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 June 30, 1998

                                       OR

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

For the transition period from ________ to ___________

                         Commission file number: 0-15997

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

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

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

                           (714) 966-3400
----------------------------------------------------------------------
         (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 |_|

As of July 31, 1998,  there were 31,520,271  shares of the  Registrant's  common
stock outstanding.



<PAGE>


                               FILENET CORPORATION
                                      Index

   
                                                                        Page
                                                                       Number
--------------------------------------------------------------------------------

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Balance Sheets
         as of June 30, 1998 and December 31, 1997......................  3

         Consolidated Statements of Operations
         for the three and six month periods ended June 30, 
         1998 and 1997..................................................  4

         Consolidated Statements of Comprehensive Income
         for the three and six month periods ended 
         June 30, 1998 and 1997.........................................  5

         Consolidated Statements of Cash Flows
         for the six month periods ended June 30, 1998 and 1997.........  6

         Notes to Consolidated Financial Statements.....................  7

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................... 10

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings.............................................. 17

Item 4.  Submission of Matters to a Vote of Security Holders............ 17

Item 6.  Exhibits and Reports on Form 8-K............................... 17

         SIGNATURE...................................................... 18

         INDEX TO EXHIBITS.............................................. 19

                                       2
<PAGE> 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
                               FILENET CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)
<TABLE>
<CAPTION>
                                                  June 30,          December 31,
                                                    1998                1997
                                             -----------------   ---------------
                                                (Unaudited)
  <S>                                              <C>                 <C> 
 ASSETS  
 Current assets:
   Cash and cash equivalents..................    $  50,101           $  37,344
   Short-term marketable securities...........       17,595              26,600
   Accounts receivable, net...................       69,759              61,283
   Inventories................................        3,155               3,541
   Prepaid expenses and other current assets..        7,491               8,309
   Deferred income taxes......................        5,871               6,439
                                                  ------------       -----------
   Total current assets.......................      153,972             143,516

 Property, net................................       33,551              27,587
 Long-term marketable securities..............       13,886               7,826
 Other assets.................................        1,042                 941
                                                  ------------       -----------
     Total assets.............................    $ 202,451           $ 179,870
                                                  ============       ===========

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
   Accounts payable...........................    $  16,192           $  15,003
   Accrued compensation.......................       17,362              14,845
   Unearned maintenance revenue...............       14,474               8,848
   Accrued royalties..........................        2,092               2,743
   Other accrued liabilities..................       21,264              19,190
                                                  ------------       -----------
   Total current liabilities..................       71,384              60,629

 Deferred income taxes........................          437                 430

 Stockholders' equity:
   Preferred stock - $.10 par value; 7,000,000
     shares authorized; none issued and outstanding
   Common stock - $.01 par value; 200,000,000 
     shares authorized; 31,290,285 and 31,121,676 
     shares outstanding at June 30, 1998 and 
     December 31, 1997, respectively..........      140,481             130,741
   Retained earnings..........................        9,507               2,348
   Accumulated other comprehensive income.....       (4,791)             (4,146)
                                                  ------------       -----------
                                                    145,197             128,943
   Treasury stock, at cost; 1,098,000 and 
     820,000 shares at June 30, 1998 and
     December 31, 1997, respectively..........      (14,567)            (10,132)
                                                  ------------       -----------
   Total stockholders' equity.................      130,630             118,811
                                                  ============       ===========
     Total liabilities and stockholders' equity   $ 202,451          $  179,870
                                                  ============       ===========
</TABLE>
See accompanying notes to consolidated financial statements.
                                       3
<PAGE>



                               FILENET CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                     Three Months               Six Months
                                    Ended June 30,             Ended June 30,
                                 ---------------------     ---------------------
                                    1998      1997            1998       1997       
                                  ---------  ---------     ---------- ----------
<S>                             <C>         <C>            <C>        <C>    
Revenue:
   Software.................    $  44,403   $ 31,075       $ 87,650   $  53,157
   Service..................       29,467     23,256         52,938      41,493
   Hardware.................        6,502      8,119         13,393      15,362
                                 ---------  ---------      ---------  ----------
   Total revenue............       80,372     62,450        153,981     110,012
                                 ---------  ---------      ---------  ----------

 Costs and expenses:
   Cost of software revenue..       4,265      3,166         7,951        6,165
   Cost of service revenue...      17,967     13,765        33,313       26,896
   Cost of hardware revenue..       3,238      4,838         6,598       10,167
   Research and development..      11,820      9,593        23,894       19,733
   Selling, general and
   administrative............      37,585     31,021        74,152       60,787
   Restructuring and other 
   costs.....................                  6,000                      6,000
                                ----------  ---------      ---------  ----------
   Total costs and expenses..      74,875     68,383       145,908      129,748
                                ----------  ---------      ---------  ----------

 Operating income (loss).....       5,497     (5,933)        8,073      (19,736)

 Other income, net...........       1,031        580         2,010        1,301
                                ----------  ---------      ---------  ----------

 Income (loss) before income 
  taxes......................       6,528     (5,353)       10,083      (18,435)

 Provision (benefit) for income
  taxes......................       1,893     (1,499)        2,924       (5,161)
                                ----------  ---------      ---------  ----------

 Net income (loss)...........   $   4,635   $ (3,854)      $ 7,159    $ (13,274)
                                ==========  =========      =========  ==========

 Earnings (loss) per share:
   Basic.....................   $    0.15   $  (0.13)      $  0.23    $   (0.44)
   Diluted...................   $    0.14   $  (0.13)      $  0.21    $   (0.44)

 Weighted average shares outstanding:            
   Basic.....................      30,801     30,390        30,501       30,240
   Diluted...................      34,097     30,390        33,530       30,240

</TABLE>
See accompanying notes to consolidated financial statements.

