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                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[X]  ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997
                                                                 OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 For the transition period from to

          Commission File Number        0-15997

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

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

        3565 Harbor Boulevard, Costa Mesa, California    92626
           (Address of principal executive office)     (Zip code)

Registrant's telephone number, including area code:  (714) 966-3400


Securities  registered  pursuant to Section  12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:

     Title of each class                Name of each exchange which registered
Common stock,  $0.01 par value                          Nasdaq


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]

Based on the closing sale price of March 17, 1998, the aggregate market value of
the 14,981,441 shares of voting stock of the Registrant held by nonaffiliates of
the Registrant on such date was $579,631,952.  For purposes of such calculation,
only executive officers, board members and beneficial owners of more than 10% of
the Company's outstanding common stock are deemed to be affiliates.

The number of shares outstanding of the Registrant's common stock was 15,145,900
at March 17, 1998.


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's  definitive proxy statement for its 1998 Annual Meeting
are  incorporated  by reference  into Part III as set forth herein.  Portions of
Registrant's  Annual Report to  Stockholders  for the fiscal year ended December
31, 1997 are  incorporated  by reference  into Parts II, III and IV as set forth
herein.

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<PAGE>

                               FILENET CORPORATION

                                    FORM 10-K
                      For the Year Ended December 31, 1997

                                      INDEX
<TABLE>


                                     PART I                                 Page
<S>                                                                          <C>
Item 1. Business..............................................................3
Item 2. Properties...........................................................10
Item 3. Legal Proceedings....................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................11

                                PART II

Item 5. Market for the Registrant's Common Stock and Related
        Stockholder Matters..................................................11
Item 6. Selected Financial Data..............................................12
Item 7. Management's Discussion and Analysis of Financial Condition
        and Results of Operations............................................13
Item 8. Financial Statements and Supplementary Data..........................13
Item 9. Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure.............................................13

                                                       PART III

Item 10. Directors and Executive Officers of the Registrant..................13
Item 11. Executive Compensation..............................................13
Item 12. Security Ownership of Certain Beneficial Owners and Management......13
Item 13. Certain Relationships and Related Transactions......................13

                                PART IV

Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.....14
Signatures...................................................................19
</TABLE>

                                       2


<PAGE>
                                     PART I


Item 1.  Business

GENERAL

FileNET  Corporation  (FileNET or the Company) develops,  markets and services a
family of integrated document management software products designed for managing
information and enhancing  enterprise  productivity.  Additionally,  the Company
manufactures  and  sells  a  line  of  12-inch  optical  storage  and  retrieval
libraries.  The Company markets its products in more than 60 countries through a
global  sales,  services and support  organization,  including  its  ValueNET(R)
partner program of resellers, system integrators and application developers.

MARKETS AND APPLICATIONS

The Company  offers a family of  complementary  products  which  enable users to
manage, on an  enterprise-wide  basis, the storage,  processing and workflow for
documents and other unstructured  information,  including scanned images, faxes,
text, spreadsheets,  graphics, drawings,  photographs,  computer output reports,
voice, and video. The Company's products provide a client server/based  document
management  architecture  that  can  be  implemented  on  a  modular  basis  and
organizations  can choose one,  some, or all of the Company's  products to build
the system that most effectively meets their needs. The Company's  customers are
typically those  organizations  which have active paper document files,  process
significant numbers of electronic documents in their day-to-day  operations,  or
have complex,  mission-critical business processes for a variety of applications
such as mortgage loan servicing,  credit card customer service, insurance claims
processing, retirement account management,  engineering drawings management, web
based  document  management,  medical  records  management,   personnel  records
management,  company  policies and procedures,  accounts payable and receivable,
traffic,  property and criminal records.  Additionally,  the Company's  products
address ad hoc business  processes at the  departmental  and workgroup levels to
improve overall  enterprise  productivity  and integrate with industry  standard
productivity   applications  like  Microsoft  Office,  Lotus  Notes  and  Novell
GroupWise.

The Company  markets its  products  in more than 60  countries  through a direct
sales force and through its ValueNET(R)  partner  program  consisting of systems
integrators,   value-added  resellers  and  distributors.  A  number  of  firms,
including  Andersen  Consulting  and  American  Management  Systems,  operate as
third-party  resellers  under the  Company's  ValueNET(R)  program  and  combine
FileNET products with vertical  market-specific  value-added services to provide
turnkey  solutions and complex systems  integration  for customers.  Other firms
such as Tech Data,  Law  Cypress,  IAI Canada,  Image Choice and  Paperlink  are
distributors  of  the  Company's  products  selling  to  hundreds  of  resellers
throughout  the world.  The  Company  also has OEM  agreements  with other firms
involving the Company's software products.

The Company offers software  maintenance  service for its products in the United
States and in countries where it has direct international sales operations.  The
Company's  international  resellers offer  maintenance in the countries in which
they operate. The Company  subcontracts  hardware maintenance to Hewlett-Packard
Corporation (HP) and other third parties.

In September  1995, the Company entered into an agreement with SAP AG to deliver
data  archiving  and  document  solutions  for  their   client/server-based  R/3
enterprise  application systems environment as a Complementary Software Partner.
Deliveries of this product commenced in December 1995.

The  Company  also  has  porting  and  licensing  agreements  with  HP  and  Sun
Microsystems, Inc. (Sun) to co-market versions of FileNET's document imaging and
workflow software products to users of those companies'  products.  Sales of the
HP based  product  commenced in December 1993 and the Sun based product in March
1995. In 1996,  the Company  became a Global  Partner with HP's General  Systems
Division.  In  September  1997,  the  company  signed an IBM Market  Development
Program  Agreement with IBM's  Solution  Developer  Marketing  Alliance group to
become an IBM Business Partner.

The Company is a Certified  Microsoft  Solutions  Developer and will continue to
develop and certify products for the Microsoft BackOffice computing environment.

                                       3

<PAGE>
PRODUCTS

SOFTWARE

The following software products are currently being offered by the Company:

Integrated Document Management

In February  1998,  the Company  introduced  the  Panagon  family of  Integrated
Document  Management (IDM) software that combines imaging,  electronic  document
management,  and workflow  into a unified  architecture.  The Panagon  family of
products  includes  new desktop and web  services  software  applications  being
released by the Company for the first time and a rebranding of existing products
for client and server  environments.  With  Panagon,  the  Company has created a
software  infrastructure  that allows  companies to capture any type of document
electronically,  then  quickly and easily  access,  manage,  and  integrate  the
information with their existing  critical business  applications  throughout the
enterprise.  Using Microsoft's Windows Explorer or web browsers familiar to most
business  professionals,  companies can search the entire enterprise network for
information,  retrieve documents of all types, easily work with the information,
and then route it as needed for further review, processing, or decision making.

The new Panagon  IDM Desktop  range of  products  are built  around  Microsoft's
component  software  architecture (COM) and allow applications to be quickly and
easily developed and tailored to meet an organization's  specific  requirements.
Panagon IDM Desktop reduces the ongoing cost of ownership through the ability to
easily deploy applications on the Web or in a client/server environment. Cost of
ownership is also reduced through the use of rapid application development (RAD)
techniques and compatibility  with  industry-standard  programming tools such as
Visual Basic,  PowerBuilder and more. As a result, it takes less time to develop
customized IDM applications, less time to integrate the software components into
a company and less time to train users.

