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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, 2004

                                                        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 5, 2004, there were 41,330,166 shares of the Registrant's common stock
  outstanding.

**FILENET CORPORATION****Index**

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

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

     Item 2.        Management's Discussion and Analysis of Financial Condition
                      and Results of Operations  .................................. 18

     Item 3.        Quantitative and Qualitative Disclosures about Market Risk..... 37

     Item 4.        Controls and Procedures........................................ 38

     **PART II.       OTHER INFORMATION**

     Item 1.        Legal Proceedings.............................................. 39

     Item 6.        Exhibits....................................................... 39

     **SIGNATURE**      ............................................................... 40

     **INDEX TO EXHIBITS**............................................................. 41

                                       2

PART I. FINANCIAL INFORMATION

        **Item 1.  Unaudited Condensed Consolidated Financial Statements****FILENET CORPORATION**
                          UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                              (In thousands, except per share amounts)

                                                            September 30,        December 31,
                                                                    2004                2003 
 ASSETS
 Current assets:
   Cash and cash equivalents                                 $   213,146         $   203,305
   Short-term investments available for sale                      78,825              32,286
   Accounts receivable, net                                       41,462              38,096
   Prepaid expenses and other current assets                      12,128              13,174
   Deferred income taxes                                           3,551               3,551 
   Total current assets                                          344,112             290,412

   Property, net                                                  23,369              26,922
   Long-term investments available for sale                       15,883              12,672
   Goodwill                                                       26,184              26,170
   Intangible assets, net                                          6,455               7,979
   Deferred income taxes                                          23,081              23,001
   Other assets                                                    2,894               4,692 

    Total assets                                             $   441,978         $   391,848 

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
   Accounts payable                                          $     7,931         $    11,006
   Accrued compensation and benefits                              29,036              27,648
   Customer deposits and advances                                  5,843               5,217
   Unearned maintenance revenue                                   56,154              40,691
   Other accrued liabilities                                      17,176              16,524 
     Total current liabilities                                   116,140             101,086

   Unearned maintenance revenue and other liabilities              2,991               1,614
   Commitments and contingencies (Note 11)

 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; 40,574,016 issued and  39,476,016
     shares outstanding at September 30, 2004; and
     38,906,640 shares issued and 37,808,640 shares
     outstanding at December 31, 2003                            256,023             234,025
   Retained earnings                                              76,615              64,098
   Accumulated other comprehensive income                          4,776               5,592
   Treasury stock, at cost; 1,098,000 shares                     (14,567)            (14,567)
   Net stockholders' equity                                      322,847             289,148 

     Total liabilities and stockholders' equity              $   441,978         $   391,848 *See accompanying notes to unaudited condensed consolidated financial statements.*

                                                 3
**FILENET CORPORATION**
                        UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                (In thousands, except per share amounts)

                                                  Three Months Ended                 Nine Months Ended
                                                     September 30,                      September 30,
                                                2004              2003             2004              2003 
 Revenue:
   Software                              $    35,447       $    35,320      $   109,475       $   104,397
   Customer support                           47,510            41,907          139,852           123,063
   Professional services and education        13,531            12,162           40,745            36,095 
   Total revenue                              96,488            89,389          290,072           263,555 

 Costs:
   Software                                    3,835             3,800           10,486            10,416
   Customer support                            9,891            10,487           30,125            31,026
   Professional services and education        11,404            10,586           33,396            32,001 
   Total cost of revenue                      25,130            24,873           74,007            73,443

     Gross Profit                             71,358            64,516          216,065           190,112

 Operating expenses:
   Sales and marketing                        36,674            34,405          117,433           103,660
   Research and development                   19,664            19,049           59,469            58,031
   General and administrative                  8,509             8,241           27,136            24,393 
   Total operating expenses                   64,847            61,695          204,038           186,084

 Operating income                              6,511             2,821           12,027             4,028

 Other income, net                             1,245               632            3,238             3,297 

 Income before income taxes                    7,756             3,453           15,265             7,325

 Provision for income taxes                    1,396               967            2,748             2,051 

 Net income                              $     6,360       $     2,486      $    12,517       $     5,274 

 Earnings per share:
   Basic                                 $      0.16       $      0.07      $       0.32      $       0.15
   Diluted                               $      0.16       $      0.06      $       0.31      $       0.14

 Weighted-average shares outstanding:
   Basic                                      39,284            36,588            38,806            36,234
   Diluted                                    40,495            38,494            40,793            37,471

*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,    .
                                                            2004              2003            2004             2003 

 Net income                                          $     6,360       $     2,486     $    12,517      $     5,274 
 Other comprehensive income (loss):
   Foreign currency translation adjustments                1,746             1,582            (644)           6,942
 Unrealized gain (loss) on securities:
    Unrealized holding gain (loss), net of taxes              52               (23)           (172)             (61)
 Total other comprehensive income (loss)                   1,798             1,559            (816)           6,881 
 Comprehensive income                                $     8,158       $     4,045     $    11,701      $    12,155 *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,
                                                                             2004                     2003  

Cash flows from operating activities:
 Net income                                                         $      12,517             $      5,274
 Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                                         12,419                   14,759
     Loss on sale of property                                                 403                       14
     Provision for doubtful accounts                                          136                       52
     Deferred income taxes                                                    (80)                   1,746
     Stock option income tax benefit                                            -                    2,129

     Changes in operating assets and liabilities, net of
       the effects of acquisitions:
       Accounts receivable                                                 (3,643)                   2,871

       Prepaid expenses and other current assets                              888                    2,423
       Accounts payable                                                    (3,041)                   2,026
       Accrued compensation and benefits                                    1,494                    1,840
       Customer deposits and advances                                         625                    3,264
       Unearned maintenance revenue                                        16,902                    2,916
       Income taxes payable                                                 3,066                    (1590)
       Other                                                                  789                   (1,931)
 Net cash provided by operating activities                          $      42,475              $    35,793 

 Cash flows from investing activities:
 Capital expenditures                                                      (7,845)                  (6,809)
 Proceeds from sale of property                                               104                      129
 Cash paid for acquisition                                                      -                   (8,073)
 Purchases of marketable securities                                       (84,822)                 (81,354)
 Proceeds from sales and maturities of marketable securities               39,065                   77,805 
 Net cash used in investing activities                              $     (53,498)            $    (18,302)

 Cash flows from financing activities:
 Proceeds from issuance of common stock                                    21,543                    9,485
 Principal payments on lease obligation                                         -                       (5)
 Net cash provided by financing activities                          $      21,543             $      9,480 
 Effect of exchange rate changes on cash and cash equivalents                (679)                   5,146 

 Net increase in cash and cash equivalents                          $       9,841             $     32,117
 Cash and cash equivalents, beginning of year                             203,305                  130,154 
 Cash and cash equivalents, end of period                           $     213,146             $    162,271 

 Supplemental cash flow information:
 Interest paid                                                      $          37             $         36
 Income taxes paid / (refunded)                                     $        (423)            $      2,221

________________________________________________________________________________
See Notes 4 and 10 for additional non-cash disclosures.
*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  and  subsidiaries  (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,  2004,  and the results of its  operations,  its
     comprehensive  operations  and its cash flows for the three and nine months
     ended  September  30,  2004 and  2003.  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, 2003 filed with
     the SEC on March 12,  2004.  The  results  of  operations  for the  interim
     periods are not  necessarily  indicative of the  operating  results for the
     year, or any other future period.

