected; or

     o    the potential loss of key personnel of the acquired company.

     If we fail to  successfully  manage future  acquisitions or fully integrate
future  acquired   businesses,   products  or  technologies  with  our  existing
operations,  we may not receive the intended  benefits of the  acquisitions  and
such acquisitions may harm our business and financial results.

     ***Our business is highly  automated for the  execution of marketing,  selling
and  technical  support  functions,  and natural  disasters  that disable  these
systems  could result in a disruption  in our ability to transact  business***.  We
depend on the  integrity of our  information  systems  network  connectivity  to
perform these business functions.  Significant business interruption could occur
at our Costa  Mesa  headquarters facility due to a natural  disaster  such as an
earthquake, which could cause a prolonged power outage and the inability for key
personnel to perform their job functions.

     ***Protection of our  intellectual  property and other  proprietary  rights is
limited, which could result in the use of our technology by competitors or other
third parties***. There is risk of third-party claims of infringement,  which could
expose us to litigation and other costs.  Our success  depends,  in part, on our
ability  to  protect  our  proprietary  rights to the  technologies  used in our
principal products.  We rely on a combination of copyrights,  trademarks,  trade
secrets,  patents,  confidentiality  procedures  and  contractual  provisions to
protect our proprietary rights in our software products.  Our existing or future
copyrights,  trademarks,  trade secrets,  patents or other intellectual property
rights  may  not  have  sufficient  scope  or  strength  to  provide  meaningful
protection or a commercial  advantage to us. Intellectual  property rights often
cannot be enforced  without engaging in litigation,  which involves  devotion of
significant  resources,  can  divert  management  attention  and  has  uncertain
outcomes.  In addition,  the laws of some  foreign  countries do not protect our
proprietary  rights to the same extent as do the laws of the United States.  Any
inability  to  protect  our  intellectual  property  may harm our  business  and
competitive position.

                                       17
***We may,  from time to time,  be  notified  that we are  infringing  certain
patent or  intellectual  property  rights of others,  which  could  expose us to
litigation  and other  costs***.  While  there are no  material  actions  currently
pending  against us for  infringement of patent or other  proprietary  rights of
third   parties,   we  cannot  assure  that  third  parties  will  not  initiate
infringement  actions  against  us in the  future.  Combinations  of  technology
acquired through past or future  acquisitions and our technology will create new
software  products  and  technology  that  also  may  give  rise  to  claims  of
infringement. Infringement actions can result in substantial costs and diversion
of  resources,  regardless  of the  merits of the  actions.  If we were found to
infringe  upon  the  rights  of  others,  we may  not be able  to  redesign  the
infringing  products to avoid further  infringement or obtain necessary licenses
to use the  infringed  rights  on  acceptable  terms,  or at all.  Additionally,
significant damages for past infringement could be assessed or future litigation
relative to any such licenses or usage could occur.  An adverse  disposition  of
any claims or the advent of litigation arising out of any claims of infringement
could result in  significant  costs or reduce our ability to market any affected
products.

     ***We depend on certain strategic relationships in order to broaden the number
of third party  platforms with which our products are compatible and the loss of
these relationships  could harm our business***.  In order to broaden the number of
third party platforms with which our products are compatible and thereby broaden
the  market  opportunities  for  our  products,  we have  established  strategic
relationships with a number of software and hardware platform vendors, including
companies  such as BEA Systems  Inc.,  Hewlett-Packard  Development  Company LP,
Network Appliance,  Inc., Sun MicroSystems and Veritas Software Corporation.  We
cannot  assure  that  these  companies  will not  reduce  or  discontinue  their
relationships  with,  or support  of,  FileNet and our  products.  If we fail to
maintain these  relationships,  or to establish new relationships in the future,
it could harm our business, financial condition and results of operations.

     ***We  currently  license  certain  software  from  third  parties,  including
software that is integrated with internally  developed  software and used in our
products  to  perform  key  functions.  Also,  certain of our  products  include
publicly available software pursuant to open source license agreements. We would
be unable to sell these  products if we do not maintain  these  licenses,  which
would result in reduced  revenue***.  In the past, we have had difficulty  renewing
certain  licenses.  The failure to continue to  maintain  these  licenses  would
prohibit us from selling certain products until replacement  functionality could
be  developed,  licensed or acquired.  We cannot  assure that such third parties
will  remain in  business,  that they will  continue to support  their  software
products or that their software  products will continue to be available to us on
acceptable  terms.  The loss or  inability  to  maintain  any of these  software
licenses  could result in shipment  delays or reductions  in software  shipments
until equivalent software can be developed, licensed or acquired and integrated.
In addition,  it is possible  that as a consequence  of a merger or  acquisition
transaction involving one of these third parties,  certain restrictions could be
imposed on our business that had not been imposed prior to the transaction. This
could adversely affect our sales.

     ***In addition to our direct  sales  force,  we depend on  relationships  with
systems integrators,  independent software vendors, and value added resellers to
sell our products and  services.  The loss of a large  strategic  partner  could
affect our ability to sell in a specific segment of the market***. We cannot assure
that these  channel  partners  will remain in business or continue to promote or
sell our products or services.  The loss or inability to maintain  these channel
partner  relationships,   or  our  failure  to  establish  new  channel  partner
relationships in the future,  could harm our business,  financial  condition and
results of operations.

     ***Our  stock  price  has  been  and  may  continue  to  be  volatile  causing
fluctuations  in the market price of our stock,  which would impact  shareholder
value***.  The trading price of our common stock has  fluctuated in the past and is
subject to significant  fluctuations in response to the following factors, among
others, some of which are beyond our control:

                                       18

     o    variations in quarterly operating results;

     o    fluctuations in our order levels;

     o    announcements of technological  innovations or new products or product
          enhancements by us or our competitors;

     o    key management changes;

     o    changes in accounting regulations;

     o    changes in joint marketing and development programs;

     o    developments relating to patents or other intellectual property rights
          or disputes;

     o    developments in our  relationships  with our customers,  resellers and
          suppliers;

     o    our announcements of significant  contracts,  acquisitions,  strategic
          partnerships or joint ventures;

    o    general conditions in the software and computer industries;

     o    fluctuations  in general  stock  market  prices and volume,  which are
          particularly  common among highly volatile  securities of Internet and
          software companies;

     o    acquisitions in the past have been primarily cash based  transactions.
          Future acquisitions may include stock, which could dilute earnings per
          share and possibly reduce shareholder value;

     o    we may not be able to  hedge  all  foreign  exchange  risk  due to the
          significant  fluctuation  of the Euro to the US Dollar and our ability
          to predict the mix of sales orders  denominated in the Euro at the end
          of each fiscal quarter;

     o    reduced  stock value may  restrict  our access to equity  financing to
          fund further acquisitions using stock;

     o    industry  analyst opinions may increase our stock price volatility and
          reduce shareholder value; and,

     o    other general economic and political conditions.

     In recent years,  the stock market,  in general,  has  experienced  extreme
price and volume  fluctuations  that have  affected  the  market  price for many
companies in industries  similar to ours. Some of these  fluctuations  have been
unrelated to the operating  performance of the affected companies.  These market
fluctuations may decrease the market price of our common stock in the future.

**Item 2.   *Properties***

     Our headquarters is located in Costa Mesa,  California.  We currently lease
300,238  square feet of office,  development  and  manufacturing  space in Costa
Mesa,  California  and 69,349  square  feet of office and  development  space in
Kirkland,  Washington.  In addition,  we lease 24,500  square feet of office and
manufacturing  space in Dublin,  Ireland  and 10,882  square  feet of office and
development space in Edmonton,  Alberta, Canada. We also lease sales and support
offices in 24  locations  in the  United  States,  17  locations  in  Europe,  2
locations in  Australia,  1 in Canada,  and 6 locations in Asia. We believe that
the Costa Mesa,  Dublin,  Kirkland and Edmonton  facilities will be adequate for
our anticipated development and manufacturing needs through 2005.

**Item 3.   *Legal Proceedings***

     In the  normal  course of  business,  we are  subject to  ordinary  routine
litigation  and claims  incidental  to our  business.  We monitor and assess the
merits and risks of pending legal  proceedings.  While the results of litigation
and claims cannot be predicted with certainty, based upon our current assessment
we believe that the final outcome of each existing legal proceeding  either will
be resolved in our favor or, if resolved  against us, will not have a materially
adverse effect on our consolidated results of operations or financial condition.

                                       19
**Item 4.   *Submission of Matters to a Vote of Security Holders***

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2004.

                                     **PART II****Item 5.   *Market  for  the  Registrant's Common Stock  and  Related  Stockholder
          Matters***

     Our common stock is traded on the NASDAQ  National  Market under the symbol
"FILE".  The  following  are the high and low sale prices  from  January 1, 2003
through December 31, 2004, as reported by NASDAQ:

                                                              .*High           Low*Year Ended December 31, 2004                                  .
   4th Quarter                            $28.95        $17.50
   3rd Quarter                             31.39         16.44
   2nd Quarter                             32.00         25.80
   1st Quarter                             30.45         24.19 Year ended December 31, 2003                                  .
   4th Quarter                            $27.75        $19.50
   3rd Quarter                             22.65         15.00
   2nd Quarter                             19.65         10.19
   1st Quarter                             14.18         10.39 

     The closing  price of our common stock at December 31, 2004 was $25.76.  As
of March 14,  2005  (record  date for the 2005 Annual  Meeting of  Stockholders)
there were 454 stockholders of record.

     We have not paid any dividends on our common stock. We currently  intend to
retain  earnings  for use in our  business  and do not  anticipate  paying  cash
dividends in the foreseeable future.

                                       20
**Item 6.   *Selected Financial Data***

     The following table summarizes  selected  financial data and should be read
in conjunction with our consolidated financial statements and the notes thereto,
and Item 7,  Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations.  The selected  consolidated  statements of operations and
balance  sheet  data as of and for each of the five  years in the  period  ended
December 31, 2004 have been derived from our audited financial statements.

*(in thousands, except per share amounts)**Fiscal Years Ended December 31,***2004           2003          2002          2001          2000****Consolidated statements of operations data:**
Revenue:
     Software                                  $  154,279     $  149,214    $  132,508    $  119,014    $  204,872
     Service                                      243,279        215,291       214,509       215,596       195,490 
            Total revenue                         397,558        364,505       347,017       334,610       400,362
Cost of revenue:
     Cost of software revenue                      15,122         13,800        10,565         7,522        14,643
     Cost of service revenue                       86,943         85,131        95,011       112,503       115,535             Total cost of revenue                 102,065         98,931       105,576       120,025       130,178     Gross profit                                 295,493        265,574       241,441       214,585       270,184 
Operating expenses:
     Research and development                      78,248         77,050        71,735        68,838        57,914
     Selling and marketing                        159,716        144,975       132,109       136,124       135,513
     General and administrative                    35,363         32,466        31,656        33,381        29,428
     Restructuring and in-process
     research and development                           -              -           400             -         2,984          Total operating expenses                 273,327        254,491       235,900       238,343       225,839 
Operating income (loss)                            22,166         11,083         5,541       (23,758)       44,345
     Other income, net                              5,959          4,084         5,209         2,503         5,406 
Income (loss) before income taxes                  28,125         15,167        10,750       (21,255)       49,751
     Provision (benefit) for income taxes
                                                   (1,289)         4,247         2,478        (4,633)       11,204 Net income (loss)                              $   29,414     $   10,920    $    8,272    $  (16,622)   $   38,547 

Earnings (loss) per share:
       Basic                                   $     0.75     $     0.30    $     0.23    $    (0.47)   $     1.13
       Diluted                                 $     0.72     $     0.29    $     0.23    $    (0.47)   $     1.05
Weighted average shares outstanding:
       Basic                                       39,095         36,532        35,590        35,117        34,155
       Diluted                                     40,994         38,089        36,709        35,117        36,765 
Consolidated balance sheet data:
 Working capital                               $  262,882     $  189,326    $  135,302    $  144,750    $   155,483
 Total assets                                     493,666        391,848       328,036       301,639        324,093
 Stockholders' equity                             367,864        289,148       238,905       215,825        224,957 ***Note:**  Certain  reclassifications  have been made to the  prior years' selected financial data to conform to the
current  year's presentation. Customer support revenue  and cost of  customer support revenue  includes hardware
revenue and cost of hardware revenue that was previously reported separately.*

                                       21
**Item 7.   *Management's Discussion and Analysis of Financial Condition and Results
          of Operations***

     In  addition to  historical  information  this  Annual  Report on Form 10-K
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 21E of the Securities and Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and
is  subject  to the safe  harbors  created  by  those  sections.  Words  such as
"anticipates,"  "expects," "intends," "plans," "believes," "seeks," "estimates,"
"may," "will" and variations of these words or similar  expressions are intended
to identify forward-looking  statements.  In addition, any statements that refer
to  expectations,  projections  or other  characterizations  of future events or
circumstances,   including  any  underlying  assumptions,   are  forward-looking
statements.  These  statements are not guarantees of future  performance and are
subject to risks,  uncertainties  and assumptions that are difficult to predict.
Therefore,  our actual results could differ  materially and adversely from those
expressed in any  forward-looking  statements as a result of various factors. We
undertake  no  obligation  to revise or  publicly  release  the  results  of any
revisions to these forward-looking  statements.  Readers should carefully review
the factors described under the heading "Risk Factors" and in other documents we
file from time to time with the Securities and Exchange Commission.  Our filings
with the  Securities  and Exchange  Commission,  including our Annual Reports on
Form  10-K,  Quarterly  Reports on Form  10-Q,  Current  Reports on Form 8-K and
amendments  to those  filings,  pursuant  to  Sections  13(a)  and  15(d) of the
Securities   Exchange   Act  of  1934,   are   available   free  of   charge  at
www.filenet.com,  when such reports are available at the Securities and Exchange
Commission Web site.

**Overview**

     We develop,  market, sell and support a software platform and framework for
Enterprise  Content and  Business  Process  Management.  This  platform,  called
FileNet P8, provides a flexible and scaleable framework for developing solutions
that provide our customers with the ability to manage content  throughout  their
organizations,  and streamline  their  business  processes.  Enterprise  Content
Management,   ("ECM"),   refers  to  the  broad  range  of  functions   used  by
organizations of all types,  including businesses and governmental  agencies, to
control  and  track  the  information,  or  content,  that is  important  to the
organization's operations,  whether that information is used internally, such as
sales contracts or product diagrams, or externally,  such as content provided to
customers through a Web site. The content our software manages,  commonly called
unstructured  content,  includes,  but  is  not  limited  to:  Web  pages,  word
processing  documents,  spreadsheets,  HTML, XML, PDF,  document  images,  email
messages and other electronic content. Our software offers customers the ability
to configure,  design, build and deploy ECM solutions to meet the needs of their
particular business or organization.

     We generate revenue by selling software licenses, delivering implementation
and education  services,  and by providing  technical  support to our customers.
Software  revenue  consists of fees earned from the  licensing  of our  software
products to our customers.  Implementation  and education services are sold on a
fee for service  basis,  and  technical  support and  software  maintenance  are
provided  pursuant  to service  contracts.  Annual fees for  software  technical
support and  software  maintenance  are  received in advance and  recognized  as
revenue over the duration of the contract.

     Earnings  results are highly  sensitive  to  fluctuations  in revenue.  The
nature of our cost structure is essentially  fixed - with employee  compensation
and benefits being the single  largest  expense.  These expenses  represent more
than 50% of our cost  structure.  Costs  associated  with variable  compensation
expense  and  third  party  royalty  expenses  fluctuate  with  revenue.  Future
profitability  is contingent  upon revenue  growth  achieved  through  continued
investments in internally developed or acquired software  technologies that gain
market acceptance.

                                       22
***Software***

     The FileNet P8  architecture  provides our customers with  enterprise-level
software that is scalable and flexible to handle  demanding  content  challenges
and manage complex business  processes.  The FileNet P8 architecture  provides a
framework  for  functional  expansion  to provide  enhanced  content and process
management  across an enterprise  through  product  suites;  each  emphasizing a
different  aspect of the ECM solution set, with  functions  grouped in a logical
order that are designed to meet a customer's  individual  ECM needs.  Each suite
can be implemented by a customer individually, but remains expandable to include
all  FileNet  content  and  process  management   capabilities.   Solutions  and
applications,  built by third  party  partners  or our  customers  on FileNet P8
software,  are designed to manage content;  allowing  organizations  to capture,
create,  use, and activate  that content in order to make  decisions  faster and
bring control and consistency to business  processes,  to improve efficiency and
address compliance requirements.

     We license  our ECM  software  to  companies  in the  insurance,  financial
services,   government,   manufacturing,    telecommunications   and   utilities
industries,  both directly to the end user and through  partners.  The growth in
software  license  revenue is affected by the  strength of general  economic and
business  conditions,  as  well  as the  competitive  position  of our  software
products. Our enterprise software business is characterized by long sales cycles
and timing of a few large software license  transactions  that can substantially
affect our operating  results. Over the last three years,   customers delayed or
limited their technology  capital spending  compared to spending levels in 2000.
The  ability   to  meet  regulatory   and  compliance  requirements  has  become
increasingly  critical for large public  enterprises in order to maintain proper
documentation for all key transactions.  We believe we  are well  positioned  to
grow our revenue  through our  software  products  that address our current  and
prospective  customers'  regulatory  compliance and business process improvement
requirements.  However, we believe software revenue will continue to be affected
by future economic conditions.

***Customer Support***

     We offer product support on a global basis to provide post-sales  services
to ensure  successful  implementation of our products and customer satisfaction.
Our  support offering also includes right to new versions. Our Customer  Service
and  Support organization  provides comprehensive support capabilities including
electronic and real-time  phone support and global call tracking  for  customers
and  partners on support  programs. System engineers deliver support coverage on
multiple  platforms with 24-hour call handling. Our Web site offers the  ability
to open  cases,  search  our knowledge base and review related status reports.

     Our  customers  typically  purchase  support at the time they  acquire  new
software  licenses and renew their software license support  contracts  annually
provided  their systems are still in service.  The growth of support  revenue is
influenced  by the  renewal  rate of the  existing  base and the  amount  of new
support contracts associated with the sale of new software licenses.  We believe
that our  customer  support  revenue  will  continue to grow as we sell more new
software  licenses and our  customers  continue to renew their  product  support
contracts.

***Professional Services and Education***

     Our  worldwide  professional  services  organization  provides  consulting,
implementation,  development and other technical  services and training services
to our licensed customers and authorized  ValueNet Partners.  These services are
provided by our internal  employees  and through a network of qualified  service
providers  hired  on  a  fee  for  service  basis.  Our  professional   services
organization  offers a comprehensive  methodology to help our customers  design,
install, integrate, customize and deploy our products. These services range from

                                       23

the management of large-scale  implementations  of our products billed on a time
and  material  basis  to  short-term  fixed  price  services  such  as  software
installation and implementation  packages,  but do not include  modifications to
the standard software.

     Our  educational  curriculum  includes  training  courses  for  end  users,
application   developers  and  system  administrators  through  media-based  and
instructor-led  training.  The purpose of our education services is to allow our
customers to further enhance the usability of our software  products  throughout
their enterprise.

***Research and Development***

     We have made and expect to  continue  to make  substantial  investments  in
research and development,  through internal and offshore development activities,
third party  licensing  agreements  and  through  technology  acquisitions.  Our
development  efforts  focus on our FileNet P8 platform as we continue to develop
and  enhance  our  enterprise  content  and  process  management   capabilities.
Additionally,  we license  and embed third  party  software  that is designed to
expand the  functionality  of our products  through a variety of agreements with
the producers of this software.  We expect  research and development to remain a
significant portion of our cost structure in 2005.

***Critical Accounting Policies and Estimates***

     The consolidated financial statements of FileNet are prepared in conformity
with accounting  principles  generally accepted in the United States of America.
The consolidated  financial  statements include our accounts and the accounts of
our wholly owned subsidiaries.  All intercompany  balances and transactions have
been  eliminated.  The  preparation of financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  at the date of the financial  statements and
the reported amounts of revenue and expenses during the reporting period.

     We  continually  evaluate our  estimates  and  judgments,  including  those
related to revenue recognition, valuation of intangible assets, reserves for bad
debt and sales returns and income taxes. We base our estimates on historical and
projected results that we believe are reasonable. These estimates form the basis
for making  judgments about the carrying values of assets and liabilities and by
their nature,  are subject to an inherent degree of uncertainty.  Actual amounts
could differ from our estimates and could have a significant  adverse  effect on
our  operating  results  and  financial  position.  The  significant  accounting
policies  we  believe  are  most  critical  to aid in  fully  understanding  and
evaluating our reported financial results include the following:

     **Revenue Recognition**.  The nature of our business commonly includes multiple
elements in our  arrangements  and requires us to make judgments for determining
the timing and the amount of revenue to recognize.  These judgments include, but
are not limited to  determining  the  allocation of revenue in multiple  element
arrangements  based on vendor  specific  objective  evidence and determining the
creditworthiness  of a customer to assess the  probability  of  collection  of a
transaction.