                                       4
<PAGE>



                               FILENET CORPORATION
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                         Three Months             Six Months
                                         Ended June 30,          Ended June 30,
                                     -------------------       -----------------
                                        1998       1997         1998       1997
                                     -----------  --------    --------  --------
<S>                                  <C>          <C>         <C>      <C>   

 Net income (loss)...............    $    4,635   $(3,854)   $ 7,159   $(13,274)
                                     -----------  --------    -------- ---------

 Other comprehensive income:
   Foreign currency translation
     adjustments, net of tax.....         1,064    (1,553)      (652)    (3,818)
   Unrealized gains (losses) on 
   securities:
      Unrealized holding gains
       (losses)arising during period,
        net of tax...............             7        42         12         (9)
      Reclassification adjustment for
       losses included in net income, 
       net of tax................                                 (5)
                                     -----------  --------    --------  --------
 Total other comprehensive income 
   (loss)........................         1,071    (1,511)      (645)    (3,827)
                                     -----------  ---------   --------  --------

 Comprehensive income (loss).....   $     5,706  $ (5,365)   $  6,514  $(17,101)
                                     ===========  =========   ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.

                                       5
<PAGE>
                               FILENET CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                             Six Months Ended June 30,
                                        --------------------------------------
                                               1998                1997
                                        ------------------   -----------------
<S>                                     <C>                 <C>
 Cash flows from operating activities:
 Net income (loss)....................  $     7,159         $     (13,274)
 Adjustments to reconcile net income 
   (loss) to net cash  provided by 
   operating activities:
     Depreciation and amortization....        7,109                 6,689
     Provision for doubtful accounts..          377
     Deferred income taxes............          575                  (429)
     Changes in operating assets and
      liabilities:
       Accounts receivable............       (9,325)               29,580
       Inventories....................          386                 2,852
       Prepaid expenses and other 
       current assets.................          764                   145
       Accounts payable...............        1,201                (7,457)
       Accrued compensation...........        2,551                 2,430
       Unearned maintenance revenue...        6,665                 1,921
       Accrued royalties..............         (651)               (1,647)
       Other..........................          881                (4,442)
 Net cash provided by operating         ------------------   ----------------- 
   activities.........................       17,692                16,368
                                        ------------------   -----------------

 Cash flows from investing activities:
 Proceeds from sale of equipment......          422                   124
 Capital expenditures.................      (13,586)               (6,930)
 Purchases of marketable securities...      (21,065)              (16,215)
 Proceeds from sales and maturities
   of marketable securities...........       24,113                19,170
                                        ------------------   -----------------
 Net cash used by investing activities      (10,116)               (3,851)
                                        ------------------   -----------------

 Cash flows from financing activities:
 Proceeds from issuance of common stock       9,740                 1,497
 Common stock repurchased.............       (4,435)
                                        ------------------   -----------------
 Net cash provided by financing 
  activities..........................        5,305                 1,497
                                        ------------------   -----------------

 Effect of exchange rate changes on 
   cash and cash equivalents..........         (124)               (2,535)
                                        ------------------   -----------------

 Net increase in cash and cash 
   equivalents........................       12,757                11,479
 Cash and cash equivalents, beginning 
   of year............................       37,344                28,530
                                        ==================   =================
 Cash and cash equivalents, 
   end of period......................  $    50,101          $     40,009
                                        ==================   =================

 Supplemental cash flow information:
 Interest paid........................  $        60          $        160
 Income taxes paid....................  $       516          $      2,461

</TABLE>
See accompanying notes to consolidated financial statements.
                                       6
<PAGE>


                               FILENET CORPORATION
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

1.       In  the  opinion  of  the  management   of  FileNET  Corporation  ("the
         Company"),   the    accompanying   unaudited   consolidated   financial
         statements  reflect   adjustments   (consisting  of   normal  recurring
         adjustments) necessary to present fairly the  financial position of the
         Company  at June  30,  1998 and  the  results  of its  operations,  its
         comprehensive  income  and its  cash  flows for the three and six month
         periods ended June 30, 1998  and 1997. 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 consolidated financial statements
         are adequate to ensure  the  information  presented is not  misleading.
         These  consolidated  financial statements should be read in conjunction
         with  the  consolidated  financial  statements and notes  thereto,  and
         Management's  Discussion  and   Analysis  of  Financial  Condition  and
         Results of Operations  contained in the Company's Annual Report on Form
         10-K for  the fiscal year ended  December  31,  1997 and the  Company's
         Quarterly  Report on Form 10-Q for  the quarter  ended March 31,  1998.
         The results of  operations for the interim  periods are not necessarily
         indicative of the operating results for the year.

2.       In May 1998,  the Company  effected a  two-for-one  split of its common
         stock.  All  references  in the  consolidated  financial  statements to
         number of shares and per share  amounts of the  Company's  common stock
         have been restated to reflect the split.

