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**FORM 10-Q

                              SECURITIES AND EXCHANGE COMMISSION

                                  Washington, D.C. 20549**

  (Mark One)

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

  For the quarterly period ended March 31, 2003

                                                        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: 00-15997

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

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

               **3565 Harbor Boulevard, Costa Mesa, CA 92626**
                   (Address of principal executive offices) (Zip code)

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

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

  Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule
  12b-2 of the Securities Exchange Act of 1943:
                                                      Yes  |X|  No |_|

  As of May 13, 2003, there were 36,208,052 shares of the Registrant's common stock
  outstanding.

**FILENET CORPORATION**
                                             Index

                                                                                    Page
                                                                                  Number **PART I.        FINANCIAL INFORMATION**..........................................   3

     Item 1.        Unaudited Condensed Consolidated Financial Statements  ........   3

     Item 2.        Management's Discussion and Analysis of Financial Condition
                      and Results of Operations  ..................................  17

     Item 3.        Quantitative and Qualitative Disclosures about Market Risk.....  31

     Item 4.        Controls and Procedures........................................  33

     **PART II.       OTHER INFORMATION**..............................................  33

     Item 1.        Legal Proceedings..............................................  33

     Item 6.        Exhibits and Reports on Form 8-K...............................  33

     **SIGNATURE**      ...............................................................  34

     **CERTIFICATIONS** ...............................................................  35

     **INDEX TO****EXHIBITS**       ...............................................................  37

                                              2

**PART I.  FINANCIAL INFORMATION

Item 1.  Unaudited Condensed Consolidated Financial Statements

                               FILENET CORPORATION**
                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

                                                         March 31,      December 31,
                                                             2003              2002  **ASSETS**
Current assets:
  Cash and cash equivalents                          $    152,321       $   130,154
  Short-term investments                                   24,571            29,188
  Accounts receivable, net                                 40,461            44,839
  Inventories, net                                          2,547             2,568
  Prepaid expenses and other current assets                15,103            13,317
  Deferred income taxes                                       802               802 
  Total current assets                                    235,805           220,868

  Property, net                                            32,401            34,641
  Long-term investments                                    32,633            25,864
  Goodwill                                                 17,146            16,907
  Intangible assets, net                                    2,894             3,029
  Deferred income taxes                                    21,799            21,792
  Other assets                                              5,436             4,935 
   Total assets                                      $    348,114       $   328,036 **LIABILITIES AND STOCKHOLDERS' EQUITY**
Current liabilities:
  Accounts payable                                   $      5,916       $     7,706
  Customer deposits                                         4,016             2,962
  Accrued compensation and benefits                        23,955            20,729
  Unearned maintenance revenue                             55,291            38,945
  Other accrued liabilities                                12,897            15,224 
  Total current liabilities                               102,075            85,566

  Unearned maintenance revenue and other liabilities        3,281             3,565
  Commitments and contingencies (Note 9)

Stockholders' equity:
  Preferred stock - $.10 par value; 7,000,000 shares
    authorized; none issued and outstanding
  Common stock - $.01 par value; 100,000,000 shares
    authorized; 37,077,498 shares issued and 35,979,498
    shares outstanding at March 31, 2003; and
    37,014,512 shares issued and 35,916,512 shares
    outstanding at December 31, 2002                      207,206           206,676
  Retained earnings                                        54,514            53,178
  Accumulated other comprehensive loss                     (4,395)           (6,382)

  Treasury stock, at cost; 1,098,000 shares               (14,567)          (14,567)
  Net stockholders' equity                                242,758           238,905 

    Total liabilities and stockholders' equity       $    348,114       $   328,036 *See accompanying notes to unaudited condensed consolidated financial statements.*

                                       3

**FILENET CORPORATION**
            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

                                                          Three Months Ended
                                                              March 31,                    2003            2002  
Revenue:
  Software                                           $    35,522      $    31,240
  Customer support                                        38,698           36,563
  Professional services and education                     12,131           15,836
  Hardware                                                   698            2,602 
  Total revenue                                           87,049           86,241 

Costs:
  Software                                                 3,008            2,081
  Customer support                                         9,769           10,088
  Professional services and education                     11,080           13,455
  Hardware                                                   802            1,925 
  Total cost of revenue                                   24,659           27,549

    Gross Profit                                          62,390           58,692

Operating expenses:
  Sales and marketing                                     34,399           32,289
  Research and development                                19,302           17,305
  General and administrative                               7,826            8,188 
  Total operating expenses                                61,527           57,782

Operating income (loss)                                      863              910

Other income, net                                          1,045              908 

Income before income taxes                                 1,908            1,818

Provision for income taxes                                   572              454 

Net income                                          $      1,336     $      1,364 

Earnings per share:
  Basic                                             $       0.04     $       0.04
  Diluted                                           $       0.04     $       0.04

Weighted average shares outstanding:
  Basic                                                   35,942           35,362
  Diluted                                                 36,623           37,224

*See accompanying notes to unaudited condensed consolidated financial statements.*

                                        4

**FILENET CORPORATION**
          CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
                                 (In thousands)

                                                            Three Months Ended
                                                                March 31           2003             2002  

 Net income                                             1,336    1,364 
 Other comprehensive income (loss):
   Foreign currency translation adjustments             1,997             (410)
 Unrealized gains on securities:
    Unrealized holding gains                              (10)     (75)
 Total other comprehensive income (loss)                1,987     (485)
 Comprehensive income                                   3,323      879 *See accompanying notes to unaudited condensed consolidated financial statements.*

                                        5

**FILENET CORPORATION**
         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

                                                               Three Months Ended
                                                                     March 31              2003              2002   **Cash flows from operating activities:**
Net income                                              $   1,336         $   1,364
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                           4,907             5,398
    Loss on sale of fixed assets                               37                14
    Provision for doubtful accounts                            18               278
    Deferred income taxes                                      (6)              (46)
    Changes in operating assets and liabilities,
     net of the effects of
      acquisition:
      Accounts receivable                                   4,653            (3,448)
      Inventories                                              22               253
      Prepaid expenses and other current assets              (997)           (2,504)
      Accounts payable                                     (1,830)              778
      Accrued compensation and benefits                     3,034             2,617
      Customer deposits and advances                        1,048               (56)
      Unearned maintenance revenue                         15,821            13,378
      Income taxes payable                                   (385)              (52)
      Other                                                  (967)           (3,370) 
Net cash provided by operating activities                  26,691            14,604  

Cash flows from investing activities:
Capital expenditures                                       (2,507)           (2,566)
Proceeds from sale of property                                 68                 6
Purchases of marketable securities                        (28,020)          (21,318)
Proceeds from sales and maturities of
  marketable securities                                    23,655            18,900  
Net cash used in investing activities                      (6,804)           (4,978) 

Cash flows from financing activities:
Proceeds from issuance of common stock                        530             1,081
Principal payments on capital lease obligations                (5)             (423) 
Net cash provided by financing activities                     525               658  

Effect of exchange rate changes on cash
  and cash equivalents                                      1,755              (287) 

Net increase in cash and cash equivalents                  22,167             9,997
Cash and cash equivalents, beginning of year              130,154           107,502  
Cash and cash equivalents, end of period                $ 152,321         $ 117,499  

Supplemental cash flow information:
Interest paid                                           $       7         $      28  
Income taxes paid                                       $     950         $     548  *See accompanying notes to unaudited condensed consolidated financial statements.*

                                       6

**FILENET CORPORATION**
              Notes To Condensed Consolidated Financial Statements
                                   (Unaudited)

1.   BASIS OF PRESENTATION

     The  accompanying   unaudited  interim  condensed   consolidated  financial
     statements  of FileNet  Corporation  (the  "Company")  reflect  adjustments
     (consisting of normal  recurring  adjustments)  necessary to present fairly
     the financial position of the Company at March 31, 2003, the results of its
     operations,  its comprehensive  operations and its cash flows for the three
     months  ended March 31, 2003 and 2002.  Certain  information  and  footnote
     disclosures  normally included in financial  statements have been condensed
     or omitted pursuant to rules and regulations of the Securities and Exchange
     Commission  ("SEC"),  although the Company believes that the disclosures in
     the condensed  consolidated financial statements are adequate to ensure the
     information  presented  is not  misleading.  These  condensed  consolidated
     financial  statements  should be read in conjunction  with the consolidated
     financial  statements and notes thereto,  contained in the Company's Annual
     Report on Form 10-K for the fiscal year ended  December 31, 2002 filed with
     the SEC on March 28,  2003.  The  results  of  operations  for the  interim
     periods are not  necessarily  indicative of the  operating  results for the
     year, or any other future period.

2.   RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

     In June 2001, the FASB issued SFAS No. 141, "Business  Combinations," which
     was effective  immediately.  SFAS No. 141 requires that the purchase method
     of accounting be used for all business  combinations  initiated  after June
     30, 2001 and it eliminated the pooling-of-interests method. The adoption of
     this  standard  did  not  have  a  significant   impact  on  the  Company's
     consolidated financial statements.  The Company's April 2002 acquisition of
     certain assets and certain liabilities of eGrail, Inc. was accounted for in
     compliance with this pronouncement (See Note 3 for details).