The Panagon family includes a complete suite of IDM software components that are
built to work together,  eliminating  integration issues when combining products
from different vendors. Panagon products include:

         Panagon IDM Desktop and IDM Web Services are software applications that
         offer best-of-class integrated document management for ad hoc query and
         access or  mission  critical  applications.  Companies  can  access all
         documents  stored  in  enterprise  libraries  from  within a  Microsoft
         Windows   Explorer,   Internet  browser   interface  or  via  a  custom
         application  integrated  into line of  business  systems.  Panagon  IDM
         Desktop delivers  "out-of-the-box"  integration with Microsoft  Windows
         environments and productivity  applications  such as Microsoft  Office,
         seamlessly  managing and viewing more than 200 document  formats.  Once
         located, users can create work processes to include others that need to
         share,   distribute,   or  approve,  with  the  built-in  workflow  and
         integrated e-mail features.

         Panagon IDM Services is a server based integrated  document  management
         solution  incorporating  imaging and  document  services  for medium to
         large business.  IDM Services is the high performance repository system
         that  integrates  with  Panagon IDM Desktop  and IDM Web  Services  for
         managing  all types of  documents.  IDM Services can be used as both an
         imaging and document system together or as separate applications.

         Panagon Visual WorkFlo is an enterprise-wide, scalable business process
         automation solution that can be used to easily create applications that
         reflect the way work  processes are  performed.  It allows  managers to
         control  and  modify  work  processes  to meet the  needs of a  dynamic
         business environment,  and integrates information flow between software
         applications  within a company's  business  processes.  Panagon  Visual
         WorkFlo supports multiple client,  server and applications  development
         environments and integrates with leading business process reengineering
         products  for  reduced   implementation   time.  The  product  features
         object-oriented  technology to enhance developer  productivity  through
         reusability  of  applications  and  a  wide  variety  of  vertical  and
         horizontal solutions for out-of-the-box functionality.

         Panagon Report Manager is a  high-performance,  client/server  computer
         output to laser  disk  (COLD)  product  that  eliminates  printing  and
         distributing    computer-generated    reports   and   statements.    It
         significantly  lowers costs and inefficiencies by allowing companies to
         index,   store,   retrieve,    view,   print,   fax,   and   distribute
         computer-generated  output on magnetic or optical disk.  Panagon Report
         Manager  is  built  around  industry  standards  and has an  intuitive,
         easy-to-use graphical interface with report mining capabilities.

         Panagon Capture is an enterprise  document capture application that has
         a  complete  set  of  highly  configurable   components  for  capturing
         virtually all document types,  scanned paper  documents,  fax,  e-mail,
         word  processing  documents,   spreadsheets,   HTML  forms,  audio  and
         video-clips,   computer   generated   reports,   and  electronic   data

                                        4

  <PAGE>
         interchange (EDI) information-and  making them immediately available to
         users. Its modular components can be configured to meet simple  capture
         requirements  in  distributed environments or  enterprise-wide  capture
         requirements for production operations.

         The new Panagon  family of products is  available  to new and  existing
         customers.   New  customers   will  receive  the  benefits  of  a  more
         comprehensive  range of  integrated  document  management  functions as
         opposed to acquiring  separate  document  management  technologies from
         multiple  vendors.  Existing  customers can deploy new IDM applications
         independently  or  along  side  existing   applications  using  FileNET
         software.  Existing  customers  wanting to take  advantage of Panagon's
         broader IDM capabilities for applications already deployed can recreate
         the existing applications using the IDM development environment.

Document Imaging

FileNET Panagon  WorkGroup(TM)  software is a midrange document imaging and work
management  product based on a subset of the Panagon IDM products  combined with
certain prepackaged software applications.

Document  Warehouse(TM)  for SAP  software  is a  document  and  data  archiving
application  certified by SAP, for use with the popular R/3 Enterprise  Resource
Planning (ERP) application suite.

The Company's Watermark(R) software products enable users worldwide to exchange,
process and share scanned images,  faxes and other  electronic  documents within
departments and workgroups of large enterprises and throughout midsize and small
business  environments.  Watermark  documents and folders are easily  integrated
into existing  line-of-business  applications  and take  advantage of the latest
Microsoft operating systems,  database  technologies and Internet  capabilities.
The Watermark family consists of the following products:

         Watermark Client software replaces  document  handling  procedures with
         integrated  electronic  processing of scanned  images,  faxes and other
         electronic  documents.  The  software  provides  easy-to-use  tools for
         document   capturing,   filing,   viewing,   annotation  and  OCR  that
         image-enable any OLE- or ODMA- compatible Windows application,  such as
         e-mail, databases and workflows.

         Watermark   Server  software  is  used  for  organizing,   storing  and
         optimizing  shared  network  access  to  scanned  documents,  faxes and
         electronic  files.  The  software  intelligently  captures the business
         rules  governing  document  security,  version  control,  migration and
         storage through easy  client-based  administration  and reporting tools
         designed for Microsoft BackOffice.

         Watermark  DiskExtender  software  extends  the  document  storage  and
         retrieval  capacity of the  Watermark  Server by  providing  Windows NT
         services to migrate documents to and from high-density optical media.

         Watermark  Fax  Router  software  is a  fax  management  solution  that
         streamlines  inbound fax communications  with customers,  suppliers and
         other business partners. The software delivers documents electronically
         to the intended recipient and immediately routes for processing.  Faxes
         are securely managed side-by-side with all other business documents.

         Watermark  Developer's  Toolkit  software  allows a developer  to build
         client/server and intranet applications by taking advantage of the full
         power and range of Watermark  functionality via OLE Objects and ActiveX
         Controls specifically designed to simplify application building.

Workflow

Panagon  Visual  WorkFlo(R)  software  provides  an  open,  flexible,  component
software framework for workflow  application  development.  This product enables
users  and   ValueNET(R)   partners  to  automate   business   processes   using
object-oriented programming technology, and supports standard tools such as C++,
Visual Basic,  PowerBuilder,  Microsoft  Windows-compatible tools, and FileNET's
other  WorkFlo  products.  All work  management  functions,  including  routing,
queuing,  exception  handling,  and  management  control,  are managed by Visual
WorkFlo using standard Windows interfaces and graphical tools.

FileNET  Ensemble(TM) is a general purpose workflow tool introduced in 1996 that
automates a wide range of everyday  business  processes and is  integrated  with
Microsoft  Exchange and Novell  GroupWise to enhance  these  messaging  (e-mail)
system  products.  FileNET  markets this  product  through all of its direct and
indirect  sales  channels  worldwide.  Novell markets a version of this software
under the product name "GroupWise Workflow."

                                       5
<PAGE>
Electronic Document Management

The Company's  electronic  document  management  software  products simplify the
management  and  maintenance  of  electronic  documents  and other  unstructured
information,   ensuring  the  right  information  is  always  available.  Needed
information is readily accessible, providing total manageability and security.

         Panagon IDM Document Services is a server software product that enables
         electronic  document  management  applications  across large enterprise
         LANs  and  WANs.  It  acts  as a  network  librarian,  simplifying  the
         management and maintenance of all files on the user's network.