3.       Certain   reclassifications   have  been  made  to  the  prior   year's
         consolidated  financial  statements to conform with the current  year's
         presentation.

4.       The  following  table is a  reconciliation  of the  earnings  and share
         amounts used in the calculation of basic earnings per share and diluted
         earnings per share for the three and six month  periods  ended June 30,
         1998.

<TABLE>
<CAPTION>
                                                                       Per
                                               Net                     Share
(In thousands, except per share              Income        Shares      Amount
amounts)                                  -----------   -----------   ----------
<S>                                        <C>              <C>       <C>   
 Three months ended June 30, 1998
     Basic earning per share............   $  4,635         30,801    $  0.15
     Effect of dilutive stock options...                     3,296
                                           -----------   -----------
     Diluted earnings per share.........   $  4,635         34,097    $  0.14
                                           ===========   ===========

 Six months ended June 30, 1998
     Basic earning per share............   $  7,159         30,501    $  0.23
     Effect of dilutive stock options...                     3,029
                                           -----------   -----------
     Diluted earnings per share.........   $  7,159         33,530    $  0.21
                                           ===========   ===========
</TABLE>

         The weighted average number of shares  outstanding during the three and
         six month periods ended June 30, 1997 was  30,390,000  and  30,240,000,
         respectively.   Options  to  purchase   shares  of  common  stock  were
         outstanding   during  these  periods  but  were  not  included  in  the
         computation   of  diluted   loss  per  share,   as  their   effect  was
         antidilutive.

                                       7
<PAGE>



5.       In June 1997, the Financial  Accounting  Standards  Board (FASB) issued
         Statement of Financial  Accounting  Standard (SFAS) No. 130, "Reporting
         Comprehensive  Income."  SFAS No. 130  requires  enterprises  to report
         comprehensive  income and its components in  general-purpose  financial
         statements. SFAS No. 130 is effective for the Company beginning January
         1,  1998.   Accordingly,   the  Company  has  prepared   Statements  of
         Comprehensive Income for the three and six month periods ended June 30,
         1998 and  1997  (restatement  of prior  year  financial  statements  is
         required by SFAS No. 130). Accumulated other comprehensive income as of
         June 30, 1998 is comprised of the following:

<TABLE>
<CAPTION>
                                                                    Accumulated
                                                 Unrealized Gain       Other
                                   Foreign        on Marketable    Comprehensive
 (In thousands)                 Currency Items     Securities         Income
                               --------------   --------------     ------------
 <S>                            <C>              <C>               <C>    
 Balance, December 31, 1997     $  (4,121)       $     (25)        $ (4,146)
                                               
 Current period changes              (652)               7             (645)
                               --------------   --------------     ------------
 Balance, June 30, 1998         $  (4,773)       $     (18)        $ (4,791)
                               ==============   ==============     ============
</TABLE>

6.       In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
         of an Enterprise  and Related  Information"; which is effective for the
         year ending  December 31, 1998.  The Company has not yet determined the
         impact, if any, of adopting this standard on its financial statements.

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

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

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

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

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


                                       8
<PAGE>
         
         Orange  (the State Action).  The action was purportedly filed on behalf
         of a  class of  purchasers  of the  Company's  common  stock during the
         period  October 19, 1995  through July 2, 1996.  The Plaintiff  alleges
         that the Company and  other defendants  violated Cal. Corp. Code ss.ss.
         25400 and 25500, Cal. Civ. Code ss.ss. 1709-1710  and Cal. Bus. & Prof.
         Code ss.ss. 17200 et seq. in connection  with various public statements
         made by the Company and certain of its  officers and  directors  during
         the   putative   class   period.   The  complaint   seeks   unspecified
         compensatory  and  punitive  damages,  interest,  payment of attorney's
         fees and costs, and equitable or injunctive relief.

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

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

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

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

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

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




                                       9
<PAGE>


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

The following  should be read in  conjunction  with the  unaudited  consolidated
financial  statements  and notes thereto  included in Part I--Item 1 and Factors
That May Affect Future Results in this item of this Quarterly  Report,  and with
the  audited  consolidated   financial   statements,   and  notes  thereto,  and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.

Results of Operations

Revenue
<TABLE>
<CAPTION>
                                 Three Months                 Six Months
                                Ended June 30,              Ended June 30,
                            --------------------------   -----------------------
                              1998     1997   Change      1998    1997  Change
                            --------- ------- -------    -------  ----- -------
<S>                         <C>       <C>      <C>       <C>      <C>     <C>
(Dollars in millions)
 Software revenue              
   Domestic                 $  26.7   $ 23.3    15%      $ 56.2   $ 36.4   54%
   International               17.7      7.8   127%        31.4     16.7   88%
                            -------   -------            -------  -------
 Total software revenue     $  44.4     31.1    43%      $ 87.6   $ 53.1   65%
                            -------   -------            -------  -------
     Percentage of total        
     revenue                    55%      50%                57%      48%                       

 Service revenue                
   Domestic                 $  23.2   $ 17.7    31%      $ 41.0   $ 31.9   29%
   International                6.3      5.5    15%        12.0      9.6   25%
                            --------  -------            -------  -------
 Total service revenue      $  29.5   $ 23.2    27%      $ 53.0   $ 41.5   28%
                            --------  -------            -------  -------
     Percentage of total        
     revenue                    37%      37%                34%      38%  