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

2.   NEW ACCOUNTING PRONOUNCEMENTS

          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. With respect to variable interest entities created before January 31,
     2003, in December 2003 the FASB issued FIN 46R, which,  among other things,
     revised  the  implementation  date to the  first  fiscal  years or  interim
     periods ending after March 15, 2004,  with the exception of Special Purpose
     Entities ("SPE").  The consolidated  requirements apply to all SPE's in the
     first fiscal year or interim  period  ending after  December 15, 2003.  The
     Company  has  determined  that it does not have  any  SPE's to which  these
     interpretations  apply.  The  adoption  of FIN  46R in  2004  has not had a
     material impact on the Company's consolidated financial statements.

          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;

                                       7

          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.

          In November  2003, the FASB issued FASB Staff Position (FSP) No. 150-3
     which deferred the effective dates for applying certain  provisions of SFAS
     No. 150 related to mandatorily  redeemable financial instruments of certain
     nonpublic  entities  and  certain  mandatorily  redeemable   noncontrolling
     interests for public and nonpublic entities.

          For  public  entities,  SFAS  No.  150 is  effective  for  mandatorily
     redeemable  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.

          For  mandatorily  redeemable  noncontrolling  interests that would not
     have to be classified as liabilities by a subsidiary under the exception in
     paragraph 9 of SFAS No. 150, but would be classified as  liabilities by the
     parent, the  classification and measurement  provisions of SFAS No. 150 are
     deferred  indefinitely.  For other  mandatorily  redeemable  noncontrolling
     interests  that were  issued  before  November  5,  2003,  the  measurement
     provisions   of  SFAS  No.  150  are  deferred   indefinitely.   For  those
     instruments,   the   measurement   guidance  for   redeemable   shares  and
     noncontrolling  interests  in  other  literature  shall  apply  during  the
     deferral period.

          SFAS No. 150 is to be implemented  by reporting the cumulative  effect
     of a change in accounting  principle.  The Company does not have  financial
     instruments with  characteristics of both debt and equity and therefore the
     adoption  of SFAS No.  150 has not had a material  impact on the  Company's
     consolidated financial statements.

          In March 2004,  The FASB issued EITF Issue No. 03-1 (EITF 03-1),  "The
     Meaning of  Other-Than-Temporary  Impairment and Its Application to Certain
     Investments" which provides new guidance for assessing impairment losses on
     investments.  Additionally,  EITF 03-1 includes new disclosure requirements
     for investments  that are deemed to be temporarily  impaired.  In September
     2004, the FASB delayed the accounting provisions for EITF 03-1; however the
     disclosure  requirements  remain  effective for annual periods ending after
     June 15, 2004. The Company will evaluate the impact of EITF 03-1 once final
     guidance is issued.

3.   STOCK BASED COMPENSATION

          The Company  accounts for stock based  awards to  employees  using the
     intrinsic value method in accordance with Accounting Principles Board (APB)
     Opinion No. 25,  "Accounting  for Stock Issued to Employees." The following
     table  summarizes the Company's net income (loss) and net income (loss) per
     share  on a pro  forma  basis  had  compensation  cost  for  the  Company's
     stock-based  compensation  plans been determined based on the provisions of
     SFAS No. 123, Accounting for Stock Based  Compensation",  for the three and
     nine months ended September 30, 2004 and 2003.

                                       8

                                                                  Three Months Ended                Nine Months Ended
                                                                    September 30,                     September 30,     .
 *(In thousands, except per share amounts)*       2004             2003             2004              2003 

 Net income, as reported                                $     6,360      $     2,486       $    12,517       $    5,274

 Deduct:  Total stock-based employee
 compensation expense determined under
 fair value based method for all awards, net
 of related tax effects                                      (1,969)          (1,636)          (5,644)           (5,732)
 Pro forma net income (loss)                            $     4,391      $       850       $    6,873        $     (458)

 Earnings (loss) per share:
 Basic earnings per share - as reported                 $      0.16      $      0.07       $      0.32       $     0.15
 Basic earnings (loss) per share - pro forma                   0.11             0.02              0.18            (0.06)

 Diluted earnings per share - as reported               $      0.16      $      0.06       $      0.31       $     0.14
 Diluted earnings (loss) per share - pro forma                 0.11             0.02              0.17            (0.06)

          For purposes of  computing  proforma  net income  (loss),  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 estimates the 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 and Nine Months Ended
                                                   September 30,       .

                                               2004            2003    .

         Expected life (in years)              5.28               5
         Expected volatility                     67%             63%
         Risk free interest rates               3.5%           3.15%
         Expected dividend                        0%              0%

4.   ACQUISITIONS

          On April 2, 2003, the Company  completed a stock purchase  acquisition
     of 100% of Shana  Corporation  ("Shana"),  an electronic  forms  management
     company.  This strategic  acquisition provided technology and experience to
     expand the Company's  Enterprise  Content  Management ("ECM") offering with
     electronic 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.

                                       9

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

          *(In thousands)*.

           Shana Corporation                                   April 2, 2003  

           Net tangible assets                                 $        2,725
           Goodwill                                                     3,103
           Acquired technology                                          4,000
           Technical manuals and design documents                         600
           Customer maintenance relationships                             800
           Non-compete agreements                                         277
           Liabilities assumed                                         (2,494)
           Total purchase price                                $        9,011
           Less cash acquired                                            (938)
           Net cash paid                                       $        8,073 

          The Company allocated the purchase price for this acquisition 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  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.

          Although  the  goodwill  stemming  from the Shana  stock  purchase  is
     non-deductible  for Canadian tax purposes,  a Section  338(g)  election was
     claimed resulting in deductible goodwill for U.S. tax purposes.

5.   GOODWILL AND PURCHASED INTANGIBLE ASSETS

          In acquisitions  accounted for using the purchase method,  goodwill is
     recorded as 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.   Goodwill  and  indefinite  life
     intangibles  are not  amortized,  but are  reviewed at least  annually  for
     possible  impairment.   Intangible  assets  with  definite  lives  must  be
     amortized over their estimated  useful lives.  Goodwill is recorded at cost
     and is not  amortized.  Goodwill is tested for impairment at least annually
     and written  down when  impaired.  Effective  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.  The Company  also
     periodically  evaluates whether events and  circumstances  have occurred in
     between  annual  testing dates that indicate the carrying value of goodwill
     may not be recoverable.  The Company performed an impairment analysis as of
     July 1, 2004 in accordance  with SFAS 142. The results  indicated there was
     no  impairment  of  goodwill  in any of the three  reporting  units.  As of
     September 30, 2004,  there have been no indicators  of  impairment,  and no
     impairment  of  goodwill  has  been  recognized.  If  estimates  change,  a
     materially different impairment conclusion could result.

                                       10

          The  following  table  presents  the changes in goodwill by  reporting
     segment during the nine months ended September 30, 2004:

     *(In thousands)*.
                                              Balance at       Foreign         Balance at
                                             December 31,     Currency       September 30,
     Goodwill by Reporting Segment                  2003        Change               2004 

     Software                                $    15,144      $      7        $    15,151
     Customer Support                              5,858             3              5,861
     Professional Services and Education           5,168      $      4        $     5,172 

          Total                              $    26,170      $     14        $    26,184 

          Foreign  currency  change  relates to the impact of translation on the
     portion of  goodwill  that was booked to the  Company's  Ireland and Canada
     subsidiaries.

