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, 1999

                                       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 of           (I.R.S. Employer Identification No.)
  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 April 30, 1999, there were 31,949,295  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  March 31, 1999 (unaudited) and December 31, 1998.........   3

          Consolidated Statements of Operations (unaudited)
          for the three month periods ended March 31, 1999 and 1998.......   4

          Consolidated Statements of Comprehensive Operations (unaudited)
          for the three month periods ended March 31, 1999 and 1998.......   5

          Consolidated Statements of Cash Flows (unaudited)
          for the three month periods ended March 31, 1999 and 1998.......   6

          Notes to Consolidated Financial Statements (unaudited)..........   7

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

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings...............................................  19

Item 6.   Exhibits and Reports on Form 8-K................................  19

          SIGNATURE.......................................................  20

          INDEX TO EXHIBITS...............................................  21


                                       2
<PAGE>


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

                                                    March 31,      December 31,
                                                      1999            1998
                                                  ------------    -------------
                                                  (Unaudited)
ASSETS
 Current assets:
   Cash and short-term marketable securities     $   60,520        $   71,304
   Accounts receivable, net                          60,381            61,636
   Inventories                                        1,716             2,419
   Prepaid expenses and other current assets          7,737             8,865
                                                 -----------       -----------
   Total current assets                             130,354           144,224

 Property, net                                       43,573            44,177
 Long-term marketable securities                     21,444            10,885
 Deferred income taxes                                6,393             6,385
 Other assets                                         1,244             1,151
                                                 -----------       -----------
     Total assets                                $  203,008        $  206,822
                                                 ===========       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
   Accounts payable                              $   12,822        $   21,022
   Accrued compensation and benefits                 18,183            22,165
   Unearned maintenance revenue                      13,656            11,238
   Accrued royalties                                  1,808             1,459
    Deferred income taxes                               949               942
   Other accrued liabilities                         25,155            19,676
                                                 -----------       -----------
   Total current liabilities                         72,573            76,502

 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; 
     33,032,355 and 32,924,950 shares outstanding
     at March 31, 1999 and December 31, 1998,
     respectively                                   144,979           144,242
   Retained earnings                                  5,351             3,304
   Accumulated other comprehensive operations        (5,328)           (2,659)
                                                 -----------       -----------
                                                    145,002           144,887
  Treasury stock, at cost; 1,098,000 shares
     at March 31, 1999 and December 31, 1998
     respectively                                   (14,567)          (14,567)
                                                 -----------       -----------
   Total stockholders' equity                       130,435           130,320
                                                 -----------       -----------

     Total liabilities and stockholders'
     equity                                      $  203,008           206,822
                                                 ===========       ===========

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>



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


                                               Three Month Ended March 31,
                                          -------------------------------------
                                                1999                 1998
                                          -----------------    ----------------
                                            (Unaudited)          (Unaudited)
        Revenue:
          Software                             $    41,984        $    43,247
          Service                                   33,427             23,471
          Hardware                                   6,031              6,891
                                               ------------       ------------
          Total revenue                             81,442             73,609

        Costs and expenses:
          Cost of software revenue                   3,961              3,686
          Cost of service revenue                   20,304             14,346
          Cost of hardware revenue                   3,166              3,360
          Research and development                  13,102             12,074
          Selling, general and 
            administrative                          39,445             37,567
                                               ------------    ---------------
          Total costs and expenses                  79,978             71,033
                                          -----------------    ---------------

        Operating income                             1,464              2,576

        Other income, net                            1,461                979
                                          -----------------    ---------------

        Income  before income taxes                  2,925              3,555

        Provision  for income taxes                    877              1,031
                                          -----------------    ---------------

        Net income                              $    2,048         $    2,524
                                          =================    ===============

        Earnings  per share:
          Basic                                 $     0.06         $     0.08
          Diluted                               $     0.06         $     0.08

        Weighted average shares 
         outstanding:
          Basic                                     31,915             30,204
          Diluted                                   32,554             32,962

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>



                               FILENET CORPORATION
               CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
                                 (In thousands)



                                                  Three Months Ended March 31,
                                             -----------------------------------
                                                    1999              1998
                                             -----------------   ---------------
                                                 (Unaudited)      (Unaudited)

Net income                                     $     2,048       $    2,524

Other comprehensive income (loss):
 Foreign currency translation adjustments
  (net of tax benefit of $1,779 and $1,147
  in 1999 and 1998, respectively)                   (2,653)          (1,721)
 Unrealized gains (losses) on securities:
 Unrealized holding gains (losses) arising
  during period (net of tax effect of $(11)
  and $3 in 1999 and 1998, respectively)               (16)               5
                                               --------------    ------------

 Total other comprehensive loss                     (2,669)          (1,716)
                                               --------------    ------------

 Comprehensive income (loss)                   $      (621)             808
                                               ==============    ============