 Hardware revenue
   Domestic                 $   4.6   $  6.0   (23%)     $  9.6   $ 11.1  (14%)
   International                1.9      2.2   (14%)        3.8      4.3  (12%)
                            --------  -------            -------  -------
 Total hardware             $   6.5   $  8.2   (21%)     $ 13.4   $ 15.4  (13%)
   revenue                  --------  -------            -------  -------
     Percentage of total        
     revenue                     8%      13%                 9%      14%

 Total revenue
   Domestic                 $  54.5   $ 47.0    16%      $106.8   $ 79.4   35%
   International               25.9     15.5    67%        47.2     30.6   54%                                                
                            --------  -------            -------  --------   
 Total revenue              $  80.4   $ 62.5    29%      $154.0   $110.0   40%                                                   
                            ========  =======            =======  ========
</TABLE>

Software revenue from the licensing of the Company's software products increased
43% and 65% for the three and six month  periods,  respectively,  ended June 30,
1998  over  the  comparable  periods  of  1997.  The  increases  were  primarily
attributable  to an increase in the volume of product  shipments,  including the
Company's  Panagon  product line that was released  during the first  quarter of
1998.  The  magnitude  of the  increase  in year to date  revenue  over  1997 is
partially  attributable  to weakness in orders  during the first quarter of 1997
and is not necessarily indicative of future revenue growth.

Service  revenue  consists  of  revenue  from  software  maintenance   services,
professional services, training, repairs and supplies. Service revenue increased
27% and 28% for the three and six month  periods,  respectively,  ended June 30,
1998 over the comparable  periods of 1997. The increases  were  attributable  to
increased  maintenance revenue due to the growth of the Company's installed base
and to increased demand for the Company's professional service offerings.

Hardware revenue is generated primarily from the sale of 12-inch optical storage
and retrieval  libraries  (OSARs) and  third-party  hardware.  Hardware  revenue
decreased  by 21% and 13% for the  three and six  month  periods,  respectively,
ended  June 30,  1998  from the  comparable  periods  of 1997  primarily  due to
decreases in new orders  experienced both domestically and  internationally  and


                                       10
<PAGE>

the Company's  focus on  increasing  its higher margin  software  revenues.  The
Company expects hardware revenue to continue to decline in both absolute dollars
and as a percentage of total revenues as it continues to transition its business
toward software-related revenue.

International  revenues constituted  approximately 32% and 25% of total revenues
in the three month periods ended June 30, 1998 and 1997,  respectively.  For the
six  month  periods  ended  June  30,  1998  and  1997,  international  revenues
constituted  approximately  31% and 28% of  total  revenues,  respectively.  The
increases in the proportion of  international  revenues is  attributable  to the
higher level of growth experienced internationally.  A portion of this growth is
attributable  to weakness in  international  orders  during the first quarter of
1997 and is not necessarily  indicative of future international  revenue growth.
Management expects that the Company's international  operations will continue to
account  for a  significant  portion of total  revenues.  However,  the  current
economic crisis in the Asia-Pacific region could adversely affect  international
revenues. In addition, international revenues could be adversely affected if the
U.S. dollar strengthens against international currencies.


Cost of Revenue

<TABLE>
<CAPTION>
                                     Three Months             Six Months
                                    Ended June 30,           Ended June 30,
                                -----------------------   ----------------------                                    
                                 1998    1997    Change    1998    1997   Change
                                ------  ------  -------   ------  -----  -------
 <S>                            <C>     <C>       <C>     <C>     <C>     <C>
 (Dollars in millions)                       
 Cost of software revenue       $ 4.3   $ 3.2      34%    $ 8.0   $ 6.2    29%
  Percentage of software          
   revenue                        10%     10%                9%     12%

 Cost of service revenue        $18.0   $13.8      30%    $33.3   $26.9    24%
  Percentage of service           
   revenue                        61%     59%               63%     65%

 Cost of hardware revenue       $ 3.2   $ 4.8     (33%)   $ 6.6   $10.1   (35%)
  Percentage of hardware          
   revenue                        49%     59%               49%     66%         

 Total cost of revenue          $25.5   $21.8      17%    $47.9   $43.2    11%
  Percentage of total             
   revenue                        32%     35%               31%     39%        

</TABLE>

The cost of software  revenue  includes  royalties paid to third parties and the
cost of software  distribution.  The cost of software revenue as a percentage of
software revenue for the six months ended June 30, 1998 decreased to 9% from 12%
for the comparable period in 1997. The decrease is primarily attributable to the
low revenue levels in the first quarter of 1997 without a corresponding decrease
in fixed distribution costs. Also contributing to the decrease was the fact that
software  localization  costs which were  classified  as cost of revenue in 1997
have been classified as research and development in 1998.

The cost of service revenue includes software support and professional  services
personnel,  supplies, and the cost of third-party hardware maintenance. The cost
of service revenue as a percentage of service revenue for the three month period
ended June 30, 1998 increased to 61% from 59% in the comparable  period of 1997.
The  increase  is  attributable  to  the  higher   proportion  of  lower  margin
professional  services in the service  revenue mix. The cost of service  revenue
for the six month period  ended June 30, 1998  decreased to 63% from 65% for the
comparable   period  of  1997.   This  decrease  is   attributable  to  improved
international margins from those experienced in the first quarter of 1997.