         @mezzanine(R)  is a software  product  used to  organize,  protect  and
         maintain documents published on the World Wide Web. @mezzanine provides
         improved organization and access methods to the Web browser and special
         document  management  features  such as version  control,  security and
         archiving needed by the Web server.

COLD

The Company's  Panagon  Report  Manager  software  product  stores and retrieves
computer-generated  reports to replace the use of printed  reports and  computer
output  to  microfiche.  It  also  enables  the  user  to  search  for  specific
information  located in one or more reports and extract the  information  to use
with popular  desktop  software  applications.  It is a  client/server  software
product  running  on servers  using the  Microsoft  Windows NT Server  operating
system and PC workstations  running Microsoft  Windows.  It also integrates with
FileNET's  IMS  software  product to provide  large  capacity  archival  storage
capabilities.

HARDWARE

The Company  markets an optional  integration  service,  offering  customers the
option to purchase complete  solutions,  including  industry standard  hardware,
directly  from  FileNET.  The Company also  manufactures  and markets an optical
storage and retrieval  library  (OSAR(R))  based on 12-inch optical disk storage
technology.

All named products  mentioned in this Form 10-K,  other than the Company's named
products, are trademarks or registered trademarks of the respective holder

RESEARCH AND DEVELOPMENT

The  Company's  research  and  development  activities  are  focused on software
product development.  Research and development  expenditures were $39.6 million,
$36.5 million and $24.7 million for the years ended December 31, 1997, 1996, and
1995,  respectively.  The Company  believes that its future success depends upon
its ability to continue to enhance its existing software products and to develop
new software products that  satisfactorily meet market needs.  Accordingly,  the
Company intends to continue to make substantial  investments in its research and
development activities.

BACKLOG

The Company  typically  ships its  products  within a short period of time after
acceptance of orders,  which is common in the computer  software  industry.  The
Company does not consider the level of backlog to be a significant  or important
indicator of future revenue or earnings.

SERVICES, SUPPORT AND MANUFACTURING

The Company  maintains  service  and support  organizations  that  provide  both
pre-sales and post-sales services in the United States and the foreign countries
where the Company has direct operations.

The  Company's  integration  facilities  in Costa Mesa,  California  and Dublin,
Ireland, conduct software manufacturing,  integration, test and quality control.
The  Company  operates  a Response  Center in Costa  Mesa to  provide  telephone
technical support to customers who have entered into support agreements with the
Company.  The Company is in the process of opening an additional Response Center
in Dublin, Ireland and also plans to open a Response Center for the Asia Pacific
region in Singapore.

                                       6
<PAGE>
EMPLOYEES

As of December 31, 1997, the Company had 1,490 full-time  employees of which 343
were employed in research and development; 924 in sales, marketing, professional
services  and  customer  support;  131  in  operations;  and 92 in  finance  and
administration.  Employees in the Company's German subsidiary are represented by
a labor union.  No other  employees are  represented  by labor  unions,  and the
Company has never  experienced  a work  stoppage.  The Company  believes that it
enjoys good employee relations.

COMPETITION

The market for the  Company's  products  is highly  competitive.  The  Company's
principal  competitors  for its various  product  lines  include  the  following
companies:  1) Workflow and document  imaging--  Banctec,  Inc.,  IBM,  Keyfile,
Optika,  Unisys  Corporation,  Mosaix,  Eastman  Software,  a Kodak company,  2)
Electronic Document  Management--Documentum,  IBM, Interleaf,  Novasoft, Novell,
Open Text, PC DOCS, and 3) COLD--Computron,  IBM and Microbank. Numerous smaller
software vendors also compete in each product area. The Company also experiences
competition  from systems  integrators who configure  hardware and software into
customized systems.

In addition,  RDBMS vendors,  such as Oracle,  Sybase and Informix,  may compete
with the Company in the future.  Oracle has announced products that compete with
the  Company's  document  management  products.  It is also  possible  that  new
competitors  or  alliances  among  competitors  may emerge and  rapidly  acquire
significant  market  share.  The Company  also  expects  that  competition  will
increase  as  a  result  of  software  industry  consolidations.   See  "Certain
Considerations - Competition" below.

PATENTS AND  LICENSES

The Company  holds three  patents for its OSAR product  which expire  August 26,
2003,  June 23,  2004 and August 4, 2004,  respectively.  The  Company  has also
entered into non-exclusive  license arrangements with a number of organizations,
including  IBM and Oracle,  which permit the Company and its  resellers to grant
sublicenses to end users of the Company's  systems to use software  developed by
these third-party vendors. See "Certain  Considerations - Intellectual  Property
and Other Proprietary Rights" below.

CERTAIN CONSIDERATIONS

This Annual Report on Form 10-K contains forward-looking statements that involve
risks and  uncertainties,  including  those  discussed in the  Company's  Annual
Report to Stockholders for the year ended December 31, 1997, certain sections of
which are incorporated herein by reference as set forth in Items 7 and 8 of this
report.  The actual results that the Company achieves may differ materially from
any forward-looking  statements,  which reflect management's opinions only as of
the date hereof.  The Company  undertakes  no  obligation  to revise or publicly
release  the  results  of any  revisions  to these  forward-looking  statements.
Readers  should  carefully  review  the  factors  described  below  and in other
documents the Company files from time to time with the  Securities  and Exchange
Commission,  including its 1997 Annual Report to Stockholders  and the Quarterly
Reports on Form 10-Q to be filed by the Company in 1998.

         Rapid  Technological  Change;  Product  Development  The market for the
Company's  products  is  characterized  by  rapid  technological   developments,
evolving industry standards,  changes in customer  requirements and frequent new
product introductions and enhancements.  The Company's success will be dependent
upon its ability to enhance its existing products,  develop and introduce,  in a
timely manner, new products incorporating  technological advances and respond to
customer requirements.  Specifically, the Company has announced plans to deliver
a  new  range  of  desktop  software  products  providing   integrated  document
management  capability for existing and new users.  To the extent one or more of
the Company's  competitors  introduce  products that more fully address customer
requirements,  the Company's business could be adversely affected.  There can be
no assurance  that the Company will be successful  in  developing  and marketing
enhancements to its existing  products or new products on a timely basis or that
any new or enhanced  products will adequately  address the changing needs of the
market-place.  If the Company is unable to develop and introduce new products or
enhancements  to existing  products  in a timely  manner in response to changing
market conditions or customer  requirements,  the Company's business,  financial
condition or results of  operations  could be adversely  affected.  From time to
time, the Company or its competitors may announce new products,  capabilities or
technologies  that have the  potential  to replace or shorten the life cycles of
the  Company's  existing   products.   There  can  be  no  assurance  that  such
announcements  will not cause customers to delay their  purchasing  decisions in
anticipation  of such  products,  resulting in a material  adverse effect on the
Company's business, financial condition or results of operations.

