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**FORM 10-Q

                              SECURITIES AND EXCHANGE COMMISSION

                                  Washington, D.C. 20549**

  (Mark One)

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

  For the quarterly period ended September 30, 2003

                                                        OR

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

  For the transition period from ________ to ___________

                               Commission file number: 00-15997

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

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

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

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

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

  Indicate by check mark whether the registrant is an accelerated filer as defined in Rule
  12b-2 of the Securities Exchange Act of 1934:
                                                      Yes  |X|  No |_|

  As of November 13, 2003, there were 37,558,098 shares of the Registrant's common stock
  outstanding.

**FILENET CORPORATION**
                                             Index

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

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

     Item 2.        Management's Discussion and Analysis of Financial Condition
                      and Results of Operations  ..................................  19

     Item 3.        Quantitative and Qualitative Disclosures about Market Risk.....  38

     Item 4.        Controls and Procedures........................................  40

     **PART II.       OTHER INFORMATION**..............................................  40

     Item 1.        Legal Proceedings..............................................  40

     Item 6.        Exhibits and Reports on Form 8-K...............................  40

     **SIGNATURE**      ...............................................................  41

     **INDEX TO****EXHIBITS**       ...............................................................  42

                                                2

PART I.  FINANCIAL INFORMATION

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

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

                                                               September 30,      December 31,
                                                                       2003              2002  
        ASSETS
        Current assets:
          Cash and cash equivalents                              $  162,271        $  130,154
          Short-term investments                                     33,545            29,188
          Accounts receivable, net                                   43,941            44,839
          Inventories, net                                            1,244             2,568
          Prepaid expenses and other current assets                  14,130            13,317
          Deferred income taxes                                         802               802  
          Total current assets                                      255,933           220,868

          Property, net                                              28,359            34,641
          Long-term investments                                      21,705            25,864
          Goodwill                                                   24,676            16,907
          Intangible assets, net                                      8,169             3,029
          Deferred income taxes                                      20,047            21,792
,          Other assets                                                4,322             4,935  

           Total assets                                          $  363,211        $  328,036  

        LIABILITIES AND STOCKHOLDERS' EQUITY
        Current liabilities:
          Accounts payable                                           10,484             7,706
          Customer deposits                                           6,248             2,962
          Accrued compensation and benefits                          23,549            20,729
          Unearned maintenance revenue                               45,024            38,945
          Other accrued liabilities                                  13,174            15,224  
          Total current liabilities                                  98,479            85,566

          Unearned maintenance revenue and other liabilities          2,009             3,565
          Commitments and contingencies (Note 9)

        Stockholders' equity:
          Preferred stock - $0.10 par value; 7,000,000 shares
            authorized; none issued and outstanding
          Common stock - $0.01 par value; 100,000,000 shares
            authorized; 37,922,123 issued and 36,824,123
            shares outstanding at September 30, 2003; and
            37,014,512 shares issued and 35,916,512 shares
            outstanding at December 31, 2002                        218,339           206,676
          Retained earnings                                          58,452            53,178
          Accumulated other comprehensive income(loss)                  499            (6,382)
          Treasury stock, at cost; 1,098,000 shares                 (14,567)          (14,567) 
          Net stockholders' equity                                  262,723           238,905  

            Total liabilities and stockholders' equity           $  363,211        $  328,036  *See accompanying notes to unaudited condensed consolidated financial statements.*

                                                       3

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

                                              Three Months Ended Sept 30,          Nine Months Ended Sept 30,         2003             2002              2003              2002  
 Revenue:
   Software                                  $    35,320      $    30,538       $   104,397       $    96,128
   Customer support                               41,162           37,838           121,024           111,682
   Professional services and education            12,162           12,751            36,095            43,078
   Hardware                                          745            1,975             2,039             6,682 
   Total revenue                                  89,389           83,102           263,555           257,570 

 Costs:
   Software                                        3,800            2,484            10,416             7,239
   Customer support                                9,660            9,604            28,144            29,499
   Professional services and education            10,586           11,361            32,001            38,003
   Hardware                                          827            1,337             2,882             4,847 
   Total cost of revenue                          24,873           24,786            73,443            79,588

     Gross Profit                                 64,516           58,316           190,112           177,982

 Operating expenses:
   Sales and marketing                            34,405           32,338           103,660            97,388
   Research and development                       19,049           17,764            58,031            53,993
   In-process research and development                 -                -                 -               400
   General and administrative                      8,241            7,455            24,393            24,248 
   Total operating expenses                       61,695           57,557           186,084           176,029

 Operating income                                  2,821              759             4,028             1,953

 Other income, net                                   632            1,045             3,297             3,874 

 Income before income taxes                        3,453            1,804             7,325             5,827

 Provision for income taxes                          967              415             2,051             1,340 

 Net income                                   $    2,486      $     1,389       $     5,274       $     4,487 

 Earnings per share:
   Basic                                      $     0.07      $      0.04       $      0.15       $      0.13
   Diluted                                    $     0.06      $      0.04       $      0.14       $      0.12

 Weighted-average shares outstanding:
   Basic                                          36,588           35,629            36,234            35,511
   Diluted                                        38,494           36,445            37,471            36,803

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

                                                              4

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

                                                   Three Months Ended                Nine Months Ended
                                                      September 30,                    September 30,             2003            2002             2003             2002 

 Net income                                    $   2,486        $   1,389       $   5,274        $   4,487 
 Other comprehensive income:
   Foreign currency translation adjustments        1,582              156           6,942            5,147
 Unrealized gains on securities:
    Unrealized holding gains(loss)                   (23)              12             (61)              26 
 Total other comprehensive income                  1,559              168           6,881            5,173 
 Comprehensive income                          $   4,045        $   1,557       $  12,155        $   9,660 *See accompanying notes to unaudited condensed consolidated financial statements.*

                                                          5

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

                                                                    Nine Months Ended
                                                                      September 30,            2003              2002  

Cash flows from operating activities:
 Net income                                                 $   5,274         $   4,487
 Adjustments to reconcile net income to net cash
  provided by operating activities:
   Purchased in-process research and development                    -               400
   Depreciation and amortization                               14,759            16,160
   Loss on sale of fixed assets                                    14                13
   Provision for doubtful accounts                                 52               354
   Deferred income taxes                                        1,746                16
   Stock option income tax benefit                              2,129                 -
   Changes in operating assets and liabilities,
    net of the effects of acquisitions:
     Accounts receivable                                        2,871            (5,526)
     Inventories                                                1,373               417
     Prepaid expenses and other current assets                  2,423            (3,100)
     Accounts payable                                           2,026              (861)
     Accrued compensation and benefits                          1,840             3,918
     Customer deposits and advances                             3,264            (1,781)
     Unearned maintenance revenue                               2,916             6,870
     Income taxes payable                                      (1,590)           (1,199)
     Other                                                     (3,304)           (4,213) 
 Net cash provided by operating activities                     35,793            15,955  

 Cash flows from investing activities:
 Capital expenditures                                          (6,809)           (8,592)
 Proceeds from sale of property                                   129                44
 Note receivable from officer                                       -            (1,900)
 Cash paid for acquisitions, net of cash acquired              (8,073)           (9,359)
 Purchases of marketable securities                           (81,354)         (103,529)
 Proceeds from sales and maturities of marketable              77,805            94,621  
  securities
 Net cash used in investing activities                        (18,302)          (28,715) 

 Cash flows from financing activities:
 Proceeds from issuance of common stock                         9,485             3,875
 Principal payments on capital lease obligations                   (5)           (1,293) 
 Net cash provided by financing activities                      9,480             2,582  

 Effect of exchange rate changes on cash and cash               5,146             4,138  
  equivalents

 Net increase in cash and cash equivalents                     32,117            (6,040)
 Cash and cash equivalents, beginning of year                 130,154           107,502  
 Cash and cash equivalents, end of period                     162,271           101,462  

 Supplemental cash flow information:
 Interest paid                                                     36                65  
 Income taxes paid                                          $   2,221         $   2,897  *See accompanying notes to unaudited condensed consolidated financial statements.*

                                        6

                               FILENET CORPORATION
              Notes To Condensed Consolidated Financial Statements
                                   (Unaudited)

1.   BASIS OF PRESENTATION

     The  accompanying   unaudited  interim  condensed   consolidated  financial
     statements of FileNet  Corporation (the "Company" or "FileNet") reflect all
     adjustments  (consisting  of normal  recurring  adjustments)  necessary  to
     present fairly the financial position of the Company at September 30, 2003,
     the results of its  operations  and its  comprehensive  operations  for the
     three and nine months ended September 30, 2003 and 2002, and its cash flows
     for the nine months ended September 30, 2003 and 2002. Certain  information
     and footnote  disclosures  normally  included in financial  statements have
     been  condensed  or  omitted  pursuant  to  rules  and  regulations  of the
     Securities  and  Exchange  Commission  (the  "SEC"),  although  the Company
     believes  that the  disclosures  in the  condensed  consolidated  financial
     statements  are  adequate  to  ensure  the  information  presented  is  not
     misleading.  These condensed  consolidated  financial  statements should be
     read in conjunction  with the consolidated  financial  statements and notes
     thereto  contained  in the  Company's  Annual  Report  on Form 10-K for the
     fiscal year ended  December  31, 2002 filed with the SEC on March 28, 2003.
     The  results of  operations  for the interim  periods  are not  necessarily
     indicative  of the  operating  results  for the year,  or any other  future
     period.

2.   RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
     Statement of Financial  Accounting  Standards  ("SFAS") No. 141,  "Business
     Combinations," which was effective immediately.  SFAS No. 141 requires that
     the purchase  method of  accounting  be used for all business  combinations
     initiated  after June 30, 2001 and it eliminated  the  pooling-of-interests
     method.  The adoption of this standard did not have a significant impact on
     the Company's consolidated financial statements.  The Company's acquisition
     of certain assets and certain  liabilities  of eGrail,  Inc. in April 2002,
     and the  acquisition of Shana  Corporation in April 2003 were accounted for
     in compliance with this pronouncement (See Note 3 for details).

     In June 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets," which the Company  adopted  January 1, 2002. SFAS No. 142 requires
     that goodwill and other intangible  assets with indefinite  useful lives no
     longer be amortized, but instead be tested for impairment at least annually
     and written down when impaired.  SFAS No. 142 requires purchased intangible
     assets other than goodwill to be amortized over their useful lives,  unless
     these  lives are  determined  to be  indefinite.  In  accordance  with this
     Standard,  the Company  does not  amortize  goodwill  and  indefinite  life
     intangible  assets but  evaluates  their  carrying  value  annually or when
     events or circumstances indicate that their carrying value may be impaired.
     As of the first day of July of each year, goodwill is tested for impairment
     by  determining  if the carrying  value of each  reporting unit exceeds its
     fair value.  We engaged an  independent  valuation  firm to  determine  the
     business  enterprise  value  for each of our three  reporting  units and to
     perform an impairment  analysis as of July 1, 2003 in accordance  with SFAS
     142. The analysis  indicated  there was no impairment of goodwill in any of
     the three  reporting  units.  As of September  30, 2003,  no  impairment of
     goodwill has been recognized.  If estimates change, a materially  different
     impairment conclusion could result.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
     Disposal  of  Long-Lived   Assets."  This  Statement   addresses  financial
     accounting  and reporting for the  impairment of long-lived  assets and for
     the disposal of long-lived assets and discontinued operations. SFAS No. 144
     superseded  SFAS No. 121,  "Accounting  for the  Impairment  of  Long-Lived

                                       7

     Assets and for  Long-Lived  Assets to Be Disposed Of," and is effective for
     fiscal  years  beginning  after  December  15,  2001.  The adoption of this
     Standard on January 1, 2002 did not have a material impact on the Company's
     consolidated financial position and results of operations.

     In July  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated with Exit or Disposal  Activities,"  which  addresses  financial
     accounting  and  reporting  for  costs  associated  with  exit or  disposal
     activities and supersedes  Emerging  Issues Task Force ("EITF") Issue 94-3,
     "Liability  Recognition for Certain Employee Termination Benefits and Other
     Costs  to  Exit  an  Activity   (including  Certain  Costs  Incurred  in  a
     Restructuring)."  SFAS No. 146 requires that costs  associated with exit or
     disposal activities be recognized when they are incurred rather than at the
     date of a  commitment  to an exit or  disposal  plan.  SFAS  No.  146  also
     establishes that the liability should initially be measured and recorded at
     fair value.  The Company adopted the provisions of SFAS No. 146 for exit or
     disposal activities  initiated after December 31, 2002. The adoption of the
     provisions of SFAS No. 146 in the three and nine months ended September 30,
     2003 did not have a material impact on the Company's  consolidated  results
     of operations or financial position.

     In  November  2002,  the FASB issued FASB  Interpretation  No.  ("FIN") 45,
     "Guarantor's   Accounting  and  Disclosure   Requirements  for  Guarantees,
     Including   Indirect   Guarantees   and   Indebtedness   of   Others,"   an
     interpretation  of FASB Statement Nos. 5, 57 and 107, and rescission of FIN
     34,  "Disclosure of Indirect  Guarantees of Indebtedness of Others." FIN 45
     elaborates  on the  disclosures  to be made by the guarantor in its interim
     and  annual  financial  statements  about  its  obligations  under  certain
     guarantees that it has issued. It also requires that a guarantor recognize,
     at the  inception  of a  guarantee,  a liability  for the fair value of the
     obligation  undertaken in issuing the guarantee.  The provisions related to
     recognizing a liability at inception of the guarantee for the fair value of
     the  guarantor's  obligations  does not apply to product  warranties  or to
     guarantees  accounted  for as  derivatives.  The  initial  recognition  and
     measurement   provisions  of  this   interpretation  are  applicable  on  a
     prospective basis to guarantees issued or modified after December 31, 2002,
     while the disclosure  requirements  are effective for financial  statements
     for interim or annual  periods ending after December 15, 2002. The adoption
     of the recognition  provisions of FIN 45 in the three and nine months ended
     September  30,  2003  did  not  have a  material  impact  on the  Company's
     consolidated results of operations or financial position.

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

                                       8

The following  table  summarizes  the Company's net income (loss) and net income
(loss) per share on a pro forma basis had  compensation  cost for the  Company's
stock-based  compensation  plans been determined based on the provisions of SFAS
No. 123, for the three and nine months ended September 30, 2003 and 2002:

                                                     Three Months Ended         Nine Months Ended
                                                       September 30,              September 30,    *(In thousands, except per share amounts)*   2003         2002          2003         2002  
Net income, as reported                         $   2,486    $   1,389     $   5,274    $   4,487

Deduct:  Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects                             (1,636)      (1,987)       (5,732)      (6,547) 
Pro forma net income (loss)                           850         (598)         (458)      (2,060)

Earnings per share:
Basic earnings per share - as reported          $    0.07    $    0.04     $    0.15    $    0.13
Basic earnings (loss) per share - pro forma          0.02        (0.02)        (0.01)       (0.06)

Diluted earnings per share - as reported             0.06         0.04          0.14          .12
Diluted earnings (loss) per share - pro forma   $    0.02    $   (0.02)    $   (0.01)   $   (0.06)

Pro forma  compensation cost of shares issued under the Employee Qualified Stock
Purchase Plan is measured based on the discount from market value on the date of
purchase in accordance with SFAS No. 123. For purposes of computing proforma net
income,  the Company  estimates the fair value of each option grant and employee
stock  purchase  plan  right  on the  date  of  grant  using  the  Black-Scholes
option-pricing  model. The Black-Scholes  option-pricing model was developed for
use in estimating the value of traded options that have no vesting  restrictions
and are fully transferable,  while the options issued by the Company are subject
to both vesting and restrictions on transfer. In addition, option-pricing models
require input of highly  subjective  assumptions  including  the expected  stock
price  volatility.  The Company uses projected data for expected  volatility and
expected life of its stock options based upon historical data.