The  cost  of  hardware  revenue  includes  the  cost  of  manufacturing  OSARs;
third-party  purchased hardware and the cost of hardware integration  personnel.
The cost of hardware  revenue as a percentage of hardware  revenue for the three
month  period ended June 30, 1998  decreased to 49% from 59% for the  comparable
period of 1997.  For the six month period ended June 30, 1998,  cost of hardware
revenue  decreased  to 49% from 66% for the  comparable  period  of 1997.  These
decreases   were  due  to  improved   product  mix  and  a  reduction  in  fixed
manufacturing costs.

                                       11
<PAGE>

Operating Expenses

<TABLE>
<CAPTION>
                                 Three Months                Six Months
                                Ended June 30,              Ended June 30,
                           -----------------------   ---------------------------
                            1998     1997   Change     1998      1997    Change
                           -------  ------ -------   --------  -------  --------
<S>                        <C>      <C>       <C>     <C>       <C>        <C>
(Dollars in millions)  
Research and 
   development             $ 11.8   $  9.6    23%     $ 23.9    $ 19.7     21%  
  Percentage of total         15%      15%               16%       18%
   revenue            
 Selling, general and
    administrative         $ 37.6   $ 31.0    21%     $ 74.1    $ 60.8     22%      
  Percentage of total         47%      50%               48%       55%
   revenue             
</TABLE>

Research and  development  expenses  increased 23% and 21% for the three and six
month  periods  ended June 30, 1998,  respectively,  compared to the  comparable
periods of 1997.  The increases  were due to a general  increase in salaries and
recruiting  costs  necessitated  by  the  intense  competitive  environment  for
software engineers;  increase in cost of contract developers;  and the inclusion
of  software  localization  costs in  research  and  development  in 1998.  As a
percentage of total revenue,  research and development expenses decreased to 16%
for the six month period ended June 30, 1998 from 18% for the comparable  period
of 1997.  This  decrease is primarily  attributable  to the effects of the lower
revenue levels in the first quarter of 1997.

The Company  expects that  competition  for qualified  technical  personnel will
remain  intense for the  foreseeable  future and may result in higher  levels of
compensation  expense for the Company.  The Company  believes  that research and
development  expenditures,  including  compensation of technical personnel,  are
essential to  maintaining  its  competitive  position and expects these costs to
continue to constitute a significant percentage of revenues.

Selling, general and administrative expenses increased 21% and 22% for the three
and six  month  periods  ended  June 30,  1998,  respectively,  compared  to the
comparable periods of 1997. This increase was primarily due to overall increases
in salaries,  higher sales incentive compensation due to increased revenues, and
increased  marketing  program costs. As a percentage of total revenue,  selling,
general and  administrative  expenses  decreased to 48% for the six months ended
June 30, 1998 from 55% for the  comparable  period of 1997  primarily due to the
lower revenue levels in the first quarter of 1997.

Provision for Income Taxes - The Company's combined  federal,  state and foreign
annual  effective  tax  rate for the six  months  ended  June  30,  1998 was 29%
(expense)  compared to 28%  (benefit)  for the  comparable  period in 1997.  The
increase in the rate is attributable  to a decrease in taxable income  generated
in lower tax jurisdictions outside of North America.

Foreign Currency Fluctuations and Inflation - The  Company's  performance can be
affected by changes in foreign  currency  values  relative to the U.S. dollar in
relation to the  Company's  revenue and  operating  expenses.  The impact to net
income from foreign exchange  transactions and hedging  activities is immaterial
for all periods reported.  As of June 30, 1998, the Company had forward exchange
contracts outstanding totaling approximately $8 million in 12 currencies. All of
these contracts mature in three months.

Other  comprehensive  income for the six months  ended June 30, 1998  reflects a
$652,000  increase in the unrealized loss due to foreign  currency  translation.
This increase was primarily  attributable to unrealized  losses  associated with
the weakening of the Irish currency against the U.S. dollar during the period.

Management  believes  that  inflation  has not had a  significant  impact on the
prices of the Company's  products,  the cost of its materials,  or its operating
results for the three and six month periods ended June 30, 1998 and 1997.

Other Financial Instruments - The Company enters into forward  foreign  exchange
contracts as a hedge against effects of fluctuating  currency  exchange rates on
monetary  assets  and  liabilities  denominated  in  currencies  other  than the
functional  currency of the  relevant  entity.  The Company is exposed to market
  
                                     12
<PAGE>

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.  The  counterparties  to these  instruments  are major
financial institutions.  The Company uses commercial rating agencies to evaluate
the credit quality of the counterparties,  and the Company does not anticipate a
loss resulting from any credit risk of these institutions.