         Uncertainty  of Future  Operating  Results;  Fluctuations  in Quarterly
Operating  Results  Future  operating  results  will depend  upon many  factors,
including  the demand  for the  Company's  products,  the  effectiveness  of the
Company's  efforts to continue to integrate various products it has developed or
acquired  through  acquisition  of others and to achieve the  desired  levels of

                                      7
<PAGE>

sales from such product integration, the level of product and price competition,
the length of the Company's  sales cycle,  seasonality  of  individual  customer
buying patterns,  the size and timing of individual  transactions,  the delay or
deferral  of  customer  implementations,  the  budget  cycles  of the  Company's
customers,  the timing of new product  introductions and product enhancements by
the Company and its  competitors,  the mix of sales by  products,  services  and
distribution   channels,   levels  of  international   sales,   acquisitions  by
competitors,  changes in foreign  currency  exchange  rates,  the ability of the
Company to develop  and market new  products  and  control  costs,  and  general
domestic and international economic and political conditions.  Accordingly,  the
Company's quarterly results are difficult to predict and revenues and net income
for any one quarter have in the past and may again fall  significantly  short of
anticipated  levels.  Additionally,  a large  percentage  of orders  for any one
quarter are usually  received from  customers very late in the quarter and, as a
result,  the  Company is not able to  identify  possible  revenue and net income
shortfalls to any significant extent until the end of the quarter.

         As a result of these  factors,  revenues and operating  results for any
quarter are subject to variation and are not  predictable  with any  significant
degree of  accuracy.  Therefore,  the  Company  believes  that  period-to-period
comparisons  of its results of operations  are not  necessarily  meaningful  and
should not be relied upon as indications of future performance.  Moreover,  such
factors  could cause the  Company's  operating  results in a given quarter to be
below the  expectations of public market analysts and investors and the price of
the Company's common stock could be materially adversely affected.

         Competition The document  imaging,  workflow,  computer output to laser
disk and document management software markets are highly competitive,  and there
are  certain  competitors  of the  Company  with  substantially  greater  sales,
marketing,  development and financial  resources.  The Company believes that the
competitive  factors  affecting the market for its products and services include
vendor and product  reputation;  product  quality,  performance  and price;  the
availability of products on multiple  platforms;  product  scalability;  product
integration  with  other  enterprise  applications;  product  functionality  and
features;  product ease of use; and the quality of customer support services and
training.  The relative  importance  of each of these  factors  depends upon the
specific customer involved.  While the Company believes it competes favorably in
each of these areas,  there can be no assurance  that it will continue to do so.
Moreover,  the Company's  present or future  competitors  may be able to develop
products  comparable  or superior to those  offered by the Company,  offer lower
price  products or adapt more  quickly than the Company to new  technologies  or
evolving customer requirements.  Competition is expected to intensify.  In order
to be  successful  in the future,  the  Company  must  respond to  technological
change, customer requirements and competitors' current products and innovations.
There can be no  assurance  that the Company will be able to continue to compete
effectively  in its market or that future  competition  will not have a material
adverse effect on its business, financial condition or results of operations. 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  served by the
Company.  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, any of which could have a material adverse effect on the Company's
business, financial condition or results of operations.

         Intellectual  Property  and  Other  Proprietary  Rights  The  Company's
success  depends,  in part, on its ability to protect its proprietary  rights to
the  technologies  used in its  principal  products.  The  Company  relies  on a
combination of copyrights, trademarks, trade secrets, confidentiality procedures
and contractual  provisions to protect its proprietary  rights.  There can be no
assurance that the Company's  existing or future copyrights,  trademarks,  trade
secrets or other  intellectual  property  rights will be of sufficient  scope or
strength  to  provide  meaningful  protection  or  commercial  advantage  to the
Company.  FileNET  has no  software  patents.  Also,  in selling  certain of its
products,  the Company  relies on "shrink wrap"  licenses that are not signed by
licensees  and,  therefore,  may be  unenforceable  under  the  laws of  certain
jurisdictions.  In addition,  the laws of some foreign  countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.  There can be no assurance  that such factors  would not have a material
adverse  effect on the  Company's  business,  financial  condition or results of
operations.  In addition,  the Company also relies on certain  software  that it
licenses  from  third  parties,  including  software  that  is  integrated  with
internally  developed  software  used in the  Company's  products to perform key
functions.  There can be no  assurance  that such third  parties  will remain in
business, that they will continue to support their products, that their products
are, or will be, year 2000  compliant,  or that their  products  will  otherwise
continue to be available to the Company on commercially  reasonable  terms.  The
loss or inability to maintain any of theses  software  licenses  could result in
delays or  reductions  in product  shipments  until  equivalent  software can be
developed,  identified,  licensed and  integrated,  any of which could adversely
affect the Company's business, financial condition or results of operations.

         The Company may,  from time to time,  be notified that it is infringing
certain  patent or  intellectual  property  rights of  others.  Combinations  of
technology  acquired  through  past or  future  acquisitions  and the  Company's
technology  will create new products and technology that may give rise to claims
of infringement. While no actions other than those discussed below are currently
pending  against  the Company for  infringement  of patent or other  proprietary
rights of third  parties,  there can be no assurance that third parties will not
initiate  infringement  actions against the Company in the future.  Infringement
actions can result in  substantial  cost to, and diversion of,  resources of the
Company.  If the Company  were found to infringe  upon the rights of others,  no
assurance can be given that licenses would be obtainable on acceptable  terms or

                                       8
<PAGE>
at all, that significant  damages for past infringement would not be assessed or
that further litigation  relative to any such licenses or usage would not occur.
The failure to successfully  defend any claims or obtain  necessary  licenses or
other rights, the ultimate disposition of any claims or the advent of litigation
arising out of any claims of infringement,  could have a material adverse effect
on the Company's business, financial condition or results of operations.

         In October 1994,  Wang  Laboratories,  Inc. (Wang) filed a complaint in
the United States District Court for the District of Massachusetts alleging that
the Company is infringing  five patents held by Wang (the FileNET Case). On June
23, 1995, Wang amended its complaint to include an additional related patent. On
July 2, 1996,  Wang filed a complaint in the same court  alleging that Watermark
Software  Inc.,  formerly a wholly  owned  subsidiary  that was merged  into the
Company,  is  infringing  three  of the same  patents  asserted  in the  initial
complaint (the Watermark  Case).  On October 9, 1996, Wang withdrew its claim in
the FileNET Case that one of the patents it  initially  asserted is infringed by
the Company's products that were commercialized before the initial complaint was
filed.  Wang  reserved  the right to assert  that patent  against the  Company's
products commercialized after that date in a separate lawsuit.

         In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging
business unit that has  responsibility  for this litigation.  The patents in the
suit have been  transferred  to a Kodak  subsidiary,  Kodak  Limited of England,
which,  in turn,  has  exclusively  licensed them to another  Kodak  subsidiary,
Eastman  Software,  Inc. in the United States  (Eastman).  On July 30, 1997, the
Court  permitted  Eastman and Kodak Limited of England to be  substituted in the
litigation in place of Wang.

         FileNET has moved for summary judgement on  noninfringement  as to each
of the five patents in the suit,  and for summary  judgment of  invalidity as to
one  of  the  patents.  Eastman  moved  for  summary  judgment  as to  FileNET's
unenforceability defense on one of the patents. A trial date has not been set.