     We derive revenue from the following sources: (1) software,  which includes
software   licenses,   2)  customer  support  revenues,   which  include  annual
maintenance agreements, and (3) professional services, which include consulting,
implementation and training services.

                                       24

     The  provisions  of  Statement  of  Position  No.  97-2,  Software  Revenue
Recognition,  issued by the American  Institute of Certified Public  Accountants
governs the basis for our software revenue  recognition.  Accordingly,  software
license  revenue  is  recognized  when:  (1) we  enter  into a  legally  binding
arrangement  with a customer  for the  license of  software;  (2) we deliver the
products;  (3)  customer  payment is deemed  fixed or  determinable  and free of
contingencies or significant  uncertainties;  and (4) collection is probable. We
must make  judgments and estimates to determine  whether or not the certainty of
these elements has been met.

     Our software  license  arrangements  often include  multiple  elements that
consist of software,  post contract customer support agreements and professional
services such as consulting,  implementation and training.  We recognize revenue
in  multiple  element   arrangements   using  the  residual  method  of  revenue
recognition in accordance  with SOP 98-9.  Under the residual  method,  the fair
value of the undelivered  elements is deferred and the remaining  portion of the
arrangement  fee is allocated to the  delivered  elements and is  recognized  as
revenue,  assuming  all other  revenue  recognition  criteria  have been met. If
evidence of fair value for each undelivered  element of the arrangement does not
exist,  all revenue from the  arrangement  is  recognized  when evidence of fair
value is determined or when all elements of the arrangement are delivered.

     Vendor  specific  objective  evidence  ("VSOE") of fair value for  customer
support is  determined  by  reference  to the price our  customers  pay for such
support when sold separately;  that is, the renewal rates paid by our customers.
Revenue from customer support  contracts is recognized  ratably over the term of
the  arrangement,  which  is  typically  12  months.  VSOE  of  fair  value  for
professional  services is based upon the  established  pricing  and  discounting
practices for those services when sold  separately.  Historically,  we have been
able to establish VSOE for customer  support and professional  services,  but we
may modify our pricing  practices  in the future,  which could result in changes
in, or the  inability  to  support,  VSOE of fair  value  for these  undelivered
elements.  If this occurs,  our future  revenue  recognition  for  multi-element
arrangements could differ  significantly from our historical results. A majority
of our  professional  service  revenue is derived from time and materials  based
contracts  that  typically  range  from  three  months to one year in  duration.
Revenue is recognized on such  contracts as time is incurred and approved by the
customer.  We also provide fixed price pre-packaged  services that are one month
or less in  duration.  Revenue  from such  short-term  fixed price  contracts is
recognized  upon  completion  of the work and  customer  acceptance.  Short-term
fixed-price  contracts of a repetitive  nature are more readily  estimable  than
long-term  contracts.  Our ability to make judgments  about revenue and cost for
these types of contracts has in the past been accurate.  We have little exposure
to cost overruns in professional  service engagements as any additional services
are  pre-approved by our customers in time and material  contracts and our fixed
price contracts are normally very short term in nature and highly estimable.

     We use judgment in assessing  whether fees are fixed and  determinable  and
probable of collection at the time of sale.  Since customers who have previously
deployed our products somewhere within their enterprise  comprise  approximately
90% of  software  sales,  our  ability  to  assess  the  credit-worthiness  of a
transaction is supported by the  collection  history we have with that customer.
In the past our ability to judge the  probability  of collection has been highly
accurate and we expect that this will continue. Our standard payment terms range
from net 30 to net 90 days.  Payments  that are due within 90 days are deemed to
be fixed or  determinable  based on our  successful  collection  history on such
arrangements. To the extent we elect to provide extended payment terms beyond 90
days for  competitive or other reasons,  revenue is recognized  when the amounts
become  due.  Historically,  sales  returns  and bad debt  write-offs  have been
insignificant and within management's expectations. However, any adverse changes
in these trends could impact the timing of revenue recognition in the future.

     In addition to direct  customer  sales, we sell through third party channel
partners.  Our channel partners do not inventory our software products;  rather,
shipments  are made only when the  partner  places an order for a  specific  end
user. We require our channel partners to provide us with the name and address of
all end users at the time an order is placed  and,  in many  cases,  we ship our

                                       25

products  directly  to the end  user.  Software  license  revenue  from  channel
partners is  recognized  when an end user is  identified,  product is  delivered
either  to a  channel  partner  or to their  designated  end-user  and all other
revenue recognition  criteria are met. As our channel partners only purchase our
product for specific end users, we are not subject to channel  inventory returns
or price protection issues.

     ***Allowance for Doubtful Accounts and Sales Returns***.  We make judgments as to
our ability to collect  outstanding  receivables and provide  allowances for the
portion of receivables when collection  becomes doubtful.  We perform an initial
evaluation of the  creditworthiness of our customers prior to order fulfillment,
and we perform  ongoing  credit  evaluations  of our  customers to adjust credit
limits based on payment history and the customer's current creditworthiness.  We
monitor  collections  from our customers and maintain an allowance for estimated
credit losses that is based on historical  experience  and on specific  customer
collection  issues.  While  credit  losses  have  historically  been  within our
expectations  and the  provisions  established in our financial  statements,  we
cannot  guarantee that we will continue to experience the same credit loss rates
that we have in the past.  Our accounts  receivable  are derived from sales to a
wide  variety of  customers.  We do not believe a change in liquidity of any one
customer or our inability to collect from any one customer would have a material
adverse impact on our consolidated financial position. Even though we have large
transactions,  these tend to be with large,  well  capitalized and credit worthy
customers. We also maintain a sales returns allowance based on historical return
rates.  While we are not legally required to accept sales returns,  we have done
so on certain  occasions for our customers.  Product  returns have  historically
been minimal and within our  expectations.  If we elect to accept a higher level
of returns in the future for customer relations or other reasons, our results of
operations  could  be  materially  affected.  If the  historical  data we use to
calculate the  allowance  for doubtful  accounts or if estimates do not properly
reflect future  returns,  then a change in the  allowances  would be made in the
period in which such a  determination  is made and results of operations in that
period could be materially affected.

     ***Goodwill  and Other  Intangible  Assets***.  Our  business  acquisitions  have
resulted in goodwill and other intangible  assets.  Goodwill is recorded at cost
and is not  amortized,  but is tested for impairment at least annually and would
be written down if impairment were  determined.  Effective the first day of July
of each year,  goodwill is tested for  impairment by determining if the carrying
value of each  reporting  unit exceeds its fair value.  Our reporting  units are
consistent  with  the  reportable  segments  identified  in  Note  13.  We  also
periodically  evaluate whether events and circumstances have occurred in between
annual  testing  dates that  indicate the carrying  value of goodwill may not be
recoverable.  We  performed  an  impairment  analysis  as of  July  1,  2004  in
accordance  with SFAS 142.  The results  indicated  there was no  impairment  of
goodwill in any of the three  reporting  units.  As of December 31, 2004,  there
have been no indicators of  impairment;  therefore no interim  impairment  tests
have been performed.

     Identified   intangible  assets  are  recorded  at  cost  less  accumulated
amortization.  These assets are amortized  using the  straight-line  method over
estimated useful lives of three to five years. The determination of useful lives
and  whether or not these  assets are  impaired  involves  judgment.  Long-lived
assets are reviewed for impairment  whenever  events or  circumstances  indicate
that the  carrying  amount of such  assets may not be  recoverable.  We evaluate
these assets for impairment  based on estimated  undiscounted  future cash flows
from these  assets.  If the carrying  value of the assets  exceeds the estimated
future  undiscounted  cash flows, a loss would be recorded for the excess of the
asset's  carrying  value  over the  fair  value.  While we have not  experienced
impairment of intangible assets in prior periods, we cannot guarantee that there
will not be impairment in the future.

     Determining  the fair value of a reporting unit is judgmental in nature and
involves the use of significant  estimates and assumptions.  These estimates and
assumptions include revenue growth rates and operating margins used to calculate
projected  future  cash  flows,  future  economic  and  market  conditions,  and
determination  of  appropriate  market  comparables.  We  base  our  fair  value

                                       26

estimates on assumptions we believe to be reasonable but that are  unpredictable
and  uncertain.  Actual  future  results  may differ  from those  estimates.  In
addition,  we make certain judgments and assumptions in allocating shared assets
and  liabilities  to  determine  the carrying  values for each of our  reporting
units.  Future  events,   such  as  a  significant   decrease  in  our  revenue,
profitability or market capitalization, or a change in technology could cause us
to  conclude  that  impairment  indicators  exist  and  that  goodwill  or other
intangible assets  associated with our acquisitions are impaired.  Any resulting
impairment loss could have an adverse impact on our results of operations.

     ***Income Taxes***.  We exercise  significant  judgment in determining our income
tax provision due to transactions,  credits and calculations  where the ultimate
tax  determination  is uncertain.  Uncertainties  arise as a consequence  of the
actual source of taxable  income  between  domestic and foreign  locations,  the
outcome of tax audits and the ultimate  utilization of tax credits.  Although we
believe our estimates are reasonable,  the final tax determination  could differ
from our recorded  income tax  provision  and  accruals.  In such case, we would
adjust the income tax  provision in the period in which the facts that give rise
to the revision become known.  These adjustments could have a material impact on
our income tax provision and our net income for that period.

     We  recognize  deferred  income tax assets and  liabilities  based upon the
differences  between the financial  statement carrying amounts and the tax bases
of assets and  liabilities.  Such deferred income taxes primarily  relate to the
timing  of the  recognition  of  certain  revenue  items  and the  timing of the
deductibility  of certain  reserves  and accruals  for income tax  purposes.  We
regularly  review the deferred  tax assets for  recoverability  and  establish a
valuation  allowance when it is more likely than not that some portion or all of
the deferred  tax assets will not be realized.  In the current year we concluded
that the valuation allowance  associated with domestic NOL's and other temporary
differences  should  be fully  reversed  as a  result  of the  current  year and
cumulative  domestic profits in  recent  years and future domestic  projections.
However,  we could be required to record additional  valuation allowance against
the deferred tax assets if we are unable to generate  sufficient  future taxable
income,  fail to  benefit  from  our tax  planning  strategies  or if there is a
material  change in the actual  effective tax rates or time periods within which
the underlying timing differences become taxable or deductible. Increases in the
valuation  allowance  could  have a  material  adverse  impact on our income tax
provision and our net income.  Conversely,  if we continue to generate  profits,
and  ultimately  determine that it is more likely than not that all or a portion
of the deferred tax assets will be utilized to offset future taxable income (net
of any current year stock option deductions),  the remaining valuation allowance
of $15.0 million  related to stock option  deductions will result in an increase
to additional paid in capital.

                                       27
**Results Of Operations**

     The following table sets forth certain consolidated statement of operations
data as a percentage of total revenue for the periods indicated:

       *(as a percentage of total revenue)**December 31,***2004        2003       2002**
       Revenue:
          Software                                  38.8%       40.9%      38.2%
          Customer support                          47.3        45.9       45.4
          Professional services and education       13.9        13.2       16.4
             Total revenue                         100.0       100.0      100.0
       Cost of revenue:
          Software                                   3.8         3.8        3.1
          Customer support                          10.6        11.7       12.8
          Professional services and education       11.3        11.6       14.5 
             Total cost of revenue                  25.7        27.1       30.4
          Gross profit                              74.3        72.9       69.6
       Operating expenses:
          Research and development                  19.7        21.1       20.8
          Selling and marketing                     40.2        39.8       38.1
          General and administrative                 8.9         8.9        9.1 
             Total operating expenses               68.8        69.8       68.0
       Operating income                              5.5         3.1        1.6
       Other income, net                             1.5         1.1        1.5     Income before tax                          7.0%        4.2%       3.1%***Note:** Certain  reclassifications have been made to the prior years' results
     of operations data to conform to the current year's presentation.  Customer
     support  revenue and cost of customer  support  revenue  includes  hardware
     revenue  and   cost  of  hardware  revenue  that  was  previously  reported
     separately.***Revenue**

     Total  revenue  increased  by  9.1%  in  2004  compared  to  2003  due to a
combination of service  revenue  growth of 13.0% and software  revenue growth of
3.4%.  Total revenue  increased by 5.0% in 2003 compared to 2002 due to software
revenue growth of 12.6% and service revenue growth of 0.4%. Total revenue growth
is dependent upon continued  software revenue growth accompanied by professional
services growth to implement the software products, and a continued high renewal
rate of maintenance  contracts to support the installed  base.  Service  revenue
growth is highly  correlated with prior period software revenue growth.  Further
discussion of revenue trends with  additional  explanation is contained below in
each revenue component discussion.

                                       28
***Revenue by  Geography***.  The  following  table sets forth  total  revenue by
geography and as a percentage of total revenue for the periods indicated:

**Revenue by Geography***(in thousands)**% Increase /                   % Increase /**Year ended December 31,***2004***(decrease)***2003***(decrease)***2002**

Total United States Revenue        $  278,177          8.2%       $  257,100          2.2%     $  251,447

Europe, Middle East / Africa           93,972         10.1%           85,339*         9.5%         77,953
Asia / Pacific                         15,793         29.8%           12,171         22.7%          9,916
Canada                                  8,786         10.2%            7,971         42.8%          5,581
Other                                     830        (56.9)%           1,924*        (9.2)%         2,120 
Total International Revenue           119,381         11.2%          107,405         12.4%         95,570

Total Revenue                      $  397,558          9.1%       $  364,505          5.0%     $  347,017 

Revenue as a % of total revenue:
United States Revenue                      70%                            71%                          72%
International Revenue                      30%       29%       28%Total Revenue Contribution                100%                           100%                         100% **** Note** - 2003  revenue  for the Middle East  Africa  Region of $1.5  million  was  reclassified  for
comparability  purposes  from   Other  International  to Europe,  Middle East/Africa  to  reflect an
organization change that was effective in 2004.*

     Market  acceptance of our P8 products,  and continued  penetration into our
installed base, accounted for the growth in all our geographic markets.

     Revenue  generated  in  the  United  States  has  consistently  represented
approximately 70% of total revenue for the past three years. International sales
volumes  remained  consistant for all three years in local currency.  The dollar
increase was due to favorable  foreign  currency  rates against the dollar,  The
Europe,  Middle East, Africa ("EMEA") region is our largest international market
contributing  approximately 80% of our international  revenue. Asia Pacific is a
much smaller market for FileNet, but produced revenue growth of 59.3% during the
three-year period from 2002 to 2004. We made significant investments in the Asia
Pacific  region to support the revenue  growth that we believe will  continue to
increase in countries such as China and India.

     We expect  international  revenue to  continue to  represent a  significant
percentage of total revenue in the range of 30%. However, international revenues
will be adversely affected if the U.S. dollar strengthens  against certain major
international  currencies,  especially  the Euro, or if  international  economic
conditions remain relatively weak.

                                       29
***Revenue by Reporting Segment***.  The following table sets forth total revenue
by  reporting  segment  and as a  percentage  of total  revenue  for the periods
indicated:

**Revenue by Reporting Segment***(in thousands)**% Increase /                    %Increase /**Year ended December 31,***2004***(decrease)***2003***(decrease)***2002**

Revenue:
Software                        $  154,279            3.4%       $  149,214          12.6%      $  132,508
Customer Support                   188,011           12.4%          167,230           6.1%         157,550
Professional Services and
Education                           55,268           15.0%           48,061         (15.6)%         56,959 
Total Revenue                   $  397,558            9.1%       $  364,505           5.0%      $  347,017

Revenue as a % of total revenue:
Software                              38.8%                            40.9%                          38.2%
Customer Support                      47.3%                            45.9%                          45.4%
Professional Services and
Education                             13.9%      13.2%      16.4%Total Revenue Contribution           100.0%                           100.0%                         100.0%***Note:**  Certain  reclassifications have been made to the prior  years' segment information to conform to the
current year's presentation.  The residual operating activity of the previously reported Hardware reporting
segment has been  incorporated  into  the  Customer  Support  reporting  segment.  This reclassification is
predicated on the reduced scale and change in the nature of on-going hardware operations. The only activity
in the Hardware reporting segment is related to supporting  legacy customers with spare parts and supplies,
and management no longer reviews the Hardware reporting segment on a stand-alone basis.****Software***.  Software  revenue  consists of fees earned from the licensing of
our software  products to our customers.  Software revenue  increased by 3.4% in
2004 compared to 2003,  and by 12.6% in 2003  compared to 2002.  Our P8 platform
and associated products were announced early in 2003. We attribute the growth in
software  revenue  in both  2004 and 2003 to  market  acceptance  for  these new
products.

     Sales to customers  who have  previously  deployed  our products  somewhere
within their enterprise comprised  approximately 90% of software revenue in 2004
and drove the  demand in our key  vertical  industries  of  financial  services,
insurance,  telecommunications,  manufacturing, government and utilities. We saw
these customers  increase usage of our products to expand existing  applications
and to create new applications throughout their enterprise with our software. We
believe  the IT spending  environment  has  improved  during the past two fiscal
years as we have  experienced the return of larger software  deployments by some
of our customers. We believe these trends will continue in 2005 with a moderate,
but steady  improvement  in IT spending on  enterprise  content  management  and
business process management software as large enterprises look for software that
supports  key  business   applications  and  solves  regulatory  and  compliance
requirements related to managing content.

     ***Customer  Support***.  Customer  support  revenue  consists  of  revenue  from
software  maintenance  contracts,  "fee for  service"  billings  and the sale of
hardware spare parts and supplies.  Support  contracts  entitle our customers to
receive  technical  support,  bug fixes and upgrades to new versions of software
releases when and if available.  Customer support revenue  increased by 12.4% in
2004 compared to 2003 and by 6.1% in 2003 compared to 2002.  These  increases in
customer support revenue reflect an increase in our overall  customer  installed
base  combined  with a high  rate of  renewal  in the  existing  customer  base.
Customer support revenue is directly related to the sale of software licenses in
prior periods.  Customer  support revenue grew more slowly in both 2004 and 2003
compared to the growth rate in  previous  years as a result of reduced  software
sales growth in 2002 and 2003 and software support pricing pressure. A prolonged
economic slowdown negatively affects the growth rate of customer support revenue
as this revenue stream is directly related to software revenue growth over time.

                                       30

However,  we believe we will  continue to  experience  a high rate of renewal on
support contracts, as our customers tend to deploy mission critical applications
using our software to manage content.

     ***Professional  Services and Education***.  Professional  services and education
revenue is earned by providing  consulting services to customers for the design,
implementation,  deployment,  upgrade and  migration of our  software  products,
technical consulting services provided to our resellers,  and training services.
No  modifications  are made to our standard  base product code once the software
has  been  sold.  Professional  services  are  usually  performed  on a time and
material  basis and are also generated from  short-term  fixed price  offerings.
Professional  services  revenue and education  revenue is dependent on the level
and the nature of software  sales in prior periods -  particularly  new customer
sales. Professional services revenue decreased in 2003 compared to 2002 and then
recovered  in  2004  to the  2002  levels.  We  experienced  fewer  and  smaller
consulting  engagements and increased  pricing  pressures in the past two years.
Competitive  pricing pressures have led to higher discounts and an increased use
of partners for professional services. The decrease in professional services and
education   revenue  is  also  affected  by  software   revenue  that  has  been
characterized by repeat purchases for additional  software  licenses that do not
require  large-scale   professional  services  engagements  but  rather  smaller
engagements and a lesser need for customer training classes.  We believe we will
experience  a moderate,  but steady  improvement  in  professional  services and
education  revenue in 2005 based on the software  revenue  trends we experienced
during the last half of 2004,  with  strong  dependency  on new system  sales to
generate the professional services and education demand from our customers.