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

                               FILENET CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

                                                     Quarter Ended March 31,
                                                 -------------------------------
                                                     1999             1998
                                                 -------------      ------------
                                                  (Unaudited)       (Unaudited)
 Cash flows from operating activities:
 Net income                                      $    2,048         $   2,524
 Adjustments to reconcile net loss to net
   cash provided by (used by)operating
   activities:
     Depreciation and amortization                    4,323             3,431
     Provision for doubtful accounts                     43               447
     Deferred income taxes                               15               300
     Changes in operating assets and 
       liabilities, net of acquisition:
       Accounts receivable                             (492)           (2,039)
       Inventories                                      703               558
       Prepaid expenses and other
         current assets                                 911              (730)
       Accounts payable                              (8,039)            2,915
       Accrued compensation                          (3,720)             (541)
       Unearned maintenance revenue                   2,474             4,472
       Accrued royalties                                350              (595)
       Other                                          7,818             4,052
                                                 -------------      ------------
 Net cash provided by (used by) operating
  activities                                          6,434            14,794
                                                 -------------      ------------

 Cash flows from investing activities:
 Capital expenditures                                (4,220)           (7,436)
 Proceeds from sale of property                          37               314
 Purchases of marketable securities                 (16,844)                0
 Proceeds from sales and maturities of 
  marketable securities                               5,500            11,345
                                                 -------------      ------------
 Net cash used by investing activities              (15,527)            4,223
                                                 -------------      ------------

 Cash flows from financing activities:
 Proceeds from issuance of common stock                 738             3,291
 Common stock repurchased                                 0            (4,435)
                                                 -------------      ------------
 Net cash provided by(used by)financing
  activities                                            738            (1,144)
                                                 -------------      ------------

 Effect of exchange rate changes on cash 
  and cash equivalents                               (1,246)           (1,384)
                                                 -------------      ------------

 Net increase (decrease) in cash and 
  cash equivalents                                   (9,601)           16,489
 Cash and cash equivalents, beginning 
  of year                                            55,820            37,344
                                                 =============      ============
 Cash and cash equivalents, end of period        $   46,219         $  53,833
                                                 =============      ============

 Supplemental cash flow information:
 Interest paid                                   $        6         $       8
 Income taxes paid                               $     (483)        $  (2,066)

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 March 31, 1999 and
     the results of its operations,  its comprehensive income and its cash flows
     for the  three  month  periods  ended  March  31,  1999 and  1998.  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,  1998 filed by the  Company  with the SEC on March 30,
     1999. 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 months ended March 31, 1999.
<TABLE>
<CAPTION>
    (In thousands, except per share amounts)       Net Income         Shares        Per Share
                                                                                      Amount
                                                   ------------     ------------   -----------
      <S>                                          <C>              <C>               <C>
      Three months ended March 31, 1999
              Basic earning per share              $  2,048             31,915        $  0.06
              Effect of dilutive stock options                            639
                                                   ------------     ------------
              Diluted earnings per share           $  2,048             32,554        $  0.06
                                                   ============     ============
</TABLE>
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
     Operations for the three months ended March 31, 1999  (restatement of prior
     year financial  statements is required by SFAS No. 130).  Accumulated other
     comprehensive  operations  as  of  March  31,  1999  is  comprised  of  the
     following:
<TABLE>
<CAPTION>
                                                                               Accumulated
                                 Foreign Currency         Unrealized              Other
                                   Translation              Holding            Comprehensive
(In thousands)                      Adjustment           Gains (Losses)          Operations
                                 -----------------      -----------------     ----------------
<S>                              <C>                    <C>                   <C>
 Balance, December 31, 1998       $    (2,667)          $            8        $      (2,659)
 Current period changes                (2,653)                     (16)              (2,669)
                                 -----------------      -----------------     ----------------
 Balance, March 31, 1999          $    (5,320)          $           (8)              (5,328)
                                 =================      =================     ================
</TABLE>

6.   In June 1998,  the FASB  issued SFAS No. 133,  "Accounting  for  Derivative
     Instruments  and Hedging  Activities,"  which is effective for fiscal years
     beginning  after June 15, 1999. SFAS 133 will require the Company to record
     all derivatives on the balance sheet at fair value.  For  derivatives  that
     are hedges,  changes in the fair value of derivatives will be offset by the
     change  in  fair  value  of  the  hedged  assets,   liabilities,   or  firm
     commitments. The Company believes the impact of adopting this standard will
     not be material to its results of  operations  or equity.  The Company will
     continue to evaluate the adoption of such pronouncement.

                                       7
<PAGE>
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 Software,  Inc., formerly a wholly owned
     subsidiary  that was merged into the Company,  is  infringing  three of the
     same patents  asserted in the initial  complaint (the Watermark  Case).  On
     October 9, 1996,  Wang  withdrew  its claim in the FileNET Case that one of
     the patents it initially  asserted is infringed by certain of the Company's
     products which 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.

     The Company 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 the
     Company's unenforceability defense on one of the patents. In July 1998, the
     Magistrate Judge assigned to the case heard oral arguments on the Company's
     motion for summary  judgement that U.S.  Patent  4,918,588 is not infringed
     and is invalid. The Magistrate Judge has not yet decided these motions. The
     Company  believes  that after he has ruled on these  motions,  he will hear
     oral arguments in the remaining  motions in the sequence in which they were
     filed. A trial date has not been set.