         If it should be determined  that the patents at issue in the litigation
are  valid  and  are  infringed  by  any of the  Company's  products,  including
Watermark  products,  the Company will,  depending on the product,  redesign the
infringing  products or seek to obtain a license to market the  products.  There
can be no  assurance  that the Company  will be able to obtain such a license on
acceptable terms.  Based on the Company's  analysis of these Eastman patents and
their  respective file histories,  the Company  believes that it has meritorious
defenses to Eastman's  claims;  however,  the ultimate  outcome or any resulting
potential loss cannot be determined at this time.

         Dependence  on Certain  Relationships  The Company  has entered  into a
number of  co-marketing  relationships  with other  companies  such as Microsoft
Corporation,  Compaq Computer Corporation, SAP AG, HP and Sun Microsystems, Inc.
There can be no assurance  that these  companies  will not reduce or discontinue
their relationships with, or support of, the Company and its products.

         Dependence  on Key  Management  and  Technical  Personnel The Company's
success depends to a significant degree upon the continued  contributions of its
key management,  marketing, technical and operational personnel. In general, the
Company does not utilize employment  agreements for its key employees.  The loss
of the  services  of one or more key  employees  could have a  material  adverse
effect on the Company's operating results.  The Company also believes its future
success  will  depend in large  part upon its  ability  to  attract  and  retain
additional highly skilled management,  technical, marketing, product development
and  operational  personnel.   Competition  for  such  personnel,   particularly
engineers  and  other  technical  personnel,  is  intense,  and  there can be no
assurance  that the Company will be successful in attracting  and retaining such
personnel.  In addition, the Company may experience increased compensation costs
in order to attract and retain skilled personnel.

         International Sales Historically, the Company has derived more than 30%
of its total  revenues from  international  sales.  Six percent of the Company's
1997  revenues  were  generated  in the  Asia-Pacific  region  (including  4% in
Australia). International business is subject to certain risks including varying
technical  standards,   tariffs  and  trade  barriers,  political  and  economic
instability,  reduced  protection for  intellectual  property  rights in certain
countries,   difficulties  in  staffing  and  maintaining   foreign  operations,
difficulties  in  managing  foreign   distributors,   potentially   adverse  tax
consequences,  currency  exchange  fluctuations,  the burden of complying with a
wide variety of complex operations,  foreign laws, regulations and treaties, and
the  possibility  of  difficulties  in  collecting   accounts   receivable.   In
particular,  the current  economic  crisis in the Asia Pacific  region may limit
future  growth or cause a decline  in  international  revenues.  There can be no
assurance  that any of these factors will not have a material  adverse effect on
the Company's business, financial condition or results of operations.

         Product Liability  Products as complex as those sold by the Company are
susceptible to errors or failures,  especially when first introduced or when new
versions are  released.  The  Company's  products are often  intended for use in
applications  that are  critical  to a  customer's  business.  As a result,  the
Company's  customers may rely on the effective  performance of the software to a
greater  extent than the market for  software  products  generally.  The Company
conducts  extensive  product  testing to ensure  that its  products  are free of
significant errors and defects. In addition, the Company has designed and tested
the most current  versions of its products to be year 2000  compliant.  However,
some of the Company's  customers are running earlier  product  versions that are

                                       9
<PAGE>
not  year  2000  compliant.  Although  the  Company  has been  encouraging  such
customers to migrate to current product versions, no assurance can be given that
all of them will do so in a timely  fashion,  if at all.  Moreover,  the Company
also relies on certain  software that it licenses from third parties,  including
software that is integrated  with internally  developed  software and is used in
the Company's products to perform key functions.  There can be no assurance that
such  third-party  software  will be free of errors and  defects or be year 2000
compliant  in a timely  fashion.  Although the Company has not  experienced  any
material product liability claims to date, there can be no assurance that errors
or defects,  whether associated with year 2000 functions or otherwise,  will not
result in product  liability  claims  against  the  Company in the  future.  The
Company's  license  agreements  with  customers   typically  contain  provisions
designed to limit the Company's  exposure to potential product liability claims;
however, it is possible that such limitation of liability pro-visions may not be
effective  under  the  laws of  certain  jurisdictions.  Defective  products  or
releases could result in loss of revenues,  increased service and warranty costs
and product  liability  claims,  and could adversely affect the Company's market
penetration and reputation, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations.

         Stock Price  Volatility The Company  believes that a variety of factors
could cause the price of its common stock to fluctuate,  perhaps  substantially,
including quarter-to-quarter  variations in operating results;  announcements of
developments related to its business;  fluctuations in its order levels; general
conditions in the technology sector or the worldwide  economy;  announcements of
technological  innovations,  new products or product enhancements by the Company
or its  competitors;  key  management  changes;  changes in joint  marketing and
development  pro-grams;  developments  relating to patents or other intellectual
property rights or disputes;  and  developments  in the Company's  relationships
with its customers,  distributors and suppliers.  In addition,  in recent years,
the stock market in general, and the market for shares of high-technology stocks
in particular,  has experienced extreme price fluctuations which have often been
unrelated to the operating performance of affected companies.  Such fluctuations
could adversely affect the market price of the Company's common stock.

Item 2.           Properties

The Company  currently  leases  250,000 square feet of office,  development  and
manufacturing  space in Costa Mesa,  California and 42,000 square feet of office
and development space in Bellevue, Washington. The Company also leases sales and
support  offices in 34  locations  in the  United  States,  13 in  Europe,  3 in
Australia,  3 in Canada, and 4 in Asia. The Company believes that the Costa Mesa
and Bellevue  facilities  will be adequate for the Company's  anticipated  needs
through 1998.

Item 3.           Legal Proceedings

         In October 1994,  Wang  Laboratories,  Inc. (Wang) filed a complaint in
the United States District Court for the District of Massachusetts alleging that
the Company is infringing  five patents held by Wang (the FileNET Case). On June
23, 1995, Wang amended its complaint to include an additional related patent. On
July 2, 1996,  Wang filed a complaint in the same court alleging that Watermark,
formerly  a  wholly-owned  subsidiary  that  was  merged  into the  Company,  is
infringing  three of the same  patents  asserted in the initial  complaint  (the
Watermark Case). On October 9, 1996, Wang withdrew its claim in the FileNET Case
that one of the patents it  initially  asserted is  infringed  by the  Company's
products that were  commercialized  before the initial complaint was filed. Wang
reserved  the  right to  assert  that  patent  against  the  Company's  products
commercialized after that date in a separate lawsuit.

         In March 1997, Eastman Kodak Company (Kodak) purchased the Wang imaging
business unit that has  responsibility  for this litigation.  The patents in the
suit have been  transferred  to a Kodak  subsidiary,  Kodak  Limited of England,
which,  in turn,  has  exclusively  licensed them to another  Kodak  subsidiary,
Eastman  Software,  Inc. in the United States  (Eastman).  On July 30, 1997, the
Court  permitted  Eastman and Kodak Limited of England to be  substituted in the
litigation in place of Wang.

         FileNET has moved for summary judgement on  noninfringement  as to each
of the five patents in the suit,  and for summary  judgment of  invalidity as to
one  of  the  patents.  Eastman  moved  for  summary  judgment  as to  FileNET's
unenforceability defense on one of the patents. A trial date has not been set.