**Cost of Revenue*****Cost of Revenue by Reporting Segment***.  The following table sets forth total
cost of  revenue  by  reporting  segment  and as a  percentage  of total cost of
revenue by reporting segment for the periods indicated:

**Cost of Revenue by Reporting Segment**

Cost of Revenue by Reporting Segment

*(in thousands)**% Increase /                         % Increase /*Year ended December 31,                **2004***(decrease)***2003***(decrease)***2002**

Cost of revenue:
Software                          $  15,122              9.6%        $  13,800               30.6%       $  10,565
Customer Support                     41,989             (1.9)%          42,785               (4.1)%         44,603
Professional Services and
Education                            44,954              6.2%           42,346              (16.0)%         50,408 
Total Cost of Revenue             $ 102,065              3.2%        $  98,931               (6.3)%      $ 105,576

Cost of revenue as a % of
segment revenue:
Software                                9.8%                               9.2%                                8.0%
Customer Support                       22.3%                              25.6%                               28.3%
Professional Services and
Education                              81.3%                              88.1%                               88.5%
Total Cost of Revenue as a
% of Segment Revenue                   25.7%                              27.1%                               30.4% ***Note:**  Certain  reclassifications have been made to the prior  years' segment information to conform to the
current year's presentation.  The residual operating activity of the previously reported Hardware reporting
segment has been  incorporated  into  the  Customer  Support  reporting  segment.  This reclassification is
predicated on the reduced scale and change in the nature of on-going hardware operations. The only activity
in the Hardware reporting segment is related to supporting  legacy customers with spare parts and supplies,
and management no longer reviews the Hardware reporting segment on a stand-alone basis.*

                                       31
***Software***. Cost of software revenue includes royalties paid to third parties
for technology  embedded in our products to enhance features and  functionality,
referral fees, amortization of acquired technology, media costs, and the cost to
manufacture  and  distribute  software.  The  cost  of  software  revenue  as  a
percentage of software  revenue grew 1.8 percentage  points from 8.0% in 2002 to
9.8% in 2004,  resulting  from higher costs not being offset by a  corresponding
growth in revenue.  The  increase in software  cost over the period from 2002 to
2004 resulted  from  increased  third party fees and royalties of  approximately
$2.0  million in each of 2003 and 2004 and a $960,000  increase in  amortization
expense in 2003 related to the  amortization  of acquired  technology  resulting
from the eGrail  acquisition  in April 2002 and the Shana  acquisition  in April
2003.  Going  forward we  anticipate  cost of software  revenue to range between
8%-10%  of  revenue.   Future  acquisitions  resulting  in  additional  acquired
technology and future  integration of additional third party technology with our
products  would  result in  increased  software  cost,  but we would expect such
increase to be offset by increased revenue.

     ***Customer Support***. The cost of customer support revenue includes the cost of
customer support personnel,  facility and technology  infrastructure expenses in
our call centers,  and costs of supplies and hardware spare parts.  As disclosed
previously,  the residual operating activity of the previously reported hardware
business segment has been combined with the customer support reporting  segment.
We do not sell hardware to new customers. We provide spare parts and supplies as
an accommodation to our customers who purchased FileNet hardware in prior years.
We view this as a service to our customers.

     The cost of customer  support  revenue as a percentage of customer  support
revenue has decreased  from 28.3% in 2002 to 22.3% in 2004.  The  combination of
increased  customer  support revenue along with relatively flat customer support
cost in all three  years  resulted  in a lowered  percent of cost in relation to
revenue.  The  decrease  in cost as a percent of  revenue  was  improved  by our
reduction in hardware  revenues  each year,  which were a high cost,  low margin
segment. Customer support headcount, excluding the hardware function, has ranged
from  252  employees  in 2002 to 259 in 2004.  We  expect  the cost of  customer
support  revenue to range between  21%-24% of customer  support  revenue for the
near future as long as customer  support  revenue  continues to grow at a higher
rate than costs.  We believe the current cost  structure and number of personnel
in the customer  support  organization  will be sufficient to support  projected
revenue growth.

     ***Professional  Services and  Education***.  Cost of  professional  services and
education  revenue  consists of the costs of  professional  services  personnel,
training personnel, and third-party  contractors.  The increase in 2004 compared
to 2003 is due to  increased  third-party  contractor  expense of $4.3  million,
partially offset by decreased facility and depreciation  expense of $1.4 million
along with continued cost control in a number of expense areas.  The decrease in
cost  from  2002  to  2003  resulted  from  the  reduced  usage  of  third-party
contractors  of $3.9 million and lower  personnel  costs of $2.5 million.  These
decreases were predicated on the decreased revenue level during this period.

     Professional  services and education  revenue  increased 15% when comparing
2004 to 2003,  while  costs  increased  at a lower rate of 6.2% due to  improved
utilization of internal resources.  Professional  services and education revenue
and cost both  decreased at the same level in 2003 compared to 2002  maintaining
cost at approximately 88% of revenue for both years. We believe our headcount in
the  professional  services  and  education  segment  allows for revenue  growth
without  adding  additional  resources.  We  expect  professional  services  and
education costs as a percentage of professional  services and education  revenue
to range between  80%-82% in the near-term  assuming  professional  services and
education revenue continues to grow.

                                       32
**Operating Expenses*****Total  Operating  Expenses***.  The following table sets forth total operating
expense  by  function  and as a  percentage  of total  revenue  for the  periods
indicated:

**Operating Expenses***(in thousands)**% Increase /                        % Increase /**Year ended December 31,***2004***(decrease)***2003***(decrease)***2002**

Operating expense:
Research and Development         $   78,248                1.6%       $   77,050              7.4%         $   71,735
Marketing and Sales                 159,716               10.2%          144,975              9.7%            132,109
General and Administrative           35,363                8.9%           32,466              2.6%             31,656
In-process R and D                        -         -        400         .
Total Operating Expenses         $  273,327                7.4%       $  254,491              7.9%         $  235,900

Operating expense as a % of
total revenue:
Research and Development               19.7%                                21.1%                                20.7%
Marketing and Sales                    40.2%                                39.8%                                38.1%
General and Administrative              8.9%                                 8.9%                                 9.1%
Operating Expense as a % of
Revenue                                68.8%                                69.8%                                68.0%***Research and Development***. Our research and development efforts focus on our
FileNet P8  architecture  as we  continue  to develop and expand our ECM and BPM
capabilities.  The  focus  of  these  efforts  is  to  create  functionality  in
Enterprise Content  Management and Business Process  Management  technology that
provide a richer competitive product offering to our customers.

     We seek to achieve our  development  objectives  through both  internal and
external  resources,  and by obtaining third party technology to enhance product
capabilities  through  licensing  agreements  and  acquisitions.  During 2002 we
initiated a program  involving  contracted  offshore  development in lower labor
cost  countries.  During 2003 we expanded  this offshore  development  effort to
include both product  sustainment and product  development  activities.  We have
also historically acquired companies to obtain their technology.  During 2003 we
acquired  Shana  to  integrate  their  electronic  forms  capabilities  into our
products.  During  2002 we  acquired  eGrail  to  integrate  their  web  content
management capabilities into our products.

     Our  research  and  development  expense  consists of  personnel  costs for
software  developers;  third party  contracted  development  efforts and related
facilities  costs.  Research and development  expense  increased by 1.6% in 2004
compared to 2003 and by 7.4% in 2003  compared  to 2002.  The number of research
and  development  personnel was 400 in 2004, 456 in 2003 and 430 in 2002. We had
an average  of 93  contract  workers in India  throughout  2004  compared  to an
average of 52 contract workers in India in 2003.

     Research and development  expense  increased $1.2 million from 2003 to 2004
and increased $5.3 million from 2002 to 2003. The $1.2 million  increase in 2004
is attributable to our expanded offshore development program with contractors in
India,  which  represented  a $3.2 million  expense  increase that was partially
offset by reduced  compensation  expense of $1.7 million in North  America.  The
$4.9  million  increase  from  2002  to 2003 is  attributable  to 26  additional
internal employees in North America resulting in higher  compensation,  benefits
and relocation  costs of $3.0 million,  increased  facility  related expenses of

                                       33

$0.5  million   associated   with  the  integration  of  the  eGrail  and  Shana
acquisitions in April of 2002 and 2003,  respectively,  and increased consulting
expense of $1.5 million associated with offshore development through contractors
in India.

     We intend to continue to  complement  internal  development  with  offshore
development as well as with third-party  software through OEM agreements and may
execute  additional  technology  acquisitions.  Over time, we believe we will be
able to lower our  per-developer  cost  through the use of  offshore  resources.
However,  in the  near  term we do not  plan on  expanding  our use of  offshore
contract labor. We believe that research and development expenditures, including
compensation   of  technical   personnel,   are  essential  to  maintaining  our
competitive  position.  We expect  research  and  development  expense  to range
between 18%-20% of revenue  assuming  revenue growth in the near-term,  and will
gradually decrease on a percentage basis as revenue increases.

     ***Selling and  Marketing***.  We sell our products  through a direct sales force
and our indirect  channel  sales  partners.  Our selling and  marketing  expense
consists of salaries,  benefits, sales commissions and other expenses related to
the direct and indirect  sales force and personnel cost for marketing and market
development programs.

     Selling and marketing  expense increased 10.2% in 2004 compared to 2003 and
increased  9.7% in 2003  compared  to 2002.  The  number of sales and  marketing
employees in 2004 was 530  compared to 549 in 2003 and 541 in 2002.  During this
two-year  period,  marketing  personnel  increased by 14  employees  while sales
personnel decreased by 25 employees.  This shift in sales and marketing capacity
resulted  in a smaller  direct  sales  force,  with  increased  channel  partner
business and increased marketing personnel with deep vertical industry knowledge
and demand generation capabilities.

     The increase in sales and marketing  expense was $14.7 million from 2003 to
2004.  Personnel related expenses including salaries and benefits increased $7.9
million  year over  year due to a higher  salary  mix  despite  a  reduction  in
headcount.  Higher  total  revenue in 2004  resulted in  incremental  commission
expense of $4.9 million in 2004 compared to 2003.  Additionally,  travel expense
increased  $2.1  million in 2004  compared  to 2003 due to a new sales  coverage
model where  resources were deployed by account rather than geography and due to
generally  higher business  activity.  This resulted in increased travel both in
volume and distances.

     The increase in sales and  marketing  expense of $12.9 million from 2002 to
2003  reflects  a higher  salary  mix as well as  higher  variable  compensation
associated  with  higher  revenue in 2003  compared to 2002.  Personnel  related
expenses  including salaries and benefits increased $4.6 million year over year.
Higher software  revenue in 2003 resulted in higher  commission  expense of $3.4
million in 2003  compared  to 2002.  In 2003  travel,  training,  and  marketing
programs  increased  $3.6  million  from 2002  related to the FileNet P8 product
release that was announced in the first quarter of 2003.

     We expect selling and marketing expense to range between 38%-40% of revenue
in the near-term, depending on revenue growth.

     ***General and Administrative***. Our general and administrative expense consists
of  salaries,  benefits,  and other  expenses  related  to  personnel  costs for
finance, information technology,  legal, human resources and general management,
and the cost of outside professional services.

                                       34

     General and  administrative  expense  increased by 8.9% in 2004 compared to
2003 and increased by 2.6% in 2003  compared to 2002.  The number of general and
administrative  employees  in 2004  was 168  compared  to 176 in 2003 and 167 in
2002. The $2.9 million increase in absolute dollars in 2004 compared to 2003 was
attributable to increased  personnel expense of $1.8 million that included merit
increases,  increased  bonuses and the  addition of  restricted  stock  expense.
Increased consulting expense and accounting fees of $1.1 million associated with
our efforts to achieve  compliance with Section 404 of the Sarbanes-Oxley Act by
December 31, 2004 also  contributed to the increase in 2004.  Essentially all of
the $0.8 million increase in 2003 compared to 2002 was attributable to increased
consulting expense and legal fees associated with compliance with other sections
of the Sarbanes-Oxley Act.

     We expect  general and  administrative  expense to range between  8%-10% of
total revenue in the near-term, depending on revenue growth.

     ***Purchased  In-Process Research and Development***.  There were no acquisitions
during  2004 and  there  was no  in-process  research  and  development  expense
associated with our April 2003 acquisition of Shana.  Our eGrail  acquisition in
April 2002 of certain assets and certain  liabilities  of eGrail  resulted in an
allocation of $400,000 to in-process  research and  development.  The allocation
was determined by management  through  established  valuation  techniques in the
high-technology  industry  with the  assistance  of an  independent  third-party
appraiser.  In-process  research and development  was expensed upon  acquisition
because  technological  feasibility  had  not  been  established  and no  future
alternative uses existed.

     ***Other Income,  Net***. Other income, net consists of interest income earned on
our cash, cash  equivalents and investments,  and other items including  foreign
exchange gains and losses. Other income, net of other expenses, was $6.0 million
in 2004,  $4.1  million in 2003 and $5.2  million in 2002.  The increase in 2004
compared to 2003 was due almost  entirely  to an increase in interest  income of
$1.9 million based on increased  cash, cash  equivalents and investment  amounts
and a higher weighted-average  interest rate. The weighted average interest rate
earned on cash, cash  equivalents  and  investments was 2.21% in 2004,  1.39% in
2003 and 1.98% in 2002.  The overall  decrease in 2003 from 2002 of $1.1 million
was primarily attributable to a lower net foreign exchange gain of approximately
$700,000 due to a continued  weakening  of the dollar  against the Euro in 2003,
and  reduced  interest  income  of   approximately   $400,000  due  to  a  lower
weighted-average interest rate in 2003 compared to 2002.

     ***Provision for Income Taxes***. The benefit for income taxes was ($1.3) million
in 2004, compared to a provision for income taxes of $4.2 million in 2003 and of
$2.5  million in 2002.  The  effective  tax rate was (5%),  28%, and 23% for the
years ended December 31, 2004,  2003 and 2002,  respectively.  The decreased tax
rate in 2004 was due to the benefit of $13.5  million  from the  reversal of the
valuation  allowance  associated with domestic net operating loss  carryforwards
and other  temporary  differences.  Subsequent  to the reversal of the valuation
allowance,  we expect our on-going  effective tax rate to range between 30%-40%.
These rates, however, can fluctuate outside our expectations  depending upon the
mix of our profits between domestic and lower taxed foreign locations.

**Quarterly Results of Operations**

     Quarterly  revenues  and  expenses  have  historically  been  affected by a
variety  of  factors,  including  the timing of large  enterprise  transactions,
seasonality  of economic  activity  in Europe,  and to some degree the timing of
budget approvals in the government sector.  Historically,  the fourth quarter is
our highest quarter and we expect these trends to continue in 2005.

                                       35

     The following table sets forth selected unaudited quarterly information for
our last eight fiscal  quarters.  This information has been prepared on the same
basis as the  Consolidated  Financial  Statements and all necessary  adjustments
(which consisted only of normal recurring adjustments) have been included in the
amounts  stated below to present fairly the results of such periods when read in
conjunction  with  the  Consolidated  Financial  Statements  and  related  notes
included elsewhere herein.

*(in thousands, except per share amounts)**First       Second        Third        Fourth         Fiscal**Quarter      Quarter       Quarter      Quarter           Year*
Year ended December 31, 2004:
   Revenue                                   $    99,498  $    94,086  $    96,488   $   107,486  $     397,558
   Gross profit                                   74,845       69,862       71,358        79,428        295,493
   Income before income taxes                      4,876        2,633        7,756        12,860         28,125
   Net income                                      3,998        2,159        6,360        16,897         29,414
   Basic earnings per share                         0.10         0.06         0.16          0.42           0.75
   Diluted earnings per share                       0.10         0.05         0.16          0.41           0.72

Year ended December 31, 2003:
   Revenue                                   $    87,049  $    87,117  $    89,389   $   100,950  $     364,505
   Gross profit                                   62,390       63,206       64,516        75,462        265,574
   Income before income taxes                      1,908        1,964        3,453         7,842         15,167
   Net income                                      1,336        1,452        2,486         5,646         10,920
   Basic earnings per share                         0.04         0.04         0.07          0.15           0.30
   Diluted earnings per share                       0.04         0.04         0.06          0.14           0.29 **Liquidity And Capital Resources**

     As of December 31, 2004, cash and cash  equivalents  and  investments  were
$348.7  million,  an increase of $100.4  million from $248.3 million at December
31, 2003. Cash, cash  equivalents and investments  include $266.9 million in the
United States and $81.8 million held by our foreign subsidiaries.  Cash and cash
equivalents  consist of high quality and highly liquid investments in short-term
money  market  funds,  United  States  government  agency  discount  notes,  and
Corporate Notes. Cash equivalent  investments  include instruments with original
maturities  of 90 days or  less.  Short-term  investments  include  auction-rate
securities and instruments with maturities of greater than 90 days and less than
365 days.  Long-term  investments consist of high grade corporate and government
securities with maturities greater than 12 months and less than three years.

     Our two major sources of cash,  as more fully  discussed  below,  have been
cash  generated from  operations  and cash generated from financing  activities.
Cash flows from operations was $70.0 million in 2004,  $52.2 million in 2003 and
$21.4 million in 2002.  Cash provided by financing  activities was $36.1 million
in 2004, $21.3 million in 2003 and $4.7 million in 2002.

     Net  income is a primary  source of cash  from  operating  activities.  Net
income was $29.4 million, $10.9 million and $8.3 million in 2004, 2003 and 2002,
respectively.  Depreciation and amortization added to net income to provide cash
from  operating  activities - although the amount has declined  each year due to
tight budgetary control over capital spending. Depreciation and amortization was
$16.4 million in 2004, $19.4 million in 2003 and $21.6 million in 2002. Our cash
from operations is also impacted by changes in working capital accounts. Changes
in accounts  receivable  and  unearned  revenue have  typically  had the largest
impact on our cash flows. The days sales outstanding metric, which is calculated
by  dividing  quarter-end  accounts  receivable  by average  daily sales for the
quarter, was 31 days, 40 days and 47 days as of December 31, 2004, 2003 and 2002
respectively.    We  believe  that  we  will  continue  to  generate  cash  from

                                       36

unearned  revenues  but expect  increases  in cash due to  declines  in accounts
receivable to lessen.  We attempt to structure our sales  contracts to require a
majority of payments in 30 days or less, and all payments in 90 days or less. To
the extent that competitive  pressures  require us to extend our terms, it would
result in a decrease to our operating cash flows.  Our annual  customer  support
agreements  are  typically  prepaid  at the  beginning  of the  support  period,
resulting  in a large  cash  inflow and a  corresponding  increase  in  deferred
revenue. This has historically resulted in significant cash inflows in the first
quarter,  when the largest portion of our support  agreements  renews. We expect
this trend to continue in the future.

     Net cash used for investing  activities  was $88.5  million in 2004,  $64.2
million in 2003 and $27.0  million in 2002.  Capital  spending  has been  fairly
consistent and under tight budgetary  control and accounted for net cash used of
$9.4 million in 2004,  $9.2 million in 2003 and $10.8 million in 2002. We do not
expect capital expenditure levels in 2005 to differ significantly from the level
of the past few years.  Significant  changes in cash from  investing  activities
have resulted from the purchase and sale of investments and, to a lesser extent,
cash paid for  acquisitions.  Excess  cash from  operations  is invested in high
quality  debt  instruments  and  securities,  and the  timing of  purchases  and
maturities of investments could result in significant short-term fluctuations in
net cash used or generated from investing activities.  As long as we continue to
generate excess cash, we expect to invest such amounts and thus continue to show
a net use of cash related to investing activities.  However, based on the nature
of our investment  policy,  all such investments are available in the short term
if needed for any reason.

     Net cash  provided by  financing  activities  results  from the proceeds of
common stock related to employee  stock option plans and employee stock purchase
plans. As previously  noted, the cash generated from this activity  increased to
$36.1 million from $21.3 million in 2003 and $4.7 million in 2002.  Stock prices
favorably  influenced this activity.  As long as our stock price is greater than
the  exercise  price of  outstanding  stock  options,  we expect to  continue to
generate cash from option exercises.

     The effect of exchange  rate changes on cash and cash  equivalents  held in
foreign currency resulted in net cash inflows in all three years as the Euro and
other currencies progressively strengthened against the dollar.

     We have no borrowing arrangements as of December 31, 2004. On June 27, 2003
our $5.0 million  multi-currency  revolving line of credit expired in accordance
with its terms and was not renewed because the cost of carrying the line did not
justify  the level of usage.  We have been  able to meet  escrow  needs  through
existing bank relationships in the United States and internationally.

     We  believe  that our  present  cash  balances,  together  with  internally
generated  funds,  will be  sufficient  to meet our working  capital and capital
expenditures throughout 2005. See "Risk Factors".