     In June 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets," which the Company  adopted  January 1, 2002. SFAS No. 142 requires
     that goodwill and other intangible  assets with indefinite  useful lives no
     longer be amortized, but instead be tested for impairment at least annually
     and written down when impaired.  SFAS No. 142 requires purchased intangible
     assets other than  goodwill to be amortized  over their useful lives unless
     these  lives are  determined  to be  indefinite.  In  accordance  with this
     Standard,  the Company  does not  amortize  goodwill  and  indefinite  life
     intangible  assets but  evaluates  their  carrying  value  annually or when
     events or circumstances indicate that their carrying value may be impaired.
     On the  first  day of  July of  each  year  goodwill  will  be  tested  for
     impairment by  determining  if the carrying  value of each  reporting  unit
     exceeds its fair value. As of March 31, 2003, no impairment of goodwill has
     been recognized.  If estimates  change, a materially  different  impairment
     conclusion could result.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
     Disposal  of  Long-Lived   Assets."  This  Statement   addresses  financial
     accounting  and reporting for the  impairment of long-lived  assets and for
     the disposal of long-lived assets and discontinued operations. SFAS No. 144
     superseded  SFAS No. 121,  "Accounting  for the  Impairment  of  Long-Lived
     Assets and for  Long-Lived  Assets to Be Disposed Of," and is effective for
     fiscal  years  beginning  after  December  15,  2001.  The adoption of this
     Standard on January 1, 2002 did not have a material impact on the Company's
     consolidated financial position and results of operations.

                                       7

     In July  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated with Exit or Disposal  Activities,"  which  addresses  financial
     accounting  and  reporting  for  costs  associated  with  exit or  disposal
     activities  and  supersedes  Emerging  Issues Task Force (EITF) Issue 94-3,
     "Liability Recognition for  Certain Employee Termination Benefits and Other
     Costs  to  Exit  an  Activity   (including  Certain  Costs  Incurred  in  a
     Restructuring)."  SFAS No. 146 requires that costs  associated with exit or
     disposal activities be recognized when they are incurred rather than at the
     date of a  commitment  to an exit or  disposal  plan.  SFAS  No.  146  also
     establishes that the liability should initially be measured and recorded at
     fair value.  The Company adopted the provisions of SFAS No. 146 for exit or
     disposal activities initiated after December 31, 2002.

     In  November  2002,  the FASB issued FASB  Interpretation  No.  ("FIN") 45,
     "Guarantor's   Accounting  and  Disclosure   Requirements  for  Guarantees,
     Including   Indirect   Guarantees   and   Indebtedness   of   Others,"   an
     interpretation  of FASB Statement Nos. 5, 57 and 107, and rescission of FIN
     34,  "Disclosure of Indirect  Guarantees of Indebtedness of Others." FIN 45
     elaborates  on the  disclosures  to be made by the guarantor in its interim
     and  annual  financial  statements  about  its  obligations  under  certain
     guarantees that it has issued. It also requires that a guarantor recognize,
     at the  inception  of a  guarantee,  a liability  for the fair value of the
     obligation  undertaken in issuing the guarantee.  The provisions related to
     recognizing a liability at inception of the guarantee for the fair value of
     the  guarantor's  obligations  does not apply to product  warranties  or to
     guarantees  accounted  for as  derivatives.  The  initial  recognition  and
     measurement   provisions  of  this   interpretation  are  applicable  on  a
     prospective basis to guarantees issued or modified after December 31, 2002,
     while the disclosure  requirements  are effective for financial  statements
     for interim or annual  periods ending after December 15, 2002. The adoption
     of the recognition provisions of FIN 45 in the three months ended March 31,
     2003 did not have a material impact on the Company's  consolidated  results
     of operations or financial position.

     In December 2002, the FASB Issued SFAS No. 148, "Accounting for Stock-Based
     Compensation Transition and Disclosure," an amendment of SFAS No. 123. This
     statement amends SFAS No. 123,  "Accounting for Stock-Based  Compensation,"
     to provide  alternative methods of transition for a voluntary change to the
     fair  value  based   method  of   accounting   for   stock-based   employee
     compensation.   In  addition,   this   statement   amends  the   disclosure
     requirements  of SFAS No.  123 to  require  prominent  disclosures  in both
     annual and interim financial  statements about the method of accounting for
     stock-based  employee  compensation  and the effect of the  method  used on
     reported results. The transition guidance and annual disclosure  provisions
     of SFAS No. 148 are  effective  for fiscal years ending after  December 15,
     2002. The interim disclosure provisions are effective for financial reports
     containing   financial  statements  for  interim  periods  beginning  after
     December  15,  2002.  The  adoption of SFAS No. 148 did not have a material
     impact on the  Company's  consolidated  results of  operations or financial
     position.

                                       8

     The  following  table  summarizes  the  Company's net income (loss) and net
     income (loss) 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" for
     the three months ended March 31, 2003 and 2002:

    *(In thousands, except per share amounts)*                   March 31,    March 31,
                                                                   2003         2002  
     Net income, as reported                                  $   1,336    $   1,364
     Deduct:  Total stock-based employee
     compensation expense determined under
     fair value based method for all awards, net
     of related tax effects                                      (2,039)      (2,462) Pro forma net loss                                  $    (703)   $  (1,098) 

     Earnings per share:
     Basic earnings per share - as reported                   $    0.04    $    0.04
     Basic earnings (loss) per share - pro forma                  (0.02)       (0.03)

     Diluted earnings per share - as reported                      0.04         0.04
     Diluted earnings (loss) per share - pro forma       $   (0.02)   $   (0.03) 

     The fair  value of each  option  grant was  estimated  on the date of grant
     using  the   Black-Scholes   option-pricing   model.  The  March  31,  2003
     calculation was based on an expected  volatility of 66%, risk-free interest
     rates of 1.96% to 4.76%, dividend yield of zero and an expected life of two
     to five years. The March 31, 2002 calculation was on expected volatility of
     75%, risk-free interest rates of 2.16% to 4.84%, dividend yield of zero and
     an  expected  life of two to five  years.  Pro forma  compensation  cost of
     shares issued under the Employee  Qualified Stock Purchase Plan is measured
     based  on the  discount  from  market  value  on the  date of  purchase  in
     accordance with SFAS No. 123. The  Black-Scholes  option-pricing  model was
     developed  for use in estimating  the value of traded  options that have no
     vesting   restrictions   and   are   fully   transferable.   In   addition,
     option-pricing  models require the input of highly  subjective  assumptions
     including the expected stock price  volatility.  The Company uses projected
     data for expected  volatility  and expected life of its stock options based
     upon historical data.

     In  January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
     Interest   Entities."  In  general,   a  variable   interest  entity  is  a
     corporation,  partnership,  trust,  or any other legal  structure  used for
     business  purposes  that  either (a) does not have  equity  investors  with
     voting rights or (b) has equity  investors  that do not provide  sufficient
     financial  resources  for the  entity to  support  its  activities.  FIN 46
     requires a variable interest entity to be consolidated by a company if that
     company  is subject  to a  majority  of the risk of loss from the  variable
     interest  entity's  activities  or  entitled  to receive a majority  of the
     entity's residual returns or both. The consolidation requirements of FIN 46
     apply  immediately to variable  interest entities created after January 31,
     2003. The consolidation  requirements  apply to older entities in the first
     fiscal year or interim period beginning after June 15, 2003. Certain of the
     disclosure  requirements  apply in all  financial  statements  issued after
     January 31,  2003,  regardless  of when the  variable  interest  entity was
     established. The Company does not have any variable interest entities as of
     March 31, 2003.  The  adoption of FIN 46 did not have a material  impact on
     the Company's consolidated results of operations or its financial position.

     **Reclassifications.** Certain reclassifications have been made to prior-years'
     balances to conform to the current-year's presentation.

                                       9

3.   ACQUISITIONS

     On April 2, 2002, the Company  acquired  certain assets and assumed certain
     liabilities of eGrail, Inc.  ("eGrail"),  a Web content management company,
     for $9.0 million in cash. 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.
     In accordance with SFAS No. 141,  "Business  Combinations," the acquisition
     was accounted  for under the purchase  method of  accounting.  The purchase
     price  for the  acquisition  consisted  of $9.0  million  cash  and  direct
     acquisition costs of $359,000.  The purchase price was allocated as follows
     (in thousands):

           Net tangible assets                               $     581
           Goodwill                                              5,793
           Patents                                                  24
           Acquired technology                                   3,300
           In-process research and development                     400
           Liabilities assumed                                    (739)   $   9,359  

     The amount  allocated to in-process  research and  development and acquired
     technology was determined through established  valuation  techniques in the
     high-technology   industry  by  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. 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  twelve-month
     period.  As of March 31,  2003 the  project  is  complete  and the  Company
     incurred  approximately  $4.8 million of research and development  expenses
     related  to  the  project.  The  remaining  purchase  price  was  primarily
     allocated to tangible assets and goodwill.  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.  In accordance with SFAS No. 142,
     goodwill  will not be amortized  but will be reviewed for  impairment on an
     annual basis. Goodwill is tax deductible for this asset purchase.