The  assumptions  used to value the option  grants and the  purchase  rights are
stated as follows:

                                        Three Months Ended            Nine Months Ended
                                           September 30,                 September 30,           2003             2002          2003             2002  

Expected term (in years)              2-5              2-5           2-5               2-5
Expected volatility                    63%              70%      63 - 66%              70%
Risk free interest rates             3.15%     2.16 - 4.81%         3.15%     2.16 - 4.81%
Expected dividend                       0%               0%            0%               0%

                                       9

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest
Entities." In general, a variable interest entity is a corporation, partnership,
trust, or any other legal  structure used for business  purposes that either (a)
does not have equity  investors  with voting rights or (b) has equity  investors
that do not provide sufficient financial resources for the entity to support its
activities.  FIN 46 requires a variable  interest entity to be consolidated by a
company if that  company  is subject to a majority  of the risk of loss from the
variable interest  entity's  activities or entitled to receive a majority of the
entity's  residual  returns or both. The  consolidation  requirements  of FIN 46
apply  immediately to variable interest entities created after January 31, 2003.
The consolidation  requirements apply to older entities in the first fiscal year
or interim  period  beginning  after June 15,  2003.  Certain of the  disclosure
requirements  apply in all financial  statements  issued after January 31, 2003,
regardless of when the variable  interest  entity was  established.  The Company
does not have any  variable  interest  entities as of September  30,  2003.  The
adoption of FIN 46 did not have a material impact on the Company's  consolidated
results of operations or its financial position.

In April  2003,  FASB  issued  SFAS No.  149,  "Amendment  of  Statement  133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 (1) clarifies under
what  circumstances  a  contract  with  an  initial  net  investment  meets  the
characteristics  of a derivative  discussed in paragraph  6(b) of Statement 133,
(2) clarifies when a derivative contains a financing  component,  (3) amends the
definition of an underlying derivative to conform it to language used in FIN 45,
and (4) amends certain other existing  pronouncements,  which will  collectively
result in more consistent reporting of contracts as either derivatives or hybrid
instruments.  SFAS No. 149 is effective for contracts and hedging  relationships
entered into or modified  after June 30, 2003.  The adoption of SFAS No. 149 did
not have a material impact on the Company's consolidated financial statements or
financial position.

In May 2003,  FASB  issued  SFAS No.  150,  "Accounting  for  Certain  Financial
Instruments with  Characteristics  of both Liabilities and Equity." SFAS No. 150
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both debt and equity and requires
an issuer to classify the following  instruments  as  liabilities in its balance
sheet:

     o    a  financial   instrument  issued  in  the  form  of  shares  that  is
          mandatorily  redeemable and embodies an unconditional  obligation that
          requires  the  issuer  to redeem it by  transferring  its  assets at a
          specified  or  determinable  date or upon an event  that is certain to
          occur;

     o    a financial instrument, other than an outstanding share, that embodies
          an obligation to repurchase the issuer's equity shares,  or is indexed
          to  such  an  obligation,  and  requires  the  issuer  to  settle  the
          obligation by transferring assets; and

     o    a financial instrument that embodies an unconditional  obligation that
          the issuer  must  settle by  issuing a  variable  number of its equity
          shares if the  monetary  value of the  obligation  is based  solely or
          predominantly  on (1) a  fixed  monetary  amount,  (2)  variations  in
          something other than the fair value of the issuer's equity shares,  or
          (3) variations  inversely  related to changes in the fair value of the
          issuer's  equity  shares.

SFAS No. 150 is effective  for  financial  instruments  entered into or modified
after May 31, 2003 and is effective for all other  financial  instruments  as of
the first interim period  beginning  after June 15, 2003.  SFAS No. 150 is to be
implemented  by  reporting  the  cumulative  effect  of a change  in  accounting
principle.  The  adoption of SFAS No. 150 did not have a material  impact on the
Company's consolidated financial statements or financial position.

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

                                       10

3.   ACQUISITIONS

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

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

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

                                                     eGrail, Inc.         Shana Corp.
                                                   April 2, 2002       April 2, 2003 *(In thousands)*
     Net tangible assets                             $     581           $   2,725
     Patents                                                24                   -
     Acquired technology                                 3,300               4,000
     Technical manuals and design documents                  -                 600
     Customer maintenance relationships                      -                 800
     In-process research and development                   400                   -
     Non-Compete Agreements                                  -                 277
     Liabilities assumed                                  (739)             (2,494)
     Goodwill                                            5,793               3,103   
     Total purchase price                            $   9,359           $   9,011
     Less cash acquired                                      -                (938)  .
     Net cash paid                                   $   9,359           $   8,073

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

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

                                       11

     The acquisition of Shana resulted in acquired technology, technical manuals
     and design documents, and customer maintenance  relationships.  Since Shana
     had  recently  completed  Version 4.1 of its eForms  product,  there was no
     in-process   research  and   development   underway  at  the  time  of  the
     acquisition.  Shana's  technology  manuals  and  design  documents  are the
     "roadmaps"  for the  eForms  technology  and will be used by FileNet in its
     product  development.  Recurring  maintenance  revenues  are  expected  and
     estimable for Shana's  customers  based on the older and newer  versions of
     eForms technology.  The acquired technology of $4.0 million,  the technical
     manuals and design  documents  of $600,000,  and the  customer  maintenance
     relationships  of $800,000 were  assigned a useful life of five years.  The
     remaining  purchase  price  of $3.6  million  was  allocated  primarily  to
     goodwill.

     In  accordance  with SFAS No. 142,  goodwill  for both the eGrail and Shana
     acquisitions  will not be amortized and was reviewed for impairment as part
     of the annual  analysis  performed in July.  (See Note No. 4.) Although the
     goodwill  stemming  from the Shana  stock  purchase is  non-deductible  for
     Canadian  tax  purposes,  a  Section  338(g)  election  will  result in the
     reduction of taxable income for U.S. tax purposes on this transaction.

     Actual results of operations of the acquired  eGrail  business,  as well as
     assets and liabilities of the acquired eGrail business, are included in the
     unaudited  condensed  consolidated  financial  statements  from the date of
     acquisition.  The pro forma results of operations  data for the  nine-month
     periods ended  September 30, 2002  presented  below assumes that the eGrail
     acquisition  had been made at the  beginning of fiscal 2002.  The pro forma
     data is presented for  informational  purposes only and is not  necessarily
     indicative of the results of future  operations  nor of the actual  results
     that  would  have been  achieved  had the  acquisition  taken  place at the
     beginning of fiscal 2002. No pro forma  information  has been presented for
     the Shana acquisition,  as the result did not have a material impact on the
     financial statements of the Company during the reporting period.

                                                Nine Months Ended
                                                   September 30,               2003 Actual         2002 Pro Forma *(In thousands)*
              Revenue                     $  263,555             $  258,322
              Net income                       5,274                  2,634
              Earnings per share:
                 Basic                    $     0.15             $     0.07
                 Diluted                  $     0.14             $     0.07

4.   GOODWILL AND PURCHASED INTANGIBLE ASSETS

     In  acquisitions  accounted  for using the  purchase  method,  goodwill  is
     recorded for the difference,  if any,  between the aggregate  consideration
     paid  for an  acquisition  and  the  fair  value  of the net  tangible  and
     identified  intangible  assets  acquired.  SFAS No. 142 requires a periodic
     review of goodwill and indefinite life intangibles for possible impairment.
     (See Note No.2)  Intangible  assets with  definite  lives must be amortized
     over their  estimated  useful lives.  Shana goodwill and intangible  assets
     were  recorded  in  the  financial  statements  of the  Company's  Canadian
     subsidiary and a portion of the goodwill and intangible assets for previous
     acquisitions  was  allocated to the  financial  statements of the Company's
     Ireland  subsidiary.  This  results in  fluctuations  in  foreign  exchange
     translation gains and losses. The following table represents the balance of
     goodwill as of December  31, 2002 and the changes in goodwill  for the nine
     months ended September 30, 2003:

                                       12
 Goodwill *(in thousands)*
           Balance as of December 31, 2002               $       16,907
           Goodwill acquired during the period                    3,103
           Adjustments                                            3,498
           Foreign currency gain                                  1,168 
           Balance as of September 30, 2003              $       24,676

     Adjustments  to  goodwill  included  $1.7  million for the  write-off  of a
     prepaid royalty and the  recognition of a $1.7 million  deferred tax asset.
     Prior to the Shana acquisition, FileNet licensed the eForms technology from
     Shana under an agreement that resulted in a prepaid royalty.  The remaining
     balance of this prepaid royalty fee was considered additional investment in
     Shana and was  allocated  to  goodwill.  A deferred  tax asset was recorded
     under  purchase  accounting  for the  estimated  future tax  effects of the
     identified  intangibles  with a  corresponding  entry to  goodwill  of $1.7
     million.

     Acquired  technology,  technical  manuals  and design  documents,  customer
     maintenance  relationships,  non-compete  agreements  and  patents  are the
     Company's only  intangible  assets subject to  amortization  under SFAS No.
     142.  These assets were  recorded in  connection  with the  acquisition  of
     assets of eGrail in April 2002 and the  acquisition of Shana in April 2003,
     and are  comprised of the  following as of December 31, 2002 and  September
     30, 2003:

Intangible Assets Subject to Amortization
                                                                               Foreign
Balance as of December 31, 2002                           Accumulated         Currency
*(In thousands)*                                Gross      Amortization      Fluctuation         Net 

Acquired technology and other intangibles  $  3,468         $   (532)          $    79    $  3,015
Non-compete agreements                            -                -                 -           -
Patents                                          25              (12)                1          14 
Total                                      $  3,493         $   (544)          $    80    $  3,029

                                                                               Foreign
Balance as of September 30, 2003                          Accumulated         Currency
*(In thousands)*                                Gross      Amortization      Fluctuation         Net 

Acquired technology and other intangibles  $  8,868         $ (1,705)          $   756    $  7,919
Non-compete agreements                          277              (58)               27         246
Patents                                          25              (23)                2           4 
Total                                      $  9,170         $ (1,786)          $   785    $  8,169

*NOTE - other  intangibles  include  technical  manuals and customer  maintenance
relationships.*

                                       13

     Acquired technology,  technical manuals and design documents,  and customer
     maintenance  relationships  are being  amortized over a useful life of five
     years, patents are being amortized over a useful life of two years, and the
     non-compete agreements are being amortized over a period of between two and
     three years.  Amortization  expense for  amortizing  intangible  assets was
     approximately  $500,000 and  $1,177,000 for the three and nine months ended
     September 30, 2003, and $176,000 and $344,000 for the three and nine months
     ended September 30, 2002. We determined that these assets were not impaired
     as of September 30, 2003.

     Estimated future  amortization  expense (excluding foreign exchange effect)
     of purchased  intangible  assets as of September 30, 2003 is as follows (in
     thousands):

                                  Fiscal Year              Amount 
                    2003 (remaining 3 months)           $     514
                                         2004               2,041
                                         2005               2,008
                                         2006               1,942
                                         2007               1,368
                                         2008                 296  
                   Total Amortization Expense           $   8,169  

5.   EARNINGS PER SHARE

     Basic earnings per share are computed by dividing net income for the period
     by the  weighted-average  number of common  shares  outstanding  during the
     period.  Diluted  earnings  per share is computed by dividing net income by
     the weighted-average  number of common shares outstanding plus the dilutive
     effect of outstanding  stock options and shares issuable under the employee
     stock purchase plan using the treasury stock method. The number of dilutive
     options  excluded  from the  basic EPS  calculation  for the three and nine
     months  ended  September  30, 2003 were  1,906,000  and  1,237,000  shares,
     compared to 816,000 and 1,292,000 for the  comparable  periods in 2002. The
     following  table sets forth the  computation of basic and diluted  earnings
     per share for the three and nine months ended September 30, 2003 and 2002:

                                                     Three Months Ended         Nine Months Ended
                                                       September 30,              September 30,         2003         2002           2003          2002 *(In thousands, except per share amounts)*
    Net Income                                 $   2,486    $   1,389      $   5,274     $   4,487

    Shares used in computing
      basic earnings per share                    36,588       35,629         36,234        35,511
    Dilutive effect of stock plans                 1,906          816          1,237         1,292 
    Shares used in computing
      diluted earnings per share                  38,494       36,445         37,471        36,803

    Earnings per basic share                   $     .07    $     .04      $     .15     $     .13
    Earnings per diluted share                 $     .06    $     .04      $     .14     $     .12

                                                     14

6.   ACCUMULATED OTHER COMPREHENSIVE LOSS

     Accumulated other comprehensive  income for the nine months ended September
     30, 2003 is comprised of the following:

                                                Foreign
                                               Currency         Unrealized      Accumulated Other
                                            Translation            Holding          Comprehensive
     *(In thousands)*   Adjustment          Gain(Loss)             Gain(Loss) 

      Balance, December 31, 2002             $   (6,448)         $      66             $   (6,382)
      Nine month period changes                   6,942                (61)                 6,881 
      Balance, September 30, 2003            $      494          $       5             $      499

7.   OPERATING SEGMENT DATA

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

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

     The  financial  results  of the  segments  reflect  allocation  of  certain
     functional expense categories consistent with the basis and manner in which
     Company management internally  disaggregates  financial information for the
     purpose of assisting in making internal operating  decisions,  which is not
     the same as generally accepted accounting principles reporting. The Company
     evaluates  performance based on stand-alone segment operating results after
     these  allocations  have  been made to each  segment.

     Because the Company  does not evaluate  performance  based on the return on
     assets at the operating segment level, assets are not tracked internally by
     segment. Therefore, segment asset information is not presented.