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

     On October 27,  1998,  plaintiff  Thomas P.  Nyquist  filed a 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 Nyquist Federal Action). The action was purportedly filed on behalf of
     a class of purchasers of the Company's common stock during the period April
     16, 1998  through  October 7, 1998.  The  plaintiff  alleges  claims  under
     Sections 10(b) and 20(a) of the  Securities  Exchange Act and Rule 10b-5 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  damages,  interest,  attorneys'
     fees,  expert witness fees and costs.  Plaintiff has filed a motion for the
     appointment  of lead  plaintiffs  and  consolidation  of any future related
     actions.  Defendants  have not yet responded to the complaint.  The Company
     believes  that all of the  allegations  contained  in the  Nyquist  Federal
     Action are  without  merit and  intends to defend the  actions  vigorously;
     however,  the ultimate  outcome or any resulting  potential  loss cannot be
     determined at this time.

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

8.   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.  SFAS No. 131  requires  enterprises  to report
     selected   information   about  an  enterprise's   operating   segments  in
     general-purpose  financial  statements.  SFAS No. 131 is effective  for the
     Company  beginning January 1, 1998.  Accordingly,  the Company has prepared
     operating  segment  information  to report  components  that are  evaluated
     regularly by the Company's chief operating  decision-makers in deciding how
     to allocate resources and in assessing performance.  The operating segments
     are managed separately because each segment represents a strategic business
     unit that  offers  different  products  or  services.  The  results  of the
     segments  reflect  allocation  of  certain  functional  expense  categories

                                       8
<PAGE>
     consistent  with  its  internal  reporting  which  are not the same as GAAP
     reporting.  Operating segments data for the three month periods ended March
     31, 1999 and March 31, 1998 is as follows:


                                                 Three Months Ended March 31,
                                             -----------------------------------
     In thousands                                 1999                1998
                                             ----------------     --------------
     Software
       Revenue                               $    41,984          $    43,247
       Income (loss) before other income          (3,840)                 (49)

     Hardware
       Revenue                               $     6,031          $     6,891
       Income (loss) before other income             879                  972

     Customer Support
       Revenue                               $    19,545          $    15,862
       Income (loss) before other income           3,922                1,624

     Professional Services
       Revenue                               $     9,481          $     4,685
       Income (loss) before other income            (381)                (180)

     Education and other
       Revenue                               $     4,401          $     2,924
       Income (loss) before other income             884                  209

     Total
       Revenue                               $    81,442          $    73,609
       Income (loss) before other income     $     1,464          $     2,576


                                       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, 1998.


Results of Operations

Revenue                                         Three Months Ended
                                                    March 31,
                                     -------------------------------------------
 (Dollars in millions)                   1999           1998          Change
                                     ------------   ------------   -------------
 Software revenue
   Domestic                          $     25.5     $      29.5        -14%
   International                           16.5            13.7         20%
                                     ------------   ------------
   Total software revenue            $     42.0     $      43.2         -3%
                                     ------------   ------------
     Percentage of total revenue            52%             59%

 Customer Support
   Domestic                          $     16.1     $      12.4         30%
   International                            5.3             4.0         33%
                                     -------------  --------------
   Total customer support revenue    $     21.4     $      16.4         30%
                                     -------------  --------------
     Percentage of total revenue            26%             22%

 Professional Services
   Domestic                          $      5.1     $       2.5        104%
   International                            2.5             1.7         47%
                                     -------------  --------------
   Total professional services
    revenue                          $      7.6     $       4.2         83%
                                     -------------  --------------
     Percentage of total revenue             9%              6%

 Hardware revenue
   Domestic                          $      4.8     $       5.0         (4%)
   International                            1.2             1.9        (37%)
                                     -------------  --------------
   Total hardware revenue            $      6.0     $       6.9        (13%)
                                     -------------  --------------
     Percentage of total revenue              7%              9%

 Education and other revenue
   Domestic                          $      3.2     $       1.7         88%
   International                            1.2             1.2          0%
                                     -------------  --------------
   Total education and other 
    revenue                          $      4.4     $       2.9         52%
                                     -------------  --------------
     Percentage of total revenue             6%              4%

 Total revenue
   Domestic                          $     54.7     $      51.1          7%
   International                           26.7            22.5         19%
                                     -------------  --------------
   Total revenue                     $     81.4     $      73.6         11%
                                     -------------  --------------

Software revenue from the licensing of the Company's software products decreased
3% for the quarter ended March 31, 1999 over the  comparable  period of 1998 due
to a decrease  in the volume of product  shipments  domestically  offsetting  an
increase  in  international  revenues.  A decline in revenue  for the  Company's
Workflo Business Systems products has not been fully offset by the growth in its
newer Panagon  products and continues to  unfavorably  impact  overall  software
revenue growth.

                                       10
<PAGE>
Customer support revenue consists of revenue from maintenance contracts and "fee
for service"  revenues.  Customer support revenue  increased 30% for the quarter
ended  March 31,  1999 over the same period of 1998  attributable  to  increased
maintenance revenue due to the growth of the Company's installed base.