Liquidity and Capital Resources

At June 30, 1998,  combined  cash,  cash  equivalents  and short- and  long-term
marketable  securities  totaled $81.6 million,  an increase of $9.8 million from
the end of 1997.  Cash  provided by operating  activities  during the six months
ended June 30, 1998  totaled  $17.7  million  and  resulted  primarily  from net
income;  an  increase  in  accounts  payable   associated  with  higher  capital
expenditures;  an increase in accrued compensation related to sales commissions;
an increase in unearned  maintenance  revenue related to growth in the Company's
installed base; and additions to net income for  depreciation  and  amortization
expense.  These  operating  cash  inflows were offset by an increase in accounts
receivable.  Cash used by investing  activities  totaled $10.1 million and was a
result  of sales and  maturities  of  marketable  securities  offset by  capital
expenditures. Cash provided by financing activities totaled $5.3 million and was
a result of proceeds  received  from the exercise of employee  stock options and
purchases  under the employee  stock  purchase plan offset by the  repurchase of
139,000 shares of the Company's common stock.

Accounts  receivable  increased  to $69.8  million  at June 30,  1998 from $61.3
million at December 31, 1997. Days sales outstanding  increased to 77 days as of
June 30, 1998 from 72 days as of December  31, 1997  primarily  due to delays in
collections by resellers from their customers.  Current liabilities increased to
$71.4  million at June 30, 1998 from $60.6  million at December  31,  1997.  The
increase is primarily a result of increases in deferred  maintenance revenue and
accrued incentive compensation.

The Company has a $20 million  unsecured line of credit with a commercial  bank.
This line of credit  expires in May 1999 and is subject  to the  maintenance  of
certain financial covenants. The Company also has several borrowing arrangements
with  foreign  banks that  expire at various  times  during 1998 under which the
Company may borrow  approximately $2 million. As of June 30, 1998, there were no
borrowings outstanding against any of the Company's credit lines.

During the first quarter of 1998,  the Company  repurchased  $4.4 million of its
common stock,  thereby  completing  its  previously  announced $10 million stock
repurchase program.

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

Other Matters

Year 2000 - The Company is assessing  the  internal  readiness  of its  computer
systems  for  handling  the  year  2000.   The  Company   expects  to  implement
successfully the systems and programming  changes necessary to address year 2000
issues with respect to its  internal  systems and does not believe that the cost
of such actions will have a material  adverse effect on its financial  condition
or results of  operations.  Although  the  Company is not aware of any  material
operational  issue or costs  associated with preparing its internal  systems for
the year 2000,  there can be no assurance  that there will not be a delay in, or
increased costs associated with, the implementation of the necessary systems and
changes  to  address  the year  2000  issues,  and the  Company's  inability  to
implement  such  systems  and  changes  could have an  adverse  effect on future
results of operations.

Environmental Matters - The  Company  is not  aware  of any  issues  related  to
environmental  matters  that have,  or are expected  to,  materially  affect its
business.

                                       13

<PAGE>

Factors That May Affect Future Results

The  Company's  business,  financial  condition  and  operating  results  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 the Company's
actual  results to differ  materially  from recent results or from the Company's
anticipated future results.

Rapid Technological Change; Product Development - The  market for  the Company's
products is characterized by rapid technological developments, evolving industry
standards,   changes  in  customer   requirements   and   frequent  new  product
introductions  and  enhancements.   The  Company's  continued  success  will  be
dependent upon its ability to continue to enhance its existing products, develop
and introduce,  in a timely  manner,  new products  incorporating  technological
advances  and respond to customer  requirements,  including  without  limitation
enhancements to certain specified Company software products to achieve year 2000
compliance.  The Company could  experience  difficulties or delays in developing
and introducing new products or integrating some or all of the technologies  and
products from  acquisitions with the technologies and products from the Company.
Delays in or non-completion of the development of newly integrated products,  or
lack of market acceptance of such products,  could have an adverse impact on the
Company's  future  results of operations  and result in a failure to realize the
anticipated  benefits  of the  acquisitions.  To the  extent  one or more of the
Company's  competitors  introduce  products  that more  fully  address  customer
requirements,  the Company's business could be adversely affected.  There can be
no assurance  that the Company will be successful  in  developing  and marketing
enhancements to its existing  products or new products on a timely basis or that
any new or enhanced  products will adequately  address the changing needs of the
marketplace.  If the Company is unable to develop and  introduce new products or
enhancements  to existing  products  in a timely  manner in response to changing
market  conditions  or  customer   requirements   including  without  limitation
enhancements  to  certain  existing  software  products  to  achieve  year  2000
compliance,  the  Company's  business and  operating  results could be adversely
affected.  From time to time,  the Company or its  competitors  may announce new
products,  capabilities  or  technologies  that have the potential to replace or
shorten  the life cycles of the  Company's  existing  products.  There can be no
assurance that announcements of currently planned or other new products will not
cause  customers to delay their  purchasing  decisions in  anticipation  of such
products,  which could have a material adverse effect on the Company's  business
and operating results.

Uncertainty Of Future  Operating  Results;  Fluctuations In Quarterly  Operating
Results - Prior  growth rates in the  Company's  revenue and  operating  results
should not necessarily  be considered indicative of  future growth or  operating
results.  Future  operating results will depend upon many factors, including the
demand for the Company's  products,  the effectiveness of the  Company's efforts
to continue to  integrate  various products it has developed or acquired through
acquisition of others and to achieve  the  desired  levels  of sales  from  such
product integration,  the level of product and price competition,  the length of
the Company's sales cycle,  seasonality of individual customer  buying patterns,
the  size  and  timing  of  individual  transactions,  the  delay or deferral of
customer  implementations,  the budget  cycles of the  Company's  customers, the
timing of new product introductions and product enhancements by the Company  and
its  competitors,  the  mix  of  sales  by  products,  services and distribution
channels, levels of international sales, acquisitions by competitors, changes in
foreign  currency  exchange  rates,  the  ability  of the Company to develop and
market new products  and control costs,  and general domestic  and international
economic and political  conditions.  As a result of these factors, revenues  and
operating  results  for  any  quarter  are  subject  to  variation  and  are not
predictable with any significant degree of accuracy.