                                       15

     Operating  segments data for the three and nine months ended  September 30,
     2003 and 2002 are as follows:

     *In thousands*                                Three months ended                Nine months ended
                                                   September 30,                     September 30,           2003            2002     2003           2002 

     Software
       Revenue                             $   35,320      $   30,538          $  104,397    $   96,128
       Operating loss                         (15,028)        (14,822)            (46,891)      (40,272)

     Customer Support
       Revenue                             $   41,162      $   37,838          $  121,024    $  111,682
       Operating income                        17,885          16,156              51,889        44,343

     Professional Services and Education
       Revenue                             $   12,162      $   12,751          $   36,095    $   43,078
       Operating loss                              13            (742)               (553)       (2,421)

     Hardware
       Revenue                             $      745      $    1,975          $    2,039    $    6,682
       Operating income (loss)                    (49)            167      (417)          303 

     Total
       Revenue                             $   89,389      $   83,102          $  263,555    $  257,570
       Operating income                         2,821             759               4,028         1,953

8.       STOCK OPTIONS

         The following is a summary of stock option transactions regarding all stock option plans for the three
         months ended September 30, 2003:

                                                                                        Weighted-Average
                                                                          Number of           Exercise
                                                                            Options             Price  
           Balance, June 30, 2003                                         8,587,463          $  15.22
              Granted (weighted-average fair value of $9.19)                202,900             19.97
              Exercised                                                    (457,298)            11.58
              Canceled                                                     (104,900)            15.64  

           Balance, September 30, 2003                                    8,228,165       $     15.53  

                                                      16

         The following table summarizes information concerning outstanding and exercisable stock options at
         September 30, 2003:

                       Options Outstanding                                               Options Exercisable                  

                                                Weighted-Average
                                                       Remaining     Weighted-Average                        Weighted-Average
       Range of Exercise             Number          Contractual             Exercise             Number             Exercise
                   Price        Outstanding         Life (Years)                Price        Exercisable                Price 
      $   1.39  -   9.00          1,420,896                  4.12           $    7.97          1,420,646            $    7.97
          9.17  -  12.86          1,655,694                  7.62               11.97            790,612                11.21
         12.97  -  14.19          1,551,055                  7.59               13.47            751,516                13.59
         14.39  -  18.45          1,534,449                  7.52               16.77            781,122                16.60
         19.53  -  24.88          1,438,979                  6.97               22.52          1,089,018                22.78
         25.00  -  41.84            627,092                  5.81               28.14            555,878                28.22 $   1.39  -  41.84          8,228,165                  6.74           $   15.53          5,388,792            $   15.56 

9.   COMMITMENTS AND CONTINGENCIES

     Leases

     The Company leases its corporate  offices,  sales offices,  development and
     manufacturing   facilities,   and  other  equipment  under   non-cancelable
     operating leases,  some of which have renewal options and generally provide
     for  escalation of the annual rental  amount.  Amounts  related to deferred
     rent are recorded in other accrued liabilities on the consolidated  balance
     sheet.  Future  annual  minimum  lease  payments  under all  non-cancelable
     operating leases with an initial term in excess of one year as of September
     30, 2003 were as follows:

              *(In thousands)*
                2003 (remaining 3 months)               $    3,670
                2004                                        12,388
                2005                                        10,775
                2006                                         9,993
                2007                                         9,325
                2008                                         8,197
                Thereafter                                   6,548   Total                                   $   60,896 

     Product Warranties

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

                                       17

     The following  table  represents the warranty  activity and balance for the
     nine months ended September 30, 2003 and 2002:

       *(In thousands)*                           2003           2002  

        Beginning balance at January 1       $    728       $    772
                Additions                         678            856
                Deductions                       (916)          (904)  Ending balance at September 30       $    490       $    724  

     Guarantees and Indemnities

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

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

     In  connection  with  certain   facility   leases  and  other   performance
     guarantees,  the Company has  guaranteed  payments on behalf of some of its
     subsidiaries.   To  provide  subsidiary  guarantees,  the  Company  obtains
     unsecured bank guarantees from local banks.  These bank guarantees  totaled
     an equivalent of  approximately  $1.3 million  issued in local  currency in
     Europe and Asia as of September 30, 2003. Approximately $0.4 million of the
     $1.3 million is secured by cash deposit.

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

     The Company has not recorded a liability for the guarantees and indemnities
     described  above in the  accompanying  consolidated  balance  sheet and the
     maximum  amount of potential  future  payments  under such  guarantees  and
     indemnities  is not  determinable,  other  than  as  described  above.  The
     Company's product warranty  liability as of September 30, 2003 is disclosed
     in this item under the heading "Product Warranties."

10.  LEGAL PROCEEDINGS

     In the normal  course of  business,  the  Company  is  subject to  ordinary
     routine litigation and claims incidental to business.  While the results of
     litigation  and  claims  cannot be  predicted  with  certainty,  management
     believes that the final outcome of these matters will not have a materially
     adverse  effect on the  Company's  consolidated  results of  operations  or
     financial condition.
                                       18

11.  FOREIGN CURRENCY TRANSACTIONS

     As of  September  30,  2003,  the  Company  had  forward  foreign  exchange
     contracts   outstanding   totaling   approximately  $  0.9  million  in  10
     currencies.  These  contracts  were opened on the last  business day of the
     quarter and mature within three months. Accordingly, the fair value of such
     contracts is zero at September 30, 2003.

12.  RELATED-PARTY TRANSACTIONS

     In  July  2001,  the  Compensation  Committee  of the  Company's  Board  of
     Directors  ("the Board")  entered into  discussions  with Lee Roberts,  the
     Company's Chief Executive Officer,  regarding a secured loan by the Company
     to  Mr.  Roberts  to  enable  him to  purchase  a home  in  Orange  County,
     California.   In  July  2001,  the  Compensation  Committee  forwarded  its
     recommendation  to the Board to approve,  in principle,  a secured loan, in
     the  amount  of  $1.2  million  to Mr.  Roberts.  In  September  2001,  the
     Compensation   Committee  approved,  in  principle,   an  increase  in  the
     previously  requested  loan  amount to $1.9  million,  subject to review of
     final  loan  documents  and  approval  of  the  Board.  In  May  2002,  the
     Compensation  Committee  reviewed proposed loan documentation for a secured
     loan to Mr.  Roberts  and  forwarded  its  recommendation  to the  Board to
     approve  the loan on the terms set  forth in the loan  documents.  The loan
     documents  provided  that the  loan  would be  secured  by the real  estate
     purchased by Mr. Roberts. Subsequently, on June 5, 2002, the Board approved
     the loan  documents and the loan. As of September 30, 2003,  FileNet has an
     outstanding  secured note receivable from Mr. Roberts in the amount of $1.9
     million that relates to the above-referenced  loan and is included in other
     assets on the consolidated  balance sheet. The note bears interest at 2.89%
     per  annum.  Accrued  interest  on the  principal  balance  of this note is
     payable  annually  beginning  February 15, 2003 and on each  February  15th
     thereafter until the entire principal balance becomes due. Accrued interest
     as of September 30, 2003 was approximately  $34,000. The entire outstanding
     principal  balance of this note and any accrued interest is due and payable
     at the earliest of (a) June 7, 2005, (b) one year after  termination of Mr.
     Roberts' employment by the Company, or (c) ninety (90) days after voluntary
     termination  of  employment  by  Mr.  Roberts.  Imputed  interest  for  the
     difference  between the stated  interest  rate of the note and a fair value
     interest  rate of 7% was  recorded as  compensation  expense and a discount
     that is being  amortized over the term of the note to interest income using
     the effective  interest method.  The loan to Mr. Roberts is permitted under
     Section 13 of the  Securities  Exchange Act of 1934,  as amended by Section
     402 of the  Sarbanes-Oxley Act on July 30, 2002, because it was outstanding
     on July 30,  2002.  However,  its terms  cannot be  renewed  or  materially
     modified in the future.

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

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

     This  Quarterly  Report on Form 10-Q  contains  forward-looking  statements
     within the meaning of the Private Securities Litigation Reform Act of 1995,
     Section 21E of the  Securities  and Exchange Act of 1934,  as amended,  and
     Section 27A of the  Securities  Act of 1933, as amended,  and is subject to
     the safe harbors  created by those sections.  Words such as  "anticipates,"
     "expects,"  "intends," "plans,"  "believes,"  "seeks,"  "estimates," "may,"
     "will" and variations of these words or similar expressions are intended to
     identify forward-looking statements. In addition, any statements that refer
     to expectations, projections or other characterizations of future events or

                                       19

     circumstances,  including any underlying  assumptions,  are forward-looking
     statements.  These statements are not guarantees of future  performance and
     are subject to risks,  uncertainties  and assumptions that are difficult to
     predict.   Therefore,  our  actual  results  could  differ  materially  and
     adversely  from those  expressed  in any  forward-looking  statements  as a
     result of various factors. We undertake no obligation to revise or publicly
     release the results of any revisions to these  forward-looking  statements.
     Readers should carefully review the risk factors  described below under the
     heading  "Risk  Factors  That  May  Affect  Future  Results"  and in  other
     documents  we file  from  time to time  with the  Securities  and  Exchange
     Commission,  including  our Annual  Report on Form 10-K for the fiscal year
     ended  December 31,  2002.  Our filings  with the  Securities  and Exchange
     Commission, including our Annual Reports on Form 10-K, Quarterly Reports on
     Form 10-Q,  Current  Reports on Form 8-K and  amendments to those  filings,
     pursuant  to Sections  13(a) and 15(d) of the  Securities  Exchange  Act of
     1934,  are available free of charge at  www.filenet.com,  when such reports
     are available at the Securities and Exchange Commission Web site.

     **Overview**

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

     **Critical Accounting Policies and Estimates**

     The consolidated financial statements of FileNet are prepared in conformity
     with  accounting  principles  generally  accepted  in the United  States of
     America. The consolidated financial statements include our accounts and the
     accounts of our wholly owned  subsidiaries.  All intercompany  balances and
     transactions have been eliminated.  The preparation of financial statements
     in conformity with accounting  principles  generally accepted in the United
     States of America  requires  management to make  estimates and  assumptions
     that affect the reported  amounts of assets and  liabilities at the date of
     the financial  statements and the reported  amounts of revenue and expenses
     during the reporting  period.  Actual amounts could differ from  estimates.
     The significant  accounting policies we believe are most critical to aid in
     fully  understanding and evaluating our reported  financial results include
     the following:

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

     Software  license revenue  generated from sales through direct and indirect
     channels,  which do not contain  multiple  elements,  are  recognized  upon
     shipment and passage of title of the related  product,  if the requirements
     of SOP 97-2, are met. If the requirements of SOP 97-2,  including  evidence
     of an arrangement,  delivery,  fixed or determinable fee, collectibility or
     vendor  specific  evidence about the value of an element are not met at the
     date of shipment,  revenue is not recognized until these elements are known
     or resolved.  Fees are deemed to be fixed and determinable for transactions

                                       20

     with a set price that is not subject to refund or adjustment and payment is
     due within 90 days from the invoice  date.  Software  license  revenue from
     channel  partners is recognized when the product is shipped and sale by the
     channel partner to a specified end user is confirmed.

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

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

     Professional  services  revenue  consists of consulting and  implementation
     services  provided  to end users of our  software  products  and  technical
     consulting  services  provided  to our  resellers.  Consulting  engagements
     average  from one to three  months.  We do not make changes to the standard
     software code in the field.  Revenue from these  services and from training
     classes is  recognized  as such  services are delivered and accepted by the
     customer. Revenue and cost is recognized using the percentage-of-completion
     method for fixed-price  consulting contracts.  However,  revenue and profit
     are subject to revision as the contract  progresses and anticipated  losses
     on fixed-price professional services contracts are recognized in the period
     when they become known.

     ***Allowance  for  Doubtful  Accounts  and  Sales  Returns***.  We  evaluate  the
     creditworthiness  of our  customers  prior  to  order  fulfillment,  and we
     perform ongoing credit evaluations of our customers to adjust credit limits
     based on payment history and the customer's  current  creditworthiness.  We
     constantly monitor collections from our customers and maintain an allowance
     for estimated  credit losses that is based on historical  experience and on
     specific customer collection issues.  While credit losses have historically
     been  within  our  expectations  and  the  provisions  established  in  our
     financial  statements,  we  cannot  guarantee  that  we  will  continue  to
     experience  the same credit loss rates that we have in the past.  Since our
     revenue  recognition  policy  requires  customers to be  creditworthy,  our
     accounts  receivable  are based on customers  whose  payment is  reasonably
     assured.  Our accounts  receivable are derived from sales to a wide variety
     of customers.

     We do not  believe  a  change  in  liquidity  of any  one  customer  or our
     inability to collect from any one  customer  would have a material  adverse
     impact  on  our  consolidated  financial  position.   Based  on  historical
     experience,  we also  maintain a sales return  allowance  for the estimated
     amount of potential  returns.  While product returns have historically been
     minimal and within our expectations  and the allowances  established by us,
     we cannot  guarantee  that we will continue to  experience  the same return
     rates that we have in the past.

     ***Goodwill and Other Intangible  Assets***.  Goodwill is recorded at cost and is
     not amortized.  In June 2001,  the FASB issued SFAS No. 142,  "Goodwill and
     Other  Intangible  Assets," which we adopted  January 1, 2002. SFAS No. 142
     requires that goodwill and other intangible  assets with indefinite  useful
     lives no longer be amortized, but instead be tested for impairment at least
     annually and written down when  impaired.  On the first day of July of each
     year,  goodwill is tested for  impairment  by  determining  if the carrying
     value of each reporting unit exceeds its fair value.  We also  periodically
     evaluate whether events and circumstances have occurred which indicate that
     the carrying value of goodwill may not be recoverable.  The Company engaged
     an independent  valuation firm to determine the business  enterprise  value
     for each of our three reporting units and to perform an impairment analysis
     as of July 1, 2003 in  accordance  with SFAS 142.  The  analysis  indicated

                                       21

     there was no impairment of goodwill in any of the three reporting units. As
     of September 30, 2003, no  impairment of goodwill has been  recognized.  If
     estimates  change,  a  materially  different  impairment  conclusion  could
     result.

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

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

     ***Research and Development  Costs***. We expense research and development  costs
     as incurred.  No amounts are required to be capitalized in accordance  with
     SFAS No. 86,  "Accounting  for the Costs of  Computer  Software to be Sold,
     Leased,  or  Otherwise  Marketed,"  because our  software is  substantially
     completed concurrently with the establishment of technological feasibility.

                                       22
**Results of Operations**

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

                                            Three Months Ended       Nine Months Ended
                                               September 30,            September 30,      2003       2002          2003      2002   

Revenue:
 Software                                     39.5%      36.7%         39.6%      37.3%
 Customer support                             46.1       45.5          45.9       43.4
 Professional services and education          13.6       15.4          13.7       16.7
 Hardware                                      0.8        2.4           0.8        2.6  
   Total revenue                              100.0     100.0         100.0      100.0

Cost of revenue:
 Software                                      4.3        3.0           4.0        2.8
 Customer support                             10.8       11.5          10.7       11.4
 Professional services and education          11.8       13.7          12.1       14.8
 Hardware                                      0.9        1.6           1.1        1.9  
   Total cost of revenue                      27.8       29.8          27.9       30.9  

Gross Profit                                  72.2       70.2          72.1       69.1

Operating expenses:
 Sales and marketing                          38.5       38.9          39.3       37.8
 Research and development                     21.3       21.4          22.0       21.0
 In-process research and development             -          -             -        0.1
 General and administrative                    9.2        9.0           9.3        9.4  
   Total operating expenses                   69.0       69.3          70.6       68.3  

Operating income                               3.2         .9           1.5         .8
Other income, net                              0.7        1.3           1.3        1.5  
Income before income tax                       3.9%       2.2%          2.8%       2.3% 

                                            23
**Revenue**

     Total  revenue  for the three  months  ended  September  30, 2003 was $89.4
     million  compared to $83.1 million for the three months ended September 30,
     2002, an increase of $6.3 million, or 8%. Total revenue for the nine months
     ended September 30, 2003 was $263.6 million  compared to $257.6 million for
     the nine months ended  September 30, 2002, an increase of $6.0 million,  or
     2%. International revenue for the three and nine months ended September 30,
     2003  was 24% and 29% of  total  revenue,  compared  to 29% and 28% for the
     three and nine months  ended  September  30, 2002.  The  increases in total
     revenue for the three-month and nine-month periods ended September 30, 2003
     as  compared  to the same  periods  in 2002,  resulted  from  increases  in
     software  and customer  support  revenue  partially  offset by decreases in
     professional  services  and hardware  revenue.  These trends are more fully
     discussed and explained below.

     *Software:*  Software  revenue consists of fees earned from the licensing of
     our  software  products  to  customers.  Software  revenue  increased  $4.8
     million,  or 16%, to $35.3 million for the three months ended September 30,
     2003,  from $30.5  million for the three months ended  September  30, 2002.
     Software revenue  increased $8.3 million,  or 9%, to $104.4 million for the
     nine months  ended  September  30,  2003,  from $96.1  million for the nine
     months ended September 30, 2002.  Software revenue  represented 40% and 37%
     of  total  revenue  for the  three  months  ended  September  30,  2003 and
     September 30, 2002, respectively. Software revenue represented 37% of total
     revenue for the nine months  ended  September  30, 2003 and  September  30,
     2002, respectively.

     The increase in software  revenue is the result of a combination  of larger
     transactions,  continued sales of additional  software licenses to existing
     customers  in  our  key  vertical  industries  of  financial  services  and
     insurance,  and heightened  demand for our content  management and business
     process  product  offerings.   We  believe  enterprise  content  management
     continues to be a priority for companies in our key vertical industries. If
     overall economic conditions strengthen and if technology spending increases
     as a consequence  of this  improvement,  we anticipate  that demand for our
     software products, particularly in our key vertical industries, will result
     in an increase.