         If it should be determined  that the patents at issue in the litigation
are  valid  and  are  infringed  by  any of the  Company's  products,  including
Watermark  products,  the Company will,  depending on the product,  redesign the
infringing  products or seek to obtain a license to market the  products.  There
can be no  assurance  that the Company  will be able to obtain such a license on
acceptable terms.  Based on the Company's  analysis of these Eastman patents and
their  respective file histories,  the Company  believes that it has meritorious
defenses to Eastman's  claims;  however,  the ultimate  outcome or any resulting
potential loss cannot be determined at this time.

     On December 20, 1996,  plaintiff Michael I. Goldman (the Plaintiff) filed a
class  action  complaint  against the Company  and certain of its  officers  and
directors  in the  Superior  Court of  California,  County of Orange  (the State

                                       10
<PAGE>
Action).  The action was purportedly filed on behalf of a class of purchasers of
the  Company's  common stock during the period  October 19, 1995 through July 2,
1996. The Plaintiff alleges that the Company and other defendants  violated Cal.
Corp. Code ss.ss. 25400 and 25500, Cal. Civ. Code ss.ss. 1709-1710 and Cal. Bus.
& Prof. Code ss.ss.  17200 et seq. in connection with various public  statements
made by the  Company  and  certain  of its  officers  and  directors  during the
putative class period. The complaint seeks unspecified compensatory and punitive
damages,  interest,  payment of  attorney's  fees and costs,  and  equitable  or
injunctive relief.

         On April 1, 1997,  The Plaintiff  filed another class action  complaint
against  the Company and certain of its  officers  and  directors  in the United
States  District  Court for the Central  District  of  California  (the  Federal
Action).  The  action  purportedly  was  filed on  behalf  of the same  class of
purchasers of the Company's  common stock as the State Action.  The  allegations
contained in the Federal Action are very similar to the allegations contained in
the State Action,  except that the Federal  Action asserts claims under Sections
10(b) and 20(a) of the  Securities  Exchange Act and Rule 10b-5.  The  complaint
seeks  unspecified  compensatory  damages,  interest,  attorneys'  fees,  expert
witness fees,  costs and equitable or injunctive  relief.  On July 2, 1997,  the
court granted  plaintiff's  motion to be appointed  "lead  plaintiff"  under the
Private Securities Litigation Reform Act.

         In the Federal  Action,  defendants  have filed a motion to dismiss the
complaint  in its  entirety.  Plaintiff  has filed a motion to stay the  Federal
Action,  in light of the parallel  State Action.  The court is scheduled to hear
both of these motions during April 1998.

     In the State Action,  defendants moved to stay the action,  in light of the
parallel  Federal Action.  The trial court granted the motion to stay the action
as to  discovery on September  8, 1997.  Defendants  also  demurred and moved to
strike the  complaint.  The trial court  overruled  the  demurrer and denied the
motion to strike on October 21, 1997. On January 14, 1998,  the court entered an
order dismissing with prejudice two of plaintiff's  three causes of action:  the
claims under Cal. Civ. Code ss.ss.  1709-1710 and Cal. Bus. & Prof.  Code ss.ss.
17200 et seq.

         On January 30, 1998,  the trial court in the State  Action  granted the
Plaintiff's  motion to certify a class  composed of persons  who bought  FileNET
stock in California  only between October 19, 1995 and July 2, 1996. This ruling
is subject to revision  based on the decisions to be rendered by the  California
Supreme Court in Diamond Multimedia Systems, et al. v. Superior Court (Pass) and
StorMedia,  Inc., et al. v. Superior Court  (Werczberger).  The trial court also
denied the Plaintiff's motion to lift the discovery stay.

         The  Company  believes  that all of the  allegations  contained  in the
complaints  filed in the State and Federal Actions are without merit and intends
to defend the actions vigorously.

         The Company,  in the normal  course of business,  is subject to various
other  legal  matters.  While the  results of  litigation  and claims  cannot be
predicted with certainty,  the Company  believes that the final outcome of these
other  matters  will not  have a  materially  adverse  effect  on the  Company's
consolidated results of operations or financial condition.

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

None.


                                     PART II


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

     There is hereby incorporated herein by reference  the information appearing
under the caption "Stock Market and Dividend Information," which appears on page
42 of the Registrant's Annual Report to Stockholders for the year ended December
31, 1997 and is filed herewith as Exhibit 13.1.

                                       11

<PAGE>

Item 6.           Selected Financial Data

The following table summarizes certain selected financial data:
<TABLE>
<CAPTION>
                                                                              For Fiscal Years Ended
                                              --------------------------------------------------------------------------------------
                                               Dec. 31, 1997     Dec. 31, 1996     Dec. 31, 1995     Jan. 1, 1995      Jan. 2, 1994
                                                   (1997)             (1996)           (1995)            (1994)            (1993)
                                              --------------    ---------------  ----------------    -------------     -------------
                                                                     (In thousands, except per share amounts)
Consolidated statements of operations data:
<S>                                                 <C>               <C>               <C>             <C>               <C>

Revenue:
     Software revenue                               $132,723          $140,659          $116,052        $  81,102         $  54,067
     Service revenue                                  89,280            82,118            67,174           60,753            60,933
     Hardware revenue                                 29,422            46,136            46,152           50,480            51,410
                                                  ------------       ----------       ----------        ----------        ----------
            Total revenue                            251,425           268,913           229,378          192,335           166,410

Costs and expenses:
     Cost of software revenue                         14,768            16,464            15,146           12,472             7,831
     Cost of service revenue                          56,503            53,568            44,277           41,645            42,812
     Cost of hardware revenue                         20,330            29,633            28,800           30,999            34,116
     Research and development                         39,575            36,502            24,711           18,274            15,247
     Selling, general and administrative             125,122           117,761            96,499           71,267            61,711
     Merger, restructuring, write-off of
        purchased in-process research and
        development and other costs                    6,000            16,011             6,393                0                 0
                                                 ------------        ----------       ----------       ----------         ----------
         Total costs and expenses                    262,298           269,939           215,826          174,657           161,717

                                                 ------------        ----------       ----------       ----------         ----------
Operating income (loss)                              (10,873)           (1,026)           13,552           17,678             4,693

     Other income, net                                 3,160             2,838             2,780            1,821               333

                                                -------------        ----------       ----------       ----------         ----------
Income (loss) before income taxes                     (7,713)            1,812            16,332           19,499             5,026

     Provision (benefit) for income taxes             (2,187)            4,456             8,116            5,356             4,760

                                                -------------       -----------       ----------      -----------         ----------
Net income (loss)                                  $  (5,526)       $   (2,644)        $   8,216        $  14,143         $     266
                                                =============       ===========       ==========      ===========         ==========

Basic earnings (loss) per share                   $   (0.36)       $    (0.18)        $    0.57       $     1.04          $   0.02
Diluted earnings (loss) per share                 $   (0.36)       $    (0.18)        $    0.52       $     0.95          $   0.02

Weighted average shares outstanding - basic
                                                      15,155            15,007            14,430           13,661            12,567
Weighted average shares outstanding -
     diluted                                          15,155            15,007            15,856           14,834            13,178

Consolidated balance sheet data:

Working capital                                    $  82,887         $  89,339         $  86,354        $  63,149         $  47,819
Total assets                                         179,870           195,679           189,682          152,642           124,986
 Long-term debt, excluding current portion                                                                                      163
Stockholders' equity                                 118,811           132,806           131,158          101,006            78,383

  Certain  reclassifications  have  been  made  to  the  prior  years'  selected
  financial data to conform with the current year's presentation.
</TABLE>

                                       12

<PAGE>


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

There is hereby incorporated herein by reference the information appearing under
the caption  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations," which appears on pages 18 through 24 of the Registrant's
Annual Report to Stockholders  for the year ended December 31, 1997 and is filed
herewith as Exhibit 13.2.