          Intangible assets subject to amortization consist of the following:

*(In thousands)*                                 September 30, 2004                         December 31, 2003         .

                                         Gross    Accumulated                      Gross    Accumulated
Intangible Assets                        Asset   Amortization         Net          Asset   Amortization         Net 

Acquired technology and other
intangibles                        $    10,111         (3,795)  $   6,316    $    10,020         (2,272)  $   7,748
Non-compete agreements                     323           (184)        139            317            (90)        227
Patents                                     28            (28)          -             28            (24)          4 
     Total                         $    10,462         (4,007)  $   6,455    $    10,365         (2,386)  $   7,979 

          Acquired  technology and other  intangibles are being amortized over a
     useful life of five years,  and non-compete  agreements are being amortized
     over three years.  Amortization  expense for intangible assets was $518,000
     for the three months ended  September 30, 2004 compared to $500,000 for the
     comparable period in 2003.  Amortization expense for amortizing  intangible
     assets was $1,558,000 for the nine months ended September 30, 2004 compared
     to $1,177,000 for the comparable period in 2003.

          Estimated future  amortization  expense  (assuming no foreign exchange
     effect) of  purchased  intangible  assets as of  September  30,  2004 is as
     follows:

              *(In thousands)*.
                       Fiscal Year                      Amount  
                  (Remainder) 2004                 $       536
                              2005                       2,111
                              2006                       2,042
                              2007                       1,451
                              2008                         315
                        Thereafter                           -               $     6,455

                                       11

6.   EARNINGS PER SHARE

          Basic  earnings  per share is 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,  shares  issuable under the
     employee stock  purchase plan and restricted  stock issued to key executive
     management  using the treasury  stock method.  The number of  anti-dilutive
     options  excluded  from the EPS  calculation  for the three and  nine-month
     period  ended  September  30, 2004 were  2,780,900  and  1,371,049  shares,
     compared to 1,993,320 and 3,286,127 for the comparable periods in 2003. The
     following  table sets forth the  computation of basic and diluted  earnings
     per share for the three and nine-month  period ended September 30, 2004 and
     2003:

                                                  Three Months Ended             Nine Months Ended
                                                    September 30,                  September 30,     *(In thousands, except per share amounts)*      2004            2003            2004             2003 

 Net Income                              $    6,360      $    2,486      $   12,517       $    5,274

 Shares used in computing
   basic earnings per share                  39,284          36,588          38,806           36,234
 Dilutive effect of stock plans               1,211           1,906           1,987            1,237 
 Shares used in computing
   diluted earnings per share                40,495          38,494          40,793           37,471

 Earnings per basic share                $     0.16      $     0.07      $     0.32       $     0.15
 Earnings per diluted share              $     0.16      $     0.06      $     0.31       $     0.14

7.   ACCUMULATED OTHER COMPREHENSIVE INCOME

          Accumulated  other  comprehensive  income,  net of taxes, for the nine
     months ended September 30, 2004 is comprised of the following:

        *(In thousands)*.
                                            Foreign           Unrealized              Accumulated
                                           Currency              Holding                    Other
                                        Translation              Loss on            Comprehensive
                                         Adjustment           Securities                   Income 

        Balance, December 31, 2003      $     5,645           $      (53)             $     5,592
        Nine month period changes              (644)                (172)                    (816)
        Balance, September 30, 2004     $     5,001           $     (225)             $     4,776

                                                      12

8.   OPERATING SEGMENT DATA

          The Company has prepared operating 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 for which  financial
     performance is assessed and resources allocated.

          The Company's  reportable operating segments effective January 1, 2004
     include  Software,   Customer  Support,   and  Professional   Services  and
     Education.  The  residual  operating  activity of the  previously  reported
     Hardware  reporting  segment has been  combined  with the Customer  Support
     reporting segment.  There have been no new hardware sales; only spare parts
     and  supplies.  Prior year  hardware  amounts have been  reclassified  into
     customer service to conform to the new segment presentation.

          The Software operating segment develops,  markets, and sells a unified
     platform and framework for ECM software and solutions. The Customer Support
     segment  provides  after-sale  support for  software,  as well as providing
     software  upgrades,  on a when and if available basis,  under the Company's
     right to new versions  program.  The Customer Support segment also provides
     operating  supplies  and spare  parts  for the  installed  base of  Optical
     Storage and Retrieval  ("OSAR")  libraries,  the  remaining  portion of the
     previous hardware business. The Professional Services and Education segment
     provides fee-based implementation and technical consulting services related
     to  the  Company's  standard  products  and  post-implementation   training
     services.

          The accounting  policies of the Company's  operating  segments are the
     same as those for the  Company as a whole - except  that the  disaggregated
     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.  The Company evaluates
     performance  based on stand-alone  segment  operating  income.  Because the
     Company does not evaluate  performance  based on the return on assets or on
     interest income at the operating segment level,  assets and interest income
     are not tracked internally by segment.  Therefore,  such information is not
     presented.

                                       13

          Operating  segments data for the three and nine months ended September
     30, 2004 and 2003 are as follows:

                                            Three months ended                     Nine months ended
                                              September 30,                          September 30,         .

*(In thousands)*       2004              2003                2004               2003 

Software
  Revenue                             $    35,447       $    35,320         $   109,475       $    104,397
  Operating loss                          (17,609)          (15,028)            (56,405)           (46,891)

Customer Support
  Revenue                             $    47,510       $    41,907         $   139,852       $    123,063
  Operating income                         23,617            17,836              66,273             51,472

Professional Services and Education
  Revenue                             $    13,531       $    12,162         $    40,745       $     36,095
  Operating income (loss)                     503                13               2,159              (553)

Total
  Revenue                             $    96,488       $    89,389         $   290,072       $    263,555
  Operating income                          6,511             2,821              12,027              4,028

9.   STOCK OPTIONS

          The following is a summary of stock option transactions  regarding all
     stock option plans for the three months ended September 30, 2004:

          .
                                                                                                  Weighted
                                                                          Number of                Average
                                                                            Options         Exercise Price 

          Balance, June 30, 2004                                          6,955,996             $    18.08
                Granted (weighted-average fair value of $10.75)              79,000                  21.16
                Exercised                                                   (83,760)                 11.85
                Canceled                                                    (36,718)                 18.36 
          Balance, September 30, 2004                                     6,914,518             $    18.26 

                                                         14

          The following table summarizes  information concerning outstanding and
     exercisable stock options at September 30, 2004:

  .
  **Options Outstanding****Options Exercisable**.

                                                    Weighted
                                                     Average            Weighted                                 Weighted
                                                   Remaining             Average                                  Average
  Range of Exercise             Number           Contractual            Exercise             Number              Exercise
              Price        Outstanding           Life (Years)              Price     Exercisable                 Price 
  $     1.39 - 9.50            767,938                  3.17         $      7.98            764,416          $       7.98
       9.75 - 12.86          1,110,384                  7.13               12.35            606,180                 12.06
      12.97 - 14.19          1,084,042                  6.67               13.47            703,126                 13.52
      14.39 - 18.45          1,089,323                  6.66               16.89            783,402                 16.98
     18.75  - 25.00          1,270,550                  6.01               22.68          1,129,811                 22.92
      25.28 - 41.84          1,592,281                  7.90               28.00         485,886                 28.79 .
  $    1.39 - 41.84          6,914,518                  6.52         $     18.26       4,472,821          $      17.00 .