Professional   services   revenue   consists  of  revenue  from  consulting  and
implementation services provided to end users of the Company's software products
and technical  consulting  services  provided to the Company's  resellers.  Such
services are  primarily  performed on a time and  material  basis.  Professional
services  revenue  increased  83% for the quarter  ended March 31, 1999 over the
same  period  of 1998 and is a result  of the  Company's  efforts  to build  its
professional services capabilities to support its solution-oriented strategy.

Hardware revenue is generated primarily from the sale of 12-inch optical storage
and  retrieval  libraries  (OSAR).  Hardware  revenue  decreased  by 13% for the
quarter  ended  March 31,  1999  from the  comparable  period of 1998  primarily
because  of  decreases  in  new  orders   experienced   both   domestically  and
internationally due to customers'  ordering  competitive  products.  The Company
expects  hardware revenue to continue to decline in both absolute dollars and as
a percentage of total revenue.

Education  and  other  revenue  are  generated  from the  sale of  spare  parts,
education  services,  supplies and "third party"  products.  Education and other
revenue  increased 52% for the quarter ended March 31, 1999 over the  comparable
period of 1998 due to increased  training revenue related to the Panagon product
which was released during the first quarter in 1998.

International  revenues were  approximately 33% and 30% of total revenues in the
quarter ended March 31, 1999 and 1998, respectively. Management expects that the
Company's  international  operations  will continue to account for a significant
portion of total  revenues.  However,  the ongoing global  economic crisis 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 Ended March 31,
                                                    ------------------------------------------
 (Dollars in millions)                                   1999             1998         Change
                                                    -----------      -----------     ---------
<S>                                                  <C>              <C>               <C>
 Cost of software revenue                            $    3.9         $    3.7            5%
  Percentage of software revenue                           9%               9%
 Cost of customer support revenue                    $    9.6         $    8.4           14%
  Percentage of customer support revenue                  45%              51%
 Cost of professional services revenue               $    7.6         $    3.7          105%
  Percentage of professional services revenue            100%              89%
 Cost of hardware revenue                            $    3.2         $    3.4           (6%)
  Percentage of hardware revenue                          53%              49%
 Cost of education and other revenue                 $    3.1         $    2.2           41%
  Percentage of education and other revenue               70%              76%
 Total cost of revenue                               $   27.4         $   21.4           28%
  Percentage of total revenue                             34%              29%
</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  remained  constant at 9% for the quarters ended March 31, 1999
and 1998.

The cost of  customer  support  revenue  includes  customer  support  personnel,
supplies, and the cost of third party hardware maintenance. The cost of customer
support  revenue as a  percentage  of customer  support  revenue for the quarter
ended March 31, 1999  decreased to 45% from 51% in the same period of 1998.  The
decrease is attributable  to the transition of higher cost hardware  maintenance
services to a third party contractor.

The cost of professional  services  revenue  consists  primarily of professional
services  personnel  and  third  party  contractors.  The  cost of  professional
services  revenue as a  percentage  of  professional  services  revenue  for the
quarter  ended March 31, 1999  increased  to 100% from 89% in the same period of
1998 due to the  addition  of  professional  services  personnel  to support the
Company's   announced  strategy  of  delivering   complete  document  management
solutions to  customers,  including  related  consulting  services.  The Company
expects  professional  services revenue to increase and absorb the higher costs.

                                       11
<PAGE>
The cost of hardware revenue  includes the cost of manufacturing  OSARs, and the
cost of  hardware  integration  personnel.  The cost of  hardware  revenue  as a
percentage of hardware revenue for the quarter ended March 31, 1999 increased to
53% from 49% for the  comparable  period of 1998.  The  increase is due to lower
revenue without a decrease in fixed manufacturing costs.

The cost of education and other revenue includes the cost of supplies, education
services,  spare parts and third party product.  The cost of education and other
revenue as a  percentage  of  education  and other  revenue for the three months
ended March 31, 1999 decreased to 70% from 76% in the same period of 1998 due to
increased  training  revenue  related to the Panagon  product which was released
during the first  quarter of 1998 without a  corresponding  increase in training
cost.


Operating Expenses
                                              Three Months Ended March 31,
                                       -----------------------------------------
 (Dollars in millions)                     1999            1998         Change
                                       -----------     -----------    ----------
 Research and development               $   13.1         $   12.1         8%
  Percentage of total revenue                16%              16%
 Selling, general and administrative    $   39.4         $   37.6         5%
  Percentage of total revenue                48%              51%

Research and development expenses increased 8% for the first quarter of 1999 due
to a general  increase in salaries  and  recruiting  costs  necessitated  by the
intense competitive environment for software engineers;  and an increase in cost
of  contract  developers.  As  a  percentage  of  total  revenue,  research  and
development expenses were at 16% for the three-month period ended March 31, 1999
and 1998.