     Actual results of operations of the acquired  eGrail  business,  as well as
     assets and liabilities of the acquired eGrail business, are included in the
     unaudited  condensed  consolidated  financial  statements  from the date of
     acquisition.  The pro forma results of operations  data for the three-month
     period  ended  March 31, 2003 and 2002  presented  below  assumes  that the
     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 (in thousands):

                                                    Three Months Ended March 31,
                                                       2003                2002  
           Revenue                               $    87,049        $    86,993
           Net income / (loss)                         1,336              (453)
           Earnings per share:
              Basic                              $      0.04        $    (0.01)
              Diluted                            $      0.04        $    (0.01)

                                       10

4.   GOODWILL AND PURCHASED INTANGIBLE ASSETS

     In  acquisitions  accounted  for using the  purchase  method,  goodwill  is
     recorded for 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.  SFAS No. 142 requires a periodic
     review of goodwill and indefinite life intangibles for possible impairment.
     Intangible  assets  with  definite  lives  must  be  amortized  over  their
     estimated  useful lives.  A portion of goodwill and  intangible  assets was
     allocated  to our  Ireland  subsidiary  at the time of  acquisition,  which
     results in foreign exchange  translation  fluctuation.  The following table
     represents the balance of goodwill by reportable segment as of December 31,
     2002 and the changes in goodwill  for the three months ended March 31, 2003
     (in thousands):

                                 Balance at                                 Foreign  Balance at
                                December 31,                               Currency    March 31,
                                       2002    Acquired   Adjustments   Fluctuation        2003 

     Software                    $    9,141     $     -       $     -     $    118    $   9,259
     Customer support                 4,059           -             -           79        4,138
     Professional services
       and education                  3,707           -             -           42        3,749
     Hardware                             -           -             -            -            - 
       Total                     $   16,907     $     -       $     -     $    239    $  17,146 

     Acquired  technology and patents are the Company's only  intangible  assets
     subject to  amortization  under SFAS No. 142. These assets were recorded in
     connection with the April 2002 eGrail  acquisition and are comprised of the
     following as of March 31, 2003 (in thousands):

                                                                   Foreign
                                                Accumulated       Currency
                                    Gross      Amortization    Fluctuation          Net 
     Acquired technology        $   3,468          $   (721)     $     137    $   2,884
     Patents                           25       (16)         1         10  $   3,493  $   (737) $     138  $   2,894 

     Acquired technology is being amortized over a useful life of five years and
     patents are being  amortized over a useful life of two years.  Amortization
     expense for amortizing  intangible assets was $183,000 for the three months
     ended March 31, 2003 and estimated future  amortization  expense (excluding
     foreign  exchange  effect) of purchased  intangible  assets as of March 31,
     2003 is as follows (in thousands):

                                    Fiscal
                                      Year            Amount 
                  2003 (remaining 9 months)       $      548
                                      2004               724
                                      2005               721
                                      2006               721
                                      2007               180
                                      2008                 -  $    2,894 

                                       11

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 and shares issuable under the employee
     stock  purchase  plan  using  the  treasury  stock  method.  The  number of
     anti-dilutive  options  excluded  from the EPS  calculation  for the  three
     months  ended  March  31,  2003  and  2002  were  681  and  1,862   shares,
     respectively.  The following  table sets forth the computation of basic and
     diluted  earnings  per share for the three  months ended March 31, 2003 and
     2002:

     *(In thousands, except per share amounts)*         Three Months Ended
                                                           March 31,
                                                        2003           2002 

       Net income                                 $    1,336      $   1,364 

       Shares used in computing
          basic earnings per share                    35,942         35,362
       Dilutive effect of stock plans                    681          1,862 
       Shares used in computing
          diluted earnings per share                  36,623         37,224

        Earnings per basic share                  $     0.04      $    0.04
        Earnings per diluted share                $     0.04      $    0.04

6.   ACCUMULATED OTHER COMPREHENSIVE LOSS

     Accumulated other  comprehensive  loss as of March 31, 2003 is comprised of
     the following:

                                         Foreign        Unrealized           Accumulated
                                        Currency           Holding                 Other
                                     Translation             Gains         Comprehensive
     *(in thousands)*    Adjustment          (Losses)            Operations  

      Balance, December 31, 2002      $    (6,448)      $       66           $    (6,382)
      Current period changes                1,997         (10)        1,987  
      Balance, March 31, 2003         $    (4,451) $       56   $    (4,395) 

7.   OPERATING SEGMENT DATA

     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 upon which  financial
     performance is assessed and resources allocated.

                                       12

     The Company's  reportable  operating  segments include  Software,  Customer
     Support,  Professional Services and Education,  and Hardware.  The Software
     operating  segment  develops and markets the Company's  Enterprise  Content
     Management  software  products.   The  Customer  Support  segment  provides
     after-sale  support for software,  as well as providing  software  upgrades
     when and if  available  pursuant  to the  Company's  right to new  versions
     program. The Professional Services and Education segment provides fee-based
     implementation  and technical  services  related to the Company's  software
     products,  and also  provides  training.  The  Hardware  operating  segment
     manufactures  and  markets  the  Company's  line  of  Optical  Storage  And
     Retrieval ("OSAR") libraries.

     The  financial  results  of the  segments  reflect  allocation  of  certain
     functional expense categories consistent with the basis and manner in which
     Company management internally  disaggregates  financial information for the
     purpose of assisting in making internal operating  decisions,  which is not
     the same as Generally Accepted Accounting Principles reporting. The Company
     evaluates  performance  based on  stand-alone  segment  operating  results.
     Because the Company  does not evaluate  performance  based on the return on
     assets at the operating segment level, assets are not tracked internally by
     segment. Therefore, segment asset information is not presented.

     Operating  segments data for the three months ended March 31, 2003 and 2002
     are as follows:

                                                        Three Months Ended
                                                            March 31,
      *In thousands*                                    2003           2002  
       Software
         Revenue                                 $    35,522    $    31,240
         Operating loss                              (14,747)       (12,425)

       Customer Support
         Revenue                                 $    38,698    $    36,563
         Operating income                             16,964         13,665

       Professional Services and Education
         Revenue                                 $    12,131    $    15,836
         Operating loss                                 (975)          (445)

       Hardware
         Revenue                                 $       698    $     2,602
         Operating income (loss)                        (379)           115 

       Total
         Revenue                                 $    87,049    $    86,241
         Operating income                                863            910

                                       13

8.   STOCK OPTIONS

     The following is a summary of stock option transactions regarding all stock
     options plans for the three months ended March 31, 2003:

                                                                 Weighted-
                                                Number of        Exercise
                                                  Options           Price 
     Balances, December 31, 2002                8,706,316       $   15.12
        Granted (weighted-average fair
         value of $6.20)                          167,650           12.76
        Exercised                                 (62,986)           8.41
        Canceled                                  (74,996)          17.81 

     Balances, March 31, 2003                   8,735,984       $   15.10 

     The following  table  summarizes  information  concerning  outstanding  and
     exercisable stock options at March 31, 2003:

                               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-$9.00       1,724,257            4.58      $   7.96        1,687,682      $   7.94
    9.17-12.86       1,825,774            7.96         11.91          617,785         10.68
   12.97-15.16       1,852,101            8.08         13.56          758,575         13.71
   15.17-21.13       1,722,521            7.61         17.68          876,411         17.85
   21.38-41.84     1,611,331            6.81         25.38        1,256,056         25.52 
$  1.39-$41.84       8,735,984            7.04      $  15.10        5,196,509      $  15.03

9.   COMMITMENTS AND CONTINGENCIES

     Leases

     The Company leases its corporate  offices,  sales offices,  development and
     manufacturing   facilities,   and  other  equipment  under   non-cancelable
     operating leases,  some of which have renewal options and generally provide
     for  escalation of the annual rental  amount.  Amounts  related to deferred
     rent are recorded in other accrued liabilities on the consolidated  balance
     sheet.  Future  annual  minimum  lease  payments  under all  non-cancelable
     operating leases with an initial term in excess of one year as of March 31,
     2003 were as follows:

                                                     (In thousands) 
     2003 (remaining 9 months)                             $  8,896
     2004                                                    12,236
     2005                                                    10,431
     2006                                                     9,819
     2007                                                     9,092
     2008                                                     7,317
     Thereafter                                               7,627  Total                                                 $ 65,418 

                                       14

     Product Warranties

     The Company  provides a 90-day warranty for its hardware  products  against
     defects in materials and workmanship and for its software  products against
     substantial  nonconformance  to the  published  documentation  at  time  of
     delivery. For hardware products the Company accrues warranty costs based on
     historical  trends in product  return rates and the  expected  material and
     labor  costs to provide  warranty  services.  For  software  products,  the
     Company records the estimated cost of technical support during the warranty
     period.  A provision for these estimated  warranty costs is recorded at the
     time of sale or license.  If the Company were to  experience an increase in
     warranty claims compared with historical experience,  or costs of servicing
     warranty claims were greater than the expectations on which the accrual had
     been based, gross margins could be adversely affected.

     The following  table  represents the warranty  activity and balance for the
     three months ended March 31, 2003 and 2002 (in thousands):

                                                     2003           2002 

     Beginning balance at December 31                 728            772
          Additions                                   225            269
          Deductions                                 (316)          (391)
     Ending balance at March 31                       637            650 

     Guarantees and Indemnities

     In November  2002,  the FASB  issued FIN 45,  "Guarantor's  Accounting  and
     Disclosure  Requirements for Guarantees,  Including Indirect  Guarantees of
     Indebtedness of Others." The initial  recognition  and initial  measurement
     provisions  apply on a prospective  basis to guarantees  issued or modified
     after  December 15, 2002.  The  disclosure  requirements  are effective for
     financial  statements of interim and annual  periods  ending after December
     15, 2002.

     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.  The fair value of  guarantees  issued  during the three months
     ended March 31, 2003 is insignificant.

     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 either uses its
     $5.0 million line of credit as collateral to unconditionally  guarantee the
     performance  of locally  denominated  bank  guarantees  or it obtains  both
     secured  and  unsecured  bank  guarantees  from  local  banks.  These  bank
     guarantees  totaled an equivalent of  approximately  $1.3 million issued in
     local  currency  in  Europe  and Asia as of March  31,  2003.

     The Company  indemnifies  its directors and officers to the maximum  extent
     permitted  under  the laws of the  State of  Delaware.  There  have been no
     modifications  or new guarantees  issued during the first quarter of fiscal
     year 2003.  The Company has not recorded a liability  for these  guarantees
     and  indemnities  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.