10.  ISSUANCE OF RESTRICTED STOCK

          The Company awarded 25,000 shares of restricted stock to eight members
     of the research  and  development  team on July 14,  2004.  These shares of
     restricted stock vest at a rate of 25% annually over a four-year period and
     contain no  accelerated  vesting  features.  These  shares  were  valued at
     $519,000 based on the July 14, 2004 closing price of $20.76 per share.

          As  previously  reported,   the  Company  awarded  132,500  shares  of
     restricted  stock to ten members of the senior  management team on March 9,
     2004.  These shares of restricted stock vest December 31, 2008, and include
     a feature that allows the stock to vest on an  accelerated  basis  provided
     certain  performance  targets  are  achieved.  These  shares were valued at
     approximately  $3.6  million  based on the March 9, 2004  closing  price of
     $27.47 per share.

          Both of these  awards were made under the 2002  Incentive  Award Plan.
     The grant  value of the  restricted  stock  award is recorded in the equity
     section  of  the  balance  sheet  as an  increase  in  common  stock  and a
     contra-equity  offset to  deferred  compensation.  Expense  related  to the
     shares is  amortized  on a  straight-line  basis over the  vesting  period.
     Recognition  of expense  may be  accelerated  if it becomes  probable  that
     certain  performance  targets  will be achieved  that  trigger  accelerated
     vesting  for  those   shares  that   contain  the   acceleration   feature.
     Approximately  $218,205 and $452,161 of compensation expense was recognized
     in the three and nine-month periods ended September 30, 2004, respectively,
     for these restricted stock awards with no acceleration.

                                       15

11.  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, 2004 were as follows:

    *(In thousands)*.

     2004 (remaining 3 months)                        $      3,216
     2005                                                   11,719
     2006                                                   11,132
     2007                                                   10,174
     2008                                                    8,950
     2009                                                    6,818
     Thereafter                                              5,928  Total                                            $     57,937 **Product Warranties**

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

          The  following  table  represents  the  warranty  accrual for the nine
     months ended September 30, 2004 and 2003:

          .
          *(In thousands)***2004                   2003**

          Beginning balance at January 1          $    479               $    728
              Additions                                851                    678
              Deductions                              (967)                  (916)    Ending balance at September 30      $    363               $    490 .

     **Guarantees and Indemnities**

          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  and may also provide  indemnification  against legal claims that
     the Company's software products infringe certain  third-party  intellectual
     property rights. Guarantees and indemnities to customers in connection with
     product  sales and service  generally  are subject to limits based upon the

                                       16

     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,  payments by the Company under
     these agreements have been immaterial.

          In  connection  with  certain  facility  leases and other  performance
     guarantees,  the Company has  guaranteed  payments on behalf of some of its
     domestic and foreign subsidiaries.  To provide subsidiary  guarantees,  the
     Company  obtains  unsecured bank  guarantees  from local banks.  These bank
     guarantees  totaled  an  equivalent  of  approximately  $2.5  million as of
     September 30, 2004. Approximately $1.5 million was issued in local currency
     in Europe and Asia,  while the  balance  was  issued in the United  States.
     Approximately $0.4 million of the $2.5 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,
     as the estimated fair value of these items is de minimis. Also, 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, 2004 is disclosed in this item under
     the heading "Product Warranties."

     **Legal Proceedings**

          In the normal  course of business,  the Company is subject to ordinary
     routine litigation and claims incidental to its 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.

12.  FOREIGN CURRENCY TRANSACTIONS

          The Company is exposed to foreign  exchange rate  fluctuations  due to
     intercompany  accounts  between  the U.S.  parent  company  and the foreign
     subsidiaries.  The  Company  is  also  exposed  to  foreign  exchange  rate
     fluctuations  as the  financial  statements  of  foreign  subsidiaries  are
     translated  into U.S.  dollars  for  consolidation  purposes.  The  Company
     purchases  foreign  exchange  contracts  to mitigate the effect of exchange
     gains and losses on recorded foreign currency  denominated  monetary assets
     and liabilities.  The Company does not use foreign  exchange  contracts for
     speculative or trading  purposes.  All  outstanding  forward  contracts are
     marked-to-market  on a monthly  basis  with gains and  losses  included  in
     interest and other income,  net. As of September 30, 2004,  the Company had
     forward foreign exchange contracts outstanding totaling  approximately $3.1
     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, 2004.

13.  INCOME TAXES

          The Company's combined federal, state and foreign annual effective tax
     rate for the three months ended  September  30, 2004 is 18% compared to 28%
     for the comparable period in 2003. The Company's  combined  federal,  state
     and foreign annual  effective tax rate for the nine months ended  September
     30, 2004 is 18%  compared  to 28% for the  comparable  period in 2003.  The
     provision  for income  taxes  differs  from the tax computed at the federal

                                       17

     statutory  income  tax  rate  due  primarily  to  earnings   considered  as
     permanently  reinvested  in  foreign  operations  with  lower tax rates and
     reductions  in  the  domestic  deferred  tax  valuation  allowance  as  net
     operating loss carryforwards  were utilized.  The decreased tax rate in the
     nine months ended September 30, 2004 was primarily due to the mix of income
     earned by domestic operations versus the foreign subsidiaries.

          The Company is continually  assessing the valuation  allowance related
     to its deferred tax assets. As of September 30, 2004, the Company has a net
     tax deferred asset of approximately  $26.6 million and valuation  allowance
     of approximately $24.3 million.  The Company will continue weighing various
     factors  throughout  the  balance  of the year to  assess  the need for any
     valuation allowance. Recoverability of the deferred tax assets is dependent
     on  continued  profitability  from  operations,  as well as the  geographic
     region  generating  the  profits.  Should the  Company's  level of domestic
     profitability  continue at the current  rate,  it would  likely  remove the
     entire valuation allowance associated with net operating loss carryforwards
     and other  temporary  differences by the end of 2004. A one-time,  non-cash
     benefit would be realized by decreasing tax expense (causing an increase in
     earnings) by  approximately  $8.0 million to $11.0  million.  Additionally,
     approximately  $9.0 million of valuation  allowance related to stock option
     deductions  would be  evaluated  for  potential  reversal,  which  could be
     credited to additional paid in capital.

14.  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 for $1.9 million to enable him to purchase a home in Orange
     County,  California. The note bears interest at 2.89% per annum. On June 5,
     2002, the Board approved the loan.

          Mr.  Roberts is current  with all  payments  and  obligations  of this
     agreement.  Mr. Roberts made two payments,  of $37,000 in February 2003 and
     $53,000 in February 2004, toward the accrued interest balance in accordance
     with the terms and conditions of the loan agreement.  Mr. Roberts also made
     two payments in December 2003 and June 2004 of  approximately  $294,000 and
     $331,000, respectively,  toward the principal loan balance of $1.9 million.
     As of  September  30,  2004,  the  outstanding  balance on the secured note
     receivable from Mr. Roberts is approximately $1.275 million and is included
     in other assets on the  consolidated  balance sheet.  The accrued  interest
     balance  as  of  September  30,  2004  was  approximately  $36,248.  Please
     reference Note 4 of the December 31, 2003 financial  statements included in
     our  Annual  Report on Form 10-K for  additional  details  of the terms and
     conditions of this loan.