     **Commitments**.  We  lease  certain  of  our  facilities  under  noncancelable
operating lease  arrangements that expire at various dates through 2013. We have
certain  royalty  commitments  associated with licensing of third party products
that require  minimum  payments or  contractual  prepayments.  We have  contract
commitments  associated with third party development  agreements.  The following
table summarizes  future minimum  payments for these  obligations as of December
31, 2004:

                                       37
*(in thousands*)**Payments Due by Period**       .
                                          Total         2005     2006-2007    2008-2009     Thereafter 
Contractual obligations:
  Operating leases                     $ 55,646     $ 12,265      $ 22,161     $ 15,435        $ 5,785
  Third party licensing contracts         3,032        3,032             -            -              -
  Third party development contracts       4,155        2,775         1,380            -              -        .
Total contractual cash obligations    $  62,833     $ 18,072      $ 23,541     $ 15,435        $ 5,785 

     We have bank  guarantees  issued in local  currencies in Europe and Asia as
discussed  in Note 15 of the Notes to  Consolidated  Financial  Statements.  The
following  table  summarizes  future minimum  commercial  commitments  for these
obligations as of December 31, 2004:

                                    *(in thousands)***Amount of Commitment Expiration Per Period**     .
                                           Total
                                         Amounts                            2006-          2008-
Other commercial commitments:          Committed            2005            2007           2009     Therafter      .
  Secured and unsecured bank
   guarantees                          $   2,555       $   1,506        $    877        $   172        $    -      .
Total commercial commitments           $   2,555       $   1,506        $    877        $   172        $    -      .

**OTHER MATTERS*****Environmental   Matters***.  We  are  not  aware  of  any  issues  related  to
environmental  matters that have, or are expected to have, a material  effect on
our business.

**Impact of Recently Issued Accounting Pronouncements**

       NEW ACCOUNTING PRONOUNCEMENTS

     In March  2004,  The FASB  issued  EITF Issue No.  03-1 (EITF  03-1),  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments"  which  provides new guidance for  assessing  impairment  losses on
investments.  Additionally,  EITF 03-1 includes new disclosure  requirements for
investments that are deemed to be temporarily  impaired.  In September 2004, the
FASB delayed the  accounting  provisions  for EITF 03-1;  however the disclosure
requirements  remain effective for annual periods ending after June 15, 2004. We
will evaluate the impact of EITF 03-1 once final guidance is issued.

     In  December  2004,  the  FASB  revised   Statement  No.  123  (FAS  123R),
"Share-Based  Payment,"  which requires  companies to expense the estimated fair
value of employee stock options and similar awards based on the grant-date  fair
value of the award.  The cost will be recognized over the period during which an
employee is required to provide  service in exchange for the award,  usually the
vesting  period.  The accounting  provisions of FAS 123R will be effective as of
the beginning of the first interim or annual  reporting period that begins after
June 15, 2005. We will adopt the  provisions of FAS 123R on July 1, 2005 using a

                                       38

modified prospective  application.  Under the modified prospective  application,
FAS 123R, will apply to new awards,  unvested awards that are outstanding on the
effective  date and any awards  that are  subsequently  modified  or  cancelled.
Compensation  expense for outstanding awards for which the requisite service had
not been rendered as of the effective date will be recognized over the remaining
service period using the  compensation  cost calculated for pro forma disclosure
purposes under FAS 123 (Note 2 Stock-Based Compensation). We  are in the process
of  determining  how  the  new method  of valuing  stock-based  compensation  as
prescribed  in  FAS  123R  will be applied to valuing stock-based awards granted
after the effective date and the impact the recognition of compensation  expense
related to such awards will have on our financial statements.

     ***Inflation***.  We believe that  inflation has not had a significant  impact on
the price of our products,  the cost of our materials,  or our operating results
for any of the three years ended December 31, 2004.

**Item 7a.   *Quantitative and Qualitative Disclosures about Market Risk*****Interest Rate Risk**

     Our exposure to market rate risk for changes in interest  rates  relates to
our investment  portfolio.  We have not used derivative financial instruments in
our investment  portfolio.  We place our investments with  high-quality  issuers
and,  by  policy,  limit the amount of credit  exposure  to any one  issuer.  We
protect  and  preserve  our  invested  funds by  limiting  default,  market  and
reinvestment   risk.  Our  investments  in  marketable   securities  consist  of
high-grade  corporate and  government  securities  with  maturities of less than
three years.  Investments purchased with an original maturity of three months or
less are considered to be cash  equivalents.  We classify all of our investments
as available-for-sale.  Available-for-sale securities are carried at fair value,
with unrealized gains and losses,  net of tax, reported in a separate  component
of  stockholders'  equity.  Average  maturity  of our  investment  portfolio  is
approximately  3 months;  therefore,  the movement of interest  rates should not
have a material impact on our balance sheet or income statement.

     At any time, a significant increase/decrease in interest rates will have an
impact  on the  fair  market  value  and  interest  earnings  of our  investment
portfolio.  We do not  currently  hedge this  interest  rate  exposure.  We have
performed  a  sensitivity  analysis as of  December  31, 2004 and 2003,  using a
modeling  technique  that measures the change in the fair values  arising from a
hypothetical 50 basis points and 100 basis points adverse movement in the levels
of interest  rates across the entire yield curve,  which are  representative  of
historical  movements in the Federal  Funds Rate with all other  variables  held
constant.   The   analysis   covers   our   investment   and  is  based  on  the
weighted-average  maturity of our  investments as of December 31, 2004 and 2003.
The sensitivity  analysis  indicated that a hypothetical 50 basis points adverse
movement  in  interest  rates  would  result in a loss in the fair values of our
investment  instruments  of  approximately  $323,000  at  December  31, 2004 and
approximately  $194,000 at December 31, 2003. Similarly a hypothetical 100 basis
points  adverse  movement in interest  rates would  result in a loss in the fair
values of our  investments  of  approximately  $645,000 at December 31, 2004 and
approximately $388,000 at December 31, 2003.

                                       39

     The following table provides  information about our investment portfolio at
December 31, 2004:

  *(in thousands)***Estimated**Debt Securities                          **Cost               Fair Value**

    Due in one year or less:
       Short-term munis-taxable     $   120,725             $    120,725
       Corporate                         15,724                   15,682
       Governments/Agencies              75,087                   74,789 
  Total due in one year             $   211,536             $    211,196

  Due in one to three years:
       Government/Agencies               14,364                   14,256 
   Total due in one to three years       14,364                   14,256 

      Grand total                   $   225,900             $    225,452 

     Actual maturities may differ from contractual maturities because the issuer
of the securities may have the right to repurchase such securities.  We classify
short-term  investments in current assets, as all such investments are available
for current operations.

**Foreign Currency Fluctuations**

     Our  performance  can be  affected  by changes in foreign  currency  values
relative to the U.S.  dollar in relation to our revenue and operating  expenses.
We have entered into forward  foreign  exchange  contracts in an effort to hedge
against the effects of fluctuating  currency  exchange rates on monetary  assets
and liabilities  denominated in currencies other than the functional currency of
the relevant  entity  (mainly in Europe and Asia  Pacific).  We have not entered
into forward foreign exchange contracts for speculative or trading purposes. Our
accounting  policies for these  contracts  are based on our  designation  of the
contracts  as  hedging  transactions.  Gains  and  losses  on  foreign  exchange
contracts are recognized in income in the same period as gains and losses occur.
Our forward contracts have an original maturity of three months. These contracts
were opened on the last  business day of the quarter and thus had a nominal fair
value as of December 31, 2004.

     Cumulative other comprehensive income increased from a gain of $5.6 million
during 2003, to a gain of $11.0 million during 2004,  due to unrealized  foreign
currency  translation  gains of $5.4 million resulting from the strengthening of
the Euro against the U.S. dollar during 2004.

                                       40
**Item 8.   *Financial Statements and Supplementary Data***

     The  consolidated  financial  statements  for the years ended  December 31,
2004,  2003 and 2002 are  incorporated  herein by reference  and  submitted as a
separate section of this Form 10-K. (See Item 15).

**Item 9.   *Changes  in  and  Disagreements  with  Accountants on  Accounting  and
          Financial Disclosure***

     None.

**Item 9a.   *Controls and Procedures*****Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures**

     We maintain  disclosure controls and procedures that are designed to ensure
that  information  required  to be  disclosed  in our  Exchange  Act reports are
recorded,  processed,  summarized and reported within the time periods specified
in the  Securities  and  Exchange  Commission's  rules  and  forms and that such
information is accumulated and  communicated  to our  management,  including our
Chief Executive Officer and Chief Financial  Officer,  as appropriate,  to allow
for timely decisions regarding required disclosure.  In designing and evaluating
the disclosure controls and procedures,  management recognizes that any controls
and  procedures,  no matter how well  designed  and  operated,  can provide only
reasonable  assurance  of  achieving  the  desired  control  objectives,  and in
reaching a reasonable level of assurance, management necessarily was required to
apply its  judgment in  evaluating  the  cost-benefit  relationship  of possible
controls and procedures.

     As of December 31, 2004, the end of the period  covered by this report,  an
evaluation was carried out under the supervision and with the  participation  of
our management,  including our Chief  Executive  Officer and our Chief Financial
Officer,  of the  effectiveness  of the design and  operation of our  disclosure
controls and procedures as required by Securities  Exchange Act of 1934 Rule 13a
- 15(b). Based on the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure  controls and procedures were effective at
the  reasonable  assurance  level.  There  has been no  change  in our  internal
controls over financial reporting during our most recent fiscal quarter that has
materially affected,  or is reasonably likely to materially affect, our internal
controls over financial reporting

**Management's Report on Internal Control Over Financial Reporting**

     Our management is responsible for  establishing  and  maintaining  adequate
internal  control  over  financial  reporting;  as such term is  defined  in the
Securities  Exchange Act of 1934 Rules  13a-15(f).  Under the supervision of our
management,  including our principal  executive officer and principal  financial
officer,  we conducted an  evaluation of our internal  controls  over  financial
reporting.  We based our  evaluation  on  the  framework  in Internal  Control -
Integrated Framework issued by the Committee of Sponsoring  Organizations of the
Treadway  Commission  (COSO).  Based  on  our  evaluation under the framework in
Internal  Control  -  Integrated Framework, management  has concluded  that  our
internal control over financial reporting was effective as of December 31, 2004.

     Our  management's  assessment of the  effectiveness of our internal control
over  financial  reporting  as of December 31, 2004 has been audited by Deloitte
and Touche LLP, an  independent  registered  public  accounting  firm  that also
audited our  financial  statements,  as stated in their report which is included
herein.

                                       41
**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and Board of Directors of
FileNet Corporation
Costa Mesa, California

     We have  audited  management's  assessment,  included  in the  accompanying
Management's Report on Internal Control Over Financial Reporting,   that FileNet
Corporation and  subsidiaries  (the  "Company")  maintained  effective  internal
control over  financial  reporting  as of December  31, 2004,  based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining  effective internal control over financial reporting
and for its assessment of the  effectiveness  of internal control over financial
reporting.   Our  responsibility  is  to  express  an  opinion  on  management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.

     We  conducted  our audit in  accordance  with the  standards  of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and  perform  the audit to obtain  reasonable  assurance  about  whether
effective  internal  control over  financial  reporting  was  maintained  in all
material  respects.  Our audit included  obtaining an  understanding of internal
control over financial reporting,  evaluating management's  assessment,  testing
and evaluating the design and operating  effectiveness of internal control,  and
performing   such  other   procedures   as  we   considered   necessary  in  the
circumstances.  We believe that our audit  provides a  reasonable  basis for our
opinions.

     A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's  board of  directors,  management,  and  other  personnel  to  provide
reasonable  assurance  regarding the reliability of financial  reporting and the
preparation  of financial  statements for external  purposes in accordance  with
generally  accepted  accounting  principles.  A company's  internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

     Because of the inherent  limitations  of internal  control  over  financial
reporting,  including  the  possibility  of  collusion  or  improper  management
override of controls,  material  misstatements  due to error or fraud may not be
prevented or detected on a timely basis. Also,  projections of any evaluation of
the  effectiveness  of the internal  control over financial  reporting to future
periods are subject to the risk that the controls may become inadequate  because
of changes in conditions,  or that the degree of compliance with the policies or
procedures may deteriorate.

     In  our  opinion,  management's  assessment  that  the  Company  maintained
effective internal control over financial  reporting as of December 31, 2004, is
fairly stated, in all material  respects,  based on the criteria  established in
Internal  Control--Integrated  Framework  issued by the  Committee of Sponsoring
Organizations  of the  Treadway  Commission.  Also in our  opinion,  the Company
maintained, in all material respects,  effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission.

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company Accounting Oversight Board (United States),  the consolidated  financial
statements  and  financial  statement  schedule  as of and  for the  year  ended
December 31, 2004 of the Company and our report  dated March 11, 2005  expressed
an unqualified opinion on those financial statements and the financial statement
schedule.

*/s/ Deloitte and Touche LLP*

Deloitte and Touche LLP
Costa Mesa, California
March 11, 2005

                                       42
**PART III****Item 10.    *Directors and Executive Officers of the Registrant***

     We hereby  incorporate  by reference the  information  appearing  under the
caption  "Election of Directors," under the caption  "Executive  Officers of the
Company,"  under the  caption  "Section  16(a)  Beneficial  Ownership  Reporting
Compliance"  and under the  caption  "Code of  Ethics" of our  definitive  Proxy
Statement  for our 2005  Annual  Meeting  to be filed  with the  Securities  and
Exchange Commission.

**Item 11.   *Executive Compensation***

     We hereby  incorporate  by reference the  information  appearing  under the
caption  "Executive  Compensation" and under the caption "Election of Directors"
of our definitive  Proxy  Statement for our 2005 Annual Meeting to be filed with
the Securities and Exchange Commission.

**Item 12.   *Security Ownership  of Certain  Beneficial Owners and  Management and
           Related Stockholder Matters***

     We hereby  incorporate  by reference the  information  appearing  under the
caption  "Voting   Securities  and  Principal   Holders   Thereof"  and  "Equity
Compensation  Plans"  of our  definitive  Proxy  Statement  for our 2005  Annual
Meeting to be filed with the Securities and Exchange Commission.

**Item 13.   *Certain Relationships and Related Transactions***

     We hereby  incorporate  by reference the  information  appearing  under the
caption  "Related Party  Transactions" of our definitive Proxy Statement for our
2005 Annual Meeting to be filed with the Securities and Exchange Commission.

**Item 14.   *Principal Accountant Fees and Services***

     We hereby  incorporate  by reference the  information  appearing  under the
caption  "Principal  Accountant  Fees  and  Services"  of our  definitive  Proxy
Statement  for our 2005  Annual  Meeting  to be filed  with the  Securities  and
Exchange Commission.

                                       43
**PART IV****Item 15.   Exhibits, Financial Statement Schedule****(a)  Report of  Independent  Registered  Public  Accounting Firm, Financial****Statements and Financial Statement Schedule**Page

         Report of Independent Registered Public Accounting Firm                       F-2

         Consolidated Balance Sheets at December 31, 2004 and December 31, 2003        F-3

         Consolidated Statements of Operations for each of the three years in
         the period ended December 31, 2004                                            F-4

         Consolidated Statements of Comprehensive Operations for each of the
         three years in the period ended December 31, 2004                             F-5

         Consolidated Statements of Stockholders' Equity for each of the three
         years in the period ended December 31, 2004                                   F-6

         Consolidated Statements of Cash Flows for each of the three years in
         the period ended December 31, 2004                                            F-7

         Notes to Consolidated Financial Statements                                    F-8

         Schedule II.  Valuation and Qualifying Accounts and Reserves                  S-1

                                             44
**(c)  Exhibits**

The following exhibits are filed herewith or incorporated by reference:

Exhibit No.Exhibit Description

      3.1*        Restated  Certificate of  Incorporation,  as amended  *(filed as Exhibit 3.1 to  Registrant's  Form S-4
                  filed on January 26, 1996; Registration No. 333-00676)*.

      3.1.1*      Certificate of  Amendment  of  Restated  Certificate  of  Incorporation  *(filed  as  Exhibit  3.1.1 to
                  Registrant's Form S-4 filed on January 26, 1996, Registration No. 333-00676)*.

      3.2*        Bylaws  *(filed as  Exhibit 3.2 of  the  Registrant's  registration statement on Form S-1, Registration
                  No. 33-15004)*.

      4.1*        Form of  certificate  evidencing  Common  Stock  *(filed as Exhibit  4.1 to  Registrant's  registration
                  statement on Form S-1, Registration No. 33-15004)*.

      4.2*        Rights  Agreement,  dated as of November 4, 1988 between  FileNet  Corporation  and the First National
                  Bank of Boston,  which includes the form of Rights  Certificate as Exhibit A and the Summary of Rights
                  to Purchase  Common Shares as Exhibit B *(filed as Exhibit 4.2 to Registrant's  registration  statement
                  on Form S-4 filed on January 26, 1996; Registration No. 333-00676)*.

      4.3*        Amendment One dated July 31, 1998 and Amendment Two dated November 9, 1998 to Rights  Agreement  dated
                  as of November 4, 1988 between FileNet  Corporation and BANKBOSTON,  N.A.  formerly known as The First
                  National Bank of Boston *(filed as Exhibit 4.3 to Registrant's  registration statement on Form 10-Q for
                  the quarter ended September 30, 1998)*.

      4.4*        Amendment  Three dated  November  30, 2001 to Rights  Agreement  dated as of November 4, 1988  between
                  FileNet  Corporation  and Equiserve  Trust Company,  N.A.,  successors to BANKBOSTON,  N.A.  *(filed as
                  Exhibit 4.4 to Registrant's Annual Report on Form 10-K filed for the year ended December 31, 2001)*.

      10.2*+      Amended  and  Restated  1995 Stock  Option  Plan of FileNet  *(filed as  Exhibit  99.1 to  Registrant's
                  registration statement on Form S-8 filed on October 15, 2001; Registration No. 333-71598)*.

      10.2.1*+    Amendment to the 1995 Stock Option Plan approved by Registrant's  Board of Directors dated May 7, 2003
                  *(filed as Exhibit 10.2.1 to Registrant's  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  2003)*.

      10.2.2*+    Amended  Form  of  1995  Executive  Officer  Stock  Option  Agreement  *(filed  as  Exhibit  10.2.2  to
                  Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)*.

      10.3*+      Second Amended and Restated 1986 Stock Option Plan of FileNet Corporation,  together with the forms of
                  Incentive Stock Option  Agreement and  Non-Qualified  Stock Option  Agreement *(filed as Exhibits 4(a),
                  4(b) and 4(c), respectively,  to the Registrant's registration statement on Form S-8, Registration No.
                  33-48499)*,  the first  Amendment  thereto  *(filed as  Exhibit  4(d) to the  Registrant's  registration
                  statement  on Form S-8,  Registration  No.  33-69920)*,  and the  Second  Amendment  thereto  *(filed as
                  Appendix  A to  the  Registrant's  Proxy  Statement  for  the  Registrant's  1994  Annual  Meeting  of
                  Stockholders, filed on April 29, 1994)*.

      10.4*+      Non-Statutory  Stock Option  Agreement  (with  Notice of Grant of Stock  Option and Special  Addendum)
                  between Registrant and Mr. Lee Roberts *(filed as Exhibit 99.17 to Registrant's  registration statement
                  on Form S-8 filed on August 20, 1997)*.

      10.6*+      Amended and Restated  FileNet  Corporation  1998 Employee  Stock Purchase Plan *(filed as Appendix B to
                  Registrant's  Definitive Proxy Statement on Schedule 14A, for the Registrant's  2002 Annual Meeting of
                  Stockholders, filed on April 18, 2002)*.

      10.7*+      FileNet  Corporation  International  Employee Stock Purchase Plan *(filed as Appendix C to Registrant's
                  Definitive Proxy Statement on Schedule 14A, for the Registrant's  2002 Annual Meeting of Stockholders,
                  filed on April 18, 2002)*.

      10.8*       Lease between the Registrant and C. J. Segerstrom and Sons for the  headquarters of the Company, dated
                  September 1, 1999 *(filed as Exhibit 10.23 to Registrant's  registration statement on Form 10-Q for the
                  quarter ended September 30, 1999)*.

      10.10*+     Written  Compensation  Agreement and  Non-Statutory  Stock Option  Agreement  (with Notice of Grant of
                  Stock Option and Special Addendum) between  Registrant and Mr. Sam Auriemma *(filed as Exhibit 99.1 and
                  99.2 to Registrant's  registration  statement on Form S-8, filed on April 20, 2001;  Registration  No.
                  333-59274)*.

      10.11*      Asset Purchase  Agreement dated April 2, 2002 by and between 3565 Acquisition  Corporation and eGrail,
                  Inc. *(filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K, filed on April 12, 2002)*.

      10.12*+     Secured  Promissory  Note  between  Registrant  and Mr. Lee D.  Roberts  dated June 14, 2002 (*filed as
                  Exhibit 10.12 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)*.