                                       15

     The Company's product warranty  liability as of March 31, 2003 is disclosed
     in this item under the heading "Product Warranties."

10.  LEGAL PROCEEDINGS

     In the normal  course of  business,  the  Company  is  subject to  ordinary
     routine litigation and claims incidental to business.  While the results of
     litigation  and  claims  cannot be  predicted  with  certainty,  management
     believes that the final outcome of these matters will not have a materially
     adverse  effect on the  Company's  consolidated  results of  operations  or
     financial conditions.

11.  FOREIGN CURRENCY TRANSACTIONS

     As of March 31, 2003, the Company had forward  foreign  exchange  contracts
     outstanding totaling approximately $ 15.5 million in 10 currencies.  These
     contracts  were opened on the last  business  day of the quarter and mature
     within three months. Accordingly,  the fair value of such contracts is zero
     at March 31, 2003.

12.  RELATED-PARTY TRANSACTIONS

     In  July  2001,  the  Compensation  Committee  of the  Company's  Board  of
     Directors  the ("Board")  entered into  discussions  with Lee Roberts,  the
     Company's Chief Executive Officer,  regarding a secured loan by the Company
     to  Mr.  Roberts  to  enable  him to  purchase  a home  in  Orange  County,
     California.   In  July  2001,  the  Compensation  Committee  forwarded  its
     recommendation  to the Board to approve,  in principle,  a secured loan, in
     the  amount  of  $1.2  million  to Mr.  Roberts.  In  September  2001,  the
     Compensation   Committee  approved,  in  principle,   an  increase  in  the
     previously  requested  loan  amount to $1.9  million,  subject to review of
     final  loan  documents  and  approval  of  the  Board.  In  May  2002,  the
     Compensation  Committee  reviewed proposed loan documentation for a secured
     loan to Mr.  Roberts  and  forwarded  its  recommendation  to the  Board to
     approve  the loan on the terms set  forth in the loan  documents.  The loan
     documents  provided  that the  loan  would be  secured  by the real  estate
     purchased by Mr. Roberts. Subsequently, on June 5, 2002, the Board approved
     the loan  documents  and the loan.  As of March 31,  2003,  FileNet  has an
     outstanding  secured note receivable from Mr. Roberts in the amount of $1.9
     million that relates to the above-referenced  loan and is included in other
     assets on the consolidated  balance sheet. The note bears interest at 2.89%
     per  annum.  Accrued  interest  on the  principal  balance  of this note is
     payable  annually  beginning  February 15, 2003 and on each  February  15th
     thereafter  until the entire  principal  balance  becomes  due.  The entire
     outstanding  principal balance of this note and any accrued interest is due
     and  payable  at the  earliest  of (a) June 7,  2005,  (b) one  year  after
     termination of Mr. Roberts'  employment by the Company,  or (c) ninety (90)
     days after  voluntary  termination  of employment by Mr.  Roberts.  Imputed
     interest for the  difference  between the stated  interest rate of the note
     and a fair value interest rate of 7% was recorded as  compensation  expense
     and a  discount  that is  being  amortized  over  the  term of the  note to
     interest  income  using  the  effective  interest  method.  The loan to Mr.
     Roberts is permitted  under  Section 13 of the  Securities  Exchange Act of
     1934, as amended by Section 402 of the Sarbanes-Oxley Act on July 30, 2002,
     because it was  outstanding  on that  date.  However,  its terms  cannot be
     renewed or materially modified in the future.

     John  Savage,  a member  of  FileNet's  Board of  Directors  and the  Audit
     Committee of FileNet's Board of Directors,  is Managing  Partner of Alliant
     Partners,   who  acted  as  financial  advisors  to  eGrail  and  was  paid
     approximately $500,000 by eGrail. Accordingly,  John Savage recused himself
     from all discussions  related to the acquisition between FileNet and eGrail
     and abstained from voting on the transaction.

                                       16

13. SUBSEQUENT EVENTS

     On April 2, 2003,  the Company  acquired Shana  Corporation,  an electronic
     forms management company, for a purchase price of $8.5 million in cash. The
     Company  believes  that  electronic  forms  management  is an  increasingly
     important  technology and is an essential  component of electronic  content
     management.   The  Company  expects  that  current  regulatory   compliance
     initiatives in healthcare,  education and  manufacturing  will increase the
     demand for forms technology.

     In  accordance  with SFAS No. 141,  "Business  Combinations,"  the purchase
     method  of  accounting  will be used to  record  this  acquisition  and the
     purchase price is expected to be allocated  primarily to goodwill and other
     intangible  assets. The Company is currently in the process of obtaining an
     independent  appraisal  of the fair value of the  tangible  and  intangible
     assets  acquired in order to allocate the purchase price in accordance with
     SFAS No. 141. The  preliminary  valuation  indicates  that net tangible and
     identified  intangible assets have an estimated fair value of approximately
     $7.0 million.  The difference between the purchase price and estimated fair
     value of the net tangible and identified intangible assets will be recorded
     as goodwill.  We do not anticipate any in-process  research and development
     costs.

     **Item 2.  Management's  Discussion  and Analysis of Financial  Condition and
     Results of Operations**

     This  Quarterly  Report on Form 10-Q  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.   These   forward-looking
     statements  are subject to a number of risks and  uncertainties,  including
     those  discussed in "Risk Factors That May Affect Future Results" below and
     in the notes to our  consolidated  financial  statements for the year ended
     December 31, 2002. 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 risk factors  described
     below and in other  documents we file from time to time with the Securities
     and Exchange  Commission,  including our Annual Report on Form 10-K for the
     fiscal year ended  December 31, 2002.  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  and
     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**

     FileNet  Corporation  develops,  markets,  sells  and  supports  Enterprise
     Content  Management  ("ECM")  software to enable  organizations  to improve
     operational  efficiency  and  leverage  their  content  resources  to  make
     decisions  faster.  In the first quarter of 2003 we introduced  FileNet P8,
     our new  architecture  that  provides a unified  platform and framework for
     ECM. This approach is intended to offer our customers the ability to easily
     configure,  design,  build and  deploy a  variety  of  enterprise-wide  ECM
     solutions to meet a broad range of content management needs within a single
     scalable  framework.  We also offer professional  services and training for
     the implementation of these software solutions,  as well as 24 hours a day,
     seven days a week  technical  support and  services to our  customers  on a
     global basis.

                                      17

**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.  Actual amounts could differ from  estimates.
     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***.   FileNet  accounts  for the  licensing of software in
     accordance with the American Institute of Certified  Accountants  ("AICPA")
     Statement of Position  ("SOP") 97-2,  "Software  Revenue  Recognition."  We
     enter  into  contracts  for the  sale of our  products  and  services.  The
     majority of these contracts  relate to single elements and contain standard
     terms and conditions.  However,  there are agreements that contain multiple
     elements or non-standard terms and conditions.  Contract  interpretation is
     sometimes required to determine the appropriate  accounting,  including how
     the price should be allocated  among the  deliverable  elements and when to
     recognize revenue.

     Software  license revenue  generated from sales through direct and indirect
     channels,  which do not contain  multiple  elements,  are  recognized  upon
     shipment and passage of title of the related  product,  if the requirements
     of SOP 97-2, are met. If the requirements of SOP 97-2,  including  evidence
     of an arrangement,  delivery,  fixed or determinable fee, collectibility or
     vendor  specific  evidence about the value of an element are not met at the
     date of shipment,  revenue is not recognized until these elements are known
     or resolved.  Fees are deemed to be fixed and determinable for transactions
     with a set price that is not subject to refund or adjustment and payment is
     due within 90 days from the invoice  date.  Software  license  revenue from
     channel  partners is recognized when the product is shipped and sale by the
     channel partner to an end user is confirmed.

     For  arrangements  with  multiple  elements,  we  allocate  revenue to each
     element  of a  transaction  based  upon its fair  value  as  determined  in
     reliance on vendor specific objective evidence. This evidence of fair value
     for all  elements  of an  arrangement  is based on the normal  pricing  and
     discounting practices for those products and services when sold separately.
     If fair value of any undelivered element cannot be determined  objectively,
     we defer the revenue until all elements are  delivered,  services have been
     performed or until fair value can objectively be determined.

     Customer  support  contracts  are  renewable on an annual basis and provide
     after-sale support for our software, as well as software upgrades under the
     Company's right to new versions program, on a when-and-if-available  basis.
     Revenue from post-contract  customer support is recognized ratably over the
     term of the arrangement, which is typically 12 months.

     Professional  services  revenue  consists of consulting and  implementation
     services  provided  to end users of our  software  products  and  technical
     consulting  services  provided  to our  resellers.  The  majority  of these
     consulting  engagements  average from one to three months and are generally
     not  essential to the  functionality  of the  software.  Revenue from these
     services  and from  training  classes is  recognized  as such  services are
     delivered and accepted by the customer.  Fixed-price  consulting  contracts
     are the  exception  and  because  estimates  of costs  applicable  to these
     contracts  are  reasonably  dependable,  revenue  is  recognized  using the
     percentage-of-completion method. However, revenue and profit are subject to
     revision as the contract  progresses and anticipated  losses on fixed-price
     professional  services  contracts  are  recognized  in the period when they
     become known.

                                       18

***Allowance for Doubtful Accounts and Sales Returns***.      We   evaluate   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
     constantly 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.  Since our
     revenue  recognition  policy  requires  customers to be  creditworthy,  our
     accounts  receivable  are based on customers  whose  payment is  reasonably
     assured.  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.  Based on historical
     experience,  we also  maintain a sales return  allowance  for the estimated
     amount of potential  returns.  While product returns have historically been
     minimal and within our expectations  and the allowances  established by us,
     we cannot  guarantee  that we will continue to  experience  the same return
     rates that we have in the past.