     **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
     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

                                       18

     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,  2003.  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**

          We develop, market, sell and support a software platform and framework
     for  Enterprise  Content  Management.  This  platform,  called  FileNet P8,
     provides a flexible and scaleable framework for developing solutions, which
     allow our customers a competitive  advantage by managing content throughout
     their organizations,  and streamlining their business processes. Enterprise
     Content Management,  or ECM, refers to the broad range of functions used by
     organizations of all types, including businesses and governmental agencies,
     to control and track the information,  or content, that is important to the
     organization's  operations,  whether that  information is used  internally,
     such as  sales  data or  product  specifications,  or  externally,  such as
     content provided to customers  through a Web site. The content our software
     manages, commonly called unstructured content, includes, but is not limited
     to: Web pages,  word processing  documents,  spreadsheets,  HTML, XML, PDF,
     document images,  email messages and other electronic content. Our software
     offers  customers  the ability to configure,  design,  build and deploy ECM
     solutions to meet the needs of their  particular  business or organization.
     These  solutions  allow  customers  to  manage  content   throughout  their
     organizations,  automate  and  streamline  their  business  processes,  and
     provide the broad-spectrum of connectivity needed to support their critical
     and everyday decision-making.

          We  generate   revenue  by  selling  software   licenses,   delivering
     implementation and education  services,  and by providing technical support
     to our  customers.  Software  revenue  consists  of fees  earned  from  the
     licensing of our software  products to our  customers.  Implementation  and
     education  services  are sold on a fee for  service  basis,  and  technical
     support and software maintenance are generally provided pursuant to service
     contracts  of a  one-year  duration.  Annual  fees for  software  technical
     support and  software  maintenance  are  generally  received in advance and
     recognized  as  revenue  over  the  duration  of the  contract.  Since  our
     operations are not capital or equipment  intensive,  and cost of goods sold
     is relatively small,  employee compensation is the largest single operating
     expense for FileNet.  Future  profitability  is contingent  upon  strategic
     investments in internally developed or acquired software  technologies that
     are  accepted  by the market and result in  software  license  and  service
     revenue.  This  investment  is the key factor in  achieving  our  long-term
     business strategy.

     Software

          The  FileNet P8  architecture  offers our  customers  enterprise-level
     scalability and flexibility to handle demanding content challenges, complex
     business  processes,  and integration to existing  systems.  The FileNet P8
     architecture  provides a  framework  for  functional  expansion  to provide
     enhanced  content  and  process  management  across an  enterprise  through
     pre-packaged  suites,  each  emphasizing  a  different  aspect  of the  ECM
     solution set, with  functions  grouped in a logical order that are designed
     to meet a customer's individual ECM needs. Each suite can be implemented by
     a customer individually,  but remains expandable to include all FileNet ECM
     capabilities.  FileNet  ECM  solutions  are  designed  to  manage  content;
     allowing  organizations to capture,  create, use, and activate that content
     in order to make  decisions  faster and bring  control and  consistency  to
     business   processes,   to  improve   efficiency  and  address   compliance
     requirements.

                                       19

     Services and Support

          We operate  service and  support  organizations  on a global  basis to
     provide  both  pre-sales  and  post-sales  services  to  ensure  successful
     implementation of our products and customer satisfaction. Due to the highly
     configurable nature of our products,  many of our product sales are coupled
     with  contracts for continuing  support  services.  Our worldwide  Customer
     Service   and   Support   organization   provides   comprehensive   support
     capabilities  including  electronic and real-time  phone support and global
     call  tracking  for  customers  and  partners on support  programs.  System
     engineers deliver support coverage on multiple  platforms with 24-hour call
     handling.  Our Web site  offers  the  ability  to open  cases,  search  our
     knowledge  base  and  review  related  status  reports.  Our  manufacturing
     facilities in Costa Mesa, California and Dublin, Ireland,  conduct software
     manufacturing and distribution, localization, integration, test and quality
     control.

     Professional Services and Education

          Our worldwide  professional services organization provides consulting,
     development,   architecture  and  other  technical  services  and  training
     services to our licensed  customers and  authorized  ValueNet  Partners and
     Global System  Integrators.  These services are provided  through  in-house
     employees  and  through a network  of  qualified  partners.  Our  worldwide
     professional  services  organization offers a comprehensive  methodology to
     architect,  install,  integrate,  customize and deploy our products.  These
     services range from the management of  large-scale  implementations  of our
     products to prepackaged  standard  services such as software  installation,
     but do not include modifications to the standard software.  Our educational
     curriculum includes training courses for end users,  application developers
     and system administrators through media-based and instructor-led training.

     Research and Development

          We have made and expect to continue to make substantial investments in
     research  and   development,   primarily   through  internal  and  offshore
     development  activities,  third  party  licensing  agreements  and  through
     technology  acquisitions.  Our  development  efforts  focus on our  unified
     FileNet P8 ECM  architecture  as we continue to develop and enhance our ECM
     capabilities.  Additionally, we license and embed third party software that
     enhances the  functionality of our products through a variety of agreements
     with the producers of this software.

     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.  Certain of
     these contracts  relate to single  elements and contain  standard terms and
     conditions,   while  other   agreements   contain   multiple   elements  or

                                       20

     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  and vendor specific evidence about the value of an element,
     are not met at the date of shipment,  revenue is not recognized until these
     elements  are  known  or  resolved.   Fees  are  deemed  to  be  fixed  and
     determinable  for  transactions  with a set price  that is not  subject  to
     refund or  adjustment  and  payment is due within 90 days from the  invoice
     date.  Software  license  revenue from channel  partners is not  recognized
     until the 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 using the residual method.
     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 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.  Revenue from these services
     and from training  classes is recognized as such services are delivered and
     accepted by the  customer.  Professional  services are not required for the
     software to function.  We do not make changes to the standard software code
     in the field.

          ***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
     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 returns. While product returns have historically been minimal and
     within our expectations,  and we are not legally required to accept returns
     of  non-defective  products,  we cannot  guarantee that we will continue to
     experience the same return rates that we have in the past.

                                       21
***Goodwill***. Goodwill is recorded at cost and is not amortized.  Goodwill
     is tested for  impairment at least annually and written down when impaired.
     Effective  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 in between  annual testing dates that indicate
     the  carrying  value of goodwill  may not be  recoverable.  We performed an
     impairment  analysis as of July 1, 2004 in  accordance  with SFAS 142.  The
     results  indicated  there was no impairment of goodwill in any of the three
     reporting units. As of September 30, 2004, there have been no indicators of
     impairment, and no impairment of goodwill has been recognized. If estimates
     change, a materially different impairment conclusion could result.

          ***Long-Lived  Assets***.  Property,  plant  and  equipment  and  identified
     intangible  assets 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 five years. The  determination
     of useful  lives and  whether  or not these  assets are  impaired  involves
     judgment.  Long-lived assets 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, which require significant estimates and judgments. If
     impairment were indicated, we would be required to write the related assets
     down to their fair  values.  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 (related to domestic  operations) 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 continue  to  generate  profits and
     ultimately  determine 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.