                                                                  45

      10.13*+     Option Exchange Agreement between Registrant and Mr. Ron L. Ercanbrack,  dated May 22, 2002,  together
                  with  form of  Incentive  Stock  Option  Agreement  and  Grant  Notice  *(filed  as  Exhibit  10.13  to
                  Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)*.

      10.14*+     The 2002 Incentive Award Plan, as approved by stockholders at the  Registrant's  Annual Meeting on May
                  22, 2002,  together  with the forms of  Incentive  Option  Agreement  and  Non-Qualified  Stock Option
                  Agreement for Independent  Directors *(filed as Exhibit 10.14 to Registrant's  Quarterly Report on Form
                  10-Q for the quarter ended June 30, 2002)*.

      10.14.1*+   Amended Form of 2002  Incentive  Award Plan Incentive  Option  Agreement with Notice of Grant of Stock
                  Option *(filed as Exhibit 10.14.1 to Registrant's  Quarterly  Report on Form 10-Q for the quarter ended
                  September 30, 2002)*.

      10.14.2*+   Amended Form of 2002  Incentive  Award Plan  Non-Qualified  Stock  Option  Agreement  for  Independent
                  Directors  with Notice of Grant of Stock Option *(filed as Exhibit  10.14.2 to  Registrant's  Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 2002)*.

      10.14.3*+   Amendment  to the  2002  Incentive  Award  Plan  dated  May 7,  2003  *(filed  as  Exhibit  10.14.3  to
                  Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)*.

      10.14.4*+   Amended  and  Restated 2002  Incentive Award Plan of  FileNet Corporation,  *(filed on April 1, 2004 as
                  Appendix B of Registrant's Definitive Proxy Statement for its 2004 Annual Meeting of Stockholders)*.

      10.15*      Stock  Purchase  Agreement  dated  April  2,  2003  by  and  among  Registrant,  FileNet  Nova  Scotia
                  Corporation,  Shana Corporation and certain Sellers *(filed as Exhibit 10.15 to Registrant's  Quarterly
                  Report on Form 10-Q for the quarter ended June 30, 2003)*.

      10.15.1*    Escrow  Agreement  dated April 2, 2003 by and among FileNet Nova Scotia  Corporation,  certain Sellers
                  and Bennett Jones LLP *(filed as Exhibit 10.15.1 to Registrant's  Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 2003)*.

      10.16*+     Amended  and  Restated  Letter  Agreement  dated May 15,  2003 by and  between  Registrant  and Lee D.
                  Roberts,  Chief Executive  Officer *(filed as Exhibit 10.16+ to Registrant's  Quarterly  Report on Form
                  10-Q for the quarter ended June 30, 2003)*.

      10.17*+     Form of Amended and Restated Letter Agreement,  dated May 15, 2003, by and between  Registrant and the
                  Chief  Financial  Officer and President  *(filed as Exhibit 10.17 to Registrant's  Quarterly  Report on
                  Form 10-Q for the quarter ended June 30, 2003)(1)*.

      10.18*+     Form of Amended and Restated Letter Agreement by and among Registrant and certain  Executive  Officers
                  *(filed as Exhibit 10.18 to Registrant's  Quarterly  Report on Form 10-Q for the quarter ended June 30,
                  2003).(2)*

      10.19*+     CEO Severance  Agreement  together with Addendum II to Stock Option Agreement  between  Registrant and
                  Mr. Lee D.  Roberts  *(filed as Exhibit  10.19 to  Registrant's  Quarterly  Report on Form 10-Q for the
                  quarter ended June 30, 2003)*.

      10.20*+     Form of Restricted Stock Agreement between Registrant and certain Executive Officers *(filed as Exhibit
                  10.21 to Registrant's Quarterly report on form 10-Q for the quarter ended March 31, 2004)*.

      21.1        List of subsidiaries of Registrant *(filed as FileNet Corporation Subsidiary Information)*.

      23.1        Consent of Independent Registered Public Accounting Firm

      31.1        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

      31.2        Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

      32.1        Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act

      32.2        Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
   ________________________________________________________________________________________________________________

   ** Incorporated herein by reference                   + Management contract, compensatory plan or arrangement*

     (1)  Amended and Restated Letter Agreement, dated May 15, 2003 was entered into by and between  Registrant
          and  Messrs.  Sam  Auriemma,  Chief Financial Officer and Ron L. Ercanbrack, President

     (2)  Amended and Restated Letter Agreement,  dated May 15, 2003 was entered into by and between Registrant
          and Messrs. Martyn D. Christian,  David D. Despard,  Frederick P. Dillon,  Karl J. Doyle,  William J.
          Kreidler, Chas W. Kunkelmann, Philip  Rugani, Daniel S. Whelan, Franz  X. Zihlmann, and Ms. Audrey N.
          Schaeffer.  Amended and Restated  Letter  Agreement  with substantially the same terms and conditions
          was  entered  into  between  Registrant  and  Philip C. Maynard  dated  August 30, 2004,  and  L. Kim
          Poindexter dated January 1, 2005.

                                                                  46
**SIGNATURES**

     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.

                                          FILENET CORPORATION

Date: March 15, 2005            By:      ***/s/    Lee D. Roberts***          .
                                                  Lee D. Roberts
                                                  Chief Executive Officer and
                                                  Chairman of the Board

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

**DATE****SIGNATURE AND TITLE**

March 15, 2005                  ***/s/ Lee D. Roberts***          .
                                 Lee D. Roberts
                                 Chief Executive Officer and
                                 Chairman of the Board
                                (Principal Executive Officer)

March 15, 2005                   ***/s/ Sam M. Auriemma***          .
                                 Sam M Auriemma,
                                 Chief Financial Officer and Senior Vice
                                 President, Finance (Principal Financial
                                 and Accounting Officer)

March 15, 2005                  ***/s/ Theodore J. Smith***           .
                                 Theodore J. Smith
                                 Director

March 15, 2005                   ***/s/ L. George Klaus***           .
                                 L. George Klaus
                                 Director

March 15, 2005                   ***/s/ John C. Savage***           .
                                 John C. Savage
                                 Director

March 15, 2005                   ***/s/ Roger S. Siboni***           .
                                 Roger S. Siboni
                                 Director

                                       47
**Index to Consolidated Financial Statements**

     As required under Item 8,  Financial  Statements  and  Supplementary  Data,
FileNet  Corporation's  consolidated  financial  statements are provided in this
separate section as follows:
                                                                                       Page

     Report of Independent Registered Public Accounting Firm                            F-2

     Consolidated Balance Sheets at December 31, 2004 and December 31, 2003             F-3

     Consolidated Statements of Operations for each of the three years in the
        period ended December 31, 2004                                                  F-4

     Consolidated Statements of Comprehensive Operations for each of the
        three years in the period ended December 31, 2004                               F-5

     Consolidated Statements of Stockholders' Equity for each of the three years
        in the period ended December 31, 2004                                           F-6

     Consolidated Statements of Cash Flows for each of the three years in the
        period ended December 31, 2004                                                  F-7

     Notes to Consolidated Financial Statements                                         F-8

     Schedule II.  Valuation and Qualifying Accounts and Reserves                       S-1

                                      F-1
**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Stockholders and the Board of Directors of
FileNet Corporation:

     We have audited the  accompanying  consolidated  balance  sheets of FileNet
Corporation and  subsidiaries  (the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of operations, comprehensive operations,
stockholders'  equity,  and cash flows for each of the three years in the period
ended  December  31, 2004.  Our audits also  included  the  financial  statement
schedule listed in the Index at Item 15(a).  These financial  statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial  statements and the
financial statement schedule based on our audits.

     We  conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion,  such consolidated  financial statements present fairly, in
all  material  respects,  the  financial  position  of FileNet  Corporation  and
subsidiaries  as of  December  31,  2004  and  2003,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting  principles  generally accepted
in the United States of America.  Also, in our opinion, such financial statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.

     We have also  audited,  in  accordance  with the  standards  of the  Public
Company  Accounting  Oversight Board (United States),  the  effectiveness of the
Company's  internal  control over  financial  reporting as of December 31, 2004,
based on  Internal  Control--Integrated  Framework  issued by the  Committee  of
Sponsoring Organizations of the Treadway Commission,  and our report dated March
11, 2005  expressed an  unqualified  opinion on  management's  assessment of the
effectiveness of the Company's internal control over financial  reporting and an
unqualified  opinion on the effectiveness of the Company's internal control over
financial reporting.

*/s/ Deloitte and Touche LLP*

Deloitte and Touche LLP
Costa Mesa, California
March 11, 2005

                                      F-2
**CONSOLIDATED BALANCE SHEETS**

                                           ASSETS

*(in thousands, except share and per share amounts)***December 31,                                                              2004            2003**
Current assets:
   Cash and cash equivalents                                       $   123,217     $   100,605
   Short-term investments                                              211,196         134,986
   Accounts receivable, net of allowances for doubtful accounts
     and sales returns of $3,835 and $3,917 at December 31,
     2004 and 2003, respectively                                        35,878          38,096
   Prepaid expenses and other current assets                            12,179          13,174
   Deferred income taxes                                                 3,681           3,551 **Total current assets**                                  386,151         290,412

Property, net                                                           21,738          26,922
Long-term investments                                                   14,256          12,672
Goodwill                                                                27,268          26,170
Intangible assets, net of accumulated amortization of  $4,750 and
$2,386 at December 31, 2004 and 2003, respectively                       6,188           7,979
Deferred income taxes                                                   36,028          23,001
Other assets                                                             2,037           4,692 **Total assets**                                      $   493,666     $   391,848 

                                LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                $    13,868     $    11,006
   Accrued compensation and benefits                                    33,674          27,648
   Customer deposits and advances                                        9,007           5,217
   Unearned customer support revenue                                    47,145          40,691
   Income tax payable                                                    5,374           1,492
   Other accrued liabilities                                            14,201          15,032 **Total current liabilities**                             123,269         101,086

Unearned customer support revenue                                        2,533           1,614
Commitments and contingencies (Notes 9, 14 and 15)

Stockholders' equity:
   Preferred stock, $0.10 par value; 7,000,000 shares
     authorized; none issued and outstanding
   Common stock, $0.01 par value; 100,000,000 shares authorized;
     41,690,989 shares issued and 40,592,989 shares outstanding at
     December 31, 2004; and 38,906,640 shares issued and
     37,808,640 shares outstanding at December 31, 2003                284,490         234,025
   Deferred compensation                                                (6,530)              -
   Retained earnings                                                    93,512          64,098
   Accumulated other comprehensive income                               10,959           5,592
   Treasury stock, at cost; 1,098,000 shares at                        382,431         303,715
     December 31, 2004 and 2003                                        (14,567)        (14,567)   Net stockholders' equity                                            367,864         289,148 **Total liabilities and stockholders' equity**        $   493,666     $   391,848 *See accompanying Notes to Consolidated Financial Statements*

                                                       F-3
**CONSOLIDATED STATEMENTS OF OPERATIONS***(in thousands, except share and per share amounts)**Year Ended December 31,***2004           2003              2002****Revenue:**
   Software                                           $   154,279    $   149,214       $   132,508
   Customer support                                       188,011        167,230           157,550
   Professional services and education                     55,268         48,061            56,959 **Total revenue**                                          397,558        364,505           347,017 **Cost of revenue:**
   Cost of software                                        15,122         13,800            10,565
   Cost of customer support                                41,989         42,785            44,603
   Cost of professional services and education revenue     44,954         42,346            50,408 **Total cost of revenues**                                102,065         98,931           105,576 **Gross profit**                                             295,493        265,574           241,441 **Operating expenses:**
   Research and development                                78,248         77,050            71,735
   Selling and marketing                                  159,716        144,975           132,109
   General and administrative                              35,363         32,466            31,656
   In-process research and development                          -              -               400 **Total operating expenses**                               273,327        254,491           235,900 

 Operating income                                          22,166         11,083             5,541

 Other income, net                                          5,959          4,084             5,209 

 Income before income taxes                                28,125         15,167            10,750

 Provision (benefit) for income taxes                      (1,289)         4,247             2,478 **Net income**                                           $    29,414    $    10,920       $     8,272 

 Earnings per share:
   Basic                                              $       .75    $       .30       $       .23
   Diluted                                            $       .72    $       .29       $       .23

 Weighted average shares outstanding:
   Basic                                                   39,095         36,532            35,590
   Diluted                                                 40,994         38,089            36,709 *See accompanying Notes to Consolidated Financial Statements*

                                                    F-4
**CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS***(in thousands)**Year Ended December 31,***2004             2003            2002** Net income                                           $    29,414      $    10,920      $    8,272 

 Other comprehensive income:
     Foreign currency translation
         adjustments                                        5,590           12,093           7,631
     Unrealized holding gains (losses) on
         available-for-sale securities, net of tax           (223)            (119)             27      Other comprehensive income                             5,367           11,974           7,658  Comprehensive income                                 $    34,781      $    22,894      $   15,930 *See accompanying Notes to Consolidated Financial Statements*

                                                            F-5
**CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY***(in thousands)**Accumulated
                              Common                                                Other
                               Stock                  Deferred   Retained   Comprehensive   Treasury Stock**Shares      Amount  Compensation   Earnings      Operations           Shares       Amount       Total***Balances at January 1, 2002**   36,390  $  199,526       $     -  $  44,906     $   (14,040)      $   (1,098)   $ (14,567)  $ 215,825

Stock options exercised          286       2,753                                                                              2,753
Stock option income tax
benefit                                      685                                                                                685
Common stock issued under the
 Employee Qualified Stock
  Purchase Plan                  339       3,712                                                                              3,712
Foreign currency translation
  adjustment                                                                        7,631                                     7,631
Unrealized holding gains on
   available-for-sale-securities                                                       27                                        27
Net income                                                          8,272                                                     8,272 **Balances at December 31, 2002** 37,015  $  206,676       $     -  $  53,178     $    (6,382)     $   (1,098)    $ (14,567)  $ 238,905 

Stock options exercised        1,553      17,569                                                                             17,569
Stock option income tax
benefit                                    5,865                                                                              5,865
Common stock issued under
  the Employee Qualified Stock
  Purchase Plan                  339       3,788                                                                              3,788
Non-employee stock
   compensation                              127                                                                                127
Foreign currency translation
     adjustment                                                                    12,093                                    12,093
Unrealized holding gains on
  available-for-sale-securities                                                     (119)                                     (119)
Net income                                                         10,920                                                    10,920**Balances at December 31, 2003** 39,907  $  234,025       $     -  $  64,098     $     5,592       $   (1,098)   $ (14,567)  $ 289,148

Stock options exercised        2,271      30,669                                                                             30,669
Stock option income tax
benefit                                    7,087                                                                              7,087
Common stock issued under
  the Employee Qualified Stock
  Purchase Plan                  236       5,445                                                                              5,445
Non-employee stock
   compensation                                4                                                                                  4
Restricted stock granted         277       7,260        (6,530)                                                                 730
Foreign currency translation
     adjustment                                                                     5,590                                     5,590
Unrealized holding gains on
  available-for-sale-securities                                                     (223)                                     (223)
Net income                                                        29,414                                                     29,414 **Balances at December 31, 2004** 41,691  $  284,490      $ (6,530) $ 93,512      $    10,959       $   (1,098)  $  (14,567)  $ 367,864 

                                             See accompanying Notes to Consolidated Financial Statements

                                                                                   F-6
**CONSOLIDATED STATEMENTS OF CASH FLOWS***(in thousands)**Year Ended December 31,***2004            2003              2002****Cash flows provided by operating activities:**
   Net income                                                   $    29,414     $    10,920        $    8,272
   Adjustments to reconcile net income to net cash
      provided by operating activities:
   Purchased in-process research and development                                          -               400
   Depreciation and amortization                                     16,350          19,378            21,588
   Loss on sale of fixed assets                                         426              27                47
   Provision for doubtful accounts and sales returns                  1,108             653             1,752
   Deferred income taxes                                            (13,158)         (3,956)            1,629
   Stock option income tax benefit                                    7,087           5,865               685
   Changes in operating assets and liabilities, net of
      effects of acquisition:
   Accounts receivable                                                1,918           8,835            (7,818)
   Prepaid expenses and other current assets                            920           3,723            (3,000)
   Accounts payable                                                   2,502           2,325              (940)
   Accrued compensation and benefits                                  5,301           5,309             2,101
   Customer deposits and advances                                     3,774           2,198            (1,895)
   Unearned customer support revenue                                  6,855          (2,276)            4,651
   Income taxes payable                                               3,898           2,349            (3,966)
   Other assets and liabilities                                       3,625          (3,183)           (2,066)Net cash provided by operating activities                         70,020          52,167            21,440 **Cash flows used for investing activities:**
   Capital expenditures                                              (9,435)         (9,177)          (10,825)
   Proceeds from sale of property                                       106             135                66
   Note receivable                                                        -             294            (1,900)
   Cash paid for acquisitions, net of cash acquired                       -          (8,073)           (9,359)
   Purchases of investments                                        (131,360)       (141,668)         (151,578)
   Proceeds from sales and maturities of investments                 52,225          94,305           146,571 Net cash used in investing activities                            (88,464)        (64,184)          (27,025)**Cash flows provided by financing activities:**
   Proceeds from issuance of common stock                            36,114          21,357             6,465
   Principal payments on capital lease obligations                     -                (16)           (1,799)Net cash provided by financing activities                         36,114          21,341             4,666 

   Effect of exchange rate changes on cash and cash
      equivalents                                                     4,942           9,927             6,521 

   Net increase in cash and cash equivalents                         22,612          19,251             5,602
   Cash and cash equivalents, beginning of year                     100,605          81,354            75,752 Cash and cash equivalents, end of year                       $   123,217     $   100,605       $    81,354 

   Supplemental cash flow information:
   Interest paid                                                $        38     $        48       $       100
   Income taxes paid                                            $       349     $     3,050       $    $4,301
   See Note 4 for non-cash investing and financing activities                                                           .

                              *See accompanying Notes to Consolidated Financial Statements*

                                      F-7
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****Note 1   *Nature of Operations***

     FileNet Corporation  ("FileNet" or "the Company") develops,  markets, sells
and supports a framework for Enterprise Content Management ("ECM") software that
delivers capabilities in a tightly integrated offering.  The Company markets its
products  to a broad range of  industries  in more than 90  countries  through a
global sales, service and support organization,  including its ValueNet business
partner  program of value added  resellers,  system  integrators and independent
software vendors.

**Note 2   *Summary of Significant Accounting Policies*****Basis of Presentation**.  The accompanying  consolidated financial statements
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America.  The consolidated  financial statements include
the accounts of the Company and its wholly owned subsidiaries.  All intercompany
balances and transactions have been eliminated.

     **Use of Estimates**.  The  preparation  of financial  statements in conformity
with accounting  principles  generally  accepted in the United States of America
requires  management to make estimates and assumptions  that affect the reported
amounts of assets and  liabilities  and disclosure of contingent  liabilities at
the date of the financial  statements  and the reported  amounts of revenues and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.  Estimates are used for, but not limited to, the  accounting  for the
allowance  for doubtful  accounts and  sales returns,  contingencies and income
taxes.

     **Foreign Currency Translation**. The Company measures the financial statements
of its foreign subsidiaries using the local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
on the balance sheet date.  Revenues,  costs and expenses are  translated at the
rates of exchange prevailing during the year. Translation  adjustments resulting
from this process are included in  stockholders'  equity.  Gains and losses from
foreign  currency  transactions are included in other income,  net.  Transaction
gains  incurred  during the years ended  December 31,  2004,  2003 and 2002 were
approximately $890,000, $700,000, and $1.5 million, respectively.

     **Cash Equivalents**.  Investments purchased with an original maturity of three
months or less are  considered  to be cash  equivalents  and are stated at cost,
which approximates fair value. Cash equivalents  consist of cash, time deposits,
commercial  paper, U.S.  government and U.S.  government  agencies  instruments,
money market funds and other money market  instruments.  The Company invests its
excess cash only in investment AAA grade money market instruments from companies
in a variety  of  industries  and,  therefore,  believes  that it bears  minimal
principal risk.  During 2004 the Company changed the  classification  of certian
securitites  from cash  equivalents to short-term  investments and  reclassified
prior years to the current year's presentation (Note 7).

     **Investments**.  The Company's  investments  consist of marketable  high-grade
corporate and government  securities  with  maturities of less than three years.
The  Company   classifies  all  of  its   investments   as   available-for-sale.
Available-for-sale  securities are carried at fair value,  with unrealized gains
and losses, net of tax, reported in a separate component of stockholders' equity
(Note 7).