     *Customer  Support:*  Customer  support  revenue  consists  of  revenue  from
     software maintenance  contracts,  "fee for service" revenue and the sale of
     spare parts and supplies.  Customer support revenue increased $3.3 million,
     or 9%, to $41.1 million for the three months ended  September 30, 2003 from
     $37.8  million for the three months  ended  September  30,  2002.  Customer
     support  revenue  increased $9.3 million,  or 8%, to $121.0 million for the
     nine months  ended  September  30,  2003 from  $111.7  million for the nine
     months ended September 30, 2002.  Customer support revenue  represented 46%
     and 45% of total revenue for the three months ended  September 30, 2003 and
     September 30, 2002, respectively.  Customer support revenue represented 46%
     of total  revenue for the nine months ended  September 30, 2003 compared to
     43% for the comparable period of 2002.

     The increase in customer support revenue was primarily due to the growth in
     our base of customers who receive  ongoing  maintenance  as a result of new
     and add-on  customer  software  sales made  during the three  months  ended
     September 30, 2003. Our solutions tend to be mission critical  applications
     for our  customers  and  consequently  we have  experienced  a high rate of
     renewal on maintenance contracts from our customer base. However, over time
     the growth rate for customer support revenue is dependent on our success in
     achieving software revenue growth and high rates of customer satisfaction.

     *Professional  Services and Education:*  Professional  services and education
     revenue is generated primarily from consulting and implementation  services
     provided  to end  users  of our  software  products,  technical  consulting
     services  provided to our resellers and training  services  provided to end
     users and  resellers.  Professional  services  are  performed on a time and
     material basis or under a fixed price contract.  Professional  services and
     education revenue  decreased $0.6 million,  or 5%, to $12.2 million for the

                                       24

     three  months  ended  September  30, 2003 from $12.8  million for the three
     months ended  September  30,  2002.  Professional  services  and  education
     revenue  decreased  $7.0  million,  or 16%,  to $36.1  million for the nine
     months  ended  September  30,  2003 from $43.1  million for the nine months
     ended  September  30, 2002.  Professional  services and  education  revenue
     represented  14% and  15% of  total  revenue  for the  three  months  ended
     September  30, 2003 and  September  30,  2002,  respectively.  Professional
     services and  education  revenue  represented  14% of total revenue for the
     nine months ended  September  30, 2003  compared to 17% for the  comparable
     period in 2002.

     Professional  services  revenue and  education  revenue is dependent on the
     level and the nature of software sales over time. Generally, software sales
     for new customer system  implementations  will generate larger professional
     service  consulting  engagements  and  training  enrollments  than sales of
     additional  licenses  to  existing  customer  installations.  In our recent
     quarters,  software revenue has been  characterized by repeat purchases for
     additional software licenses that do not require  large-scale  professional
     services  engagements.  Additionally,  the  professional  service market in
     general has experienced  significant  pricing pressure resulting in reduced
     revenue.  These  factors have reduced  professional  services and education
     revenue.  However, as more fully discussed in the software revenue section,
     if software  sales  increase to our installed  base and new  customers,  we
     would expect that demand for consulting  and education  would increase over
     the next several quarters.

     *Hardware:*  Hardware revenue is generated primarily from the sale of 12-inch
     Optical  Storage  And  Retrieval  ("OSAR")   libraries.   Hardware  revenue
     decreased $1.3 million,  or 65%, to $0.7 million for the three months ended
     September  30, 2003 from $2.0 million for the three months ended  September
     30, 2002.  Hardware revenue decreased $4.7 million, or 70%, to $2.0 million
     for the nine months ended September 30, 2003 from $6.7 million for the nine
     months ended September 30, 2002. Hardware revenue represented slightly less
     than 1% of total  revenue for the three  months ended  September  30, 2003,
     compared  to 2%  for  the  comparable  period  of  2002.  Hardware  revenue
     represented  less  than 1% of  total  revenue  for the  nine  months  ended
     September 30, 2003,  compared to 3% for the comparable  period of 2002. The
     decline in hardware revenue reflects that hardware is not a strategic focus
     for us, and we expect  hardware  revenue to  continue  to  decrease  in the
     future.

     **Cost of Revenue**

     Total cost of revenue  increased  $0.1  million,  or less than 1%, to $24.9
     million for the three months ended  September 30, 2003,  from $24.8 million
     for the  comparable  period in 2002.  Total cost of revenue  decreased $6.2
     million,  or 8%, to $73.4  million for the nine months ended  September 30,
     2003,  from $79.6 million for the  comparable  period in 2002. The decrease
     for the  nine-month  period is primarily due to the decrease in the cost of
     professional  services and education  revenue and hardware  revenue as more
     fully discussed below.

     *Software:*  Cost of  software  revenue  includes  royalties  paid  to  third
     parties,  amortization expense for acquired technology and other intangible
     assets,  partner  commissions,  software  media  costs,  and  the  cost  to
     manufacture and distribute software. The cost of software revenue increased
     $1.3 million,  or 52%, to $3.8 million for the three months ended September
     30, 2003 from $2.5 million for the three months ended  September  30, 2002.
     The cost of  software  revenue  increased  $3.2  million,  or 44%, to $10.4
     million for the nine months ended  September 30, 2003 from $7.2 million for
     the nine months ended  September  30, 2002.  The costs of software  revenue
     represented 11% and 8% of the related software revenue for the three months
     ended September 30, 2003 and September 30, 2002, respectively. The costs of
     software revenue represented 10% and 8% of the related software revenue for
     the  nine  months  ended   September  30,  2003  and  September  30,  2002,
     respectively.

     The  increase  in cost of  software  revenue  for the three and nine  month
     periods of 2003,  as compared to the same periods in 2002, is due primarily
     to  higher  partner  commission  expense  and the  additional  amortization
     expense of acquired  technology and other intangible assets associated with

                                       25

     the  acquisitions  of eGrail  in April  2002 and  Shana in April  2003.  We
     anticipate cost of software  revenue as a percentage of software revenue to
     remain comparable to current levels in future periods,  however  additional
     technology  acquisitions  or  unexpected  increases in third party  royalty
     costs could increase cost of software revenue in the future.

     *Customer  Support:*  Cost of  customer  support  revenue  includes  costs of
     customer support personnel,  cost of supplies and spare parts, and the cost
     of third-party hardware  maintenance.  The cost of customer support revenue
     increased  $0.1 million,  or 1%, to $9.7 million for the three months ended
     September  30, 2003 from $9.6 million for the three months ended  September
     30, 2002. The cost of customer support revenue  decreased $1.4 million,  or
     5%, to $28.1  million for the nine  months  ended  September  30, 2003 from
     $29.5  million for the nine months ended  September  30, 2002.  These costs
     represented  23% and 25% of the related  customer  support  revenue for the
     three months ended September 30, 2003 and 2002,  respectively.  These costs
     represented  23% and 26% of the related  customer  support  revenue for the
     nine months ended September 30, 2003 and 2002, respectively.

     The  decrease  in cost of  customer  support  revenue  as a  percentage  of
     customer  support  revenue  was  primarily  due to  automation  and process
     improvements that allowed growth in the customer and revenue base without a
     proportional  increase in support  personnel and cost. The decrease in cost
     of  customer  support  revenue  for nine months  ended  September  30, 2003
     compared  to the same  period in 2002 is  primarily  attributable  to lower
     variable  compensation  expense and lower supplies cost. Going forward,  we
     expect cost of customer support revenue to remain  relatively stable in the
     near term.

     *Professional  Services and  Education:*  Cost of  professional  services and
     education  revenue  consists  primarily of costs of  professional  services
     personnel, training personnel, and third-party independent consultants. The
     cost of professional services and education revenue decreased $0.8 million,
     or 7%, to $10.6 million for the three months ended  September 30, 2003 from
     $11.4 million for the three months ended  September  30, 2002.  The cost of
     professional services and education revenue decreased $6.0 million, or 16%,
     to $32.0  million for the nine months ended  September  30, 2003 from $38.0
     million  for  the  nine  months  ended  September  30,  2002.  These  costs
     represented 87% and 89% of the related professional  services and education
     revenue  for  the  three  months  ended   September   30,  2003  and  2002,
     respectively.   These  costs   represented  89%  and  88%  of  the  related
     professional  services  and  education  revenue for the nine  months  ended
     September 30, 2003 and 2002, respectively.

     The decrease in cost of professional services and education revenue in 2003
     compared to 2002 was  primarily  attributable  to a reduction in the use of
     third-party independent consultants, as well as lower variable compensation
     expense; all directly related to the decrease in professional  services and
     education revenue. We expect professional services and education costs as a
     percentage  of  professional  services and  education  revenue to vary from
     period to period,  depending on the utilization rates of internal resources
     and  the  mix  between  the  use  of  internal  resources  and  third-party
     independent consultants.

     *Hardware:*  Cost of hardware  revenue  includes the cost of  assembling  and
     distributing our OSAR library  products,  the cost of hardware  integration
     personnel,  and warranty costs. The cost of hardware revenue decreased $0.5
     million,  or 38%, to $0.8 million for the three months ended  September 30,
     2003 from $1.3 million for the three months ended  September 30, 2002.  The
     cost of hardware  revenue  decreased $1.9 million,  or 40%, to $2.9 million
     for the nine months ended September 30, 2003 from $4.8 million for the nine
     months ended  September 30, 2002. The decrease in cost of hardware  revenue
     is directly related to the decrease in sales of OSAR library products.  The
     increase in costs as a percentage  of sales  reflects  the fixed  operating
     costs  relative to reduced sales volume.  This  operating  segment is not a
     strategic focus for us.

                                       26
**Operating Expenses***Sales and  Marketing:*  Sales and marketing  expense  consists  primarily of
     salaries and benefits,  sales commissions and other expenses related to the
     direct and indirect sales force, various marketing expenses and the cost of
     other market  development  programs.  Sales and marketing expense increased
     $2.1 million,  or 6%, to $34.4 million for the three months ended September
     30, 2003 from $32.3 million for the three months ended  September 30, 2002,
     and represented 38% and 39% of total revenue for these respective  periods.
     Sales  and  marketing  expense  increased  $6.3  million,  or 6%, to $103.7
     million,  6%,  for the nine  months  ended  September  30,  2003 from $97.4
     million for the nine months ended  September 30, 2002, and  represented 39%
     and 38% of total revenue for these respective periods.

     The increase in sales and marketing  expense in the quarter ended September
     30,  2003 and  during the first nine  months of 2003 was  primarily  due to
     investment in our sales and marketing  capabilities  that include  targeted
     contact  and  campaign  management  for  specific  industries,  and channel
     partner  development  expenses associated with the launch of our FileNet P8
     product.   This   increase  was  partially   offset  by  reduced   variable
     compensation  expense.  We expect  sales  and  marketing  expense  to be at
     approximately  39% of  revenue  in  the  near-term  due  to the  continuing
     investment in demand generation capabilities for targeted customers through
     our direct and indirect sales channels.

     *Research  and  Development:*  Research  and  development  expense  primarily
     consists of costs of personnel to support product development. Research and
     development  expense  increased $1.2 million to $19.0 million,  7%, for the
     three  months  ended  September  30, 2003 from $17.8  million for the three
     months ended  September 30, 2002, and  represented 21% of total revenue for
     these respective  periods.  Research and development expense increased $4.0
     million to $58.0 million, for the nine months ended September 30, 2003 from
     $54.0 million for the nine months ended September 30, 2002, and represented
     22% and 21% of total revenue for these respective periods.

     The increase  year over year in the first nine months of 2003 is the result
     of increased third party development  expense and increased  headcount.  We
     are  transitioning  our development labor base from purely direct personnel
     to a mix of internal  and third party  developers.  Third party  developers
     tend to be located in lower labor cost countries.  Over time, we believe we
     will be able to lower our per developer cost through the use of these third
     party resources. However, in the near term, some duplicate expenses will be
     incurred  as our  development  programs  are  transitioned  to third  party
     developers.  Third  party  development  costs  for the  nine  months  ended
     September  30, 2003 was $2.4 million  compared to $1.3 million for the same
     period in 2002. Research and development employee headcount totaled 464 for
     the period ended  September 30, 2003 compared to 459 for the same period in
     2002.   Increased  internal  headcount  resulted  in  higher  compensation,
     benefits and relocation costs related to the eGrail and Shana  acquisitions
     in April of 2002 and 2003, respectively. This increase was partially offset
     by a decrease in variable compensation expense.

     Our  research  and  development   efforts  are  focused  on  enhancing  and
     maintaining  our  enterprise  content  management  capabilities  within the
     FileNet P8 product line.  These efforts will focus on  enhancements  to our
     FileNet P8 platform,  Business Process  Management,  Web Content Management
     and  the   development   of  integrated   records   management   and  other
     capabilities. We intend to complement internal development with third-party
     software  through  OEM  agreements  and may execute  additional  technology
     acquisitions.  We expect that competition for qualified technical personnel
     will remain strong and may result in higher levels of compensation  expense
     for  us  in  the  future.   We  believe  that   research  and   development
     expenditures,  including compensation of technical personnel, are essential
     to maintaining our competitive position. We expect research and development
     expense to be at approximately 21% of revenue in the near term.

                                       27
*In-process Research and Development:*  There has been no in-process research
     and development  expensed during 2003. The acquisition of the eGrail assets
     acquired  in April  2002  included  $400,000  of  in-process  research  and
     development,  which was expensed  upon  acquisition  because  technological
     feasibility  had not  been  established  and no  future  alternative  uses,
     existed.

     *General and  Administrative:*  General and  administrative  expense consists
     primarily of personnel costs for finance,  information  technology,  legal,
     human   resources  and  general   management,   and  the  cost  of  outside
     professional  services.  General and administrative  expense increased $0.7
     million, or 9%, to $8.2 million,  for the three months  ended September 30,
     2003 from $7.5 million for the three months ended  September 30, 2002,  and
     represented 9% of total revenue for these respective  periods.  General and
     administrative  expense  increased $0.1 million,  or less than 1%, to $24.4
     million for the nine months ended September 30, 2003 from $24.3 million for
     the nine months ended  September  30,  2002,  and  represented  9% of total
     revenue for these respective periods.

     General and  administrative  expense was essentially  unchanged  during the
     first nine months of 2003  compared to the first nine months of 2002 due to
     cost  containment  programs that have been in effect over the last eighteen
     months.  We  expect  general  and  administrative  expenses  to  remain  at
     approximately 9% of revenue for the near term.

     **Amortization of Purchased Intangible Assets**

     The April 2002  purchase of eGrail  assets  resulted in  intangible  assets
     comprised  of acquired  technology  of $3.3 million and patents of $24,000,
     with assigned useful lives of five years and two years,  respectively.  The
     April 2003 purchase of Shana resulted in $5.7 million of intangible assets;
     comprised of acquired  technology  of $4.0  million,  customer  maintenance
     relationships  of $800,000 and technology  manuals and design  documents of
     $600,000.  All intangible  assets for the Shana acquisition were assigned a
     useful life of five years. Non-compete agreements with former executives of
     Shana were  valued at $277,000  and were  assigned a useful life of between
     two and three years.

     **Other Income, Net**

     Other income, net, consists primarily of interest income earned on our cash
     and cash  equivalents,  short and  long-term  investments,  and other items
     including  foreign  exchange  gains and losses,  the gain (loss) on sale of
     fixed assets, and interest expense.  Other income, net was $0.6 million for
     the three months ended September 30, 2003 compared to other income,  net of
     $1.0 million for the three months ended  September 30, 2002.  Other income,
     net was $3.3 million for the nine months ended  September 30, 2003 compared
     to other  income,  net of $3.8 million for the nine months ended  September
     30, 2002. Other income decreased slightly between comparable periods due to
     reduced investment  earnings between comparable periods partially offset by
     foreign exchange gains.