     ***Goodwill and Other Intangible  Assets.***  Goodwill is recorded at cost and is
     not amortized.  In June 2001,  the FASB issued SFAS No. 142,  "Goodwill and
     Other  Intangible  Assets," which we adopted  January 1, 2002. SFAS No. 142
     requires that goodwill and other intangible  assets with indefinite  useful
     lives no longer be amortized, but instead be tested for impairment at least
     annually and written down when  impaired.  On the first day of July of each
     year goodwill will be tested for  impairment by determining if the carrying
     value of each reporting unit exceeds its fair value.  We also  periodically
     evaluate whether events and circumstances have occurred which indicate that
     the  carrying  value of goodwill  may not be  recoverable.  As of March 31,
     2003, no impairment of goodwill has been recognized. If estimates change, a
     materially different impairment conclusion could result.

     ***Long-Lived Assets.***  Property,  plant and equipment,  intangible assets, and
     capitalized   software   costs  are  recorded  at  cost  less   accumulated
     depreciation or  amortization.  They are amortized using the  straight-line
     method over  estimated  useful lives of generally  three to six years.  The
     determination  of useful lives and whether or not these assets are impaired
     involves  judgment  and are  reviewed  for  impairment  whenever  events or
     circumstances  indicate that the carrying  amount of such assets may not be
     recoverable.  We  evaluate  the  carrying  value of  long-lived  assets and
     certain  identifiable  intangible  assets for  impairment of value based on
     undiscounted  future cash flows resulting from the use of the asset and its
     eventual  disposition.   While  we  have  not  experienced   impairment  of
     intangible assets in prior periods, we cannot guarantee that there will not
     be impairment in the future.

     ***Deferred Income Taxes.*** 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. We maintain a valuation allowance against a portion of
     the deferred tax assets due to uncertainty regarding the future realization
     based on historical  taxable income,  projected future taxable income,  and
     the expected timing of the reversals of existing temporary differences.  If
     we operate at a loss or are unable to generate  sufficient  future  taxable
     income,  we could be required to increase the valuation  allowance  against
     all or a significant portion of our deferred tax assets, which would result
     in a  substantial  increase to our effective tax rate and could result in a
     material adverse impact on our consolidated operating results.  Conversely,
     if the Company continues to generate profits and ultimately determines that
     it is more likely than not that all or a portion of the remaining  deferred
     tax assets will be utilized to offset future taxable income,  the valuation
     allowance could be decreased or eliminated all together,  thereby resulting
     in a substantial decrease to our effective tax rate.

     ***Research and Development Costs.***  We expense research and development  costs
     as incurred.  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 our  software is  substantially
     completed concurrently with the establishment of technological feasibility.

                                       19

**Results of Operations**

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

                                                   Three Months Ended
                                                        March 31,            2003            2002 

  Revenue:
     Software                                      40.8%            36.2%
     Customer support                              44.5             42.4
     Professional services and education           13.9             18.4
     Hardware                                        .8              3.0 
  Total Revenue                                   100.0            100.0

  Cost of revenue:
     Software                                       3.5              2.4
     Customer support                              11.2             11.7
     Professional services and education           12.7             15.6
     Hardware                                        .9              2.2 
        Total cost of revenue                      28.3             31.9 

  Gross Profit                                     71.7             68.1 

  Operating expenses
  Sales and marketing                              39.5             37.4
  Research and development                         22.2             20.1
  General and administrative                        9.0              9.5 
        Total operating expenses                   70.7             67.0

  Operating income (loss)                           1.0              1.1
  Other income, net                                 1.2              1.1 
  Income (loss) before income tax                   2.2%             2.2%**Revenue**

     As more fully  discussed  and  explained  below,  total  revenue  increased
     slightly to $87.0  million for the three  months  ended March 31, 2003 from
     $86.2  million for the three  months  ended March 31,  2002.  International
     revenue accounted for 29% of total revenue, or $25.5 million, for the three
     months ended March 31, 2003, compared to 27%, or $23.1 million for the same
     period in 2002.  These increases in revenue were primarily  attributable to
     increases in software  and customer  support  revenue  partially  offset by
     decreases in professional services and hardware revenue.

     *Software*:  Software  revenue  consists of fees earned from the licensing of
     our  software  products  to  customers.  Software  revenue  increased  $4.3
     million,  or 14%,  to $35.5  million for the three  months  ended March 31,
     2003,  from  $31.2  million  for the three  months  ended  March 31,  2002.
     Software  revenue  represented  41% of total  revenue for the three  months
     ended March 31, 2003 compared to 36% for the comparable period of 2002. The
     increase in software revenue was primarily due to an increase in demand for
     our  content  management  solutions  associated  with our  broader  product
     offering coupled with a slightly more favorable business climate worldwide.
     Additionally,  we were  successful in increasing our software  revenue from

                                       20

     our existing customers as they expanded the use of our products. We remain,
     however,  in a difficult  economic  environment where a global reduction in
     Information  Technology  spending  could  have  a  negative  effect  on our
     software revenue growth going forward.

     *Customer  Support*:  Customer  support  revenue  consists  of  revenue  from
     software maintenance  contracts,  "fee for service" revenue and the sale of
     spare parts and supplies.  Customer support revenue increased $2.1 million,
     or 6%, to $38.7  million  for the three  months  ended  March 31, 2003 from
     $36.6 million for the three months ended March 31, 2002.  Customer  support
     revenue represented 44.5% of total revenue for the three months ended March
     31, 2003 compared to 42.4% for the comparable  period of 2002. The increase
     in customer  support revenue was primarily due to the growth in our base of
     customers who receive ongoing maintenance as a result of new customer sales
     and sales of additional  products to our installed base,  along with a high
     rate of renewal  from the  existing  base.  However,  the  occurrence  of a
     prolonged economic slowdown that negatively impacts software revenue growth
     would result in a reduced future growth rate for customer support revenue.

     *Professional  Services and Education*:  Professional  services and education
     revenue is generated primarily from consulting and implementation  services
     provided  to end  users  of our  software  products,  technical  consulting
     services  provided to our resellers and training  services  provided to end
     users and  resellers.  Professional  services are generally  performed on a
     time and  material  basis.  Professional  services  and  education  revenue
     decreased $3.7 million, or 23%, to $12.1 million for the three months ended
     March 31,  2003 from $15.8  million  for the three  months  ended March 31,
     2002.  Professional services and education revenue represented 14% of total
     revenue for the three months  ended March 31, 2003  compared to 18% for the
     comparable  period in 2002.  The revenue  decrease in the first  quarter of
     2003 compared to the first quarter of 2002 is reflective of the  continuing
     economic  slowdown  that has  resulted  in  fewer  and  smaller  consulting
     engagements for professional services,  particularly in North America. This
     trend, coupled with pricing pressures, has negatively impacted professional
     services  and  education  revenue  and  we  do  not  expect  a  significant
     improvement in the near future.

     *Hardware*:  Hardware revenue is generated primarily from the sale of 12-inch
     Optical  Storage  And  Retrieval  ("OSAR")   libraries.   Hardware  revenue
     decreased $1.9 million,  or 73%, to $0.7 million for the three months ended
     March 31, 2003 from $2.6 million for the three months ended March 31, 2002.
     Hardware revenue represented slightly less than 1% of total revenue for the
     three months ended March 31, 2003, compared to 3% for the comparable period
     of 2002.  The decline in hardware  revenue  reflects that hardware is not a
     strategic  focus for us and we  expect  hardware  revenue  to  continue  to
     decrease as a percentage of total revenue and in absolute dollars.

     **Cost of Revenue**

     Total cost of revenue decreased $2.8 million,  or 10%, to $24.7 million for
     the  three  months  ended  March  31,  2003,  from  $27.5  million  for the
     comparable  period in 2002. The decrease for the three-month  comparison is
     primarily  due to the  decrease in the cost of  professional  services  and
     education revenue as discussed below.

     *Software*:  Cost of  software  revenue  includes  royalties  paid  to  third
     parties, amortization of acquired technology, partner commissions, software
     media costs, and the cost to manufacture and distribute software.  The cost
     of software revenue increased $0.9 million,  or 43% to $3.0 million for the
     three  months  ended March 31, 2003 from $2.1  million for the three months
     ended March 31, 2002.  The absolute  dollar costs  represented 8% and 7% of
     the related  software revenue for the three months ended March 31, 2003 and
     March 31, 2002,  respectively.  As a percentage  of software  revenue these
     costs were  effectively  unchanged.  Going  forward, we anticipate  cost of
     software revenue as a percentage of software  revenue to remain  comparable
     to current levels.

                                       21

*Customer  Support*:  Cost of  customer  support  revenue  includes  costs of
     customer support personnel,  cost of supplies and spare parts, and the cost
     of third-party hardware  maintenance.  The cost of customer support revenue
     decreased  $0.3 million,  or 3%, to $9.8 million for the three months ended
     March 31,  2003 from $10.1  million  for the three  months  ended March 31,
     2002.  These costs  represented 25% and 28% of the related customer support
     revenue for the three months  ended March 31, 2003 and 2002,  respectively.
     The decrease in cost of customer  support  revenue in absolute  dollars for
     the three months  ended March 31, 2003  compared to the same period in 2002
     is primarily  attributable to cost controls and lower supplies  costs.  The
     decrease in cost of customer  support  revenue as a percentage  of customer
     support  revenue was primarily due to automation  and process  improvements
     that allowed growth in the customer and revenue base without a proportional
     increase in support  personnel and cost.  Going forward, we expect customer
     support cost of revenue to remain relatively stable in absolute dollars for
     the near term.