          We are continually  assessing the valuation  allowance  related to our
     deferred tax assets.  As of September  30, 2004, we have a net tax deferred
     asset  of   approximately   $26.6  million  and   valuation   allowance  of
     approximately  $24.3 million.  We will continue  weighing  various  factors
     throughout  the  balance  of year to  assess  the  need  for any  valuation
     allowance.  Recoverability  of the  deferred  tax  assets is  dependent  on
     continued  profitability from operations,  as well as the geographic region
     generating the profits. Should our level of domestic profitability continue
     at the current rate, we would likely remove the entire valuation  allowance
     associated  with net  operating  loss  carryforwards  and  other  temporary
     differences  by the end of 2004.  We would  realize  a  one-time,  non-cash
     benefit by decreasing our tax expense  (causing an increase in earnings) by
     approximately  $8.0 million to 11.0  million.  Additionally,  approximately
     $9.0 million of  valuation  allowance  related to stock  option  deductions
     would be  evaluated  for  potential  reversal,  which  could be credited 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 September           Nine Months Ended
                                                     September 30,                     September 30,
                                                 2004            2003              2004             2003      

Revenue:
   Software                                      36.8 %          39.5 %            37.8 %           39.6 %
   Customer support                              49.2            46.9              48.2             46.7
   Professional services and education           14.0            13.6              14.0             13.7  
Total Revenue                                   100.0           100.0             100.0            100.0

Cost of revenue:
   Software                                       4.0             4.3               3.6              4.0
   Customer support                              10.3            11.7              10.4             11.8
   Professional services and education           11.8            11.8              11.5             12.1  
      Total cost of revenue                      26.1            27.8              25.5             27.9  

Gross Profit                                     73.9            72.2              74.5             72.1

Operating expenses:
Sales and marketing                              38.0            38.5              40.5             39.3
Research and development                         20.4            21.3              20.5             22.0
General and administrative                        8.8             9.2               9.3              9.3  
      Total operating expenses                   67.2            69.0              70.3             70.6  

Operating income                                  6.7             3.2               4.2              1.5
Other income, net                                 1.3             0.7               1.1              1.3  
Income before income tax                          8.0 %           3.9  %            5.3 %            2.8 %

                                                                23
**Revenue**

          As more fully discussed below,  total revenue increased by 7.9% in the
     quarter  ended  September  30, 2004 compared to the same period in 2003 and
     increased 10.1% in the nine-month  period ended September 30, 2004 compared
     to the same period in 2003.  We believe this  revenue  growth is due to our
     customers placing  importance on our products and services to improve their
     business  processes  and manage  their  unstructured  content  within their
     organizations. All three of our revenue segments showed growth year to year
     for the nine-month period ended September 30, 2004.

          ***Revenue by Geography***.  The following table sets forth total revenue by
     geography and as a percentage of total revenue for the periods indicated:

     **Revenue by Geography**

                                          Three Months Ended                           Nine Months Ended
                                             September 30,                                September 30,                 .
*(In thousands)*                                                       %                                            %
                                                                 Increase/                                     Increase/
                                        2004           2003      decrease               2004           2003    decrease $ Total Revenue
Total United States Revenue       $   64,532     $   65,318         (1.2%)        $  198,820     $  182,483         9.0%

Europe, Middle East and Africa        23,366         18,601         25.6%             70,908         64,256        10.4%
Canada, Latin America and Asia         8,590          5,470         57.0%             20,344         16,816        21.0%
Total International Revenue           31,956         24,071         32.8%             91,252         81,072        12.6%

Total Revenue                     $   96,488     $   89,389          7.9%         $  290,072     $  263,555        10.1%

% of Total Revenue
United States Revenue                   66.9%          73.1%                            68.5%          69.3%
International Revenue                   33.1%          26.9%      31.5%          30.7% 
Total Revenue Contribution             100.0%         100.0%                           100.0%         100.0%

          Revenue  generated in the United States grew by 9.0% in the first nine
     months of 2004 compared to the same period in 2003 and decreased marginally
     by 1.2% in the  third  quarter  of 2004  over  the  comparable  prior  year
     quarter. This increase during the nine-month period is primarily due to the
     increase in service  revenue.  The  factors  driving  software  license and
     service  revenue  growth  will be more fully  discussed  in the  Revenue by
     Reporting  Segment  section below.  The revenue growth in the United States
     was  complemented  by  increased  international  revenue  in the  three and
     nine-month  periods  of 2004  compared  to the  same  quarter  a year  ago.
     International  revenue represented  approximately 31.5% of total revenue in
     the first nine months of 2004 compared to approximately  30.7% for the same
     nine months in 2003.

          We  believe   that   process   improvement   and  content   management
     requirements are global in nature and international customers also view our
     products as  essential  to solving  their  business  and content  problems.
     Revenue growth in the long term appears to be non-regional  in nature,  but
     is subject to periodic  fluctuations.  Furthermore,  international revenues
     will be adversely affected if the U.S. dollar  strengthens  against certain
     major  international  currencies or if  international  economic  conditions
     weaken.

                                       24
***Revenue by Reporting  Segment***.  The  following  table sets forth total
     revenue by reporting  segment and as a percentage  of total revenue for the
     periods indicated:

     Revenue by Reporting Segment

                                         Three Months Ended                                   Nine Months Ended
                                           September 30,                                        September 30,             .
                                                             % Increase/                                       % Increase/
*(In thousands)*     2004            2003       (decrease)             2004            2003       (decrease)$ Total Revenue
Software                     $   35,447      $   35,320            0.4%        $  109,475      $  104,397            4.9%
Customer Support                 47,510          41,907           13.4%           139,852         123,063           13.6%
Professional Services and
Education                        13,531          12,162           11.3%            40,745          36,095           12.9%
Total Revenue                $   96,488      $   89,389            7.9%        $  290,072      $  263,555           10.1%

% of Total Revenue
Software                           36.7%           39.5%          (2.8)              37.7%           39.6%          (1.9)
Customer Support                   49.2%           46.9%           2.4               48.2%           46.7%           1.5
Professional Services and
Education                          14.1%           13.6%           0.4               14.1%           13.7%           0.4
Total Revenue Contribution
                                  100.0%          100.0%                            100.0%          100.0%

          ***Software***.  Software revenue consists of fees earned from the licensing
     of our software products to our customers. Demand was relatively stable for
     our products for the comparable  three and  nine-month  periods in 2004 and
     2003. As we have seen in prior  quarters this year,  fluctuation  in buying
     patterns and the general  market climate has affected our level of software
     sales quarter to quarter, creating an environment that is unpredictable. We
     believe this environment will continue in the near term. In the longer term
     we believe spending on enterprise  content  management and business process
     management  software  will be a  priority  as  companies  look to  automate
     regulatory and compliance requirements. Additionally, we believe there will
     be  increased  demand  for our ECM  products  driven  by the need for large
     organizations to manage their unstructured content.