     **Income Taxes**

     Our combined  federal,  state and foreign annual effective tax rate for the
     three  months  ended  September  30,  2003,  is 28% compared to 23% for the
     comparable period in 2002. The combined  federal,  state and foreign annual
     effective  tax rate for the nine months  ended  September  30, 2003, is 28%
     compared to 23% for the comparable period in 2002. The provision for income
     taxes  differs  from the tax computed at the federal  statutory  income tax
     rate due  primarily to earnings  considered  as  permanently  reinvested in
     foreign operations. The increased tax rate in 2003 was primarily due to the
     mix  of  income  earned  by  our  domestic  operations  versus  the  foreign
     subsidiaries.

     We have a  deferred  net tax asset of  approximately  $22.6  million  and a
     valuation  allowance of  approximately  $23.8  million as of September  30,
     2003.  FileNet management will continue weighing various factors throughout
     the year to assess the  recoverability  of its recorded deferred assets and

                                       28

     the need for any valuation  allowance against such amounts.  Recoverability
     of the deferred tax assets is dependent on  profitability  from  operations
     going forward.  If we were to reverse the entire valuation allowance in the
     future, we would record a non-cash charge to increase  additional  reported
     paid in  capital by  approximately  $9.0  million,  and tax  expense  would
     decrease  (causing an increase in earnings) by approximately  $10.0 million
     to $14.0 million.

     **Liquidity and Capital Resources**

     At September 30, 2003,  combined cash,  cash  equivalents  and  investments
     totaled  $217.5  million,  an increase of $32.3  million from  December 31,
     2002.

     Cash  provided  by  operating  activities  during  the  nine  months  ended
     September  30, 2003  totaled  $35.8  million and resulted  primarily  from:
     additions to net income for depreciation and amortization  expense of $14.8
     million,  net  income of $5.3  million,  an  increase  of $3.3  million  in
     customer deposits and advances, an increase in unearned maintenance revenue
     related to prepaid maintenance  contracts of $2.9 million and a decrease in
     accounts receivable of $2.9 million.  The increase in unearned  maintenance
     revenue is primarily the result of the growth in our base of annual support
     contracts  resulting  from new  customer  sales  and  sales  of  additional
     products  to the  existing  base.  Additionally,  a  significant  number of
     maintenance  contracts  renew early in the year and are  amortized  ratably
     throughout the year resulting in a lower balance in unearned maintenance by
     December 31.

     For the nine months  ended  September  30,  2003,  cash used for  investing
     activities  totaled $18.3 million and included:  Shana  acquisition of $8.1
     million,  capital  expenditures  of  $6.8  million  and a net  purchase  of
     marketable securities of $3.5 million.

     Cash provided by financing activities totaled $9.5 million and was a result
     of proceeds  received from the exercise of employee stock options and stock
     purchases under the employee stock purchase plan.

     On June 27, 2003, our $5.0 million multi-currency  revolving line of credit
     expired in accordance  with its terms and was not renewed  because the cost
     of carrying the line did not justify the level of usage. We believe we will
     be able to  meet  our  bank  guarantee  needs  through  our  existing  bank
     relationships in the United States and internationally.

     Contractual cash obligations of significance  include  operating leases for
     our  corporate  offices,  sales  offices,   development  and  manufacturing
     facilities,  non-cancelable  operating leases for other equipment,  some of
     which have renewal  options and  generally  provide for  escalation  of the
     annual rental amount.  (See Note No. 9 to the Notes to Unaudited  Condensed
     Consolidated Financial Statements for additional details.)

     We  believe  that  our  present  cash  balances  together  with  internally
     generated  funds and credit  lines will be  sufficient  to meet our working
     capital and capital expenditure needs for at least the next 12 months.

     **Other Financial Instruments**

     We conduct business on a global basis in several  currencies.  Accordingly,
     we are exposed to movements in foreign  currency  exchange  rates. We enter
     into forward foreign exchange  contracts to minimize the short-term  impact
     of currency fluctuations on monetary assets and liabilities  denominated in
     currencies other than the functional currency of the relevant entity. We do
     not enter into foreign  exchange  forward  contracts for trading  purposes.
     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 as other income in the consolidated statements of
     operations.  We open new hedge  contracts on the last  business day of each
     quarter  that  will  mature  at  the  end  of the  following  quarter.  The
     counterparties to these contracts are major financial institutions.  We use

                                       29

     commercial   rating   agencies  to  evaluate  the  credit  quality  of  the
     counterparties and do not anticipate  nonperformance by any counterparties.
     We do not  anticipate  a material  loss  resulting  from any  credit  risks
     related to any of these institutions.

     **Recently Adopted Accounting Pronouncements**

     In June 2001, the FASB issued SFAS No. 141, "Business  Combinations," which
     was effective  immediately.  SFAS No. 141 requires that the purchase method
     of accounting be used for all business  combinations  initiated  after June
     30, 2001 and it eliminated the pooling-of-interests method. The adoption of
     this  standard  did  not  have a  significant  impact  on our  consolidated
     financial  statements.  Our April 2002  acquisition  of certain  assets and
     certain liabilities of eGrail, Inc. and our April 2003 acquisition of Shana
     Corporation were accounted for in compliance with this  pronouncement  (See
     Note No. 3 to the Notes to the Unaudited Condensed  Consolidated  Financial
     Statements for details).

     In June 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets,"  which we  adopted  January 1, 2002.  SFAS No. 142  requires  that
     goodwill and other intangible assets with indefinite useful lives no longer
     be amortized,  but instead be tested for  impairment at least  annually and
     written  down when  impaired.  SFAS No. 142 requires  purchased  intangible
     assets other than goodwill to be amortized over their useful lives,  unless
     these  lives are  determined  to be  indefinite.  In  accordance  with this
     standard, we do not amortize goodwill and indefinite life intangible assets
     but evaluate their carrying value annually or when events or  circumstances
     indicate that their carrying value may be impaired.  As of the first day of
     July of each year,  goodwill is tested for impairment by determining if the
     carrying value of each reporting unit exceeds its fair value. We engaged an
     independent  valuation firm to determine the business  enterprise value for
     each of our three reporting units and to perform an impairment  analysis as
     of July 1, 2003 in accordance  with SFAS 142. The analysis  indicated there
     was no impairment of goodwill in any of the three  reporting  units.  As of
     September  30, 2003,  no  impairment  of goodwill has been  recognized.  If
     estimates  change,  a  materially  different  impairment  conclusion  could
     result.

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

     In July  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated with Exit or Disposal  Activities,"  which  addresses  financial
     accounting  and  reporting  for  costs  associated  with  exit or  disposal
     activities  and  supersedes  EITF Issue 94-3,  "Liability  Recognition  for
     Certain Employee  Termination  Benefits and Other Costs to Exit an Activity
     (including  Certain  Costs  Incurred  in a  Restructuring)."  SFAS No.  146
     requires  that  costs  associated  with  exit  or  disposal  activities  be
     recognized  when they are incurred  rather than at the date of a commitment
     to an exit or  disposal  plan.  SFAS  No.  146  also  establishes  that the
     liability  should  initially  be measured  and  recorded at fair value.  We
     adopted  the  provisions  of SFAS No. 146 for exit or  disposal  activities
     initiated  after  December 31, 2002.  The adoption of this standard did not
     have a material impact on our consolidated  financial  position and results
     of operations.

     In November  2002,  the FASB  issued FIN 45,  "Guarantor's  Accounting  and
     Disclosure  Requirements for Guarantees,  Including Indirect Guarantees and
     Indebtedness of Others," an interpretation of FASB Statement Nos. 5, 57 and
     107,  and  rescission  of FIN 34,  "Disclosure  of Indirect  Guarantees  of
     Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by
     the  guarantor  in its interim and annual  financial  statements  about its
     obligations  under certain  guarantees that it has issued. It also requires
     that a guarantor  recognize,  at the inception of a guarantee,  a liability
     for the fair value of the  obligation  undertaken in issuing the guarantee.

                                       30

     The  provisions  related to  recognizing  a liability  at  inception of the
     guarantee for the fair value of the guarantor's  obligations does not apply
     to product  warranties or to guarantees  accounted for as derivatives.  The
     initial  recognition and measurement  provisions of this interpretation are
     applicable on a prospective  basis to guarantees  issued or modified  after
     December 31, 2002,  while the  disclosure  requirements  are  effective for
     financial  statements  for interim or annual  periods ending after December
     15, 2002.  The adoption of the  recognition  of provisions of FIN 45 in the
     three and nine  months  ended  September  30,  2003 did not have a material
     impact on our consolidated results of operations or financial position.

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

     In  January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
     Interest   Entities."  In  general,   a  variable   interest  entity  is  a
     corporation,  partnership,  trust,  or any other legal  structure  used for
     business  purposes  that  either (a) does not have  equity  investors  with
     voting rights or (b) has equity  investors  that do not provide  sufficient
     financial  resources  for the  entity to  support  its  activities.  FIN 46
     requires a variable interest entity to be consolidated by a company if that
     company  is subject  to a  majority  of the risk of loss from the  variable
     interest  entity's  activities  or  entitled  to receive a majority  of the
     entity's residual returns or both. The consolidation requirements of FIN 46
     apply  immediately to variable  interest entities created after January 31,
     2003. The consolidation  requirements  apply to older entities in the first
     fiscal year or interim period beginning after June 15, 2003. Certain of the
     disclosure  requirements  apply in all  financial  statements  issued after
     January 31,  2003,  regardless  of when the  variable  interest  entity was
     established.  We do not have any variable interest entities as of September
     30,  2003.  The  adoption  of FIN 46 did not have a material  impact on our
     consolidated results of operations or financial position.

     In April 2003, FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
     Derivative  Instruments and Hedging Activities." SFAS No. 149 (1) clarifies
     under what  circumstances  a contract with an initial net investment  meets
     the characteristic of a derivative discussed in paragraph 6(b) of Statement
     No. 133, (2) clarifies  when a derivative  contains a financing  component,
     (3) amends the  definition  of an  underlying  derivative  to conform it to
     language  used  in  FIN  45,  and  (4)  amends   certain   other   existing
     pronouncements, which will collectively result in more consistent reporting
     of contracts as either derivatives or hybrid  instruments.  SFAS No. 149 is
     effective for contracts and hedging  relationships entered into or modified
     after June 30,  2003.  The adoption of SFAS No. 149 did not have a material
     impact on our consolidated financial statements or financial position.

     In May 2003, FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
     Instruments with  Characteristics of both Liabilities and Equity." SFAS No.
     150 establishes standards for how an issuer classifies and measures certain
     financial  instruments  with  characteristics  of both debt and  equity and
     requires an issuer to classify the following  instruments as liabilities in
     its balance sheet:

          o    a  financial  instrument  issued  in the form of  shares  that is
               mandatorily  redeemable and embodies an unconditional  obligation
               that requires the issuer to redeem it by transferring  its assets
               at a  specified  or  determinable  date or upon an event  that is
               certain to occur;

                                       31

          o    a financial  instrument,  other than an outstanding  share,  that
               embodies an obligation to repurchase the issuer's  equity shares,
               or is indexed to such an  obligation,  and requires the issuer to
               settle the obligation by transferring assets; and

          o    a financial instrument that embodies an unconditional  obligation
               that the issuer must  settle by issuing a variable  number of its
               equity  shares if the monetary  value of the  obligation is based
               solely  or  predominantly  on (1) a fixed  monetary  amount,  (2)
               variations in something other than the fair value of the issuer's
               equity shares, or (3) variations  inversely related to changes in
               the fair value of the issuer's equity shares.

     SFAS  No.  150 is  effective  for  financial  instruments  entered  into or
     modified  after  May 31,  2003 and is  effective  for all  other  financial
     instruments as of the first interim period  beginning  after June 15, 2003.
     SFAS No. 150 is to be implemented  by reporting the cumulative  effect of a
     change in accounting principle. The adoption of SFAS No. 150 did not have a
     material  impact on our  consolidated  financial  statements  or  financial
     position.

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

**Risk Factors That May Affect Future Results**

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

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

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

     o    the industry-wide slow down in IT spending;
     o    general domestic and international economic and political conditions;
     o    the discretionary  nature of our customers' budget and purchase cycles
          and the absence of long-term customer purchase commitments;
     o    the tendency to realize a substantial percentage of our revenue in the
          last weeks, or even days, of each quarter;
     o    the potential for delays or deferrals of customer orders;
     o    the size, complexity and timing of individual transactions;
     o    the length of our sales cycle;
     o    the level of software product sold and price competition;
     o    the timing of new software  introductions and software enhancements by
          us and our competitors; or,
     o    seasonality in technology purchases.

                                       32

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

     ***The  markets in which we operate  are highly  competitive  and we cannot be
sure that we will be able to continue to compete effectively, which could result
in lost  market  share and  reduced  revenue.***  The  markets  we serve are highly
competitive and we expect competition to intensify. We have multiple competitors
and  there  may  be  future  competitors,   some  of  which  have  or  may  have
substantially greater sales, marketing,  development and financial resources. As
a consequence, our present or future competitors may be able to develop software
products  comparable  or superior  to those  offered by us,  offer lower  priced
products  or adapt  more  quickly  than we do to new  technologies  or  evolving
customer requirements.

     Other competitive risks include, but are not limited to:

     o    We  anticipate   significant  future  consolidation  as  the  software
          industry matures. Large  well-established  software firms like Oracle,
          IBM and  Adobe may enter  our  market  by  adding  content  management
          features to their existing suite of products. EMC Corporation,  a data
          storage  hardware  company,  has  announced  its  intention to acquire
          Documentum.  Other  large,  well-capitalized  hardware firms  like Sun
          Microsystems  may enter our market by  acquiring  our  competitors  to
          pursue revenue growth opportunities;

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

     o    Some of our  competitors  are also our key technology  suppliers.  For
          example, IBM's Crossworlds business unit supplies a key technology for
          our business  process  management  software.  Our inability to license
          future releases of key technology from these competitive vendors could
          limit the technical capabilities of our products.

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

                                       33
***A significant portion of our revenue is derived  internationally and we are
subject  to many risks  internationally,  which  could put our  revenue at risk.***
Historically,  we have  derived  approximately  30% of our  total  revenue  from
international  sales through our worldwide  network of subsidiaries  and channel
partners.  International business is subject to certain risks including, but not
limited to, the following:

     o    political and economic instability;
     o    tariffs and trade barriers;
     o    varying technical standards and requirements for localized products;
     o    reduced  protection  for  intellectual   property  rights  in  certain
          countries;
     o    difficulties in staffing and maintaining foreign operations;
     o    difficulties in managing foreign distributors;
     o    multiple overlapping tax regimes;
     o    currency restrictions and currency exchange fluctuations;
     o    the burden of complying  with a wide variety of complex  foreign laws,
          regulations and treaties;
     o    spreading our management resources to cover multiple countries; or,
     o    longer  collection  cycles and higher risk of  non-collection  and bad
          debt expense.

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

     ***The market for content management  solutions may not grow as we anticipate,
and may decline,  and our products may not gain  acceptance  within this market.***
Our future  financial  performance will depend primarily on the continued growth
of the markets for our software  products and services as well as our ability to
capture a larger share of those markets.  Our primary product  offerings address
the new and emerging  market for content  management  solutions.  This market is
developing  rapidly,  and  while we  believe  this  market is  growing  and will
continue to grow,  particularly  as new regulations are introduced that focus on
controlling the flow of information  within  organizations to ensure  compliance
with  disclosure  and other  obligations,  there can be no assurance  that these
markets  will  continue  to grow as we  anticipate,  or that  our  products  and
solutions will gain  acceptance  within these markets.  If the markets we serve,
particularly the market for enterprise  content  management  solutions,  fail to
grow or grow more slowly than we  currently  anticipate,  or if our products and
solutions do not gain acceptance within these markets,  our business,  financial
condition and operating results would be harmed.