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 5% for the first quarter
of 1999. The increase was primarily due to overall increases in salaries and the
expansion of the  Company's  sales force offset by decreased  marketing  program
costs  along  with lower  legal  expenses.  As a  percentage  of total  revenue,
selling,  general  and  administrative  expenses  decreased  to 48% in the first
quarter  of 1999  from 51% in the same  quarter  of 1998 due to  expense  levels
growing at a lower rate than revenue.

Provision for Income Taxes. The Company's  combined  federal,  state and foreign
annual  effective tax rate for the quarter ended March 31, 1999 was 30% compared
to 29%  for  the  comparable  period  in  1998.  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 March 31, 1999, the Company had forward exchange
contracts outstanding totaling approximately $12.3 million in 9 currencies.  All
of these contracts mature in three months.

Other  comprehensive  loss for the three months ended March 31, 1999 reflects an
increase of $2.7 in the  unrealized  loss due to foreign  currency  translation.
This increase was primarily  attributable to unrealized  losses  associated with
the weakening of the Euro 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 months ended March 31, 1999 and 1998.

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
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

                                       12
<PAGE>
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.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  which is  effective  for  fiscal  years
beginning  after June 15, 1999.  SFAS 133 will require the Company to record all
derivatives on the balance sheet at fair value. For derivatives that are hedges,
changes  in the fair value of  derivatives  will be offset by the change in fair
value of the  hedged  assets,  liabilities,  or firm  commitments.  The  Company
believes  the impact of  adopting  this  standard  will not be  material  to its
results of  operations  or equity.  The Company  will  continue to evaluate  the
adoption of such pronouncement.

Liquidity and Capital Resources

At March 31, 1999,  combined  cash,  cash  equivalents  and short- and long-term
marketable securities totaled $82.0 million, a decrease of $0.2 million from the
end of 1998. Cash provided by operating activities during the three months ended
March 31, 1999 totaled $6.4 million and resulted  primarily from net income;  an
increase in unearned  maintenance  revenue  related to annual  renewal  billings
which  occur  during  the  first  quarter;  and  additions  to  net  income  for
depreciation  and  amortization  expense offset by decreases in accounts payable
and  accrued  compensation.  Cash used by  investing  activities  totaled  $15.5
million and was a result of capital  expenditures  and  purchases of  marketable
securities  offset  by sales  and  maturities  of  marketable  securities.  Cash
provided  by  financing  activities  totaled  $0.7  million  and was a result of
proceeds received from the exercise of employee stock options.

Accounts  receivable  decreased  to $60.4  million at March 31,  1999 from $61.6
million at December 31, 1998. Days sales outstanding  increased to 67 days as of
March  31,  1999  from 66 days as of  December  31,  1998.  Current  liabilities
decreased to $72.6  million at March 31, 1999 from $76.5 million at December 31,
1998. The decrease in current  liabilities is primarily a result of decreases in
accounts  payable and accrued  incentive  compensation,  offset by  increases in
unearned maintenance and accrued royalties.

The Company has a $20 million  unsecured  line of credit with a commercial  bank
that expires in May 1999 and is subject to the maintenance of certain  financial
covenants.  As of March 31, 1999, there were no borrowings  outstanding  against
the Company's credit line. The Company expects that it will be able to renew its
line of credit on comparable terms.

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.  With the  approach  of the year 2000,  the Company  recognized  that
significant issues could arise in connection with the computer software products
it  licenses  and the  internal  business  systems  which are  essential  to its
operations.  In 1997, the Company implemented a year 2000 Integrity Program (the
Program) to ensure that the Company's  computer  software  products and internal
business systems will function properly in the year 2000 and thereafter.

The  Program,  as it relates to the  software  products  licensed to  customers,
includes year 2000  compliance  testing and  certification  of certain  existing
software  products.  All new generations of the Company's software products will
be released as year 2000  compliant.  Not all-current  software  products of the
Company are year 2000  compliant  and the Company does not plan to make them so.
Accordingly, upgraded year 2000 compliant versions of such software products are
being  made  available  to  customers  and  resellers  who  will  then  bear the
responsibility  for  installing the upgraded  software  product in order to make
their systems year 2000 compliant.  Some of the Company's  customers are running
software product versions that are not year 2000 compliant. The Company has been
encouraging such customers to migrate to current software product  versions.  It
is possible  that the Company may  experience  increased  expenses in addressing
migration issues for such customers. The Company's customer support organization
initiated a program, Customer Service Profile 2000, to review the status of each
Company product  currently  installed at a customer location and it provided the
diagnostics  used in this  program  to its  resellers  for  their  use at  their
customer locations.  Customers who have support agreements with the Company have
been directly  informed as to whether or not the  particular  software  products
they have installed are year 2000 compliant.  All customers are kept informed of

                                       13
<PAGE>
the  release of year 2000  compliant  updates  and  upgrades  via the  Company's
readiness  disclosure  statement  on its Web site.  The  inability of any of the
Company's  software  products to properly manage and manipulate data in the year
2000 could result in increased  warranty costs,  customer  satisfaction  issues,
potential  lawsuits and other costs and liabilities,  as well as customers being
unable to run software licensed from the Company and incurring significant costs
from the  resultant  business  interruption.  The Company has spent an estimated
$1.1 million on year 2000 product related  projects  through March 31, 1999. The
expense for year 2000 product related  projects is estimated to be approximately
$.5  million  for the  remainder  of 1999.  Demand  for the  Company's  software
products  could be  adversely  impacted to the extent  customers  and  potential
customers are temporarily  distracted by their year 2000 remediation efforts, as
such products  compete for Information  Technology (IT) resources that have been
diverted  for  such  remedial  efforts  which  may  have  higher  priority  than
implementing document management systems.