                                      F-8
**Other  Financial  Instruments**.  The  Company  enters into  forward  foreign
exchange  contracts  as a hedge  against  the  effects of  fluctuating  currency
exchange  rates on monetary  assets and  liabilities  denominated  in currencies
other than the  functional  currency  of the  relevant  entity.  The  Company is
exposed to market risk on the forward foreign exchange  contracts as a result of
changes in foreign exchange rates;  however, the market risk should be offset by
changes in the valuation of the underlying exposures.  Gains and losses on these
contracts,  which equal the difference between the forward contract rate and the
prevailing  market spot rate at the time of  valuation,  are  recognized  in the
consolidated statements of operations. These contracts mature every three months
at the end of each quarter.  The Company  opens new hedge  contracts on the last
business  day of each  quarter  that  will  mature  at the end of the  following
quarter. The counterparties to these contracts are major financial institutions.
The Company uses  commercial  rating  agencies to evaluate the credit quality of
the counterparties and does not anticipate nonperformance by any counterparties.
The Company does not  anticipate  a material  loss  resulting  from credit risks
related to any of these institutions (Note 16).

     **Fair Value of  Financial  Instruments**.  The  recorded  amounts of financial
assets and liabilities at December 31, 2004 and 2003, approximate fair value due
to the relatively  short period of time between  origination of the  instruments
and their expected realization.

     **Accounts  Receivable**.  The Company  evaluates the  creditworthiness  of its
customers prior to order  fulfillment and regularly  adjusts credit limits based
upon ongoing  credit  evaluations  of a customer's  payment  history and current
creditworthiness.  An allowance  for estimated  credit losses is maintained  and
such  losses  have been  within  management's  expectations  and the  provisions
established.

     **Property**.  Property is stated at cost.  Depreciation  is computed using the
straight-line  method over the  estimated  useful  lives of the related  assets,
generally  three to five years.  Leasehold  improvements  are amortized over the
shorter of the  economic  lives of the  improvements  or the term of the related
lease (Note 8).

     **Long-Lived  Assets**. The Company accounts for the impairment and disposition
of long-lived assets in accordance with SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived  Assets." In accordance with SFAS No. 144,  long-lived
assets are reviewed for events or changes in  circumstances  that  indicate that
their carrying value may not be recoverable from future cash flows. Based on the
Company's most recent  analysis,  the Company believes there is no impairment at
December 31, 2004.

     **Goodwill**.  SFAS No. 142,  "Goodwill and Other Intangible  Assets," requires
that goodwill and other intangible assets with indefinite useful lives be tested
for impairment annually or when events or changes in circumstances indicate that
the carrying amount of these assets may not be  recoverable.  In accordance with
SFAS No. 142, the Company does not amortize goodwill,  but performs the required
two-step impairment review each year. Step one of this review determines whether
the fair value of each reporting unit is less than its carrying amount as of the
measurement  date. In the event that the fair value of each  reporting  unit was
less  than  the  carrying  amount,  step two of the test  would be  required  to
determine if the carrying  value of goodwill  exceeded  the implied  value.  The
Company  performed an impairment  analysis as of July 1, 2004 in accordance with
SFAS 142. The analysis  indicated  there was no impairment of goodwill in any of
the reporting  segments.  As of December 31, 2004, no impairment of goodwill has
been  recognized.   If  estimates  change,  a  materially  different  impairment
conclusion could result.

                                      F-9
**Revenue  Recognition**.  The  Company  derives  revenues  from the  following
sources:  (1) software,  which includes software  licenses,  2) customer support
revenues,  which  include  annual  support  agreements,   and  (3)  professional
services, which include consulting, implementation and training services.

     The basis for software revenue recognition is governed by the provisions of
Statement of Position  No. 97-2,  Software  Revenue  Recognition,  issued by the
American  Institute  of  Certified  Public  Accountants.  Accordingly,  software
license  revenue is  recognized  when:  (1) the  Company  enters  into a legally
binding arrangement with a customer for the license of software; (2) the Company
delivers the products;  (3) customer payment is deemed fixed or determinable and
free of  contingencies  or  significant  uncertainties;  and (4)  collection  is
probable.

     The Company's  software license  arrangements  include  multiple  elements,
including  software,  postcontract  customer support agreements and professional
services such as consulting,  implementation and training.  We recognize revenue
in  multiple  element   arrangements   using  the  residual  method  of  revenue
recognition in accordance  with SOP 98-9.  Under the residual  method,  the fair
value of the undelivered  elements is deferred and the remaining  portion of the
arrangement  fee is allocated to the  delivered  elements and is  recognized  as
revenue,  assuming  all other  revenue  recognition  criteria  have been met. If
evidence of fair value for each undelivered  element of the arrangement does not
exist,  all revenue from the  arrangement  is  recognized  when evidence of fair
value is determined or when all elements of the arrangement are delivered.

     Vendor  specific  objective  evidence  ("VSOE") of fair value for  customer
support is determined by reference to the price the Company's  customers pay for
such  support  when sold  separately;  that is,  the  renewal  rates  offered to
customers.  Revenue from customer support  contracts is recognized  ratably over
the term of the arrangement, which is typically 12 months.

     VSOE of fair value for professional  services is based upon the established
pricing and discounting  practices for those services when sold separately.  The
Company's  professional  service  revenue  is  derived  primarily  from time and
materials  based  contracts  that  typically  range  from 3 months  to 1 year in
duration.  Revenue is  recognized  on such  contracts  as time is  incurred  and
approved by the customer.  The Company may also provide fixed fee quotes in some
contracts.  Nearly all fixed price  contracts  are 1 month or less in  duration.
Revenue from such short term fixed price contracts is recognized upon completion
of the work and customer acceptance.  Professional services are not required for
the  software to function  and the Company does not make changes to the standard
software code in the field.

     The Company  assesses whether fees are fixed or determinable at the time of
sale. Standard payment terms range from net 30 to net 90 days. Payments that are
due within 90 days are deemed to be fixed or determinable based on the Company's
successful  collection history on such  arrangements.  To the extent the Company
elects to provide extended payment terms beyond 90 days for competitive or other
reasons, revenue is recognized when the amounts become due.

     In addition to direct customer sales, the Company sells through third party
channel partners.  The Company's channel partners do not inventory the Company's
software  products;  rather,  shipments are made only when the partner places an
order for a specific  end user.  The Company  requires  its channel  partners to
provide  the  Company  with the name and address of all end users at the time an
order is placed and, in many cases,  the Company  ships its product  directly to
the end user. Thus, software license revenue from channel partners is recognized
when an end user is identified, product is delivered either to a channel partner
or to their designated end-user and all other revenue  recognition  criteria are
met.

                                      F-10
**Product  Warranty**.  The Company provides a 90-day warranty for its software
products against substantial  non-conformance to the published  documentation at
the time of delivery.  The incremental cost of services performed under warranty
obligations has historically not been significant.

     **Research and Development  Costs**. We expense research and development  costs
as  incurred.  The Company does not consider its new products or new versions to
be technologically  feasible until all design  specifications for functionality,
features and technical  performance are completed and all uncertainties  related
to identified  high-risk  development  issues are  resolved.  Once all high-risk
development  issues  are  resolved  and the  program  design is  finalized,  the
products have  historically  been  considered  ready for general  release.  As a
result,  no amounts are required to be capitalized  in accordance  with SFAS No.
86,  "Accounting  for the Costs of  Computer  Software  to Be Sold,  Leased,  or
Otherwise Marketed," because no significant costs are incurred subsequent to the
establishment of technological feasibility.

     **Income  Taxes**.  The provision for incomes taxes is determined in accordance
with SFAS No.  109,  "Accounting  for  Income  Taxes."  Deferred  tax assets and
liabilities arise from temporary differences between the tax bases of assets and
liabilities and their reported amounts in the consolidated  financial statements
that will result in taxable or deductible  amounts in future years.  A valuation
allowance is established to reduce deferred tax assets if it is more likely than
not that such deferred tax assets will not be realized (Note 12).

     **Earnings  Per  Share**.  Basic  earnings  per  share are  computed  using the
weighted  average  number of common  shares  outstanding  during  the  reporting
period. Diluted earnings per share is computed using the weighted average number
of common  shares  outstanding  plus the dilutive  effect of  outstanding  stock
options and shares  issuable  under the employee  stock  purchase plan using the
treasury stock method. (Note 5).

     **Stock-Based  Compensation**.  The Company accounts for stock-based  awards to
employees  using the  intrinsic  value  method  in  accordance  with  Accounting
Principles  Board  ("APB")  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees."

     The following  table  summarizes  the Company's net income and earnings per
share on a pro forma basis had compensation  cost for the Company's  stock-based
compensation  plans been  determined  based on the  provisions  of SFAS No. 123,
"Accounting for Stock-Based Compensation:"

                                      F-11
*(In thousands, except per share amounts)***December 31,                                                             2004              2003             2002**
 Net income, as reported                                            $   29,414        $   10,920       $    8,272
  Deduct:  Total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects                           (7,821)           (7,429)          (8,735)
 Pro forma net income (loss)                                        $   21,593        $    3,491       $     (463)

 Earnings per share:
     Basic earnings per share - as reported                         $     0.75        $     0.30       $     0.23
     Basic earnings (loss) per share - pro forma                    $     0.55        $     0.10       $    (0.01)

    Diluted earnings per share - as reported                        $     0.72        $     0.29       $     0.23
    Diluted earnings (loss) per share - pro forma                   $     0.53        $     0.09       $    (0.01)

     The fair  value of each  option  grant was  estimated  on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2004, 2003 and 2002:

  ______________________________________________________________________________________________________
  **2004                  2003                 2002**
  Expected volatility                                    76%                   58%                  68%
  Risk-free interest rates                         3.07% - 3.72%         1.63% - 4.76%        2.0% to 4.61%
  Expected life (years)                                  5.46                  5.56                 5.60
  Dividend                                                0%                    0%                   0% 

     Pro forma  compensation  cost also includes the fair value of awards issued
under the Employee Stock Purchase Plan.

**Recently Issued Accounting Pronouncements****Note 3.   *New Accounting Pronouncements***

     In March  2004,  The FASB  issued  EITF Issue No.  03-1 (EITF  03-1),  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments"  which  provides new guidance for  assessing  impairment  losses on
investments.  Additionally,  EITF 03-1 includes new disclosure  requirements for
investments that are deemed to be temporarily  impaired.  In September 2004, the
FASB delayed the  accounting  provisions  for EITF 03-1;  however the disclosure
requirements remain effective for annual periods ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-1 once final guidance is issued.

     In  December  2004,  the  FASB  revised   Statement  No.  123  (FAS  123R),
"Share-Based  Payment,"  which requires  companies to expense the estimated fair
value of employee stock options and similar awards based on the grant-date  fair
value of the award.  The cost will be recognized over the period during which an
employee is required to provide  service in exchange for the award,  usually the
vesting  period.  The accounting  provisions of FAS 123R will be effective as of
the beginning of the first interim or annual  reporting period that begins after

                                      F-12

June 15, 2005. The Company will adopt the provisions of FAS 123R on July 1, 2005
using  a  modified  prospective  application.  Under  the  modified  prospective
application,  FAS 123R,  will  apply to new  awards,  unvested  awards  that are
outstanding on the effective date and any awards that are subsequently  modified
or  cancelled.  Compensation  expense  for  outstanding  awards  for  which  the
requisite  service  had not  been  rendered  as of the  effective  date  will be
recognized  over the  remaining  service  period  using  the  compensation  cost
calculated for  pro forma  disclosure purposes under FAS 123 (Note 2 Stock-Based
Compensation).  The  Company is in the process of determining how the new method
of  valuing  stock-based compensation  as prescribed in FAS 123R will be applied
to valuing  stock-based awards  granted after the effective date and the  impact
the  recognition  of compensation  expense  related to  such  awards  will  have
on  its  financial statements.

     **Reclassifications**. Certain reclassifications have been made to prior-years'
balances to conform to the current year's presentation (see Note 7 and Note 13).

**Note 4.   *Acquisitions***

     On April 2, 2002, the Company  acquired  certain assets and assumed certain
liabilities of eGrail, Inc. ("eGrail"),  a Web content management company.  This
strategic   acquisition  provides  additional  Web  Content  Management  ("WCM")
software  application  capabilities  that expand the  Company's  position in the
Enterprise Content Management ("ECM") market,  which contributed to the purchase
price  that  resulted  in  goodwill.  The  purchase  price  for the  acquisition
consisted of $9.0 million in cash  consideration and direct acquisition costs of
$359,000.

     On April 2, 2003,  the Company  completed a stock  purchase  acquisition of
Shana  Corporation  ("Shana"),  an electronic  forms  management  company.  This
strategic acquisition provides technology and experience to expand the Company's
ECM offering with Enterprise Forms Management  capability,  which contributed to
the  purchase  price  and  resulted  in  goodwill.  The  purchase  price for the
acquisition  consisted of $8.55 million in cash consideration,  less $938,000 of
acquired  cash,  plus  $184,000 in  acquisition  expenses and $277,000  paid for
Non-Compete Agreements. The Company had previously invested in licensing Shana's
technology,  and the book value of the investment as of the acquisition date was
included as purchase consideration.

     In  accordance   with  SFAS  No.  141,   "Business   Combinations,"   these
acquisitions  were accounted for under the purchase  method of  accounting.  The
purchase price was allocated as follows:

*(in thousands)***eGrail, Inc.            Shana Corp.****April 2, 2002          April 2, 2003**

 Net tangible assets                          $       581             $    2,725
 Patents                                               24                      -
 Goodwill                                           5,793                  7,235
 Acquired technology                                3,300                  4,000
 Technical manuals and design documents                 -                    600
 Customer support relationships                         -                    800
 In-process research and development                  400                      -
 Non-Compete Agreements                                 -                    277
 Liabilities assumed                                 (739)                (2,494)
 Previous investment in Shana technology                -                 (1,756)
 Deferred tax liability                                 -                 (2,376)
 Total cash purchase price                    $     9,359             $    9,011
 Less cash acquired                                     -                   (938)Net cash paid                                $     9,359             $    8,073 

                                      F-13

     The Company  allocated the purchase price for these  acquisitions  based on
fair value.  Statement of Financial Accounting Concepts No. 7 defines fair value
as the  amount  at which an asset  (or  liability)  could be bought or sold in a
current transaction between willing parties,  that is, other than in a forced or
liquidation sale.

     The valuation of the eGrail assets included $400,000 of in-process research
and  development,  which was expensed  upon  acquisition  because  technological
feasibility had not been established and no future alternative uses existed. New
product development  underway at eGrail at the time of the acquisition  included
the next  generation  of their Web Content  Management  product  that was in the
early stages of design and only 5% complete at the date of the acquisition.  The
cost to complete  the project was  estimated  at  approximately  $3.0 million to
occur over a 12-month period. As of March 31, 2003 the project was 100% complete
and the Company incurred  approximately $4.8 million of research and development
expenses  related to the project.  The acquired  technology  of $3.3 million was
assigned a useful  life of five years and  patents  of $24,000  were  assigned a
useful  life of two years.  The  remaining  purchase  price of $6.0  million was
allocated  to tangible  assets and  goodwill.  Goodwill of $5.8  million was tax
deductible for this asset purchase.

     The acquisition of Shana resulted in acquired technology, technical manuals
and design  documents,  and  customer  support  relationships.  Since  Shana had
recently  completed  Version 4.1 of its eForms product,  there was no in-process
research  and  development  underway  at the  time of the  acquisition.  Shana's
technology  manuals  and  design  documents  are the  "roadmaps"  for the eForms
technology  and will be used by FileNet in its  product  development.  Recurring
support revenues were expected and estimable for Shana's  customers based on the
older and newer versions of eForms technology.  The acquired  technology of $4.0
million,  the  technical  manuals  and design  documents  of  $600,000,  and the
customer  support  relationships of $800,000 were assigned a useful life of five
years.  The remaining  purchase price of $7.2 million was allocated to goodwill.
Although the goodwill  stemming from the Shana stock purchase is  non-deductible
for Canadian tax purposes,  the Company made a Section 338(g) election that will
result in the  deductibility  of goodwill  and other  intangibles  for U.S.  tax
purposes on this transaction.

     Actual results of operations of the acquired  eGrail  business,  as well as
assets and  liabilities  of the acquired  eGrail  business,  are included in the
audited consolidated financial statements from the date of acquisition.  The pro
forma results of operations data for 2002 presented below assume that the eGrail
acquisition had been made at the beginning of fiscal 2002. The pro forma data is
presented for informational  purposes only and is not necessarily  indicative of
the results of future  operations nor of the actual results that would have been
achieved had the acquisition taken place at the beginning of fiscal 2002. No pro
forma  information has been presented for the Shana  acquisition,  as the result
did not have a material impact on the financial statements of the Company during
the periods presented.

          *(in thousands)***2002 Pro Forma****(unaudited)**

          Revenue                          $  347,769
          Net income                            6,425
          Earnings per share:
             Basic                          $    0.18
             Diluted                        $    0.17 

                                      F-14
**Note 5   *Earnings Per Share***

     Basic earnings per share are computed by dividing net income for the period
by the  weighted-average  number of common shares outstanding during the period.
Diluted   earnings  per  share  is  computed  by  dividing  net  income  by  the
weighted-average number of common shares outstanding plus the dilutive effect of
outstanding  stock options,  shares available for issue under the employee stock
purchase plan and restricted stock issued to key executive  management using the
treasury stock method.  The number of  anti-dilutive  options  excluded from the
earnings per share  calculation for 2004,  2003 and 2002 was 1,943,014,  596,517
and 6,044,213  shares,  respectively.  The number of unvested  restricted  stock
excluded  from shares used in  computing  basic  earnings  per share was 175,000
shares for 2004. The number of unvested  restricted  stock included in computing
diluted  earnings per share was 17,141 shares for 2004. The following table is a
reconciliation  of the earnings and share  amounts  used in the  calculation  of
basic earnings per share and diluted  earnings per share *(in  thousands,  except
per share amounts)*:

                                      _______________________________________________
                                      **2004            2003             2002**

    Net Income                           $   29,414      $   10,920       $    8,272

    Shares used in computing
      basic earnings per share               39,095          36,532           35,590
    Dilutive effect of stock plans            1,899           1,557            1,119 
    Shares used in computing
      diluted earnings per share             40,994          38,089           36,709

    Earnings per basic share             $     0.75      $     0.30       $     0.23
    Earnings per diluted share           $     0.72      $     0.29       $     0.23 **Note 6   *Accumulated Other Comprehensive Operations***

     Accumulated other  comprehensive  operations for each of the three years in
the period ended December 31 are comprised of the following:

*(in thousands)**Foreign                           Accumulated
                                    Currency         Unrealized              Other
                                 Translation            Holding      Comprehensive**Adjustment      Gains (Losses)        Operations*
Balance, December 31, 2004       $    11,235        $      (276)       $    10,959
   Current Period Changes              5,590               (223)             5,367

Balance, December 31, 2003       $     5,645        $       (53)       $     5,592
   Current Period Changes             12,093               (119)            11,974

Balance, December 31, 2002       $    (6,448)       $        66        $    (6,382)
   Current Period Changes              7,631                 27              7,658

Balance, January 1, 2002         $   (14,079)       $        39        $   (14,040)

                                      F-15
**Note 7   *Investment Securities Available-for-Sale***

     The Company's  investments in marketable  securities  consist of high-grade
corporate and government  securities  with  maturities of less than three years.
Investments  purchased  with an original  maturity  of three  months or less are
considered to be cash  equivalents.  The following table  summarizes  investment
securities available for sale as of December 31:

*(in thousands)**Investment securities available-for-sale sale:***2004               2003**
  Cost                                               $    225,900         $  147,670
  Gross unrealized losses                                    (448)               (12)  Estimated fair value                               $    225,452         $  147,658 

     There were no  significant  realized  gains or losses  for the years  ended
December  31,  2004,  2003 and 2002.  Unrealized  holding  gains  and  losses on
investments,  net of  tax,  are  included  in  accumulated  other  comprehensive
operations  in  stockholders'  equity at December 31, 2004 and 2003,  and were a
cumulative loss of $276,000 and $53,000, respectively. The change year over year
was an unrealized loss of $223,000.