          ***Customer  Support***.  Customer  support revenue consists of revenue from
     software maintenance contracts,  time and material revenues and the sale of
     spare parts and supplies.  Maintenance  contracts  entitle our customers to
     receive  technical  support,  enhancements  and upgrades to new versions of
     software  releases  if and when  available.  Time and  material  revenue is
     derived from  services  provided to the  customer  that are not included in
     their  maintenance  contract  entitlements.  Customer  support  revenue  is
     generated  from new  maintenance  contracts for current year software sales
     and from the renewal of existing maintenance  contracts for previously sold
     software licenses on installed systems.  Customer support revenue increased
     by 13.4% in the three-month period ended September 30, 2004 compared to the
     same period in 2003 and  increased  13.6% in the  nine-month  period  ended
     September   30,  2004  compared  to  the  same  period  in  2003.  We  have
     historically  experienced  a high  contract  maintenance  renewal  rate and
     continue  to see this same high level of  renewal,  but are  continuing  to
     encounter pricing pressures from our customers during contract  negotiation
     and  renewal.  Accordingly,  the rate of  software  revenue  growth may not
     directly  correlate  to the  same  growth  for  customer   support  revenue
     experienced in the past.

          ***Professional   Services  and  Education***.   Professional  services  and
     education revenue is generated from consulting and implementation  services
     to end  users  of our  software  products,  technical  consulting  services
     provided to our resellers, and training services. No modifications are made
     to our  standard  base  product  code  once the  software  has  been  sold.
     Professional services and education revenue increased by 11.3% in the three
     month period ended  September  30, 2004 compared to the same period in 2003

                                       25

     and 12.9% in the nine-month period ended September 30, 2004 compared to the
     same period in 2003.  Professional  services  revenue is  dependent  on the
     level  and the  nature of  software  sales in prior  periods.  Professional
     services revenue grows more rapidly when customers purchase new systems for
     a large scale  implementation or purchase our FileNet P8 product to replace
     legacy systems, as opposed to existing customers purchasing add-on licenses
     for installed  systems.  The increase in professional  services  revenue we
     experienced in the first nine months of 2004 compared to the same period in
     2003 was  primarily  attributable  to an  increased  demand for  consulting
     services to existing  customers that migrated their custom  applications to
     the new FileNet P8 platform.  Based on software  revenue sales for the past
     two  quarters  we do not  believe  the  level of  demand  for  professional
     services and  education  services  will change  significantly  from current
     levels.

     **Cost of Revenue*****Cost of Revenue by Reporting  Segment***.  The following table sets forth
     total cost of revenue by reporting  segment and as a percentage  of revenue
     by reporting segment for the periods indicated:

     **Cost of Revenue by Reporting Segment**

                                     Three Months Ended                                       Nine Months Ended
                                        September 30,                                           September 30,          .
                                                         % Increase/                                       % Increase/
*(In thousands)*    2004         2003      (decrease)           2004            2003         (decrease) $ Total Cost of Revenue
Software                          3,835        3,800           0.9%          10,486          10,416              0.7%
Customer Support                  9,891       10,487          (5.7)%         30,125          31,026             (2.9)%
Professional Services and
Education                        11,404       10,586           7.7%          33,396          32,001              4.4%
Total Cost of Revenue            25,130       24,873           1.0%          74,007          73,443              0.8%

% Total Cost of Revenue
Software                           10.8%        10.8%            -              9.6%           10.0%            (0.4)
Customer Support                   20.8%        25.0%         (4.2)            21.5%           25.2%            (3.7)
Professional Services and
Education                          84.3%        87.0%         (2.8)            82.0%           88.7%            (6.7)
Total Cost of Revenue
as a % of Revenue                  26.0%        27.8%                          25.5%           25.3%

          ***Software***.  Cost of software revenue  includes  royalties paid to third
     parties  for  technology  used in our  products  to  enhance  features  and
     functionality,  partner fees,  amortization of acquired  technology,  media
     costs,  and the cost to manufacture  and distribute  software.  The cost of
     software  revenue in  absolute  dollars  increased  minimally  by 0.9% when
     comparing  the three  months  ended  September  30,  2004 to the same three
     months in 2003. The nine-month comparison for these two years resulted in a
     0.7%  increase.  The cost of  software  revenue  as a percent  of  software
     revenue was unchanged in the three month period  comparison and decreased a
     small 0.4  percentage  point in the nine-month  period ended  September 30,
     2004, compared to the same period in 2003. While these costs will fluctuate
     period to period based on the mix of products sold  containing  third party
     product,  our royalty costs have remained flat or decreased slightly due to
     more favorable  royalty rates that have been negotiated  during the renewal
     process over the past year. The volume of sales influenced by partners that
     requires a partner fee also fluctuates quarter to quarter.  However,  going
     forward  we  anticipate   the  cost  of  software   revenue  to  remain  at
     approximately   10%  of  software  revenue  as  we  continue  to  integrate
     third-party technology with our products.

                                       26
***Customer  Support***.  Cost of customer support revenue includes the cost
     of compensation and benefits paid to customer support  personnel,  facility
     and technology  infrastructure  expenses in our call centers,  supplies and
     spare parts.  The cost of customer support revenue as a percent of customer
     support  revenue  decreased  by 4.2  percentage  points and 3.7  percentage
     points  in the  three and  nine-month  periods  ended  September  30,  2004
     compared to the same periods in 2003. The cost of customer  support revenue
     in absolute  dollars  also  decreased  in these  comparable  periods due to
     continuing  cost  containment  programs.  The reduction in cost of customer
     support  revenue,  as a  percentage  of  the  revenue  is  attributable  to
     efficiencies  in the  delivery  of  technical  support,  which  allows  for
     increased revenue without a comparable increase in cost. We expect the cost
     of  customer  support  revenue to remain  fairly  constant  as a percent of
     customer support revenue for the near future.

          ***Professional Services and Education***. Cost of professional services and
     education revenue consists primarily of the costs of professional  services
     personnel,  training personnel,  and third-party  contractors.  The cost of
     professional  services and education revenue,  as a percent of professional
     services and education revenue,  decreased by 2.8 percentage points and 6.7
     percentage  points in the three and nine-month  periods ended September 30,
     2004 as  compared  to the same  periods in 2003.  This  decrease in cost of
     professional  services and education  revenue as a percent of  professional
     services  and  education  revenue  is  primarily   attributable  to  higher
     professional  services  and  education  revenue in 2004  compared  to 2003,
     together with lower costs  associated with reduced  employee  headcount and
     lower variable employee  compensation.  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,  the level of revenue and the mix between internal and
     external service providers.

     **Operating Expenses*****Total  Operating  Expenses***.  The  following  table  sets  forth  total
     operating  expense by function and as a percentage of total revenue for the
     periods indicated:

Operating Expenses

                                        Three Months Ended                             Nine Months Ended
                                          September 30,                                  September 30,              .