     ***We have adopted a strategy of developing a unified  platform for enterprise
content management products and related services, and we must effectively manage
the  transition of our products and services to this platform or our revenue may
suffer.***  Our future success  depends,  in part, on our ability to execute on our
strategy of delivering a unified  platform and framework for Enterprise  Content
Management.  To date, the majority of our revenue has been generated by sales of
licenses to our diverse content  management  products and related services.  Our
unified platform  strategy  requires us to adapt our legacy products and develop
new  products  for our new  FileNet P8  platform.  We expect that this family of
products  and services  will  continue to account for the majority of our future
revenue,  making us highly  dependent on continued  sales of this single product
family.  If we do not make an effective  transition  from existing  products and
services to our FileNet P8  architecture,  our revenue may be seriously  harmed.
Among  the  factors  that  make a smooth  transition  difficult  are  delays  in
development, variations in pricing, delays in customer purchases in anticipation
of new  introductions  and customer  demand for the new  offerings.  If we incur
delays in customer purchases or do not accurately estimate the market effects of
new  introductions,  future demand for our products and services and our revenue
may be seriously harmed.

     ***We must develop and sell new  products to keep up with rapid  technological
change in order to achieve future revenue growth and  profitability.***  The market
for  our  software  and  services  is  characterized   by  rapid   technological
developments,  evolving industry standards, changes in customer requirements and
frequent new product introductions and enhancements.  Our ability to continue to
sell  products  will be  dependent  upon our  ability to continue to enhance our
existing  software and services  offerings,  develop and introduce,  in a timely
manner, new software products  incorporating  technological advances and respond

                                       34

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

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

     ***We must devote substantial  resources to software  development,  and we may
not realize  revenue from our  development  efforts for a substantial  period of
time.***  Introducing  new products that rapidly  address  changing  market demands
requires a continued high level of investment in research and  development.  Our
product development and engineering expenses were $58.0 million, or 22% of total
revenue, for the nine months ended September 30, 2003 and $ 54.0 million, or 21%
of total  revenue,  for the nine months  ended  September  30,  2002.  The costs
associated  with software  development  are  increasing,  including the costs of
recruiting  and  retaining  engineering  talent and  acquiring or licensing  new
technologies.  The  majority  of our  investment  in  new  and  existing  market
opportunities  must be made prior to our ability to generate  revenue from these
new  opportunities.  These investments of money and resources must be made based
on our  prediction  of new products and services  that the market needs and will
accept. As a result,  our operating  results could be adversely  affected if our
predictions  of market  demand are  incorrect and we are not able to realize the
level  of  revenues  we  expect  from  new   products  or  if  that  revenue  is
significantly delayed.

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

     ***We must retain and attract key  executives  and personnel who are essential
to our business, which could result in increased personnel expenses.*** Our success
depends to a  significant  degree upon the  continued  contributions  of our key
management, as well as other marketing, technical and operational personnel. The

                                       35

loss of the services of one or more key employees could have a material  adverse
effect on our operating results.  We do not have employment  agreements with any
of  the  members  of our  United  States-based  senior  management.  We do  have
employment  contracts with members of our  international  management that commit
them to a notification period.

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

     ***If our  products  contain  errors,  we could incur  unplanned  expenses and
delays  that  could  result in  reduced  revenue,  lower  profits,  and  harmful
publicity.***  Software,  services and products,  as complex as those we sell,  are
susceptible to errors or failures, especially when first introduced or deployed.
Our  software  products  are often  intended  for use in  applications  that are
critical to a customer's  business.  As a result,  our customers may rely on the
effective  performance  of our software to a greater  extent than the market for
software products generally. Despite internal testing and testing by current and
potential customers,  new products or enhancements may contain undetected errors
or  performance  problems  that are  discovered  only  after a product  has been
installed  and used by customers.  Errors or  performance  problems  could cause
delays  in  product   introduction   and  shipments  or  could  require   design
modifications,  either  of which  could  lead to a loss in or delay of  revenue.
These  problems  could  cause a diversion  of  development  resources,  harm our
reputation  or result in  increased  service or warranty  costs,  or require the
payment  of  monetary  damages.  While our  license  agreements  with  customers
typically contain provisions designed to limit our exposure to potential product
liability  claims,  it is possible that such limitation of liability  provisions
may not be effective under the laws of certain jurisdictions.

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

     o    difficulties  in the  integration  of  the  operations,  products  and
          personnel of the acquired companies;
     o    the incurrence of debt;
     o    liabilities  and risks that are not known or  identifiable at the time
          of the acquisition;
     o    difficulties in retaining the acquired company's customer base;
     o    valuations  of  acquired  assets  or  businesses  that are  less  than
          expected; or
     o    the potential loss of key personnel of the acquired company.

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

     ***Our business is highly  automated for the  execution of marketing,  selling
and technical support  functions.***  We depend on the integrity of our information
systems network  connectivity to perform these business  functions.  Significant
business interruption could occur at our Costa Mesa headquarters facility due to
a natural  disaster  such as  earthquake,  which could  cause a prolonged  power
outage and the inability for key  personnel to perform their job  functions.  We
have taken  precautionary  measures  including  implementing a disaster recovery
plan to mitigate this risk.

                                       36
***Protection of our  intellectual  property and other  proprietary  rights is
limited, which could result in the use of our technology by competitors or other
third parties. There is risk of third-party claims of infringement,  which could
expose us to litigation and other costs.***  Our success  depends,  in part, on our
ability  to  protect  our  proprietary  rights to the  technologies  used in our
principal products.  We rely on a combination of copyrights,  trademarks,  trade
secrets,  patents,  confidentiality  procedures  and  contractual  provisions to
protect our proprietary rights in our software  products.  We cannot assure that
our existing or future copyrights,  trademarks,  trade secrets, patents or other
intellectual  property rights will have sufficient  scope or strength to provide
meaningful  protection or a commercial  advantage to us.  Intellectual  property
rights often cannot be enforced without  engaging in litigation,  which involves
devotion of  significant  resources,  can divert  management  attention  and has
uncertain  outcomes.  In  addition,  the laws of some  foreign  countries do not
protect our proprietary  rights to the same extent, as do the laws of the United
States. Any inability to protect our intellectual property may harm our business
and competitive position.

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

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

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

                                       37
***Our  stock  price  has  been  and  may  continue  to  be  volatile  causing
fluctuations  in the market price of our stock,  which would impact  shareholder
value.***  The trading price of our common stock has  fluctuated in the past and is
subject to significant  fluctuations in response to the following factors, among
others, some of which are beyond our control:

     o    variations in quarterly operating results;
     o    fluctuations in our order levels;
     o    announcements of technological  innovations or new products or product
          enhancements by us or our competitors;
     o    key management changes;
     o    changes in accounting regulations;
     o    changes in joint marketing and development programs;
     o    developments relating to patents or other intellectual property rights
          or disputes;
     o    developments in our  relationships  with our customers,  resellers and
          suppliers;
     o    our announcements of significant  contracts,  acquisitions,  strategic
          partnerships or joint ventures;
     o    general conditions in the software and computer industries;
     o    fluctuations  in general  stock  market  prices and volume,  which are
          particularly  common among highly volatile  securities of Internet and
          software companies;
     o    acquisitions in the past have been primarily cash based  transactions.
          Future  acquisitions  may include  stock,  which could  dilute EPS and
          possibly reduce shareholder value;
     o    we may not be able to  hedge  all  foreign  exchange  risk  due to the
          significant  fluctuation  of the Euro to the US Dollar and our ability
          to predict the mix of sales orders  denominated in the Euro at the end
          of each fiscal quarter;
     o    reduced  stock value may  restrict  our access to equity  financing to
          fund further acquisitions using stock;
     o    industry  analyst opinions may increase our stock price volatility and
          reduce shareholder value; and,
     o    other general economic and political conditions.

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

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

Our exposure to market rate risk for changes in interest rates relates primarily
to our investment  portfolio.  We have not used derivative financial instruments
in our investment portfolio.  We place our investments with high-quality issuers
and,  by  policy,  limit the amount of credit  exposure  to any one  issuer.  We
protect  and  preserve  our  invested  funds by  limiting  default,  market  and
reinvestment risk. Our investments in marketable securities consist primarily of
high-grade  corporate and  government  securities  with  maturities of less than
three years.  Investments purchased with an original maturity of three months or
less are considered to be cash  equivalents.  We classify all of our investments
as available-for-sale.  Available-for-sale securities are carried at fair value,
with unrealized gains and losses,  net of tax, reported in a separate  component
of stockholders'  equity.  Average  maturity of our investment  portfolio is 4.1
months;  therefore,  the  movement of interest  rates should not have a material
impact on our balance sheet or income statement.

At any time,  a  significant  increase/decrease  in interest  rates will have an
impact  on the  fair  market  value  and  interest  earnings  of our  investment
portfolio.  We do not  currently  hedge this  interest  rate  exposure.  We have
performed a  sensitivity  analysis as of  September  30, 2003 and 2002,  using a
modeling  technique  that measures the change in the fair values  arising from a
hypothetical 50 basis points and 100 basis points adverse movement in the levels

                                       38

of interest  rates across the entire yield curve,  which are  representative  of
historical  movements in the Federal  Funds Rate with all other  variables  held
constant.   The   analysis   covers   our   investment   and  is  based  on  the
weighted-average  maturity of our investments as of September 30, 2003 and 2002.
The sensitivity  analysis  indicated that a hypothetical 50 basis points adverse
movement  in  interest  rates  would  result in a loss in the fair values of our
investment  instruments  of  approximately  $258,000 at  September  30, 2003 and
approximately $271,000 at September 30, 2002. Similarly a hypothetical 100 basis
points  adverse  movement in interest  rates would  result in a loss in the fair
values of our  investments of  approximately  $515,000 at September 30, 2003 and
approximately $541,000 at September 30, 2002.

The following table provides information about our cash and cash equivalents and
our investment portfolio at September 30, 2003 (dollars in thousands):

 .
                                                     Estimated Fair
   (In thousands)                          Cost               Value 
   Debt Securities
     Due in one year or less:
        Short-term munis-taxable     $   8,339            $   8,359
        Corporate                       13,642               13,647
        Governments/Agencies            11,539               11,539 
   Total due in one year                33,520               33,545

   Due in one to three years:
        Taxable munis                        -                    -
        Corporate                        2,222                2,208
        Government/Agencies             19,500               19,497 
     Total due in three years           21,722               21,705 
       Grand total                   $  55,242            $  55,250 

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

**Foreign Currency Fluctuations and Inflation**

Our performance  can be affected by changes in foreign  currency values relative
to the U.S.  dollar in relation to our revenue and operating  expenses.  We have
entered into forward foreign exchange  contracts  primarily to hedge amounts due
from  and the  net  assets  of  selected  subsidiaries  denominated  in  foreign
currencies (mainly in Europe and Asia Pacific) against  fluctuations in exchange
rates.  We  have  not  entered  into  forward  foreign  exchange  contracts  for
speculative or trading purposes. Our accounting policies for these contracts are
based on our designation of the contracts as hedging transactions.  The criteria
we  use  for   designating  a  contract  as  a  hedge  include  the   contract's
effectiveness   in  risk  reduction  and   one-to-one   matching  of  derivative
instruments  to underlying  transactions.  Gains and losses on foreign  exchange
contracts are recognized in income in the same period as gains and losses on the
underlying  transactions.  If an underlying  hedged  transaction were terminated
earlier than initially  anticipated,  the offsetting gain or loss on the related
forward  foreign  exchange  contract  would be  recognized in income in the same
period. In addition,  since we enter into forward contracts only as a hedge, any
change in currency  rates would not result in any material net gain or loss,  as
any gain or loss on the underlying foreign currency denominated balance would be
offset  by the  gain or loss on the  forward  contract.  Our  forward  contracts
generally have an original  maturity of three months.  As of September 30, 2003,
we had forward foreign exchange  contracts  outstanding  totaling  approximately
$0.9 million in ten currencies. These contracts were opened on the last business
day of the quarter and mature within three months.

                                       39

Cumulative  other  comprehensive  loss  decreased  by $6.9  million for the nine
months ended September 30, 2003 due to unrealized  foreign currency  translation
gains  resulting  from the  strengthening  of the Euro  against the U.S.  dollar
during the first nine months of 2003.

Management  believes  that  inflation  has not had a  significant  impact on the
prices of our products, the cost of our materials,  or our operating results for
the nine months ended September 30, 2003.

**Item 4.   Controls and Procedures**

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

As of September  30,  2003,  the end of the quarter  covered by this report,  an
evaluation was carried out under the supervision and with the  participation  of
the Company's  management,  including the Company's Chief Executive  Officer and
the Company's Chief Financial  Officer,  of the  effectiveness of the design and
operation of the Company's disclosure controls and procedures as required by SEC
Rule 13a - 15(b). Based on the foregoing,  the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at the reasonable assurance level.

There has been no change  in the  Company's  internal  controls  over  financial
reporting  during the Company's  most recent fiscal  quarter that has materially
affected,  or is reasonably likely to materially  affect, the Company's internal
controls over financial reporting.

**PART II. OTHER INFORMATION****Item 1. Legal Proceedings**

     See Note 10 to Consolidated Financial Statements.

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

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

     (b)  Reports on Form 8-K
     No reports on Form 8-K were filed in the quarter ended September 30, 2003.

                                       40
**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**November 13, 2003           By:     /s/ Sam M. Auriemma                       
Date                               Sam M. Auriemma, Senior Vice President
                                   (Principal Financial and Accounting Officer,
                                   Authorized Signatory)
                                   and Chief Financial Officer

                                       41
**Index to Exhibits**

  The following exhibits are filed herewith or incorporated by reference:

  Exhibit No.Exhibit Description           

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

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

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

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

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

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

        4.4*        Amendment Three dated November 30, 2002 to Rights  Agreement
                    dated as of November 4, 1988 between FileNet Corporation and
                    Equiserve  Trust  Company,  N.A.,  successors to BANKBOSTON,
                    N.A. *(filed as Exhibit 4.4 to Registrant's  Annual Report on
                    Form 10-K filed for the year ended December 31, 2002).*

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

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

     10.1.2*        Waiver   and    First   Amendment   to    Credit   Agreement
                    (Multi-currency)  by and  among the  Registrant  and Bank of
                    America,  N.A.,  formerly known as Bank of America  National
                    Trust  and  Savings   Association,   dated  June  29,  2002,
                    effective   June  29,  2002   *(filed  as  Exhibit   10.1  to
                    Registrant's  Annual  Report on Form 10-K filed for the year
                    ended December 31, 2002).*

       10.2*+       Amended  and  Restated  1995  Stock  Option  Plan of FileNet
                    *(filed  as  Exhibit   99.1  to   Registrant's   registration
                    statement   on  Form  S-8  filed  on   October   15,   2002;
                    Registration No. 333-71598).*

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

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

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

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

       10.5*+       Non-Statutory  Stock  Option Agreement (with Notice of Grant
                    of Stock Option and Special Addendum) between Registrant and
                    Mr. Ron Ercanbrack  *(filed as Exhibit 99.19 to  Registrant's
                    registration  statement  on Form  S-8  filed on  August  20,
                    1997).*

                                       42

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

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

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

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

      10.10*+       Written  Compensation  Agreement  and  Non-Statutory   Stock
                    Option  Agreement  (with  Notice  of Grant of Stock  Option)
                    between  Registrant  and Mr. Sam Auriemma  *(filed as Exhibit
                    99.1 and 99.2 to Registrant's registration statement on Form
                    S-8, filed on April 20, 2002; Registration No. 333-59274)*.