     *Professional  Services and  Education*:  Cost of  professional  services and
     education  revenue  consists  primarily of costs of  professional  services
     personnel, training personnel, and third-party independent consultants. The
     cost of professional services and education revenue decreased $2.3 million,
     or 17%,  to $11.1  million for the three  months  ended March 31, 2003 from
     $13.4  million  for the three  months  ended  March 31,  2002.  These costs
     represented 92% and 85% of the related professional  services and education
     revenue for the three months  ended March 31, 2003 and 2002,  respectively.
     The decrease in absolute dollars was primarily  attributable to a reduction
     in the  use of  third-party  independent  consultants,  as  well  as  lower
     commission and variable  compensation  expense, all directly related to the
     decrease in professional services revenue.  We expect professional services
     and education costs as a percentage of professional  services and education
     revenue to vary from period to period,  depending on the utilization  rates
     of internal resources and the mix between the use of internal resources and
     third party independent consultants.

     *Hardware*:  Cost of hardware  revenue  includes the cost of  assembling  and
     distributing our OSAR library  products,  the cost of hardware  integration
     personnel,  and warranty costs. The cost of hardware revenue decreased $1.1
     million,  or 58%, to $0.8 million for the three months ended March 31, 2003
     from $1.9 million for the three  months  ended March 31, 2002.  These costs
     represented  114% and 73% of the  related  hardware  revenue  for the three
     months  ended  March  31,  2003 and 2002,  respectively.  The  decrease  in
     absolute  dollars  is  directly  related to the  decrease  in sales of OSAR
     library products. As we have discussed  previously,  this operating segment
     is not a strategic focus for us.

     **Operating Expenses***Research  and  Development*:  Research  and  development  expense  primarily
     consists of costs of personnel to support product development. Research and
     development  expense  increased  to $19.3  million,  or 12%,  for the three
     months  ended March 31, 2003 from $17.3  million for the three months ended
     March 31, 2002, and represented  22.2% and 20.1% of total revenue for these
     respective periods.  The increase in absolute dollars year over year in the
     first  quarter  of 2003 is  primarily  the  result of  increased  headcount
     resulting in higher compensation,  benefits and relocation costs related to
     the April 2002  eGrail  acquisition.  We expect  research  and  development
     expense to be at  approximately  21% of revenue in the near-term due to the
     continuing  enhancement of ECM  capabilities and the added costs associated
     with the acquisition of Shana Corporation on April 2, 2003.

     Our  research  and  development  efforts are focused on  enhancing  our ECM
     capabilities  within  the P8 product  suite.  These  efforts  will focus on
     enhancements to our Business Process  Management and Web Content Management
     products  and  the  development  of  integrated   records   management  and
     integrated  collaborative  capabilities.  We intend to complement  internal
     development  with  third-party  software  through  OEM  agreements  and may
     execute additional technology acquisitions.

                                       22

     We expect that  competition for qualified  technical  personnel will remain
     intense and may result in higher levels of  compensation  expense for us in
     the  future.  We  believe  that  research  and  development   expenditures,
     including compensation of technical personnel, are essential to maintaining
     our competitive position and expect these costs will continue to constitute
     a significant percentage of total revenue.

     *Sales and  Marketing*:  Sales and marketing  expense  consists  primarily of
     salaries and benefits,  sales commissions and other expenses related to the
     direct and indirect sales force, various marketing expenses and the cost of
     other market development programs. Sales and marketing expense increased to
     $34.4 million,  or 7%, for the three months ended March 31, 2003 from $32.3
     million for the three months ended March 31, 2002,  and  represented  39.5%
     and 37.4% of total revenue for these  respective  periods.  The increase in
     2003  was  primarily  due to  additional  trade  show and  channel  partner
     development  expenses  associated  with the  launch of our  FileNet  P8 ECM
     product that occurred in the first quarter of 2003.

     *General and  Administrative*:  General and  administrative  expense consists
     primarily of personnel costs for finance,  information  technology,  legal,
     human   resources  and  general   management,   and  the  cost  of  outside
     professional services. General and administrative expense decreased to $7.8
     million, or 4%, for the three months ended March 31, 2003 from $8.2 million
     for the three months ended March 31, 2002, and represented 9.0% and 9.5% of
     total revenue for these respective  periods.  The decrease in first quarter
     2003  compared to first  quarter 2002 was  primarily  due to on-going  cost
     containment.

     We expect operating expenses to remain at, or slightly above, these current
     levels for the near term.

     **Amortization of Purchased Intangible Assets**

     Acquired  technology of $3.3 million  resulting  from the asset purchase of
     eGrail in April 2002 was  assigned a useful  life of five years and patents
     of $24,000  were  assigned  a useful  life of two  years.  Amortization  of
     acquired  technology  is  recorded  on a  straight-line  basis as a cost of
     software revenue and amortization of patents is recorded on a straight-line
     basis as an  operating  expense.  Amortization  expense was  approximately
     $183,000  for the  three  months  ended  March 31,  2003 for both  acquired
     technology and patents.  We determined  that these assets were not impaired
     at March 31, 2003.

     **Other Income, Net**

     Other income, net, consists primarily of interest income earned on our cash
     and cash  equivalents,  short and  long-term  investments,  and other items
     including  foreign  exchange  gains and losses,  the gain (loss) on sale of
     fixed assets, and interest expense.  Other income, net was $1.0 million for
     the three months ended March 31, 2003 compared to other income, net of $0.9
     million  for the three  months  ended March 31,  2002.  This  increase  was
     primarily related to interest on increased cash balances.

     **Income Taxes**

     Our combined  federal,  state and foreign annual effective tax rate for the
     three  months  ended  March  31,  2003,  is 30%  compared  to 25%  for  the
     comparable  periods in 2002.  The  increased tax rate in 2003 was primarily
     due  to  the  unfavorable  mix  of  income  between  domestic  and  foreign
     jurisdictions.  FileNet  management will continue  weighing various factors
     for the remainder of the year to assess the  recoverability of our recorded
     deferred assets and the need for any adjustment to the valuation  allowance
     against such  amounts.  Any  adjustment to the  valuation  allowance  could
     impact the effective tax rate in subsequent quarters.

                                       23

**Liquidity and Capital Resources**

     At March 31, 2003,  combined cash, cash equivalents and investments totaled
     $209.5  million,  an increase of $24.3 million from December 31, 2002. Cash
     provided by  operating  activities  during the three months ended March 31,
     2003  totaled  $26.7  million and  resulted  primarily  from an increase in
     unearned  maintenance revenue related to prepaid  maintenance  contracts of
     $15.8 million,  additions to net income for  depreciation  and amortization
     expense of $4.9  million,  net  income of $1.3  million  and a decrease  in
     accounts  receivable of $4.7 million. A larger percentage of prepaid annual
     maintenance  contracts  renew in the first quarter of each year compared to
     subsequent  quarters, resulting  in an  increase  in  unearned  maintenance
     revenue.

     Cash used for  investing  activities  totaled  $6.8  million  and  included
     capital  expenditures  of $2.5  million  and net  purchases  of  marketable
     securities of $4.4 million.  Cash provided by financing  activities totaled
     $0.5  million and was a result of proceeds  received  from the  exercise of
     employee  stock  options  and  stock  purchases  under the  employee  stock
     purchase plan offset by payments on capital lease obligations.

     We have a $5.0 million  multi-currency  revolving line of credit  available
     until June 27, 2003.  Borrowings  under the  arrangement  are unsecured and
     bear interest at 125 basis points over the London Interbank Offered Rate. A
     standby letter of credit fee of 125 basis points per annum and a commitment
     fee of 50 basis points are assessed against any unused amounts.  There were
     no borrowings  outstanding against our line of credit at March 31, 2003. We
     have been using the line of credit as collateral for issuance of letters of
     credit valued at  approximately  $500,000 in Europe for certain  government
     sales contracts and a small number of vendor  contracts.  We are subject to
     certain  financial  covenants  that  include,   but  are  not  limited  to,
     compliance with specific balance sheet ratios, no two consecutive quarterly
     losses, an aggregate loan limit to the officers not to exceed $5.0 million,
     and a capital  expenditure limit under this line of credit. As of March 31,
     2003, we were in compliance with all such covenants.

     Contractual cash obligations of significance  include  operating leases for
     our  corporate  offices,  sales  offices,   development  and  manufacturing
     facilities, and other equipment under non-cancelable operating leases, some
     of which have renewal  options and generally  provide for escalation of the
     annual rental amount. (See Note 9).

     We  believe  that  our  present  cash  balances  together  with  internally
     generated  funds and credit  lines will be  sufficient  to meet our working
     capital and capital expenditure needs for at least the next twelve months.

     **Other Financial Instruments**

     We enter 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.  We are exposed to market risk on the forward 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  statement of
     operations.  These  contracts  mature every three months at the end of each
     quarter.  We open 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.  We use
     commercial   rating   agencies  to  evaluate  the  credit  quality  of  the
     counterparties and do not anticipate  nonperformance by any counterparties.
     We do not  anticipate  a material  loss  resulting  from any  credit  risks
     related to any of these institutions.

                                       24

**Recently Adopted Accounting Pronouncements**

     In June 2001, the FASB issued SFAS No. 141, "Business  Combinations," which
     was effective  immediately.  SFAS No. 141 requires that the purchase method
     of accounting be used for all business  combinations  initiated  after June
     30, 2001 and it eliminated the pooling-of-interests method. The adoption of
     this  standard  did  not  have a  significant  impact  on our  consolidated
     financial  statements.  Our April 2002  acquisition  of certain  assets and
     certain  liabilities of eGrail,  Inc. was accounted for in compliance  with
     this pronouncement (See Note 3 for details).