Item 8. Financial Statements and Supplementary Data

There is hereby  incorporated  herein by reference the information  appearing on
pages 25 through 40 of the  Registrant's  Annual Report to Stockholders  for the
year  ended  December  31,  1997 and is filed  herewith  as  Exhibit  13.3.  The
accompanying  Independent  Auditors'  Report  is  also  incorporated  herein  by
reference and filed herewith as Exhibit 13.3.


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

None.


                                    PART III


Item 10. Directors and Executive Officers of the Registrant

There is hereby incorporated herein by reference the information appearing under
the caption  "Election of Directors," under the caption  "Executive  Officers of
the Company," and under the caption  "Compliance  with  Securities  Laws" of the
Registrant's  definitive Proxy Statement for its 1998 Annual Meeting to be filed
with the Securities and Exchange Commission.


Item 11. Executive Compensation

There is hereby incorporated herein by reference the information appearing under
the  caption  "Executive  Compensation"  and  under  the  caption  "Election  of
Directors" of the  Registrant's  definitive  Proxy Statement for its 1998 Annual
Meeting to be filed with the Securities and Exchange Commission.


Item 12. Security Ownership of Certain Beneficial Owners and Management

There is hereby incorporated herein by reference the information appearing under
the  caption  "Voting   Securities  and  Principal   Holders   Thereof"  of  the
Registrant's  definitive Proxy Statement for its 1998 Annual Meeting to be filed
with the Securities and Exchange Commission.


Item 13. Certain Relationships and Related Transactions

There is hereby incorporated herein by reference the information appearing under
the caption "Note 12: Related Party  Transactions,"  which appears on page 39 of
the  Registrant's  Annual Report to Stockholders for the year ended December 31,
1997 and is filed herewith as Exhibit 13.4.


                                       13


<PAGE>
                                     PART IV



Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K

(a)      Financial statements

         1.       The list of financial statements contained in the accompanying
                  Index to  Consolidated  Financial  Statements  covered  by the
                  Independent   Auditors'  Report  is  herein   incorporated  by
                  reference.

         2.       Financial statement schedule

                  The  listed  financial  statement  schedule  contained  in the
                  accompanying  Index  to  Consolidated   Financial   Statements
                  covered  by  the  Independent   Auditors'   Report  is  herein
                  incorporated by reference.

         3.       Exhibits

                  The list of exhibits  contained in the  accompanying  Index to
                  Exhibits is herein incorporated by reference.

(b)      Reports on Form 8-K

         No reports on Form 8-K were filed during the fourth quarter of 1997.



               Index to Consolidated Financial Statements Covered
                         by Independent Auditors' Report

                             Item 14(a) (1) and (2)

<TABLE>
<CAPTION>
                                                                                        Page Reference
                                                                                   --------------------------
                                                                                               1997 Annual
                                                                                                Report to
                                                                                   Form 10-K   Stockholders

The  information  under the  following  captions,  which is included in the 1997
     Annual Report to Stockholders, is incorporated herein by reference:
<S>                                                                                    <C>          <C>

Independent Auditors' Report                                                                        40
Consolidated balance sheets at December 31, 1997 and December 31, 1996                              25
Consolidated statements of operations for each of the years ended    December
     31, 1997, 1996 and 1995                                                                        26
Consolidated statements of stockholders' equity for each of the years ended
     December 31, 1997, 1996 and 1995                                                               27
Consolidated statements of cash flows for each of the years ended    December
     31, 1997, 1996 and 1995                                                                        28
Notes to consolidated financial statements                                                          29

Independent Auditors' Report on Schedule                                               15

Schedule for each of the three years ended  December 31, 1997, 1996
     and 1995
II.  Valuation and qualifying accounts and reserves                                    16

</TABLE>

                                       14

<PAGE>


INDEPENDENT AUDITORS' REPORT ON SCHEDULE



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

We have audited the consolidated financial statements of FileNET Corporation and
its  subsidiaries  as of  December  31,  1997 and 1996 and for each of the three
years in the period ended  December 31, 1997, and have issued our report thereon
dated February 3, 1998. Such  consolidated  financial  statements and report are
included in your 1997 Annual Report to Stockholders and are incorporated  herein
by  reference.  Our audits also  included the  financial  statement  schedule of
FileNET  Corporation and its  subsidiaries,  listed in Item 14. The consolidated
financial statement schedule is the responsibility of the Company's  management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated  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.

/s/ Deloitte & Touche LLP

February 3, 1998
Costa Mesa, California


                                       15
<PAGE>


                                             SCHEDULE II
                                    VALUATION AND QUALIFYING ACCOUNTS
                                          ($ in thousands)
<TABLE>
<CAPTION>

                                             Balance at         Additions -
                                            Beginning of     Charged to Costs                    Balance at End
Description                                   Period          and Expenses         Deductions       of Period
----------------------------------------- ---------------- -------------------- --------------- ----------------
<S>                                            <C>               <C>                 <C>              <C>
Year ended December 31, 1997:
Inventory reserves                             $  660            $  380              $ 710 (1)        $  330
Allowance for doubtful accounts                 2,140               350                800 (2)         1,690
Reserve for returned systems                    3,185                                  460 (3)         2,725

Year ended December 31, 1996:
Inventory reserves                                573               635                548 (1)           660
Allowance for doubtful accounts                 1,540             1,205                605 (2)         2,140
Reserve for returned systems                    3,153                32                                3,185

Year ended December 31, 1995:
Inventory reserves                                651               482                560 (1)           573
Allowance for doubtful accounts                   731               857                 48 (2)         1,540
Reserve for returned systems                    2,747               869                463 (3)         3,153
</TABLE>




--------------------------

(1) Consists  primarily of the write-off of excess/obsolete inventories.
(2) Consists primarily of uncollectible invoice amounts.
(3) Consists primarily of returned systems.


                                       16
<PAGE>
                                Index to Exhibits

Exhibit
  No.   Description
-----  ----------------------------------------------------------------------

3.1*      Restated Certificate of Incorporation, as amended(filed as Exhibit 3.1
          to 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  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 (the "Form S-1")).

4.1*      Form  of certificate  evidencing Common Stock (filed as Exhibit 4.1 to
          the 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 Form S-4 filed on January 26, 1996; Registration No. 333-00676).

10.1*     Second  Amended and  Restated  Credit Agreement (Multicurrency) by and
          among the Registrant and Bank of America National  Trust  and  Savings
          Association  dated  June 25, 1997,  effective  June 1, 1997  (filed as
          Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1997).