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

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

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

      10.14*+       The   2002    Incentive    Award   Plan,    as  approved  by
                    stockholders at the  Registrant's  Annual Meeting on May 22,
                    2002,  *(filed as  Exhibit  10.14 to  Registrant's  Quarterly
                    Report on Form 10-Q for the quarter ended June 30, 2002)*.

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

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

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

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

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

      10.16*+       Amended and Restated Letter Agreement dated  May 15, 2003 by
                    and between  Registrant and Lee D. Roberts,  Chief Executive
                    Officer *(filed as Exhibit 10.161 to  Registrant's  Quarterly
                    Report on Form 10-Q for the quarter ended June 30, 2003)*.

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

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

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

      10.20+        Non-Statutory  Stock  Option  Agreement  between  Registrant
                    and Mr.Kenneth F. Fitzpatrick.

       31.1         Certification of Chief Executive Officer

       31.2         Certification of Chief Financial Officer

                                       43

       32.1         Certification of Chief Executive Officer

       32.2         Certification of Chief Financial Officer
      ------------- ------------------------------------------------------------
     ** Incorporated herein by reference
     + Management contract, compensatory plan or arrangement*

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

     (2)  Amended and Restated Letter Agreement,  dated May 15, 2003 was entered
          into by and between Registrant and Messrs. Martyn D. Christian,  David
          D.  Despard,  Frederick P. Dillon,  Karl J. Doyle,  Michael W. Harris,
          William J. Kreidler,  Chas W.  Kunkelmann,  Philip  Rugani,  Daniel S.
          Whelan, Franz X. Zihlmann,  Ms. Katharina M. Mueller and Ms. Audrey N.
          Schaeffer.  Mr. Kenneth F. Fitzpatrick  entered in a Letter Agreement,
          dated  September  2,  2003  on   substantially   the  same  terms  and
          conditions.

                                       44

                                                                   EXHIBIT 10.20

                              **FILENET CORPORATION****NON-QUALIFIED STOCK OPTION AGREEMENT****FOR KENNETH FITZPATRICK**

     This  Non-Qualified  Stock  Option  Agreement  is  entered  into by FileNet
Corporation,  a Delaware  corporation  hereinafter referred to as "Company," and
Kenneth Fitzpatrick,  who is concurrently being hired as Chief Marketing Officer
of the Company, hereinafter referred to as "Optionee."

     WHEREAS, the Compensation  Committee (the "Committee") has approved a stock
option grant to Optionee in order to induce  Optionee to agree to be employed by
the Company and to serve the Company in the capacity of Chief Marketing Officer;

     WHEREAS, the Option to purchase shares of its Common Stock granted pursuant
to this  agreement  has been  awarded  outside of and not pursuant to any of the
Company's existing employee benefit plans; and

     WHEREAS, the Committee has determined that it would be to the advantage and
best interest of the Company and its  stockholders  to grant the Option provided
for herein to the  Optionee  as an  inducement  to enter into the service of the
Company and as an incentive for increased  efforts during such service,  and has
advised the Company  thereof and  instructed the  undersigned  officers to issue
said Option.

     NOW,  THEREFORE,  in consideration of the mutual covenants herein contained
and  other  good  and  valuable  consideration,   receipt  of  which  is  hereby
acknowledged, the parties hereto do hereby agree as follows:

                                   **ARTICLE I.****DEFINITIONS**Section 1.1.

     Whenever the following  terms are used in this  Agreement,  they shall have
the  meaning  specified  below  unless  the  context  clearly  indicates  to the
contrary.  The masculine pronoun shall include the feminine and neuter,  and the
singular the plural, where the context so indicates.

     Agreement shall mean this Stock Option Agreement.

     Board shall mean the Board of Directors of the Company.

Cause shall mean:  (i)  Optionee's  commission of any act of theft,  fraud,
embezzlement or dishonesty; or (ii) Optionee's willful or intentional misconduct
adversely affecting the business or affairs of the Company or any Subsidiary; or
(iii) Optionee's  unauthorized use or disclosure of confidential  information or
trade secrets of the Company or any Subsidiary.  The foregoing  definition shall
not be deemed to be inclusive  of all acts or omissions  that the Company or any
Subsidiary  may  consider  as grounds  for the  dismissal  or  discharge  of any
Optionee.

     Change in  Control  shall  mean a change in  ownership  or  control  of the
Company effected through any of the following transactions:

     (a)  Any person or related  group of persons  (other  than the Company or a
          person  that,  prior  to  such  transaction,  directly  or  indirectly
          controls,  is  controlled  by, or is under common  control  with,  the
          Company) directly or indirectly acquires beneficial  ownership (within
          the  meaning  of Rule  13d-3  under the  Exchange  Act) of  securities
          possessing  more than 50% of the total  combined  voting  power of the
          Company's  outstanding  securities  pursuant  to a tender or  exchange
          offer made directly to the Company's stockholders which the Board does
          not recommend such stockholders accept; or

     (b)  There is a change in the  composition of the Board over a period of 36
          consecutive months (or less) such that a majority of the Board members
          (rounded up to the nearest whole number)  ceases,  by reason of one or
          more proxy contests for the election of Board members, to be comprised
          of  individuals  who either (i) have been Board  members  continuously
          since the  beginning  of such  period,  or (ii) have been  elected  or
          nominated for election as Board members during such period by at least
          a majority of the Board members described in clause (i) who were still
          in office at the time such election or nomination  was approved by the
          Board.

     Committee  shall  mean  the   Compensation   Committee  of  the  Board,  as
constituted from time to time.

     Common Stock shall mean the common  stock of the  Company,  par value $0.01
per share.

     Code shall mean the Internal Revenue code of 1986, as amended.

     Corporate Transaction shall mean:

     (a)  The  stockholders of the Company approve a merger or  consolidation of
          the Company with any other corporation (or other entity), other than a
          merger or consolidation which would result in the voting securities of
          the  Company  outstanding  immediately  prior  thereto  continuing  to
          represent (either by remaining  outstanding or by being converted into
          voting  securities  of the  surviving  entity)  more  than  50% of the
          combined voting power of the voting  securities of the Company or such
          surviving  entity   outstanding   immediately  after  such  merger  or
          consolidation;  provided,  however,  that a  merger  or  consolidation
          effected to  implement a  recapitalization  of the Company (or similar
          transaction) in which no person acquires more than 25% of the combined
          voting power of the Company's then  outstanding  securities  shall not
          constitute a Change in Control; or

                                       2

     (b)  The stockholders of the Company approve a plan of complete liquidation
          of the  Company or an  agreement  for the sale or  disposition  by the
          Company of all or substantially all of the Company's assets.

     DRO shall mean a domestic relations order as defined by the Code or Title I
of the Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder.

     Employee shall mean any officer or other employee (as defined in accordance
with Section 3401(c) of the Code) of the Company,  or of any corporation that is
a Subsidiary.

     Exchange Act shall mean the Securities Exchange Act of 1934, as amended.

     Expiration  Date  shall  mean the  date on  which  the  Option  expires  as
specified on the Signature Page hereof.

     Fair  Market  Value of a share of Common  Stock as of a given date shall be
(a) the average of the high and low selling prices of a share of Common Stock on
the  principal  exchange or the Nasdaq  Stock  Market on which  shares of Common
Stock are then  trading,  if any (or as  reported on any  composite  index which
includes such principal exchange), on such date, or if shares were not traded on
such date, then on the next preceding date on which a trade occurred,  or (b) if
Common  Stock is not traded on an exchange or the Nasdaq  Stock  Market,  but is
quoted on Nasdaq or a  successor  quotation  system,  the average of the closing
representative  bid and  asked  prices  for the  Common  Stock  on such  date as
reported by Nasdaq or such successor quotation system, or (c) if Common Stock is
not  publicly  traded on an  exchange  and not  quoted on Nasdaq or a  successor
quotation  system,  the  Fair  Market  Value  of a  share  of  Common  Stock  as
established by the Committee acting in good faith.

     Option shall mean the non-qualified  stock option granted to Optionee under
this Agreement.

     Optionee shall mean Kenneth Fitzpatrick.

     Permitted Transferee shall mean, any child, stepchild,  grandchild, parent,
stepparent,   grandparent,   spouse,  former  spouse,  sibling,  niece,  nephew,
mother-in-law,  father-in-law,  son-in-law, daughter-in-law,  brother-in-law, or
sister-in-law, including adoptive relationships, of Optionee, any person sharing
Optionee's household (other than a tenant or employee), any trust in which these
persons (or Optionee) control the management of assets,  and any other entity in
which these  persons  (or  Optionee)  own more than fifty  percent of the voting
interests,  or any other transferee specifically approved by the Committee after
taking into account any state or federal tax or  securities  laws  applicable to
transferable options.

     Rule 16b-3 shall mean Rule 16b-3  promulgated  under the  Exchange  Act, as
such Rule may be amended from time to time.

     Securities Act shall mean the Securities Act of 1933, as amended.

                                       3
Subsidiary  shall mean any corporation in an unbroken chain of corporations
beginning  with the  Company  if each of the  corporations  other  than the last
corporation in the unbroken chain then owns stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

     Termination  of Employment  shall mean the time when the  employee-employer
relationship  between  the  Optionee  and  the  Company  or  any  Subsidiary  is
terminated for any reason, with or without cause,  including,  but not by way of
limitation,  a  termination  by  resignation,  discharge,  death,  disability or
retirement;  but  excluding  (a)  terminations  where  there  is a  simultaneous
reemployment  or  continuing  employment  of  Optionee  by  the  Company  or any
Subsidiary, (b) at the discretion of the Committee, terminations which result in
a temporary  severance  of the  employee-employer  relationship,  and (c) at the
discretion of the Committee, terminations which are followed by the simultaneous
establishment  of a consulting  relationship by the Company or a Subsidiary with
the Optionee.  The Committee,  in its absolute  discretion,  shall determine the
effect of all  matters and  questions  relating to  Termination  of  Employment,
including,  but not by way of limitation,  the question of whether a Termination
of Employment  resulted  from a discharge  for good cause,  and all questions of
whether a particular  leave of absence  constitutes a Termination  of Employment
and the  vesting,  exercise  and  other  terms of the  Option  during a leave of
absence.

                                   **ARTICLE II.****GRANT OF OPTION**Section 2.1.Grant of Option

     Effective as of the grant date set forth on the Signature Page hereof,  the
Company  irrevocably  grants to the  Optionee the Option to purchase any part or
all of the aggregate number of shares of Common Stock set forth on the Signature
Page hereof, all upon the terms and conditions set forth in this Agreement.

Section 2.2.Purchase Price

     The purchase  price of the shares of Common Stock  covered by the Option is
set forth on the Signature  Page hereof,  and shall not be subject to commission
or other charge.

Section 2.3.Consideration to Company

     In  consideration  of the  granting  of this  Option  by the  Company,  the
Optionee agrees to render faithful and efficient  services to the Company or its
any  Subsidiary,  with such  duties and  responsibilities  as the Company or any
Subsidiary  shall from time to time prescribe,  for a period of at least one (1)
year from the date this Option is granted.

                                       4
**ARTICLE III.****PERIOD OF EXERCISABILITY**Section 3.1.Commencement of Exercisability

     The Option shall become exercisable in the time and manner set forth on the
Signature Page hereof. Except as otherwise may be provided by the Committee,  no
portion of the Option that is  unexercisable  at Termination of Employment shall
thereafter become exercisable.

Section 3.2.Duration of Exercisability

     The  installments  for  exercisability  provided on the Signature  Page are
cumulative.  Each such installment  that becomes  exercisable as provided on the
Signature Page shall remain  exercisable  until it becomes  unexercisable  under
Section 3.3.

Section 3.3.Expiration of Option

     Except  to the  extent  otherwise  set  forth in any  severance,  change in
control or employment agreement (see section 5.8), if applicable, the Option may
not be  exercised  to any  extent  by  anyone  after  the  first to occur of the
following events:

     (a)  The expiration of ten (10) years from the date the Option was granted,
          as set forth on the Signature Page hereof;

     (b)  The time of the Optionee's Termination of Employment for Cause;

     (c)  The  expiration  of three (3) months  from the date of the  Optionee's
          Termination of Employment by reason of his retirement,  resignation or
          termination of his employment not for Cause,  unless the Optionee dies
          within said three-month period;

     (d)  The  expiration  of one (1)  year  from  the  date  of the  Optionee's
          Termination of Employment by reason of his disability;

     (e)  The expiration of one (1) year from the date of the Optionee's  death;
          or

     (f)  The effective  date of a Corporate  Transaction,  unless the successor
          corporation  or a parent or subsidiary  of the  successor  corporation
          assumes or  substitutes  the Option as  described  in Section  3.5. At
          least  fifteen  (15) days prior to the  effective  date of a Corporate
          Transaction  as to which  the  successor  corporation  or a parent  or
          subsidiary of the successor  corporation does not assume or substitute
          the Option, the Committee shall give the Optionee notice of such event
          if the  Option  has then  neither  been  fully  exercised  nor  become
          unexercisable under this Section 3.3.

                                       5
Section 3.4.Tax Consequences

     The Optionee  acknowledges  that,  the Option  granted under this Agreement
shall be treated for all  purposes as not  qualifying  under  Section 422 of the
Code and therefore shall be subject to taxation as a non-qualified option.

Section 3.5.Acceleration of Option

     (a)  This  Option,  to the extent  outstanding  at the time of a  Corporate
          Transaction, but not otherwise fully exercisable,  shall automatically
          accelerate  so  that  this  Option  shall,  immediately  prior  to the
          effective  date  of  the  Corporate  Transaction,  become  vested  and
          exercisable  for all of the  shares of  Common  Stock  subject  to the
          Option. No such acceleration of this Option,  however,  shall occur if
          and to the extent this  Option is, in  connection  with the  Corporate
          Transaction: (i) to be assumed by the successor corporation (or parent
          or subsidiary thereof) or to be substituted with a comparable right to
          purchase or receive,  for each share of optioned  stock subject to the
          Option   immediately   prior  to  the   Corporate   Transaction,   the
          consideration  (whether stock,  cash, or other securities or property)
          received in the Corporate  Transaction  by the holders of Common Stock
          for each share held on the effective date of the transaction;  or (ii)
          to be  replaced  with  a  cash  incentive  program  of  the  successor
          corporation  which  preserves the spread existing on the Option shares
          at the  time of the  Corporate  Transaction  (the  excess  of the Fair
          Market Value of such Option shares over the aggregate  exercise  price
          payable for those  shares,  appropriately  adjusted)  and provides for
          subsequent  pay-out in accordance with the Option  exercise  schedule.
          The  determination of Option  comparability  under clause (i) shall be
          made by the Committee,  and such determination shall be final, binding
          and conclusive.

     (b)  Immediately  following  the Corporate  Transaction,  this Option shall
          terminate and cease to be outstanding, except to the extent assumed or
          substituted  by the  successor  corporation  (or parent or  subsidiary
          thereof) in connection with the Corporate Transaction.

     (c)  If  this  Option  is  assumed  in   connection   with  the   Corporate
          Transaction,   then  this  Option  shall  be  appropriately  adjusted,
          immediately after such Corporate  Transaction,  to apply to the number
          of and class of  securities  which  would have been  isssuable  to the
          Optionee in consummation of such Corporate  Transaction had the Option
          been exercised  immediately prior to such Corporate  Transaction,  and
          appropriate  adjustments  shall  also be made to the  exercise  price;
          provided, that the aggregate exercise price shall remain the same.