The Company  has also  initiated  communications  with  significant  third party
vendors of computer  software with which the Company's systems interface or upon
which the Company's  software products depend in order to coordinate  efforts to
minimize the extent to which the  Company's  business will be vulnerable to such
third  parties'  failure to remediate  their own year 2000 issues.  Although the
Company's  compliance testing utilizes the embedded  third-party  software as an
essential  part of its  software  being  tested,  the  Program  does not include
certification  of  customer-developed  applications  which run on the  Company's
software products or third party software which is incorporated in the Company's
software  products.  Customers  and third party  vendors  will  remain  directly
responsible for year 2000 compliance testing of their software.

The Company  requires that  contingency  plans be developed and validated in the
event  that any of its  products  cannot  be  updated  and  certified  year 2000
compliant  before its scheduled  release date.  The Company  expects to have its
contingency  plans in place by October 31,  1999.  In  addition,  the Company is
forming a rapid  response  team as part of its  Customer  Services and IT groups
that will respond to any problems during the year 2000 date change period.

The  Program  also  includes a review of all  internal  IT systems for year 2000
compliance.  This year 2000  compliance  effort for IT  systems is divided  into
three  categories:  1) applications  development  and support;  2) IT production
services and operations; and 3) business communications (data, voice and video).
The program  methodology  consists of four phases: I) assessment;  II) potential
impact analysis; III) compliance integration;  and IV) update,  assessment,  and
contingency plan.

The Company's significant business systems (financial,  operational,  marketing,
customer  support,  etc.) have been reviewed and are either  currently year 2000
compliant or will be upgraded  and/or  replaced so as to be year 2000 tested and
compliant  during  1999.  All of  the  hardware  and  software  deployed  in the
Company's  technical  infrastructure  is  either  fully  year  2000  tested  and
compliant or is scheduled to be replaced with year 2000 compliant  components by
October  31,  1999.  The  Company is also  evaluating  IT related  environmental
systems (heating, air conditioning, security, etc.) and intends to make all such
systems year 2000  compliant by October 31, 1999.  To the extent  possible,  the
Company will develop and execute  contingency  plans designed to allow continued
operation in the event of failure of the Company's or third parties'  systems by
October 31, 1999. Contingency plans are being developed in certain key areas, in
particular  finance,  IT and  customer  service  to  ensure  that any  potential
business  interruptions  caused  by the year  2000  issue  are  mitigated.  Such
contingency  plans  may  include   identification  of  alternative  sources  for
processing data and managing  customer  support  issues.  Business teams will be
monitoring the critical  systems,  and service  centers to react  immediately to
facilitate  repairs at the end of the year 1999.  Data  retention  and  recovery
procedures will be in place for critical  business data to provide back-ups with
on-site  and  off-site  data  copies.  For those  business,  infrastructure  and
environmental  systems  that are to be  upgraded  in order to achieve  year 2000
compliance,  the majority were already  scheduled for upgrade for other business
reasons.  The Company's  cost to fund solely year 2000  compliance  projects has
been $0.3 million through March 31, 1999. The expense to complete these projects
is estimated to be approximately $0.5 million for the remainder of 1999.

 Although the Company is not aware of any material  operational  issues or costs
associated  with  preparing its software  products and 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 issue.  The  Company's  inability  to implement
such  systems  and  changes  could have an adverse  effect on future  results of
operations.  The costs of the Company's  year 2000 project and the date on which
the  Company  believes  it will be  completed  are  based on  management's  best
estimates and include  assumptions  regarding  third party  modification  plans.
However,  in particular due to the potential impact of third party  modification
plans,  there can be no  assurance  that these  estimates  will be achieved  and
actual results could differ materially from those anticipated.

                                       14
<PAGE>
The  foregoing  statements  are based upon  management's  best  estimates at the
present  time,  which were  derived  utilizing  numerous  assumptions  of future
events,  including the continued availability of certain resources,  third party
modification  plans and other  factors.  There can be no  guarantee  that  these
estimates will be achieved and actual results could differ materially from those
anticipated.  Specific  factors  that  might  cause  such  material  differences
include,  but are not limited to, the nature and amount of programming  required
to upgrade or replace  each of the  affected  programs,  and the  success of the
Company's external customers, resellers, and vendors and suppliers in addressing
the year 2000 issue.