10.2*     Business  Alliance Program Agreement between the Registrant and Oracle
          Corporation  dated  July 1, 1996,  as amended by Amendment One thereto
          (filed  as  Exhibit 10.4  to Form 10-QA for the quarter ended June 30,
          1996).

10.3*     Runtime  Sublicense  Addendum  between   the  Registrant   and  Oracle
          Corporation  dated  July 1, 1996,  as amended by Amendment One thereto
          (filed  as  Exhibit 10.4 to Form 10-QA  for the quarter ended June 30,
          1996).

10.4*     Full Use and Deployment Sublicense Addendum between the Registrant and
          Oracle  Corporation  dated  July 1, 1996,  as amended by Amendment One
          thereto (filed  as  Exhibit 10.4  to Form 10-QA  for the quarter ended
          June 30, 1996).

10.5*     Lease  between  the  Registrant  and C. J. Segerstrom  & Sons  for the
          headquarters  of  the Company,  dated April 30, 1987 (filed as Exhibit
          10.19 to the Form S-1).

10.6*     Third  Amendment  to  the  Lease  between  the   Registrant  and  C.J.
          Segerstrom & Sons  dated April 30, 1987,  for additional facilities at
          the  headquarters  of  the  Company,  dated October 1, 1992  (filed as
          exhibit 10.7 to Form 10-K filed on April 4, 1997).

10.7*     Fifth Amendment to the Lease between the Registrant and C.J.Segerstrom
          & Sons  dated April 30, 1987,  for  the  extension of the  term of the
          lease,  dated  March 28, 1997 (filed as  exhibit 10.8 to Form 10-Q for
          the quarter ended March 31, 1997).

10.8*     1989  Stock  Option  Plan  for   Non-Employee  Directors   of  FileNET
          Corporation,  as  amended  by  the  First Amendment, Second Amendment,
          Third Amendment  thereto (filed as  Exhibit 10.9 to Form S-4  filed on
          January  26, 1996; Registration No. 333-00676).

10.9*     Amended and Restated  1995 Stock Option Plan of FileNET Corporation as
          approved by stockholders at the  Registrant's Annual Meeting on May 8,
          1996 (filed as Exhibit 99.1 to Form S-8 filed on July 29, 1996).

10.10*    Second Amended  and Restated Stock Option Plan of FileNET Corporation,
          together  with  the forms of  Incentive  Stock  Option  Agreement  and
          Non-Qualified Stock Option Agreements (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),  and an 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).

--------------------------------------------
* Incorporated herein by reference

                                       17
<PAGE>
Exhibit
  No.     Description
--------  ----------------------------------------------------------------------
10.11*    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 Form S-8 on August 20, 1997).

10.12*    Non-Statutory Stock Option Agreement   (with  Notice of Grant of Stock
          Option and Special Addendum) between Registrant and Mr. Ron Ercanbrack
          (filed as exhibit 99.19 to Form S-8 on August 20, 1997).

10.13*    Agreement  for the  Purchase of IBM products  dated December  20, 1991
          (filed on May 5, 1992 with the Form 8 amending the Company's Form 10-K
          for the fiscal year ended December 31, 1991).

10.14*    Amendment #A1011-941003-01 dated September 30, 1994,  to the Agreement
          for  the  Purchase of IBM products  dated December 20, 1991  (filed as
          exhibit 10.12  to  form 10-K  for the  fiscal year  ended December 31,
          1996).

10.15*    Development and  Initial Supply Agreement  between the  Registrant and
          Quintar Company dated August 20, 1992  (filed as Exhibit 10.21 to Form
          10-K for the year ended January 3, 1993).

10.16*    Amendment  dated December 22, 1992  to  the  Development  and  Initial
          Supply Agreement  between  the  Registrant  and  Quintar Company dated
          August 20, 1992  (filed  as  Exhibit 10.22  to  Form 10-K for the year
          ended January 3, 1993).

10.17*    Product  License  Agreement  between  the  Registrant and Novell, Inc.
          dated  May 16, 1995  (filed  as  Exhibit 10.26  to  Form 10-Q  for the
          quarter ended July 2, 1995).

10.18*    Agreement  and  Plan of Merger  between  the  Registrant and Watermark
          Software Inc. dated July 18, 1995 (filed as Exhibit 10.27 to Form 10-Q
          for the quarter ended July 2, 1995).

10.19*    Agreement  and  Plan  of  Merger  between  the  Registrant  and  Saros
          Corporation,  as amended,  dated  January 17, 1996  (filed as Exhibits
          2.1, 2.2, 2.3, and 2.4 to Form 8-K on March 13, 1996).

10.20*    Stock  Purchase  Agreement  by  and  Among  FileNET  Corporation,  IFS
          Acquisition Corporation, Jawaid Khan and Juergen Goersch dated January
          17, 1996 and Amendment 1 to Stock Purchase Agreement dated January 30,
          1996 (filed as Exhibit  10.2 to form 10-K for the year ended  December
          31, 1995).

13.1      Market  for the  Registrant's  Common  Stock  and  Related Stockholder
          Matters  incorporated  by  reference  to  page 42 of the  1997  Annual
          Report.

13.2      Management's  Discussion and Analysis of Financial Condition and
          Results of Operations incorporated by reference to pages 18 through 24
          of the 1997 Annual Report.

13.3      Financial Statements  incorporated by reference to pages 25 through 40
          of the 1997 Annual Report.

13.4      Certain  Relationships   and  Related  Transactions   incorporated  by
          reference to page 12 of the 1997 Annual Report.

21.1      List  of  subsidiaries of  Registrant  (filed as  FileNET  Corporation
          Subsidiary  Information).   23.1  Consent  of  Deloitte &  Touche  LLP
          (filed as Independent Auditors' Consent).

27        Financial Data Schedule.

---------------------------------------------
* Incorporated herein by reference


                                     18


<PAGE>

                                   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 30, 1998          By:    /s/     T. J. Smith
                                   ------- -----------------------------------
                                             T. J. Smith
                                             Chief Executive Officer

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: March 30, 1998          By:    /s/     T. J. Smith
                                  ------- --------------------------------------
                                             T. J. Smith
                                             Chief Executive Officer
                                             (Principal Executive Officer)
                                             Director

Date: March 30, 1998         By:      /s/     Lee D. Roberts
                                   ------- -------------------------------------
                                              Lee D. Roberts
                                              President and
                                              Chief Operating Officer

Date: March 30, 1998         By:      /s/     Mark S. St. Clare
                                   ------- -------------------------------------
                                              Mark S. St. Clare
                                              Chief Financial Officer and
                                              Sr. Vice President, Finance
                                              (Principal Financial Officer)

Date: March 30, 1998         By:      /s/     Lee M. Kim
                                   ------- -------------------------------------
                                              Lee M. Kim
                                              Controller and
                                              Chief Accounting Officer

Date: March 30, 1998         By:      /s/     Frederick K. Fluegel
                                   ------- -------------------------------------
                                              Frederick K. Fluegel
                                              Director

Date: March 30, 1998        By:      /s/     John C. Savage
                                   ------- -------------------------------------
                                             John C. Savage
                                             Director

Date: March 30, 1998        By:      /s/     William P. Lyons
                                   ------- -------------------------------------
                                             William P. Lyons
                                             Director




                                       19