     In June 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets,"  which we  adopted  January 1, 2002.  SFAS No. 142  requires  that
     goodwill and other  intangible  assets with  indefinite  useful  lives,  no
     longer be amortized, but instead be tested for impairment at least annually
     and written down when impaired.  SFAS No. 142 requires purchased intangible
     assets other than  goodwill to be amortized  over their useful lives unless
     these  lives are  determined  to be  indefinite.  In  accordance  with this
     standard, we do not amortize goodwill and indefinite life intangible assets
     but evaluate their carrying value annually or when events or  circumstances
     indicate  that their  carrying  value may be impaired.  On the first day of
     July of each year, goodwill will be tested for impairment by determining if
     the carrying  value of each  reporting  unit exceeds its fair value.  As of
     March 31, 2003, no impairment of goodwill has been recognized. If estimates
     change, a materially different impairment conclusion could result.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
     Disposal  of  Long-Lived   Assets."  This  statement   addresses  financial
     accounting  and reporting for the  impairment of long-lived  assets and for
     the disposal of long-lived assets and discontinued operations. SFAS No. 144
     superseded  SFAS No. 121,  "Accounting  for the  Impairment  of  Long-Lived
     Assets and for  Long-Lived  Assets to Be Disposed Of," and is effective for
     fiscal  years  beginning  after  December  15,  2001.  The adoption of this
     standard  on  January  1,  2002  did  not  have a  material  impact  on our
     consolidated financial position and results of operations.

     In July  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated with Exit or Disposal  Activities,"  which  addresses  financial
     accounting  and  reporting  for  costs  associated  with  exit or  disposal
     activities  and  supersedes  EITF Issue 94-3,  "Liability  Recognition  for
     Certain Employee  Termination  Benefits and Other Costs to Exit an Activity
     (including  Certain  Costs  Incurred  in a  Restructuring)."  SFAS No.  146
     requires  that  costs  associated  with  exit  or  disposal  activities  be
     recognized  when they are incurred  rather than at the date of a commitment
     to an exit or  disposal  plan.  SFAS  No.  146  also  establishes  that the
     liability  should  initially  be measured  and  recorded at fair value.  We
     adopted  the  provisions  of SFAS No. 146 for exit or  disposal  activities
     initiated after December 31, 2002.

     In November  2002,  the FASB  issued FIN 45,  "Guarantor's  Accounting  and
     Disclosure  Requirements for Guarantees,  Including Indirect Guarantees and
     Indebtedness of Others," an interpretation of FASB Statement Nos. 5, 57 and
     107,  and  rescission  of FIN 34,  "Disclosure  of Indirect  Guarantees  of
     Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by
     the  guarantor  in its interim and annual  financial  statements  about its
     obligations  under certain  guarantees that it has issued. It also requires
     that a guarantor  recognize,  at the inception of a guarantee,  a liability
     for the fair value of the  obligation  undertaken in issuing the guarantee.
     The  provisions  related to  recognizing  a liability  at  inception of the
     guarantee for the fair value of the guarantor's  obligations does not apply
     to product  warranties or to guarantees  accounted for as derivatives.  The
     initial  recognition and measurement  provisions of this interpretation are
     applicable on a prospective  basis to guarantees  issued or modified  after
     December 31, 2002,  while the  disclosure  requirements  are  effective for
     financial  statements  for interim or annual  periods ending after December
     15, 2002.  The adoption of the  recognition  of provisions of FIN 45 in the
     three  months  ended March 31,  2003 did not have a material  impact on its
     consolidated results of operations or financial position.

                                       25

     In December 2002, the FASB Issued SFAS No. 148, "Accounting for Stock-Based
     Compensation Transition and Disclosure," an amendment of SFAS No. 123. This
     statement amends SFAS No. 123,  "Accounting for Stock-Based  Compensation,"
     to provide  alternative methods of transition for a voluntary change to the
     fair  value  based   method  of   accounting   for   stock-based   employee
     compensation.   In  addition,   this   statement   amends  the   disclosure
     requirements  of SFAS No.  123 to  require  prominent  disclosures  in both
     annual and interim financial  statements about the method of accounting for
     stock-based  employee  compensation  and the effect of the  method  used on
     reported results. The transition guidance and annual disclosure  provisions
     of SFAS No. 148 are  effective  for fiscal years ending after  December 15,
     2002. The interim disclosure provisions are effective for financial reports
     containing   financial  statements  for  interim  periods  beginning  after
     December  15,  2002.  The  adoption of SFAS No. 148 did not have a material
     impact on our consolidated results of operations or financial position.

     In  January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
     Interest   Entities."  In  general,   a  variable   interest  entity  is  a
     corporation,  partnership,  trust,  or any other legal  structure  used for
     business  purposes  that  either (a) does not have  equity  investors  with
     voting rights or (b) has equity  investors  that do not provide  sufficient
     financial  resources  for the  entity to  support  its  activities.  FIN 46
     requires a variable interest entity to be consolidated by a company if that
     company  is subject  to a  majority  of the risk of loss from the  variable
     interest  entity's  activities  or  entitled  to receive a majority  of the
     entity's residual returns or both. The consolidation requirements of FIN 46
     apply  immediately to variable  interest entities created after January 31,
     2003. The consolidation  requirements  apply to older entities in the first
     fiscal year or interim period beginning after June 15, 2003. Certain of the
     disclosure  requirements  apply in all  financial  statements  issued after
     January 31,  2003,  regardless  of when the  variable  interest  entity was
     established.  We do not have any variable interest entities as of March 31,
     2003.  The  adoption  of FIN 46 did  not  have  a  material  impact  on our
     consolidated results of operations or our financial position.

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

     **Risk Factors That May Affect Future Results**

          Our business, financial condition, operating results and prospects can
     be impacted by a number of factors,  including but not limited to those set
     forth below 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. Factors that may affect our business, financial
     condition and results of operations include:

          ***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.***
     Prior  growth  rates  in our  revenue  and  operating  results  should  not
     necessarily be considered indicative of future growth or operating results.
     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.

                                       26

     These factors include, but are not limited to, the following:

        o   the industry-wide slow down in IT spending;
        o   general domestic and international economic and political conditions;
        o   the discretionary nature of our customers' budget and purchase cycles
            and the absence of long-term customer purchase commitments;
        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   the size, complexity and timing of individual transactions;
        o   changes in foreign currency exchange rates;
        o   the length of our sales cycle;
        o   variations in the productivity of our sales force;
        o   the level of software product sold and price competition;
        o   the timing of new software introductions and software enhancements by
            us and our competitors;
        o   the mix of sales by products, software, services and distribution channels;
        o   project overruns associated with fixed price contracts;
        o   acquisitions by us and our competitors;
        o   our ability to develop and market new software products and control costs;
        o   the quality of our customer support; and
        o   the level of international sales.

          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. Our
     future financial  performance will depend primarily on the continued growth
     of the  markets  for our  software  products  and  services  as well as the
     purchase of our products by customers in these  markets.  If the markets we
     serve fail to grow or grow more slowly than we  currently  anticipate,  our
     business,  financial condition and operating results would be harmed. These
     intensely  competitive  markets  can  change  rapidly.  There are  multiple
     competitors of ours and there may be future competitors, 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.  In order to be
     successful in the future, we must respond to technological change, customer
     requirements and competitors' current software products and innovations. We
     cannot  assure that we will be able to continue to compete  effectively  in
     our target  markets  or that  future  competition  will not have a material
     adverse  effect  on  our  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 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.

                                       27

***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.
     Our future success also depends,  in part, on our ability to execute on our
     strategy of  developing a unified  platform and  framework  for  Enterprise
     Content Management. This strategy requires us to make long-term investments
     and commit  significant  resources  based on our prediction of new products
     and  services  that the market needs and will  accept.  Our  strategy  also
     requires us to develop and maintain relations with technology partners.  We
     may not be successful in maintaining these  relationships or 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  difficulties that
     could delay or prevent the successful development, introduction and sale of
     these  products  and   enhancements.   In  addition,   these  products  and
     enhancements  may not adequately  meet the  requirements of the marketplace
     and may not achieve any significant degree of market acceptance. If we fail
     to  successfully  maintain  or  establish   relationships  with  technology
     partners or to execute on our integrated product solution  strategy,  or if
     release dates of any future  products or  enhancements  are delayed,  or if
     these  products or  enhancements  fail to achieve our  prediction of market
     acceptance  when  released,  our business  operating  results and financial
     condition  could be materially  harmed.  In the past,  we have  experienced
     delays  in the  release  dates  of  enhancements  and new  releases  to our
     products  and we  cannot  assure  that we will not  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. We cannot assure that announcements of currently planned
     or other new  software  products  will not 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.

          ***We must effectively manage our new product and services transitions or
     our revenue  may suffer.***  If we do not make an  effective  transition  from
     existing  products and services to our P8 architecture,  our revenue may be
     seriously harmed. Among the factors that make a smooth transition difficult
     are  delays in  development,  variations  in  pricing,  delays in  customer
     purchases in anticipation of new  introductions and customer demand for the
     new  offerings.  If we  incur  delays  in  customer  purchases  or  do  not
     accurately estimate the market effects of new introductions,  future demand
     for our products and services and our revenue may be seriously harmed.

          ***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.  We cannot  assure that our
     existing or future copyrights,  trademarks, trade secrets, patents or other
     intellectual  property  rights  will have  sufficient  scope or strength to
     provide meaningful protection or a commercial advantage to us. 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.