Therefore, the Company believes that period-to-period comparisons of its results
of operations  are not  necessarily  meaningful and should not be relied upon as
indications  of future  performance.  Moreover,  such  factors  could  cause the
Company's  operating  results in a given quarter to be below the expectations of
public market analysts and investors. In either case, the price of the Company's
common stock could be materially adversely affected.

Competition - The document imaging, workflow, computer output  to laser disk and
document  management  software  markets  are highly  competitive,  and there are
certain competitors of the Company with substantially greater sales,  marketing,
development and financial  resources.  The Company believes that the competitive

                                       14
<PAGE>

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

Intellectual  Property and  Other  Proprietary  Rights - The  Company's  success
depends  in  part on  its  ability  to  protect  its  proprietary  rights to the
technologies used in its principal products. The Company relies on a combination
of copyrights, trademarks,  trade   secrets,   confidentiality   procedures  and
contractual  provisions  to  protect  its  proprietary  rights.  There can be no
assurance that the Company's  existing or future copyrights,  trademarks,  trade
secrets or other  intellectual  property  rights will be of sufficient  scope or
strength  to  provide  meaningful  protection  or  commercial  advantage  to the
Company.  FileNET  has no  software  patents.  Also,  in selling  certain of its
products,  the Company  relies on "shrink wrap"  licenses that are not signed by
licensees  and,  therefore,  may be  unenforceable  under  the  laws of  certain
jurisdictions.  In addition,  the laws of some foreign  countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States.  There can be no assurance  that such factors  would not have a material
adverse effect on the Company's business or operating results.

The  Company  may from time to time be notified  that it is  infringing  certain
patent or  intellectual  property  rights of others.  Combinations of technology
acquired through past or future  acquisitions and the Company's  technology will
create new products and technology that may give rise to claims of infringement.
While no  actions  other than the ones  discussed  below are  currently  pending
against the Company for  infringement of patent or other  proprietary  rights of
third  parties,  there can be no assurance  that third parties will not initiate
infringement actions against the Company in the future. Infringement actions can
result in substantial cost to and diversion of resources of the Company.  If the
Company were found to infringe  upon the rights of others,  no assurance  can be
given that licenses  would be  obtainable  on  acceptable  terms or at all, that
significant  damages for past infringement would not be assessed or that further
litigation  relative to any such licenses or usage would not occur.  The failure
to successfully  defend any claims or obtain necessary licenses or other rights,
the ultimate  disposition of any claims or the advent of litigation  arising out
of any  claims of  infringement,  could have a  material  adverse  effect on the
Company's business, financial condition or results of operations.

In October 1994,  Wang filed a complaint in the United States District Court for
the  District of  Massachusetts  alleging  that the Company is  infringing  five
patents held by Wang. On June 23, 1995, Wang amended its complaint to include an
additional  related patent.  On July 2, 1996, Wang filed a complaint in the same
court  alleging that  Watermark,  formerly a  wholly-owned  subsidiary  that was
merged into the Company, is infringing three of the same patents asserted in the
initial  complaint.  On October 9, 1996, Wang withdrew its claim that one of the
patents it initially  asserted is infringed by the Company's  products that were
commercialized  before the initial  complaint was filed. Wang reserved the right
to assert that patent against the Company's products  commercialized  after that
date in a  separate  lawsuit.  Based on the  Company's  analysis  of these  Wang
patents and their  respective file histories,  the Company  believes that it has
meritorious  defenses to Wang's  claims;  however,  the ultimate  outcome or any
resulting potential loss cannot be determined at this time.

In March 1997,  Eastman  Kodak  Company  ("Kodak")  purchased  the Wang  imaging
business unit that has  responsibility  for this litigation.  The patents in the
suit have been  transferred  to a Kodak  subsidiary,  Kodak  Limited of England,
which in turn has exclusively licensed them to another Kodak subsidiary, Eastman
Software,  Inc. in the United  States.  On July 30,  1997,  the Court  permitted
Eastman  Software,  Inc. and Kodak Limited of England to be  substituted  in the
litigation in place of Wang.  The Company  cannot  predict what impact,  if any,
this will have on the litigation.

                                       15
<PAGE>
If it should be determined that the patents at issue in the litigation are valid
and  are  infringed  by any  of  the  Company's  products,  including  Watermark
products,  the Company will,  depending on the product,  redesign the infringing
products  or seek to obtain a license  to market the  products.  There can be no
assurance  that the Company will be able to obtain such a license on  acceptable
terms.