The EURO Conversion.  On January 1, 1999, eleven of the fifteen-member countries
of the European Union  established fixed conversion rates between their existing
sovereign currencies and the EURO. These countries have agreed to adopt the EURO
as their common legal  currency from that date.  The EURO will trade on currency
exchanges and be available for non-cash transactions. These countries will issue
sovereign debt exclusively in EURO and will redenominate  outstanding  sovereign
debt.  Effective on January 1, 1999, these countries no longer control their own
monetary  policies  by  directing  independent  interest  rates  for the  legacy
currencies.  Instead,  the authority to direct monetary policy,  including money
supply  and  official  interest  rates for the  EURO,  is  exercised  by the new
European Central Bank.

The legacy currencies are scheduled to remain legal tender in these countries as
a  denomination  of the EURO  between  January 1, 1999 and  January 1, 2002 (the
"transition  period").  During the transition period, public and private parties
may pay for goods and  services  using either the EURO or the  country's  legacy
currency on a "no compulsion,  no prohibition" basis. However,  conversion rates
will no longer  be  computed  directly  from one  legacy  currency  to  another.
Instead, a "triangulation" process will be applied whereby an amount denominated
in one legacy  currency  first will be converted  into an amount  denominated in
EURO,  and the resultant  EURO-denominated  amount is converted  into the second
legacy currency.

The Company has made the necessary  changes to its internal  business systems to
support transactions  denominated in the EURO, including establishing EURO price
lists for affected  countries.  The Company is in the process of evaluating  the
impact that the conversion to the EURO will have on its financial  condition and
results of operations.  Based on this evaluation to date, the Company  currently
does not believe that there will be a material  adverse  impact on its financial
condition or results of operations as a result of the EURO conversion.

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

Recent  Accounting  Pronoucements.  In June 1998,  the FASB issued SFAS No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities,"  which  is
effective for fiscal years  beginning after June 15, 1999. SFAS 133 will require
the Company to record all  derivatives  on the balance sheet at fair value.  For
derivatives  that are hedges,  changes in the fair value of derivatives  will be
offset by the change in fair value of the hedged  assets,  liabilities,  or firm
commitments.  The Company believes the impact of adopting this standard will not
be material to its results of operations or equity. The Company will continue to
evaluate the adoption of such pronouncement.

Factors That May Affect Future Results

The Company's 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 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.  There can be no assurance  that the Company will be  successful  in
developing and marketing new products or enhancements  to its existing  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

                                       15
<PAGE>
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  and to
achieve the desired level of sales from such product  integration;  the level of
product  and  price  competition;  the  length  of the  Company's  sales  cycle;
improvements in the  productivity  of the Company's sales force;  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
including EURO exchange  rates  beginning in 1999; 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
electronic  document  management  software markets are highly  competitive,  and
there are certain  competitors of the Company with substantially  greater sales,
marketing,  development and financial  resources.  The Company believes that the
competitive  factors  affecting the market for its products and services include
vendor and product  reputation;  product  quality,  performance  and price;  the
availability of products on multiple  platforms;  product  scalability;  product
integration  with  other  enterprise  applications;  product  functionality  and
features;  product ease of use; and the quality of customer support services and
training.  The relative  importance  of each of these  factors  depends upon the
specific customer involved.  While the Company believes it competes favorably in
each of these areas,  there can be no assurance  that it will continue to do so.
Moreover,  the Company's  present or future  competitors  may be able to develop
products  comparable  or superior to those  offered by the Company,  offer lower
price  products or adapt more  quickly than the Company to new  technologies  or
evolving customer requirements.  Competition is expected to intensify.  In order
to be  successful  in the future,  the  Company  must  respond to  technological
change, customer requirements and competitors' current products and innovations.
There can be no  assurance  that the Company will be able to continue to compete
effectively  in its market or that future  competition  will not have a material
adverse effect on its business, financial condition or results of operations. In
addition,  current and potential  competitors  have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their  products  to address  the needs of the  markets  served by the
Company.  Accordingly,  it is possible that new  competitors or alliances  among
competitors may emerge and rapidly acquire  significant market share.  Increased
competition  may result in price  reductions,  reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, financial condition or results of operations.

Intellectual  Property  and other  Proprietary  Rights.  The  Company's  success
depends,  in part,  on its  ability to  protect  its  proprietary  rights to the
technologies used in its principal products. The Company relies on a combination
of  copyrights,   trademarks,  trade  secrets,  confidentiality  procedures  and
contractual  provisions  to  protect  its  proprietary  rights.  There can be no
assurance that the Company's  existing or future copyrights,  trademarks,  trade
secrets or other  intellectual  property  rights will be of sufficient  scope or
strength to provide  meaningful  protection  or a  commercial  advantage  to the
Company.  The Company 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

                                       16
<PAGE>
the Company's proprietary rights to the same extent as do the laws of the United
States.  There can be no assurance  that such factors  would not have a material
adverse  effect on the  Company's  business,  financial  condition or results of
operations.  In addition,  the Company also relies on certain  software  that it
licenses  from  third  parties,  including  software  that  is  integrated  with
internally  developed  software  used in the  Company's  products to perform key
functions.  There can be no  assurance  that such third  parties  will remain in
business, that they will continue to support their products, that their products
are, or will be, year 2000  compliant,  or that their  products  will  otherwise
continue to be available to the Company on commercially  reasonable  terms.  The
loss or inability to maintain any of theses  software  licenses  could result in
delays or  reductions  in product  shipments  until  equivalent  software can be
developed, identified, licensed and integrated, which could adversely affect the
Company's business, financial condition or results of operations.