          ***We may, from time to time, be notified that we are infringing  certain
     patent or  intellectual  property  rights  of  others.***  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
     cannot  assure  that we could  redesign  the  infringing  products or could

                                       28

     obtain licenses on acceptable terms, if 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  license
     third-party products and revenue related to these products could be at risk
     if we were unable to maintain these  relationships.***  In order to expand the
     distribution  of our  products and broaden our product  offerings,  we have
     established  strategic  relationships  with a number  of  indirect  channel
     partners  and  other   consultants   that  provide   marketing   and  sales
     opportunities  for  us.  We have  entered  into  key  formal  and  informal
     agreements  with  other  companies  such  as  IBM  CrossWorlds,   Microsoft
     Corporation,  SAP AG, Siebel Systems Inc, Sun Microsystems,  Inc., BEA, EMC
     and  Verity,  Inc.  Certain  of  these  agreements  have  minimum  purchase
     requirements  and/or  require  prepayments  which  usage  is  limited  to a
     specific  timeframe while others do not have minimum purchase  requirements
     and/or are  cancelable at will. We cannot assure that these  companies will
     not reduce or discontinue their  relationships with, or support of, FileNet
     and our  products.  Our  failure to  maintain  these  relationships,  or to
     establish  new  relationships  in the  future,  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.***  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.  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,  identified,  licensed,  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.

          ***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
     also 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,  and pay
     scales in the software  industry have  significantly  increased.  We cannot
     assure that in the future we will be successful in attracting and retaining
     such personnel.

          ***A significant percent 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  25%-30% of our total
     revenue  from   international   sales  through  our  worldwide  network  of
     subsidiaries  and channel  partners.  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;
        o   reduced protection for intellectual property rights in certain countries;
        o   difficulties in staffing and maintaining foreign operations;
        o   difficulties in managing foreign distributors;
        o   varying requirements for localized products;
        o   potentially adverse tax consequences;
        o   currency restrictions and currency exchange fluctuations including those
            related to the euro;
        o   the burden of complying with a wide variety of complex foreign laws,
            regulations and treaties;
        o   the possibility of difficulties in collecting accounts receivable; and
        o   longer accounts receivable cycles and financial instability among customers.

                                       29

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

          ***If our products  contain errors 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 failures,  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
     may 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  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.

          ***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:

        o   variations in quarterly operating results;
        o   fluctuations in our order levels;
        o   changes in earnings estimates by analysts;
        o   announcements of technological innovations or new products or product
            enhancements by us or our competitors;
        o   key management changes;
        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; 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.

          ***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.  For example we
     recently completed the acquisitions of eGrail and Shana. 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:

                                       30

        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; and
        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.

**Item 3.  Quantitative and Qualitative Disclosures about Market Risk****Interest Rate Risk**

Our exposure to market rate risk for changes in interest rates relates primarily
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 primarily 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 5.5
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 March 31, 2003 and 2002, 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  March  31,  2003  and  2002.  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  $286,000  at  March  31,  2003  and
approximately  $275,000 at March 31, 2001.  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  $573,000  at  March31,  2003 and
approximately $550,000 at March 31, 2002.

                                       31

The following table provides information about our cash and cash equivalents and
our investment portfolio at March 31, 2003 (dollars in thousands):

  
                                                         Estimated Fair
  *(In thousands)*                                Cost              Value 
     Debt Securities
       Due in one year or less:
          Short-term munis-taxable         $   2,202          $   2,206
          Corporate                            5,665              5,690
          Governments/Agencies                16,669             16,675 
     Total due in one year                 $  24,536          $  24,571

     Due in one to three years:
          Taxable Munis                    $   3,493          $   3,513
          Corporate                            2,084              2,084
          Government/Agencies                 27,001             27,036 
      Total due in three years             $  32,578          $  32,633

         Grand total                       $  57,114          $  57,204 

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.

**Foreign Currency Fluctuations and Inflation**

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  primarily to hedge amounts due
from  and the  net  assets  of  selected  subsidiaries  denominated  in  foreign
currencies (mainly in Europe and Asia Pacific) against  fluctuations in exchange
rates.  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.  The criteria
we  use  for   designating  a  contract  as  a  hedge  include  the   contract's
effectiveness   in  risk  reduction  and   one-to-one   matching  of  derivative
instruments  to underlying  transactions.  Gains and losses on foreign  exchange
contracts are recognized in income in the same period as gains and losses on the
underlying  transactions.  If an underlying  hedged  transaction were terminated
earlier than initially  anticipated,  the offsetting gain or loss on the related
forward  foreign  exchange  contract  would be  recognized in income in the same
period. In addition,  since we enter into forward contracts only as a hedge, any
change in currency  rates would not result in any material net gain or loss,  as
any gain or loss on the underlying foreign currency denominated balance would be
offset  by the  gain or loss on the  forward  contract.  Our  forward  contracts
generally  have an original  maturity of three months.  As of March 31, 2003, we
had forward foreign exchange contracts outstanding totaling  approximately $15.5
million in ten currencies.  These contracts were opened on the last business day
of the quarter and mature within three months.

Cumulative other  comprehensive loss decreased $2.0 million for the three months
ended  March 31,  2003 due to  unrealized  foreign  currency  translation  gains
resulting from the  strengthening of the euro against the U.S. dollar during the
first quarter of 2003.

Management  believes  that  inflation  has not had a  significant  impact on the
prices of our products, the cost of our materials,  or our operating results for
the three months ended March 31, 2003.

                                      32

**Item 4.  Controls and Procedures**

     (a)  We maintain  disclosure  controls and procedures  that are designed to
          ensure that information  required to be disclosed in our reports under
          the Securities Exchange Act of 1934 is recorded, processed, summarized
          and reported within the time periods  specified in the SEC'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 timely decisions regarding
          required  disclosure.  In  designing  and  evaluating  the  disclosure
          controls and procedures,  management  recognized that any controls and
          procedures, no matter how well designed and operated, can provide only
          reasonable assurance of achieving the desired control objectives,  and
          management   necessarily   was  required  to  apply  its  judgment  in
          evaluating  the  cost-benefit  relationship  of possible  controls and
          procedures.

          Within 90 days prior to the date of this  report,  we  carried  out an
          evaluation,  under the supervision and with the  participation  of our
          management,  including our Chief Executive Officer and Chief Financial
          Officer,  of the  effectiveness  of the  design and  operation  of our
          disclosure controls and procedures.  Based on the foregoing, our Chief
          Executive  Officer  and Chief  Financial  Officer  concluded  that our
          disclosure controls and procedures were effective.

     (b)  Changes in internal controls. There were no significant changes in our
          internal controls or in other factors that could significantly  affect
          our internal controls subsequent to the date of the evaluation.

**PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings**

See Note 10 to Consolidated Financial Statements.

**Item 6.  Exhibits and Reports on Form 8-K**

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

(b)  No reports on Form 8-K were filed during the first quarter of 2003.

                                       33

**SIGNATURE**

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

                                 **FILENET CORPORATION**May 14, 2003*Date*
                            By:  */s/  Sam M. Auriemma*
                                 Sam M. Auriemma, Senior Vice President
                                 (Principal Financial and Accounting Officer)
                                 and Chief Financial Officer

                                       34

**CERTIFICATION**

I, Lee D. Roberts, Chief Executive Officer, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of FileNET Corporation;

2.   Based on my knowledge,  this  quarterly  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 quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  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
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  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  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

May 14, 2003*Date**/s/ Lee D. Roberts*
                                         Lee D. Roberts
                                         Chief Executive Officer

                                       35

**CERTIFICATION**

I, Sam M. Auriemma, Chief Financial Officer, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of FileNET Corporation;

2.   Based on my knowledge,  this  quarterly  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 quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  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
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  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  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

May 14, 2003*Date**/s/ Sam M. Auriemma*
                                         Sam M. Auriemma
                                         Chief Financial Officer

                                       36

                                Index to 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, 2002 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,
                2002)*.

    10.1*       Second Amended and Restated Credit  Agreement  (Multi-currency)  by and between the Registrant and
                Bank of America  National Trust and Savings  Association  dated June 30, 1999,  effective June 30,
                1999 *(filed as Exhibit 10.1 to  Registrant's  Quarterly  Report on Form 10-Q for the quarter ended
                June 30,  1999)* as amended by a Waiver and First  Amendment to Credit  Agreement  dated as of June
                29, 2002 and by a letter amendment dated as of April 5, 2002.

    10.1.1*     Waiver and First Amendment to Credit  Agreement  (Multi-currency)  by and among the Registrant and
                Bank of America,  N.A., formerly known as Bank of America National Trust and Savings  Association,
                dated June 29, 2002,  effective June 29, 2002 (*filed as Exhibit 10/1 to Registrant's Annual Report
                on Form 10-K filed for the year ended December 31, 2002)*.

    10.1.2*     Letter   amendment  dated  as  of  April  5,  2002  and  Third   Amendment  to  Credit   Agreement
                (Multi-currency)  by and between the  Registrant and Bank of America,  N.A.,  dated as of June 28,
                2002 (*filed as Exhibit 10.1.2 to Registrant's  Quarterly Report on Form 10-Q for the quarter ended
                June 30, 2002)*.

    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, 2002; Registration No. 333-71598)*.

    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)*.

    10.5*+      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  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)*.

                                                              37

    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)*.

    10.9*       Asset Purchase Agreement between the Registrant and Application Partners,  Inc. dated May 18, 2000
                *(filed as Exhibit 10.24 to Registrant's Form 10-Q for the quarter ended June 30, 2000)*.

    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,  2002;
                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)*.

    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 March 31, 2003)*.

    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 March 31, 2003)*.

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

                                                              38
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