     A portion of the Company's  investments  consist of auction rate securities
that reset  interest  rates at auction  intervals  ranging  from 7, 28, 35 or 49
days.  These  securities are readily  saleable at par value on the auction dates
and the carrying value approximates fair value throughout the holding period. In
prior years, auction rate securities were included in cash equivalents. In 2004,
the Company  determined such amounts should properly be classified as short-term
investments.  As a result,  the Company has  reclassified  $102.7 million in the
fiscal  2003  consolidated  balance  sheet  from  cash and cash  equivalents  to
short-term   investments   to  conform  to  the   current   year   presentation.
Additionally,  the Company reclassified prior years' statements of cash flows to
remove the amounts from cash equivalents and record the net purchases of auction
rate  securities  of $53.9  million and $17.1  million for fiscal 2003 and 2002,
respectively, as an investing activity.

     The contractual maturities of investments at December 31, 2004 and 2003 are
shown below.  Actual maturities may differ from contractual  maturities  because
the issuer of the securities may have the right to repurchase  such  securities.
The Company  classifies  short-term  investments in current assets,  as all such
investments are available for current operations.

*(in thousands)***2004                                      2003**        .
                                                *Unrealized      Estimated                 Unrealized      Estimated**Cost    Gain/(Loss)    Fair Value         Cost    Gain/(Loss)    Fair Value***Debt Securities**
   Due in one year or less:
      Short-term munis-taxable    $  120,725      $      -     $  120,725    $ 111,013            11      $ 111,024
      Corporate                       15,724           (42)        15,682        8,442            (2)         8,440
      Governments/Agencies            75,087          (298)        74,789       15,526            (4)        15,522 
         Total                       211,536          (340)       211,196      134,981             5        134,986 

   Due in one to three years:
      Corporate                            -             -              -        2,189            (7)         2,182
      Governments/Agencies            14,364          (108)        14,256       10,500           (10)        10,490 
         Total                        14,364          (108)        14,256       12,689           (17)        12,672 
Grand Total                       $  225,900      $   (448)    $  225,452    $ 147,670      $    (12)     $ 147,658 

                                                               F-16
**Note  8   *Property***

     Property consisted of the following at December 31:

*(in thousands)***2004            2003**
Equipment and software                              $     116,669   $     127,265
Furniture and fixtures                                     14,025          14,350
Leasehold improvements                                     23,752          24,344 
    Total property                                        154,446         165,959
Less accumulated depreciation and amortization           (132,708)       (139,037)Property, net                                       $      21,738   $      26,922 **Note  9   *Leases and Commitments***

     The Company leases its corporate  offices,  sales offices,  development and
manufacturing  facilities,  and equipment under non-cancelable operating leases,
some of which have renewal  options and may provide for escalation of the annual
rental  amount.  Amounts  related to deferred rent are recorded in other accrued
liabilities on the consolidated balance sheet.

     Expenses related to operating leases were $13.2 million;  $13.8 million and
$16.0  million  for  the  years  ended   December  31,  2004,   2003  and  2002,
respectively.  The following  table  summarizes  future  minimum lease  payments
required under operating leases at December 31, 2004:

                  *(in thousands)*
                  2005                       $        12,265
                  2006                                12,030
                  2007                                10,131
                  2008                                 8,570
                  2009                                 6,865
                  Thereafter                           5,785Total                      $        55,646

     The Company  licenses  certain software from third parties with contractual
arrangements that require future payment obligations.  At December 31, 2004 this
obligation was $3.0 million and was due the following  year. The Company entered
into a  development  contract with a third party vendor during 2003. At December
31, 2004 the Company had an obligation to pay $4.2 million under this contract.

**Note 10   *Goodwill and Purchased Intangible Assets***

     In  acquisitions  accounted  for using the  purchase  method,  goodwill  is
recorded as the difference, if any, between the aggregate consideration paid for
an acquisition and the fair value of the net tangible and identified  intangible
assets acquired. Under SFAS No. 142 goodwill and indefinite life intangibles are
not amortized but rather reviewed and analyzed for possible  impairment at least
annually  or when  circumstances  occur  that  indicate  the  carrying  value of
goodwill may not be recoverable. Goodwill was not impaired at December 31, 2004.
Intangible  assets with definite  lives must be amortized  over their  estimated
useful lives. A portion of goodwill and intangible  assets were allocated to the

                                      F-17

Company's  Ireland  subsidiary  and therefore the two following  tables  reflect
amounts resulting from foreign exchange translation.

     The following  table presents the changes in goodwill by reporting  segment
during 2004 and 2003:

*(in thousands)**Professional
                                                 Customer     Services and**Software        Support        Education            Total*
Balance, January 1, 2003          $  9,187       $  3,962         $  3,758         $ 16,907

        Acquired                     4,826          1,353            1,056            7,235
        Foreign currency effect      1,177            446              405            2,028 

Balance, December 31, 2003        $ 15,190       $  5,761         $  5,219         $ 26,170

        Foreign currency effect        636            242              220            1,098 Balance, December 31, 2004        $ 15,826       $  6,003         $  5,439         $ 27,268 

     Acquired  technology,  technical  manuals  and design  documents,  customer
support relationships, patents and non-compete agreements are the Company's only
intangible assets subject to amortization  under Statement No. 142. These assets
were recorded in connection with the April 2002 eGrail acquisition and the April
2003 Shana  acquisition,  and are  comprised of the following:

                                                                                                      (in thousands)**December 31, 2004                          December 31, 2003**.

                                         *Gross    Accumulated                      Gross    Accumulated**Asset   Amortization         Net          Asset   Amortization*         Net 

Acquired technology and other
intangibles                        $    10,571         (4,496)  $   6,075    $    10,020         (2,272)  $   7,748
Non-compete agreements                     338           (225)        113            317            (90)        227
Patents                                     29            (29)          -             28            (24)          4 
     Total                         $    10,938         (4,750)  $   6,188    $    10,365         (2,386)  $   7,979 

     Acquired  technology is being  amortized  over a useful life of five years,
patents  were  amortized  over a  useful  life  of  two  years  and  non-compete
agreements  are being  amortized  over three  years.  Amortization  expense  for
amortizing intangible  assets was  $2,109,000  for 2004 and $1,695,000 for 2003.
Estimated future  amortization  expense of purchased  intangible  assets  as  of
December  31,  2004  is  as  follows  *(in thousands)*:

**Fiscal Year              Amount**
                        2005       $       2,207
                        2006               2,134
                        2007               1,517
                        2008                 330   $       6,188 

                                      F-18
**Note 11   *Stockholders' Equity*****Shareholder  Rights Plan**. In October 1988, the Company  declared a dividend
of one common stock purchase right for each outstanding share of common stock. A
right may be  exercised  under  certain  circumstances  to purchase one share of
common stock at an exercise  price of $87.50,  subject to certain  anti-dilution
adjustments.  The rights  become  exercisable  if and when a person (or group of
affiliated or associated  persons) acquire 15% or more of FileNet's  outstanding
common stock,  or announces an offer that would result in such person  acquiring
15% or more of FileNet's common stock. After the rights become exercisable, each
right  will  entitle  its holder to buy a number of shares of  FileNet's  common
stock having a market value of twice the exercise price of the rights. After the
rights become  exercisable,  if FileNet is a party to certain merger or business
combination  transactions  or  transfers  50% or more of its assets or  earnings
power (as defined), each right will entitle its holder to buy a number of shares
of common stock of the  acquiring or surviving  entity  having a market value of
twice the exercise price of the right.  The rights expire  November 17, 2008 and
may be  redeemed  by  FileNet  at one cent per  right at any time up to ten days
after  it is  announced  that 15% or more of  FileNet's  common  stock  has been
acquired.

     **Restricted  Stock**.  During 2004 the  Company  awarded  restricted  stock to
certain  members of senior  management  and members of the  product  development
team.  All of these awards were made under the 2002  Incentive  Award Plan.  The
fair value of the  restricted  stock award is recorded in the equity  section of
the balance sheet as an increase in common stock and a  contra-equity  offset to
deferred  compensation.  All restricted  stock awards vest over time and certain
awards include a feature that allows the stock to vest on an  accelerated  basis
providing certain  performance  targets are achieved.  Certain  restricted stock
awards  are also  subject  to Change in Control  Agreements  and/or  termination
without cause provisions that could trigger accelerated vesting. Expense related
to the shares is amortized on a straight-line basis over the vesting period.

The following table summarizes the awards of restricted stock during 2004:

_____________________________________________________________________________________________________________________
                                                                                                          **Performance
                                                                                                              Vesting
  Issuance                                     Shares        Share           Share                       Acceleration****Date                  Recipients         Issued        Price       Valuation     Vesting Schedule       Feature**
12/15/2004        Executive Management                                                     25% annually
                  (Nine members)              105,000    $  26.640    $  2,797,200      over four years            No

08/30/2004        Chief Legal Officer          15,000    $  20.275    $    304,125           12/31/2008           Yes

07/14/2004        Product Development                                                      25% annually
                  (Eight members)              25,000    $  20.760    $    519,000      over four years            No

03/09/2004        Executive Management
                  (Ten members)               132,500    $  27.470    $  3,639,775           12/31/2008           Yes                   Totals                      277,500                   $7,260,100                                             .

     Recognition  of expense  may be  accelerated  if it becomes  probable  that
certain  performance  targets will be achieved that trigger  accelerated vesting
for those shares that contain the acceleration feature.  Approximately  $730,000
of compensation expense was recognized in the twelve-month period ended December
31, 2004, for these restricted stock awards with no acceleration.

                                      F-19
**Employee  Stock  Purchase  Plans**.  In May 1998,  FileNet  adopted  the 1998
Employee Stock Purchase Plan and the International  Employee Stock Purchase Plan
(the "Purchase Plans"). As of December 31, 2004, a total of 2,432,278 shares had
been  authorized  to be included in the Purchase  Plans.  Under the terms of the
Purchase  Plans,  common stock may be offered in successive  six-month  offering
periods to eligible  employees  of the Company at 85% of the market price of the
common stock at the beginning or end of the offering period, whichever is lower.
The Purchase Plans cover  substantially  all employees of the Company.  Eligible
employees  may elect to have a portion of their salary  withheld for the purpose
of making purchases under the Purchase Plans. Each participant is limited in any
plan year to the  acquisition  of that number of shares  that have an  aggregate
fair market value of not more than  $25,000.  During the past three fiscal years
there  were no charges or  credits  to income in  connection  with the  Purchase
Plans.  During 2004,  2003 and 2002 the shares  issued under the Purchase  Plans
were 236,183,  339,236,  and 338,716 at a weighted  average fair value of $8.91,
$4.40 and $4.72 per share, respectively. At December 31, 2004, $775,804 had been
withheld from employees' salaries pursuant to the Purchase Plans for the current
offering  period,  which  expires  on April 30,  2005.  At  December  31,  2004,
approximately 559,015 shares remained available for future issuance.

     **Stock  Option  Plans**.  In April 1986,  the  Company  adopted the 1986 Stock
Option Plan (the "1986 Plan"). Under the amended terms of the 1986 Plan, options
to purchase  6,500,000  shares of the  Company's  common stock were reserved for
issuance to employees,  officers and  directors.  In May 1995, the 1986 Plan was
terminated as to future grants and the remaining  reserve of 140,098  shares was
transferred into the 1995 Stock Option Plan ("1995 Plan").  Outstanding  options
under the 1986 Plan will continue to be governed by the provisions of agreements
evidencing  those  grants.  Options  granted  under the 1986  Plan  were  either
incentive stock options or nonqualified  stock options and became exercisable in
20% annual installments beginning one year after the date of grant and expire no
later than ten years plus one day from the date of grant.  The exercise price of
the incentive  stock options and  nonqualified  options were not to be less than
100% and 85%,  respectively,  of the fair market value of the  Company's  common
stock at the date of grant. To the extent any outstanding options under the 1986
Plan  terminate  or  expire  prior to  exercise,  the  shares  subject  to those
unexercised  options will be available for  subsequent  option grant pursuant to
the provisions of the 1995 Plan.

     In May 1995, the Company adopted the 1995 Plan.  Under the amended terms of
the 1995 Plan,  options to purchase  8,350,000  shares of the  Company's  common
stock were reserved for issuance to employees,  officers and directors.  Options
granted under the 1995 Plan's  Discretionary  Option Grant Program for employees
and the Automatic  Option Grant Program for directors have an exercise price per
share of 100% of the fair  market  value per share on the grant  date and become
exercisable  in 25%  annual  installments  beginning  one year  from the date of
grant. On October 21, 1999, the Plan's  Discretionary Option Program was amended
to change the vesting  schedule of all options granted from that date forward to
vest twenty-five  percent (25%) of the option shares after twelve (12) months of
service from the grant date and the balance of the options to vest in thirty-six
(36) successive  equal monthly  installments  upon completion of each additional
month of service  thereafter.  In May 2003,  the Plan was  amended to  prohibit,
without prior stockholder approval,  the re-pricing,  replacement or re-granting
through  cancellation  or lowering the option  exercise price of any outstanding
options  granted  under the Plan.  As of December 31, 2004,  there are 3,277,230
options  exercisable and 278,059 options available for future issuance under the
1995 Plan.

     Prior  to  their  merger  with  FileNet  in March  1996  and  August  1995,
respectively, Saros and Watermark Software, Inc. had adopted stock option plans.
The  Company  assumed  the Saros  Plan and the  Watermark  Plan and  outstanding
options were  converted  into options to purchase an aggregate of 975,976 shares
of FileNet common stock.  Outstanding options under these plans will continue to
be governed by the provisions of the agreements  evidencing those grants. To the
extent any of those  outstanding  options terminate or expire prior to exercise,
the shares  subject  to those  unexercised  options  will not be  available  for

                                      F-20

subsequent  option  grant.  At December 31, 2004, a total of 1,778  options were
outstanding and exercisable  under the Saros Plan. No shares remain  outstanding
or exercisable under the Watermark Plan.

     Non-employee  directors  are granted an initial  option to purchase  25,000
shares of FileNet  common stock at fair market value on the date of grant and an
additional  10,000  shares of FileNet  common  stock at fair market value on the
date of grant every year  following  the  initial  grant,  provided  such person
continued to be a director at such time.

     In May 2002, the Company  adopted the 2002 Incentive  Award Plan (the "2002
Plan").  In May 2003,  the 2002 Plan was  amended  to  prohibit,  without  prior
stockholder  approval,  the  re-pricing,   replacement  or  re-granting  through
cancellation or lowering the option  exercise price of any  outstanding  options
granted under the Plan. In May of 2004,  the 2002 Plan was amended and restated,
with stockholder approval.  These amendments included:  increasing the available
shares by 2,000,000  shares from 2,800,000 to 4,800,000  shares;  increasing the
number of shares  that may be  awarded as  restricted  stock,  restricted  stock
units,  deferred  stock,  performance  awards and stock payments from 140,000 to
700,000 shares;  increasing the annual automatic grant of stock option awards to
independent  directors  from  7,000 to 10,000  shares;  and  extending  the Plan
termination  date to February 24, 2014.  Options granted under the 2002 Plan for
independent directors,  consultants and key employees have an exercise price per
share of 100% of the fair market value per share on the grant date.  Options for
key employees and consultants  become exercisable as to 25% of the option shares
after  twelve  months of  service  from the grant  date and the  balance  of the
options in thirty-six (36) successive equal monthly installments upon completion
of  each  additional  month  of  service  thereafter.  Options  for  independent
directors  become  exercisable as to 25% per year on each of the first;  second,
third and fourth  anniversary  provided the director continues as an independent
director on each such  anniversary.  As of December 31, 2004, there were 477,773
options  exercisable and 1,313,507  available for future issuance under the 2002
Plan.

     The Company has also granted  certain  options  outside of its  shareholder
approved stock option plans.  In August 1997,  the Company made a  Non-Statutory
Stock Option Grant of 600,000 shares,  dated May 1997, to the Company's  current
Chief Executive  Officer and made a Non-Statutory  Stock Option Grant of 160,000
shares, dated June 1997, to the Company's current President.  In April 2001, the
Company  made a  Non-Statutory  Stock  Option  Grant of  140,000  shares,  dated
September 2000, to the Company's  current Chief Financial  Officer.  Such grants
were in  accordance  with hiring  such  persons  and the  employment  agreements
entered into by the Company and the grantees.  In September  2003, the Company's
Chief  Marketing  Officer  was granted a  Non-Statutory  Stock  Option  Grant of
100,000 shares. These options were subsequently cancelled in March 2004 upon the
termination of employment of the Chief  Marketing  Officer.  All non-plan grants
were made with an  exercise  price  equal to 100% of the fair  market  value per
share on the date of grant and  expire no later  than ten years from the date of
grant and all such grants  were fully  vested as of December  31,  2004.  All of
these  options  were  also  amended  in May 2003 to  prohibit  repricing.  As of
December  31,  2004,  there were 196,782  options  exercisable  related to these
Non-Statutory Stock Option Grants and 703,218 had been exercised to date.

                                      F-21

Information regarding all stock options is as follows:

__________________________________________________________________________________________________
                                                                    *Number of    Weighted Average**Options      Exercise Price***Balances, January 1, 2002**                                           8,010,453          $    15.56
            Granted (weighted average fair value of $7.02)          1,559,230               13.63
            Exercised                                                (286,114)               9.56
            Cancelled                                                (577,253)              21.42 **Balances, December 31, 2002**                                         8,706,316          $    15.12
            Granted  (weighted average fair value of $9.33)           799,100               19.97
            Exercised                                              (1,552,892)              11.31
            Cancelled                                                (309,811)              17.21 **Balances, December 31, 2003**                                         7,642,713          $    16.31
            Granted  (weighted average fair value of $13.71)        1,843,100               27.08
            Exercised                                              (2,270,666)              13.47
            Cancelled                                                (344,530)              19.35 **Balances, December 31, 2004**                                         6,870,617          $    19.99 

     The following  table  summarizes  information  concerning  outstanding  and
exercisable options at December 31, 2004:

______________________________________________________________________________________________________
**Options Outstanding                      Options Exercisable**               .
                                             *Weighted
                                              Average        Weighted                        Weighted
                                            Remaining         Average                         Average*
            Range of           Number     Contractual        Exercise            Number      Exercise
*Exercise Price      Outstanding     Life (Years)          Price       Exercisable         Price*
$       1.39 - 11.09          702,447            3.63      $     9.12           685,646    $     9.10
       11.13 - 13.38        1,422,005            7.13           13.04           780,716         13.09
       13.39 - 18.45        1,149,815            6.35           16.27           887,383         16.45
       18.75 - 25.00        1,153,709            5.77           22.59         1,043,702         22.83
       25.28 - 28.74        2,223,541            8.79           27.39           368,516         27.27
       29.00 - 41.84          219,100            4.94           30.74           187,600         30.95 $       1.39 - 41.84        6,870,617            6.88      $    19.99         3,953,563    $    17.89 

                                                   F-22
**Note 12   *Income Taxes***

     The provision  (benefit) for income taxes for the years ended  December 31,
2004, 2003 and 2002 consists of the following:

*(in thousands)****Year ended December 31,*****2004         2003         2002**
Current:
     Federal                            $     7,044    $   7,428    $  (2,126)
     State                                    2,048          885          235
     Foreign                                  2,777        1,825        2,740
Deferred:
     Federal                                 (7,021)      (4,520)       1,276
     State                                   (5,351)      (1,371)         353
     Foreign                                   (786)           -            -                                              .
Total provision (benefit)               $    (1,289)   $   4,247    $   2,478 

     Income (loss) before income taxes consists of the following components:

*(in thousands)****Year ended December 31,*****2004             2003          2002**
United States                      $    24,864       $    9,272   $      (307)
Foreign                                  3,261            5,895        11,057   Total                            $    28,125       $   15,167   $    10,750 

     A reconciliation of the provision (benefit) for income taxes at the Federal
statutory rate compared to the Company's effective tax rate is as follows:

______________________________________________________________________________________
***Year ended December 31,*****2004         2003         2002**
Income taxes (benefit), at statutory federal rate        35%          35%          35%
State taxes (benefit), net of federal benefit            (8)          (2)           3
Tax rate differential on foreign earnings                 3           (1)         (10)
Change in domestic valuation allowance                 ( 36)           -            -
R and D Credit                                           (3)          (7)          (7)
Other                                                     4            3            2 Total                                                    (5%)         28%          23%

     Deferred income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and  the  amounts  used  for  income  tax  purposes.  The  significant
components  of these  temporary  differences  consisted  of the  following as of
December 31, 2004 and 2003, respectively:

                                      F-23
*(in thousands)****Year ended December 31,*****2004             2003**                .
Deferred taxes:
     Loss carryforwards                         $    27,939      $    20,254
     Tax credit carryforwards                        20,478           15,980
     Accrued expenses                                 3,369            3,608
     Sales returns and allowance reserves               405              405
     Deferred revenue                                 6,275           10,209
     Depreciable assets and amortizable assets        3,792            4,060
     Other                                           (4,841)          (3,667)
Total                                                57,417           50,849
Valuation allowance                                 (17,708)         (24,297)Net deferred tax asset                          $    39,709      $    26,552                        .