     (d)  This Agreement shall not in any way affect the right of the Company to
          adjust,  reclassify,  reorganize  or  otherwise  change its capital or
          business structure or to merge,  consolidate,  dissolve,  liquidate or
          sell or transfer all or any part of its business or assets.

                                   **ARTICLE IV.****EXERCISE OF OPTION**Section 4.1.Person Eligible to Exercise

     Except for any person to whom the Option has been  transferred  pursuant to
Section 5.2,  during the lifetime of the  Optionee,  only he or she may exercise
the  Option  (or any  portion  thereof).  After the death of the  Optionee,  any
exercisable  portion  of the  Option  may,  prior to the time when such  portion
becomes  unexercisable  under  Section  3.3, be exercised by his or her personal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.

Section 4.2.Partial Exercise

     Any exercisable  portion of the Option or the entire Option, if then wholly
exercisable,  may be exercised in whole or in part at any time prior to the time
when the Option or portion thereof becomes unexercisable under Section 3.3.

Section 4.3.Manner of Exercise

     The Option, or any exercisable portion thereof,  may be exercised solely by
delivery to the  Secretary  of the Company or his or her  designee of all of the
following   prior  to  the  time  when  the  Option  or  such  portion   becomes
unexercisable under Section 3.3:

     (a)  A  notice  complying  with the  applicable  rules  established  by the
          Committee stating that the Option, or a portion thereof, is exercised;

     (b)  Such  representations and documents as the Committee,  in its absolute
          discretion, deems necessary or advisable to effect compliance with all
          applicable  provisions of the  Securities Act and any other federal or
          state  securities  laws or  regulations.  The  Committee  may,  in its
          absolute  discretion,  also take whatever  additional actions it deems
          appropriate to effect such compliance  including,  without limitation,
          placing  legends  on  share  certificates  and  issuing  stop-transfer
          notices to agents and registrars;

     (c)  In the event that the Option  shall be  exercised  pursuant to Section
          4.1 by any person or  persons  other  than the  Optionee,  appropriate
          proof of the right of such person or persons to exercise the Option;

     (d)  Full cash  payment to the Company for the shares with respect to which
          the Option, or portion thereof, is exercised.  However,  the Committee
          may,  in its  discretion,  (i)  allow  payment,  in  whole or in part,
          through the  delivery of shares of Common  Stock which have been owned
          by the Optionee for at least six months, duly endorsed for transfer to
          the Company with a Fair Market Value on the date of delivery  equal to
          the  aggregate  exercise  price of the  Option  or  exercised  portion
          thereof;  (ii)  allow  payment,  in  whole  or in  part,  through  the

                                       7

          surrender of shares of Common Stock then issuable upon exercise of the
          Option having a Fair Market Value on the date of Option exercise equal
          to the  aggregate  exercise  price of the Option or exercised  portion
          thereof;  (iii) allow payment,  in whole or in part,  through a broker
          cashless  exercise  procedure  whereby the Optionee  delivers a notice
          that the  Optionee  has placed a market  sell order with a broker with
          respect to shares of Common Stock then  issuable  upon exercise of the
          Option,  and the broker timely pays the Option exercise price; or (iv)
          allow payment through any combination of the consideration provided in
          the foregoing subparagraphs; and

     (e)  The receipt by the Company of full payment for such shares,  including
          payment of any applicable  withholding tax, which in the discretion of
          the Committee may be in the form of consideration used by the Optionee
          to pay for such shares under Section 4.3(d).

Section 4.4.Conditions to Issuance of Stock Certificates.

     The Company  shall not be required to issue or deliver any  certificate  or
certificates  for shares of stock  purchased  upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:

     (a)  The  admission  of such  shares to listing on all stock  exchanges  on
          which such class of stock is then listed;

     (b)  The  completion of any  registration  or other  qualification  of such
          shares  under any  state or  federal  law,  or under  the  rulings  or
          regulations  of the  Securities  and Exchange  Commission or any other
          governmental  regulatory  body  which  the  Committee  shall,  in  its
          absolute discretion, deem necessary or advisable;

     (c)  The  obtaining  of any approval or other  clearance  from any state or
          federal governmental agency which the Committee shall, in its absolute
          discretion, determine to be necessary or advisable; and

     (d)  The lapse of such reasonable  period of time following the exercise of
          the  Option  as the  Committee  may  establish  from  time to time for
          reasons of administrative convenience.

Section 4.5.Rights as Stockholder

     The  Optionee  shall not have any  stockholder  rights with  respect to the
shares of common stock purchasable upon exercise of the option until such person
shall have exercised the option,  paid the exercise price and applicable  taxes,
satisfies all other  conditions of exercise and become a holder of record of the
purchased shares.

                                       8
**ARTICLE V.****OTHER PROVISIONS**Section 5.1.Administration

     The Committee shall have the power to interpret this Agreement and to adopt
such  rules  for  the  administration,  interpretation  and  application  of the
Agreement as are consistent therewith and to interpret or revoke any such rules.
All  actions  taken  and  all  interpretations  and  determinations  made by the
Committee  in good  faith  shall be final and  binding  upon the  Optionee,  the
Company and all other  interested  persons.  No member of the Committee shall be
personally liable for any action,  determination or interpretation  made in good
faith with respect to the Agreement or the Option.  In its absolute  discretion,
the Board may at any time and from time to time  exercise any and all rights and
duties of the  Committee  under this  Agreement  except with  respect to matters
which  under Rule 16b-3 or Section  162(m) of the Code,  or any  regulations  or
rules issued thereunder, are required to be determined in the sole discretion of
the Committee.

Section 5.2.Option Generally Not Transferable

     (a)  Neither the Option nor any  interest or right  therein or part thereof
          shall  be  liable  for the  debts,  contracts  or  engagements  of the
          Optionee  or his  successors  in  interest  or  shall  be  subject  to
          disposition   by   transfer,   alienation,    anticipation,    pledge,
          encumbrance, assignment or any other means whether such disposition be
          voluntary or  involuntary  or by  operation of law by judgment,  levy,
          attachment,  garnishment  or any other legal or equitable  proceedings
          (including bankruptcy), and any attempted disposition thereof shall be
          null and void and of no effect;  provided,  however, that this Section
          5.2 shall not prevent  transfers by will or by the applicable  laws of
          descent  and  distribution  or,  with the  consent  of the  Committee,
          pursuant to a DRO or pursuant to Section 5.2(b).

     (b)  Notwithstanding   Section  5.2(a),  with  the  prior  consent  of  the
          Committee, which consent may be withheld in the sole discretion of the
          Committee,  the  Optionee  may  transfer the Option to any one or more
          Permitted  Transferees,  subject to the following terms and conditions
          and  such  other  terms  and  conditions  that may be  imposed  by the
          Committee:

          (i)  the  Option  shall  not  be  assignable  or  transferable  by the
               Permitted  Transferee  other  than by will or the laws of descent
               and distribution;

          (ii) the  Option  shall  continue  to be  subject to all the terms and
               conditions  of the Option as  applicable  to the Optionee  (other
               than the ability to further transfer the Option); and

          (iii)the Optionee  and the  Permitted  Transferee  execute any and all
               documents   requested  by  the  Committee,   including,   without
               limitation  documents to (A) confirm the status of the transferee
               as a Permitted  Transferee,  (B) satisfy any  requirements for an
               exemption  for the transfer  under  applicable  federal and state
               securities laws and (C) evidence the transfer.

                                       9
Section 5.3.Shares to Be Reserved

     The Company  shall at all times  during the term of the Option  reserve and
keep  available  such number of shares of stock as will be sufficient to satisfy
the requirements of this Agreement.

Section 5.4.Notices

     Any notice to be given  under the terms of this  Agreement  to the  Company
shall be addressed to the Company in care of its Secretary, and any notice to be
given to the  Optionee  shall be addressed to him at the address of record given
on the Signature Page hereof or to any updated address provided by the Optionee.
By a notice  given  pursuant to this Section  5.4,  either  party may  hereafter
designate a different address for notices to be given to him. Any notice that is
required to be given to the Optionee shall, if the Optionee is then deceased, be
given to the  Optionee's  personal  representative  if such  representative  has
previously  informed  the  Company of his status and  address by written  notice
under this Section 5.4.

Section 5.5.Titles

     Titles are provided herein for  convenience  only and are not to serve as a
basis for interpretation or construction of this Agreement.

Section 5.6.Construction

     This Agreement  shall be  administered,  interpreted and enforced under the
laws of the State of California, without resort to that State's conflict-of-laws
rules.

Section 5.7.Conformity to Securities Laws

     The Optionee acknowledges that this Agreement is intended to conform to the
extent  necessary with all provisions of the Securities Act and the Exchange Act
and any and all regulations and rules promulgated by the Securities and Exchange
Commission thereunder,  including without limitation Rule 16b-3. Notwithstanding
anything herein to the contrary,  this Agreement shall be administered,  and the
Option is granted and may be  exercised,  only in such a manner as to conform to
such laws,  rules and  regulations.  To the extent  permitted by applicable law,
this  Agreement  shall be deemed  amended to the extent  necessary to conform to
such laws, rules and regulations.

Section 5.8.More Favorable Terms of Severance Programs Take Precedence

     To the extent the terms and conditions contained in any severance or change
in control program,  plan or agreement,  or any employment  agreement,  with the
Optionee provide more favorable terms for the Option then those set forth herein
(including without limitation terms regarding  accelerated  vesting and extended
exercise  periods),  the more favorable terms of any such severance or change in
control program, plan or agreement or any employment agreement with the Optionee
will control.

                                       10
Section 5.9.Data Privacy

     As a  condition  of the  grant  of the  Option,  Optionee  consents  to the
collection,  use,  processing and transfer of personal data as described in this
paragraph. Optionee understands that the Company and its affiliates hold certain
personal information about Optionee, including Optionee's name, home address and
telephone number, date of birth, social security number or global identification
number, salary,  nationality,  job title, any shares of the Company stock or the
Company  positions  held,  details of all  options or any other  entitlement  to
shares  awarded,  canceled,   exercised,  vested,  unvested  or  outstanding  in
Optionee's favor, for the purpose of managing and  administering  this Agreement
("Data").  Optionee  further  understands that the Company and/or its affiliates
will  transfer  Data  amongst   themselves  as  necessary  for  the  purpose  of
implementation,  administration  and management of Optionee's  participation  in
this  Agreement,  and that the  Company  and/or any of its  affiliates  may each
further  transfer  Data  to any  third  parties  assisting  the  Company  in the
implementation,  administration  and  management  of  this  Agreement.  Optionee
understands  that these  recipients  may be located  in the United  States,  the
European  Economic  Area, or  elsewhere.  Optionee  authorizes  them to receive,
possess, use, retain and transfer the Data, in electronic or other form, for the
purposes of implementing, administering and managing Optionee's participation in
this Agreement, including any requisite transfer of such Data as may be required
for the administration of this Agreement and/or the subsequent holding of shares
of stock on  Optionee's  behalf  to a broker  or other  third  party  with  whom
Optionee  may  elect to  deposit  any  shares  of  stock  purchased  under  this
Agreement.  Optionee  understands  that Optionee may, at any time,  review Data,
require any  necessary  amendments  to it or  withdraw  the  consents  herein in
writing by contacting  the Secretary of the Company.  Withdrawal of consent may,
however,  affect  Optionee's  ability to exercise or realize  benefits  from the
Option.

                            **[SIGNATURE PAGE FOLLOWS]****FileNet Corporation**
                                 ID: 95-3757924

  **Signature Page to Non-Qualified Stock Option Agreementof Kenneth Fitzpatrick**

Option Number: _________________

Effective as of September 2, 2003, you have been granted a  Non-Qualified  Stock
Option to buy  100,000  shares  of  Common  Stock of  FileNet  Corporation  at a
purchase price per share of $21.115.

The total option price of the shares granted is $2,111,500.

Your Option  shares will become vested in  installments  pursuant to the vesting
schedule set forth below.

   Number of Shares          Vesting Date                                            

   25,000 shares             September 2, 2004
  (25% of grant)                                                                     

   2,083 shares              The second day of each month thereafter, commencing
  (approx. 1/36th of         with October 2, 2004 and continuing through September
   75% of grant)             2, 2006                                                 

   2,084 shares              The second day of each month thereafter, commencing
  (approx. 1/36th of         with October 2, 2006 and continuing through September
   75% of grant)             2, 2007 (at which time the Option will be fully vested) 

Each vesting  installment  is subject to earlier  termination as provided in the
Agreement.

Your right to exercise the Option expires September 2, 2013,  subject to earlier
termination pursuant to the Agreement to which this Signature Page is a part.

By your signature and the Company's  signature  below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Non-Qualified Stock Option Agreement to which this Signature Page is a part.

        FileNet Corporation

       _____________________________                        __________________
        By:  Lee Roberts,                                   Date
             Chief Executive Officer

       ______________________________                       __________________
        KENNETH FITZPATRICK                                 Date

**EXHIBIT 31.1

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

I, Lee D. Roberts, certify that:

     1.  I  have  reviewed  this  Quarterly  Report  on  Form  10-Q  of  FileNet
Corporation;

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

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

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

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

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

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

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

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

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

Date:    November 13, 2003

                                     */s/ Lee D. Roberts*    .**Lee D. Roberts
                                      Chief Executive Officer****EXHIBIT 31.2

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

I, Sam M. Auriemma, certify that:

     1.  I  have  reviewed  this  Quarterly  Report  on  Form  10-Q  of  FileNet
Corporation;

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

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

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

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

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

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

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

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

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

Date:   November 13, 2003

                                     */s/ Sam M. Auriemma*     .**Sam M. Auriemma
                                      Chief Financial Officer****EXHIBIT 32.1

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

Pursuant to 18  U.S.C.ss.1350,  as created by Section 906 of the  Sarbanes-Oxley
Act of 2002, the undersigned  officer of FileNET  Corporation  (the  "Company"),
hereby certifies, to such officer's knowledge, that:

     (i) the accompanying Quarterly  Report on Form 10-Q of the Company  for the
fiscal  period  ended  September 30,  2003 (the  "Report")  fully  complies  with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and

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

Dated:  November 13, 2003
                                    */s/ Lee D. Roberts*.
                                    Lee D. Roberts
                                    Chairman of the Board and
                                    Chief Executive Officer

The foregoing  certification  is being furnished  solely to accompany the Report
pursuant to 18 U.S.C.ss.1350,  and is not being filed for purposes of Section 18
of  the  Securities  Exchange  Act  of  1934,  as  amended,  and  is  not  to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof,  regardless of any general incorporation language in such
filing.

A signed  original of this  written  statement  required by Section 906 has been
provided to FileNet  Corporation and will be retained by FileNet Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.

**EXHIBIT 32.2

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

Pursuant to 18  U.S.C.ss.1350,  as created by Section 906 of the  Sarbanes-Oxley
Act of 2002, the undersigned  officer of FileNET  Corporation  (the  "Company"),
hereby certifies, to such officer's knowledge, that:

     (i) the  accompanying  Quarterly Report on Form 10-Q of the Company for the
fiscal period ended  September 30, 2003 (the  "Report")  fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and

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

Dated:  November 13, 2003
                                    */s/ Sam M. Auriemma*.
                                    Sam M. Auriemma
                                    Senior Vice President
                                    and Chief  Financial Officer

The foregoing  certification  is being furnished  solely to accompany the Report
pursuant to 18 U.S.C.ss.1350,  and is not being filed for purposes of Section 18
of  the  Securities  Exchange  Act  of  1934,  as  amended,  and  is  not  to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof,  regardless of any general incorporation language in such
filing.

A signed  original of this  written  statement  required by Section 906 has been
provided to FileNet  Corporation and will be retained by FileNet Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
```