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

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

The Company 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  the  Company's
unenforceability  defense on one of the patents.  In July 1998,  the  Magistrate
Judge  assigned to the case,  heard oral  arguments on the Company's  motion for
summary  judgement that U.S.  Patent  4,918,588 is not infringed and is invalid.
The  Magistrate  Judge has not yet decided these motions.  The Company  believes
that after he has ruled on these  motions,  he will hear oral  arguments  in the
remaining motions in the sequence in which they were filed. A trial date has not
been set.

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

Dependence  on Certain  Relationships.  The Company has entered into a number of
key relationships with other companies such as Microsoft Corporation, IBM Global
Services, 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.

                                       17
<PAGE>

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,
consultants   and  operational   personnel.   Competition  for  such  personnel,
particularly engineers and other technical personnel, is intense, and pay scales
in the software  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;
varying   requirements   for  localized   products;   potentially   adverse  tax
consequences; currency exchange fluctuations including those related to the EURO
beginning  in 1999;  the  burden of  complying  with a wide  variety  of complex
foreign laws,  regulations and treaties;  and the possibility of difficulties in
collecting accounts  receivable.  In particular,  the current economic crisis in
the Asia Pacific  region and Latin  America may limit  future  growth or cause a
decline in international  revenues.  There can be no assurance that any of these
factors  will not have a  material  adverse  effect on the  Company's  business,
financial condition or results of operations.

Product  Liability.  Products  as  complex  as  those  sold by the  Company  are
susceptible to errors or failures,  especially when first introduced or when new
versions are  released.  The  Company's  products are often  intended for use in
applications  that are  critical  to a  customer's  business.  As a result,  the
Company's  customers may rely on the effective  performance of the software to a
greater  extent than the market for  software  products  generally.  The Company
conducts  extensive  product  testing to ensure  that its  products  are free of
significant errors and defects. In addition, the Company has designed and tested
the most current  versions of its products to be year 2000  compliant.  However,
some of the Company's  customers are running earlier  products that are not year
2000  compliant.  Although the Company has been  encouraging  such  customers to
migrate to current product versions,  no assurance can be given that all of them
will do so in a timely fashion, if at all. Moreover,  the Company also relies on
certain software that it licenses from third parties, including software that is
integrated  with  internally  developed  software  and is used in the  Company's
products  to  perform  key  functions.  There  can  be no  assurance  that  such
third-party  software  will  be free  of  errors  and  defects  or be year  2000
compliant  in a timely  fashion.  Although the Company has not  experienced  any
material product liability claims to date, there can be no assurance that errors
or defects,  whether associated with year 2000 functions or otherwise,  will not
result in product  liability  claims  against  the  Company in the  future.  The
Company's  license  agreements  with  customers   typically  contain  provisions
designed to limit its 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 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,  have experienced  extreme price  fluctuations  that 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.



                                       18
<PAGE>


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

See Notes 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 1999.

                                       19
<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

May 11, 1999                   By:______________/s/_____________________________
Date                              Mark S. St. Clare, Chief Financial Officer and
                                  Sr. Vice President, Finance (Principal 
                                  Financial Officer)






                                       20
<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).

 4.3*         Amendment One dated July 31, 1998 and Amendment Two dated November
              9, 1998  to  Rights Agreements  between  FileNET  Corporation  and
              BANKBOSTON N.A.  formerly   known  as   The First National Bank of
              Boston  (filed as  Exhibit 4.3 to  Form 10-Q for the quarter ended
              September 30, 1998).

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).

10.3.1*       Runtime  Sublicense  Addendum  between  the Registrant  and Oracle
              Corporation  dated  July 1, 1996;  as  amended by  Amendments  Two
              through Six thereto  (filed as Exhibit 10.3.1 to Form 10-Q for the
              quarter ended September 30, 1998).

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 (filed as
              Exhibit 99.1 to Form S-8 filed on November 9, 1998; Registration
              No. 333-66997).
---------------------------------------------
* Incorporated herein by reference

                                       21
<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*        Amendment  2   dated  December 18, 1998  to  the   Product License
              Agreement  between the  Registrant and  Novell, Inc. dated May 16,
              1995  (filed as  Exhibit 10.17 to  Form 10-K/A for the  year ended
              December 31, 1998).

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*        Amended  and  Restated  FileNET  Corporation  1998  Employee Stock
              Purchase  Plan  (filed  as  Exhibit 99.15  to  Form S-8,  filed on
              November 9, 1998; Registration No. 333-66997).

10.22*        FileNET  Corporation  International  Employee  Stock Purchase Plan
              (filed as  Exhibit 99.16 to  Form S-8,  filed on November 9, 1998;
              Registration No. 333-66997).

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

                                       22