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

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

International Sales - Historically,   the  Company  has  derived   approximately
one-third of its total revenues from international sales. International business
is subject to certain risks including varying technical  standards,  tariffs and
trade  barriers,  political and economic  instability,  reduced  protection  for
intellectual property rights in certain countries,  difficulties in staffing and
maintaining foreign operations,  difficulties in managing foreign  distributors,
potentially adverse tax consequences, currency exchange fluctuations, the burden
of  complying  with  a  wide  variety  of  complex  operations,   foreign  laws,
regulations  and treaties and the  possibility  of  difficulties  in  collecting
accounts  receivable.  There can be no assurance  that any of these factors will
not have a  material  adverse  effect on the  Company's  business  or  operating
results.

Product Liability - The Company's  license  agreements  with customers typically
contain  provisions  designed  to limit  their  exposure  to  potential  product
liability  claims.  However,  it is possible  that such  limitation of liability
provisions  may  not be  effective  under  the  laws of  certain  jurisdictions.
Although the Company has not experienced any product  liability  claims to date,
the sale and support of products by them may entail the risk of such claims, and
there can be no assurance that the Company will not be subject to such claims in
the future.  A successful  product  liability  claim brought against the Company
could have a material  adverse  effect upon the  Company's  business,  operating
results and financial condition.

Stock Price Volatility - The Company  believes  that a variety of factors  could
cause the trading price of its common stock to fluctuate, perhaps substantially,
including quarter-to-quarter  variations in operating results;  announcements of
developments related to its business;  fluctuations in its order levels; general
conditions in the technology sector or the worldwide  economy;  announcements of
technological  innovations,  new products or product enhancements by the Company
or its  competitors;  key  management  changes;  changes in joint  marketing and
development  programs;  developments  relating to patents or other  intellectual
property rights or disputes;  and  developments  in the Company's  relationships
with its customers, distributors and suppliers. In addition, in recent years the
stock market in general,  and the market for shares of high technology stocks in
particular,  has experienced  extreme price  fluctuations  which have often been
unrelated to the operating performance of affected companies.  Such fluctuations
could adversely affect the trading price of the Company's common stock.
                                       16

<PAGE>


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

See Notes to Consolidated Financial Statements.

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

(a)  The  1998  Annual   Meeting  of  Stockholders  of  the  Company was held at
     9:00 a.m. on May 15, 1998, in Costa Mesa, California.

(b)  At the meeting the following four individuals were elected to the Company's
     Board of Directors, constituting all members of the Board of Directors:
        
        Nominee               Affirmative Votes     Votes Withheld
        -------------------- ---------------------------------------------
        William P. Lyons        12,881,792               339,686
        --------------------- ------------------ -------------------------
        Lee D. Roberts          12,888,774               332,704
        --------------------- ------------------ -------------------------
        John C. Savage          12,888,639               332,839
        --------------------- ------------------ -------------------------
        Theodore J. Smith       12,882,733               338,745
        --------------------- ------------------ -------------------------

(c)  The Company's stockholders were asked to  approve a series of amendments to
     the  Company's  1995  Stock  Option  Plan (the "1995 Plan") to increase the
     number  of shares  of  Common Stock  issuable  under  the  1995  plan by an
     additional 600,000 shares and to revise certain provisions of the Automatic
     Option  Grant  Program.  This proposal was approved in  accordance with the
     following vote of stockholders:
                                                                 Broker
       Votes For           Votes Against       Abstentions       Non-Votes
       ----------------    ----------------    --------------    --------------
       9,205,803           3,918,774           96,901            0
       
(d)  The Company's  stockholders were asked to approve the implementation of the
     1998  Employee  Stock  Purchase  Plan  as  the  successor  to the Company's
     existing  1988 Employee Qualified Stock Purchase Plan.  This  proposal  was
     approved in accordance with the following vote of stockholders:

                                                                 Broker
       Votes For           Votes Against       Abstentions       Non-Votes
       ----------------    ----------------    --------------    --------------
       12,711,169          418,392             91,917            0
       
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 second quarter of 1998.




                                       17
<PAGE>


                                    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

August 14, 1998     By:_________________________________________________________
Date                   Mark S. St. Clare, Chief Financial Officer and
                       Sr. Vice President, Finance (Principal Financial Officer)




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<PAGE>
                                INDEX TO EXHIBITS

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

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

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

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

4.1*      Form of  certificate evidencing  Common Stock (filed as Exhibit 4.1 to
          the Form S-1, Registration No. 33-15004).

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

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

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

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

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

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

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

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

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

10.9      Amended and Restated 1995 Stock Option Plan of FileNET Corporation  as
          approved by stockholders at the Registrant's Annual Meeting on May 15,
          1998. (filed as Appendix A to the Registrant's Proxy Statement for the
          Registrant's  1998  Annual  Meeting of Stockholders, filed on April 6,
          1998).
--------------------------------------------   
*  Incorporated herein by reference

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<PAGE>

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

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

10.11*    Non-Statutory Stock Option  Agreement  (with  Notice of Grant of Stock
          Option and  Special  Addendum) between  Registrant and Mr. Lee Roberts
          (filed as exhibit 99.17 to Form S-8 on August 20, 1997).

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

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

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

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

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

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

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

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

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

10.21     1998 Employee Stock Purchase Plan  as approved by  stockholders at the
          Registrant's Annual Meeting  on May 15, 1998.  (filed as Appendix B to
          the Registrant's  Proxy Statement  for the  Registrant's  1998  Annual
          Meeting of Stockholders, filed on April 6, 1998).

27        Financial Data Schedule.
---------------------------------------------
* Incorporated herein by reference

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