     Recoverability  of the existing net deferred tax assets is dependent on the
continued  Federal  and  foreign  profitability  from  operations.  The  Company
regularly   evaluates  its  net  deferred  tax  assets  for  recoverability  and
establishes  a  valuation  allowance  when it is more  likely than not that some
portion or all of the net  deferred  tax assets  will not be  realized.  The net
increase (decrease) in the total valuation allowance was ($6,589,000),  $457,000
and ($844,000) during 2004, 2003 and 2002,  respectively.  The 2004 net decrease
includes a benefit of $13.5 million from the reversal of the valuation allowance
related  to  domestic  net  operating  loss  carryforwards  and other  temporary
differences as a result of the current year domestic  profits and projections of
future domestic profitability. This decrease was partially offset by an increase
in valuation  allowance of $1.6 million  associated  with foreign net  operating
loss  carryforwards  and $6.0  million  related  to current  year  stock  option
deductions.  As of December 31, 2004, the remaining  valuation allowance relates
to stock option  deductions of approximately  $15 million and net operating loss
carryforwards  specific to certain foreign tax  jurisdictions  of  approximately
$2.7 million. The Company will continue weighing various factors in future years
to assess the need for any additional changes in its valuation allowance. Should
the Company realize increased  domestic  profitability  (net of any current year
stock option  deductions)  and  anticipate  a  continuation  of this trend,  any
decrease in the valuation  allowance  related to stock option  deductions  would
result in an increase to stockholders' equity.

     The Company has domestic Federal net operating loss carryforwards available
to offset future taxable income  totaling $64.9 million and domestic tax credits
of $20.2  million as of December 31, 2004.  The domestic  Federal net  operating
loss  carryforwards will expire at various dates from 2013 through 2024, and the
domestic tax credits will expire at various  dates from 2005  through  2024.  At
December  31, 2004,  the Company had Irish and  Austrian tax loss  carryforwards
relating to its foreign  subsidiary  operations that total  approximately  $11.0
million which have unlimited carry forward periods.

     The  Company  has made no  provision  for  U.S.  income  taxes  or  foreign
withholding taxes on the earnings of its foreign subsidiaries,  as these amounts
are considered permanently reinvested outside the United States. At December 31,
2004, the cumulative amount of undistributed  earnings was  approximately  $63.9
million,  and the  unrecognized  deferred tax liability  for these  earnings was
approximately $24.5 million.

                                      F-24

     Income tax returns filed by the Company are currently under  examination by
the Internal  Revenue Service as well as certain state and foreign  governments.
The Company regularly assesses the likelihood of adverse outcomes resulting from
current or future  examinations  to determine  the adequacy of its provision for
income  taxes.  The Company accrues  for tax  contingencies based upon  its best
estimate of the taxes it expects to pay.  These estimates are updated  over time
as more definitive information becomes available  or upon the  completion of tax
audits.   Although the outcome of tax audits are  always  uncertain,  based upon
currently  available  information, Management believes that the ultimate outcome
of  ongoing  and future  audits will not have a material effect on the Company's
financial  position,  cash  flows or  overall  trends in results  of operations.

     The American Jobs Creation Act of 2004 (the "Act"),  enacted on October 22,
2004,  makes a number of significant  changes to the income tax laws,  which may
affect the  Company  in future  years.  The main tax  incentives  affecting  the
Company include the new deduction for qualifying domestic production  activities
and the one time  repatriation of foreign  earnings  subject to an effective tax
rate of 5.25%.  Management is currently  evaluating  the impact of these and any
other changes made by the Act and, as such,  the effects of such changes  cannot
be quantified at this time.

**Note 13   *Operating Segment and Geographic Information***

     The Company has prepared  operating segment  information in accordance with
SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information," to report components that are evaluated regularly by the Company's
chief  operating  decision  maker,  or decision making group, in deciding how to
allocate  resources  and in  assessing  performance.  The  Company is  organized
geographically  and by  line  of  business.  The  line  of  business  management
structure is the primary basis for which  financial  performance is assessed and
resources allocated.

     Certain  reclassifications  have  been  made to the  prior  years'  segment
information  to  conform  to  the  current  year's  presentation.  The  residual
operating  activity of the previously  reported  Hardware  reporting segment has
been   incorporated   into  the  Customer  Support   reporting   segment.   This
reclassification  is predicated on the reduced scale and change in the nature of
on-going  hardware  operations.  The only  activity  in the  Hardware  reporting
segment is related to supporting legacy customers with spare parts and supplies,
and management no longer reviews the Hardware reporting segment on a stand-alone
basis.

     The  Company's  reporting  units are the same as the lines of business  and
include Software, Customer Support, and Professional Services and Education. The
Software operating segment develops,  markets, and sells a software platform and
application development framework for Enterprise Content Management and Business
Process Management. The Customer Support segment provides after-sale support for
software,  as well as providing  software  upgrades under the Company's right to
new versions  program.  The Customer  Support  segment also  provides  operating
supplies and spare parts for the installed base of Optical Storage and Retrieval
("OSAR") libraries, the remaining portion of the previous hardware business. The
Professional  Services and Education segment provides  fee-based  implementation
and technical consulting services related to the Company's standard products and
training services.

     The accounting policies of the Company's operating segments are the same as
those  described in Note 2 - Summary of  Significant  Accounting  Policies.  The
Company  evaluates  performance based on stand-alone  segment gross profit.  The
Company does not separately  allocate operating expenses to these segments,  nor
does it  allocate  specific  assets  to these  segments.  The  Company  does not
evaluate  performance based on the return on assets or on interest income at the
operating segment level.  Therefore,  segment information reported includes only
revenues,  cost of  revenues,  and gross  profit,  as this  information  and the
geographic  information  described  below  are the  only  information  currently
provided to the chief operating decision maker on a segment basis.

                                      F-25

     Operating  segment data for the three years ended  December 31, 2004, is as
follows:

 *(in thousands)***Professional
                                                            Customer      Services and****Software          Support         Education        Consulted*****Year Ended December 31, 2004***

 Revenue                                $   154,279     $    188,011       $    55,268      $   397,558
 Cost of Revenue                             15,122           41,989            44,954          102,065
      Gross Profit                          139,157          146,022            10,314          295,493***Year Ended December 31, 2003***

 Revenue                                $   149,214     $    167,230       $    48,061      $   364,505
 Cost of Revenue                             13,800           42,785            42,346           98,931
      Gross Profit                          135,414          124,445             5,715          265,574***Year Ended December 31, 2002***

 Revenue                                $   132,508     $    157,550       $    56,959      $   347,017
 Cost of Revenue                             10,565           44,603            50,408          105,576
      Gross Profit                          121,943          112,947             6,551          241,441

     Revenue is  attributed  to  geographic  areas based on the  location of the
entity to which the  products or services  were sold.  The  operation in Ireland
functions  as a  manufacturing  and  service  center for  non-United  States and
non-Latin  America  customers.  An allocation of its assets among the geographic
segments  is  not  prepared  for  management  reporting.  All  other  geographic
locations  include  South  America,  the  Middle  East and  Africa.  Information
concerning  principal  geographic  areas in which  the  Company  operates  is as
follows:

*(in thousands)****Year ended December 31,*****2004                          2003                       2002**         .
*Revenue          Assets       Revenue          Assets      Revenue       Assets*
North America:
   United States               $   278,177     $   372,918   $   257,100     $   283,073  $   251,447  $   251,928
   Canada                            8,786          22,611         7,971          22,627        5,581        5,398 
   Total North America             286,963         395,529       265,071         305,700      257,028      257,326

Europe:
   France                            8,252           1,793         6,166           2,111        6,593        2,086
   Germany                          28,882           4,001        29,074           6,985       22,174        3,632
   United Kingdom                   21,250          29,845        18,930          20,810       22,950       18,145
   Ireland                               -          46,019             -          39,742            -       37,114
   Other Europe                     35,588           5,640        31,169           5,954       26,236        4,902 
   Total Europe                     93,972          87,298        85,339          75,602       77,953       65,879

Asia Pacific                        15,793          10,839        12,171          10,546        9,916        4,831
All other                              830               -         1,924               -        2,120            -          .
Totals                         $   397,558     $   493,666   $   364,505     $   391,848  $   347,017  $   328,036 

                                                               F-26
**Note 14   *Litigation***

     In the normal  course of  business,  the  Company  is  subject to  ordinary
routine  litigation and claims incidental to our business.  The Company monitors
and  assesses  the  merits  and risks of pending  legal  proceedings.  While the
results of litigation and claims cannot be predicted with certainty,  based upon
its current  assessment  the  Company  believes  that the final  outcome of each
existing legal  proceeding  either will be resolved in its favor or, if resolved
against  it,  will not have a  materially  adverse  effect  on its  consolidated
results of operations or financial condition.

**Note 15    *Guarantees and Indemnifications***

     The Company has made guarantees and indemnifications, under which it may be
required to make payments to a guaranteed or indemnified  party,  in relation to
certain transactions.  In connection with the sales of its products, the Company
provides  intellectual  property  indemnities to its  customers.  Guarantees and
indemnities to customers in connection with product sales and service  generally
are  subject to limits  based upon the amount of the  related  product  sales or
service.  Payment by the Company is  conditioned  upon the other party  filing a
claim  pursuant to the terms and  conditions of the  agreement.  The Company may
challenge  this  claim and may also have  recourse  against  third  parties  for
certain  payments made by the Company.  Predicting the maximum  potential future
payment  under these  agreements  is not  possible  due to the unique  facts and
circumstances involved with each agreement.  Historically,  the Company has made
no payments under these agreements.

     In  connection  with  certain   facility   leases  and  other   performance
guarantees,  the  Company  has  guaranteed  payments  on  behalf  of some of its
subsidiaries.  To provide subsidiary  guarantees,  the Company obtains unsecured
bank guarantees from local banks. These bank guarantees totaled an equivalent of
approximately  $2.6  million  issued in local  currency in Europe and Asia as of
December 31, 2004. Furthermore,  the Company has signed an indemnity letter as a
performance  guarantee  to a  certain  customer  in  Europe  in  local  currency
equivalent to approximately $200,000 as of December 31, 2004.

     The Company  indemnifies  its directors and officers to the maximum  extent
permitted under the laws of the State of Delaware.

     The Company has not recorded a liability for the guarantees and indemnities
described above in the accompanying  consolidated  balance sheet and the maximum
amount of potential future payments under such guarantees and indemnities is not
determinable, other than as described above.

**Note 16    *Other Financial Instruments***

     The Company  enters into  forward  foreign  exchange  contracts on the last
business day of each quarter - with all contracts maturing in three months.

     The  following  table  summarizes  the  notional  amounts of the  Company's
foreign currency agreements entered into on December 31, 2004 and 2003. There is
no fair value of such agreements at December 31 as they were entered into on the
last day of the year.

                                      F-27

________________________________________________________________________________________
***At December 31,*****2004                                  2003***Notional            Notional           Notional          Notional
                            Amount              Amount             Amount            Amount**Purchased                Sold          Purchased              Sold*
European            $   22,546,242     $   (16,855,303)    $   17,907,065    $   11,888,699
Australian                       -                   -                  -           116,072
Asian                    1,292,685            (226,688)         1,791,763                 -
Canadian                         -          (5,785,124)                 -         7,878,703                            .
Total               $   23,838,927     $   (22,867,115)    $   19,698,828    $   19,883,474 **Note 17    *Related-Party Transactions***

     On June 5, 2002,  the  Compensation  Committee  of the  Company's  Board of
Directors  (the  "Board")  approved a loan to Mr.  Roberts  for $1.9  million to
enable him to  purchase a home in Orange  County,  California.  Mr.  Roberts has
repaid  this loan in full as of  December  10,  2004.  Mr.  Roberts  made  total
payments  of  $2,020,576  including  $120,576  in  interest  and  $1,900,000  in
principal.

     John Savage, a member of the Board and the Audit Committee of the Board, is
Managing  Partner of  Alliant  Partners.  Alliant  Partners  acted as  financial
advisor to eGrail in connection  with our  acquisition  of assets from eGrail in
2002 and was paid  approximately  $500,000 by eGrail.  Accordingly,  John Savage
recused himself from all discussions related to the acquisition of eGrail assets
by the Company and abstained from voting on the transaction.

                                      F-28
**SCHEDULE II

                            VALUATION AND QUALIFYING ACCOUNTS AND RESERVES***(in thousands)**Additions
                                          Balance at     Charged to                     Balance
                                           Beginning    Revenue and                      at End**of Period       Expenses    Deductions     of Period***Year ended December 31, 2004:**
   Inventory reserves                      $     250              -           250     $       -
   Allowance for doubtful accounts
     and sales returns                     $   3,917          1,108         1,190     $   3,835
**Year ended December 31, 2003:**
   Inventory reserves                      $     301            547           598     $     250
   Allowance for doubtful accounts
     and sales returns                     $   4,232            653           968     $   3,917
**Year ended December 31, 2002:**
   Inventory reserves                      $     188            139            26     $     301
   Allowance for doubtful accounts
     and sales returns                     $   3,567          1,752         1,087     $   4,232

                                                       S-1
**EXHIBIT INDEX**Exhibit No.Exhibit Title

     21.1        List of Subsidiaries of Registrant (filed as FileNet
                 Corporation Subsidiary Information)

     23.1        Consent of Independent Registered Public Accounting Firm

     31.1        Certification of Chief Executive Officer

     31.2        Certification of Chief Executive Officer

     32.1        Certification of Chief Financial Officer

     32.2        Certification of Chief Financial Officer

**Exhibit 21.1****LIST OF SUBSIDIARIES OF REGISTRANT**

        3565 Acquisition, LLC
        FileNet BV (The Netherlands)
        FileNet Canada, Inc.
        FileNet Company Limited (Ireland)
        FileNet Corporation Asia Pacific Pte. Ltd. (Singapore)
        FileNet Corporation Korea
        FileNet Corporation, Pty. Ltd (Australia)
        FileNet France S.A.R.L.
        FileNet GesmbH (Austria)
        FileNet GmbH (Germany)
        FileNet Hong Kong Limited
        FileNet Iberia, S.L. (Spain)
        FileNet Italy, S.R.L.
        FileNet Japan
        FileNet Limited (United Kingdom)
        FileNet Nova Scotia Corporation
        FileNet Poland Sp.zo.o
        FileNet (Proprietary) Limited (South Africa)
        FileNet Shared Services Centre Ireland Limited
        FileNet Sweden AB
        FileNet (Switzerland) GmbH
        Shana Corporation U.S.A.
        SPMM,Inc.

**Exhibit 23.1

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

We consent to the  incorporation  by reference in  Registration  Statement  Nos.
33-90454,  33-96076,  33-80899,  333-02194,   333-09075,  333-34031,  333-66997,
333-89983, 333-43254, 333-59274, 333-71598, 333-96711, 333-96713, 333-107012 and
333-116883  on Form S-8 of our  reports  dated  March 11,  2005  relating to the
financial  statements and financial  statements  schedule of FileNet Corporation
and management's  report on the effectiveness of internal control over financial
reporting,  appearing in this Annual Report on Form 10-K of FileNet  Corporation
for the year ended December 31, 2004.

*/s/ Deloitte and Touche LLP*

Deloitte and Touche LLP
Costa Mesa, California
March 11, 2005

**Exhibit 31.1

                    Certification of Chief Executive Officer
            Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

I, Lee D. Roberts, certify that:

1. I have reviewed  this annual  report on Form 10-K of FileNet Corporation (the
"registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact  necessary to make the statements
made, in light of the  circumstances  under which such statements were made, not
misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information included in this report, fairly present in all material respects the
financial  condition,  results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over  financial
reporting  (as defined  in Exchange Act  Rules 13-a-15(f) and 15d-15(f)) for the
registrant and have:

     a)  designed  such  disclosure  controls  and  procedures,  or caused  such
disclosure  controls and  procedures to be designed  under our  supervision,  to
ensure that  material  information  relating to the  registrant,  including  its
consolidated subsidiaries,  is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or  caused such
internal control over financial reporting to be designed under our  supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in  accordance
with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant's disclosure controls  and
procedures and presented in this report our conclusions about the  effectiveness
of the disclosure controls and procedures,  as of the end  of the period covered
by this report based on such evalution; and

     d) disclosed in this report any change in the registrant's internal control
over  financial  reporting  that occurred  during the  registrant's  most recent
fiscal quarter (the registrant's  fourth fiscal quarter in the case of an annual
report) that has  materially  affected,  or is  reasonably  likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent  evaluation of internal  control over  financial  reporting,  to the
registrant's  auditors  and the audit  committee  of the  registrant's  board of
directors (or persons performing the equivalent functions):

     a) all significant  deficiencies  and material  weaknesses in the design or
operation of internal  control over  financial  reporting  which are  reasonably
likely  to  adversely  affect  the  registrant's  ability  to  record,  process,
summarize and report financial information; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's  internal control over
financial reporting.

Date:   March 15, 2005
                                                 */s/ Lee D. Roberts*.
                                                      Lee D. Roberts
                                                  Chief Executive Officer

**Exhibit 31.2****Certification of Chief Financial Officer
            Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

I, Sam M. Auriemma, certify that:

1. I have reviewed this annual report on Form 10-K of  FileNet  Corporation (the
"registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact  necessary to make the statements
made, in light of the  circumstances  under which such statements were made, not
misleading with respect to the period covered by this report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information included in this report, fairly present in all material respects the
financial  condition,  results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))  and internal control over financial
reporting (as defined in Exchange Act  Rules 13-a-15(f)  and  15d-15(f)) for the
registrant and have:

     a)  designed  such  disclosure  controls  and  procedures,  or caused  such
disclosure  controls and  procedures to be designed  under our  supervision,  to
ensure that  material  information  relating to the  registrant,  including  its
consolidated subsidiaries,  is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

     b) designed such internal control over financial reporting, or  caused such
internal control over financial reporting to be designed under our  supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in  accordance
with generally accepted accounting principles;

     c) evaluated the effectiveness of the registrant's  disclosure controls and
procedures and presented in this report our conclusions  about the effectiveness
of the disclosure  controls and procedures,  as of the end of the period covered
by this report based on such evaluation; and

     d) disclosed in this report any change in the registrant's internal control
over  financial  reporting  that occurred  during the  registrant's  most recent
fiscal quarter (the registrant's  fourth fiscal quarter in the case of an annual
report) that has  materially  affected,  or is  reasonably  likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed,  based on our
most recent  evaluation of internal  control over  financial  reporting,  to the
registrant's  auditors  and the audit  committee  of the  registrant's  board of
directors (or persons performing the equivalent functions):

     a) all significant  deficiencies  and material  weaknesses in the design or
operation of internal  control over  financial  reporting  which are  reasonably
likely  to  adversely  affect  the  registrant's  ability  to  record,  process,
summarize and report financial information; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's  internal control over
financial reporting.

Date:   March 15, 2005
                                                 */s/ Sam M. Auriemma*.
                                                     Sam M. Auriemma
                                                  Chief Financial Officer

**Exhibit 32.1

                    Certification of Chief Executive Officer**
                Certification Pursuant To 18 U.S.C. Section 1350
                             Created by Section 906
                        of The Sarbanes-Oxley Act of 2002

The  undersigned  officer  of  FileNet   Corporation  (the  "Company"),   hereby
certifies, to such officer's knowledge, that:

     (i) the  accompanying  Annual  Report on Form 10-K of the  Company  for the
fiscal period ended  December 31, 2004 (the  "Report")  fully  complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and

     (ii) the  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.

Dated:   March 15, 2005
                                               */s/ Lee D. Roberts*.
                                                  Lee D. Roberts
                                                  Chairman of the Board and
                                                  Chief Executive Officer

**Exhibit 32.2

                    Certification of Chief Financial Officer**
                Certification Pursuant To 18 U.S.C. Section 1350,
                             Created by Section 906
                        of The Sarbanes-Oxley Act of 2002

The  undersigned  officer  of  FileNet   Corporation  (the  "Company"),   hereby
certifies, to such officer's knowledge, that:

     (i) the  accompanying  Annual  Report on Form 10-K of the  Company  for the
fiscal period ended  December 31, 2004 (the  "Report")  fully  complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and

     (ii) the  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.

Dated:  March 15, 2005
                                               */s/ Sam M. Auriemma*.
                                                  Sam M. Auriemma
                                                  Executive Vice President
                                                  Chief Financial Officer
                                                 (Principal Financial Officer)
```