                                                         %  Increase/                                  %  Increase/
(In thousands)                      2004         2003      (decrease)             2004           2003    (decrease) $ Total Operating Expenses
Research and Development      $   19,664   $   19,049           3.2%        $   59,469     $   58,031         2.5%
Marketing and Sales               36,674       34,405           6.6%           117,433        103,660        13.3%
General and Administrative         8,509        8,241           3.3%            27,136         24,393        11.2%
Total Operating Expenses      $   64,847   $   61,695           5.1%        $  204,038     $  186,084         9.6%

% Total Operating Expenses
Research and Development            20.4%        21.3%         (0.9)              20.5%          22.0%        (1.5)
Marketing and Sales                 38.0%        38.5%         (0.5)              40.5%          39.3%         1.2
General and Administrative           8.8%         9.2%         (0.4)               9.4%           9.2%         0.1
Operating Expense as a % of
Revenue                             67.2%        69.0%                            70.3%          70.6%

                                                                 27
***Research and  Development***.  Our research and  development  efforts are
     focused on enhancing and  maintaining  our  Enterprise  Content  Management
     capabilities  within the FileNet P8 product line. We delivered  version 3.0
     of our FileNet P8 platform in the third  quarter of 2004.  Our efforts also
     focus on our product suites including Business Process Manager, Web Content
     Manager,  Records Manager,  Forms Manager,  Team Collaboration  Manager and
     other  capabilities.  We delivered  our Records  Manager suite in the third
     quarter of 2004 and plan the  availability  of Team  Collaboration  Manager
     suite during the fourth quarter of 2004.

          Our research and development  expense consists  primarily of personnel
     costs for internal software development, third party contracted development
     resources and related  facilities costs.  Research and development  expense
     increased 3.2% and 2.5% in the three and nine-month periods ended September
     30, 2004  compared to the same  periods in 2003 due  primarily  to employee
     merit  increases  and  increased  offshore  consulting  expense.   However,
     research and development  expense  decreased as a percent of revenue by 0.9
     percentage  points and 1.5 percentage  points for the three and nine months
     ended  September  30,  2004  compared  to the same  periods  in 2003.  This
     decrease is primarily  attributable  to increased  revenue levels without a
     corresponding  expense  increase.  Lower  internal  personnel  and facility
     expense  resulting  from decreased  headcount  partially  offset  increased
     offshore  development  expense.  The expense mix  continues  to change with
     lower internal personnel costs and higher offshore development expense. The
     number of internal research and development  personnel was 430 on September
     30, 2004  compared to 464 on  September  30,  2003.  We  currently  have 99
     contract workers in India developing software compared to 62 one year ago.

          We believe we will be able to further decrease our per-developer  cost
     through the expanded use of offshore  resources,  however in the near term,
     some duplicate  expenses will be incurred as our  development  programs are
     transitioned  to these  offshore  development  resources.  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 20% of revenue for
     the near term.

          ***Selling and  Marketing***.  We sell our  products  through a direct sales
     force and our indirect channel sales partners.  The majority of our selling
     and marketing  expense is salaries,  benefits,  sales commissions and other
     expenses related to the direct and indirect sales force, and personnel cost
     for  marketing  and market  development  programs.  Selling  and  marketing
     expense as a percent  of revenue  decreased  by 0.5  percentage  points and
     increased  by 1.2  percentage  points for the three and  nine-months  ended
     September 30, 2004 compared to the same period in 2003. In absolute dollars
     selling and marketing expense increased by 6.6% and 13.3% for the three and
     nine-month periods ended September 30, 2004 compared to 2003. Approximately
     $13.3  million,  or 95%, of the year to date  increase is  attributable  to
     organizational  changes that resulted in higher  salaries,  higher variable
     compensation  and  associated  benefits.  We expect  selling and  marketing
     expense to remain at approximately 39% of revenue in the near-term.

          ***General and  Administrative***.  Our general and  administrative  expense
     consists  primarily of salaries,  benefits,  and other expenses  related to
     personnel costs for finance, information technology, legal, human resources
     and  general  management  and the cost of  outside  professional  services.
     General and  administrative  expense as a percent of revenue  decreased 0.4
     percentage  points and  increased  0.1  percentage  points in the three and
     nine-month periods ended September 30, 2004 compared to the same periods in
     2003. In absolute  dollars general and  administrative  expenses  increased
     3.3% and 11.2% in the three and nine-month periods ended September 30, 2004
     compared  to the same  periods  in  2003.  The  increases  in  general  and
     administrative  expense between the  comparative  periods are attributed to
     higher  salary  costs and benefits  due to  increased  headcount  and merit
     increases as well as increased  legal and accounting  fees  associated with
     compliance to meet recently mandated corporate governance  regulations.  We
     expect general and administrative expense to remain at approximately 10% of
     revenue in the near-term.

          ***Other Income, Net***.  Other income,  net consists  primarily of interest
     income  earned  on our cash and  investments,  and  other  items  including
     realized  foreign  exchange  gains and losses and interest  expense.  Other
     income,  net of other  expenses,  was $1.2 million and $3.2 million for the
     three and  nine-month  periods  ended  September  30, 2004 compared to $0.6
     million and $3.3 million during for the three and nine-month  periods ended

                                       28

     September 30, 2003. The weighted average interest rate earned on cash, cash
     equivalents  and  investments  was  1.88%  during  the  nine  months  ended
     September 30, 2004 compared to 1.35% for the same period in 2003.

          ***Provision for Income Taxes***.  Our combined  federal,  state and foreign
     annual  effective  tax rate for the three  and a  nine-month  period  ended
     September 30, 2004 was 18%,  compared to 28% for the comparable  periods in
     2003.  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  with  lower tax rates and
     reductions in our domestic deferred tax valuation allowance.  The decreased
     tax rate in the three and  nine-month  period ended  September 30, 2004 was
     primarily due to the mix of income earned by our domestic operations versus
     the foreign subsidiaries.

     **Liquidity and Capital Resources**

          At September 30, 2004, combined cash, cash equivalents and investments
     totaled $302.9 million,  an increase of $54.6 million and $3.3 million from
     December 31, 2003 and June 30, 2004, respectively.

          Cash  provided by  operating  activities  during the nine month period
     ended September 30, 2004 totaled $42.5 million and resulted primarily from:
     an increase in unearned  maintenance revenue related to prepaid maintenance
     contracts of $16.9 million;  depreciation and amortization expense of $12.4
     million;  and net  income  of  $12.5  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.

          Cash provided by financing  activities totaled $21.5 million and was a
     result of proceeds received from the exercise of employee stock options and
     stock purchases under the employee stock purchase plan.

          Net cash used in investing  activities was $53.5 million  comprised of
     $45.8  million  for the  purchase  of  marketable  securities  in excess of
     proceeds  from the sales of  marketable  securities  and $7.8  million  for
     capital expenditures.

          Contractual  cash obligations of significance  include  non-cancelable
     operating leases for our corporate offices, sales offices,  development and
     manufacturing  facilities and other  equipment,  some of which have renewal
     options and generally  provide for  escalation of the annual rental amount.
     (See Note No. 11 to the Notes to Unaudited Condensed Consolidated Financial
     Statements for additional details.)

          We believe that our present cash  balances  together  with  internally
     generated  funds 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
     (expense) 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 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.

                                       29
**New Accounting Pronouncements**

          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. With respect to variable interest entities created before January 31,
     2003, in December 2003 the FASB issued FIN 46R, which,  among other things,
     revised  the  implementation  date to the  first  fiscal  years or  interim
     periods ending after March 15, 2004,  with the exception of Special Purpose
     Entities ("SPE").  The consolidated  requirements apply to all SPE's in the
     first fiscal year or interim period ending after December 15, 2003. We have
     determined  that we do not have any  SPE's to which  these  interpretations
     apply. The adoption of FIN 46R in 2004 has not had a material impact on our
     consolidated financial statements.

          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.

          In November  2003, the FASB issued FASB Staff Position (FSP) No. 150-3
     which deferred the effective dates for applying certain  provisions of SFAS
     No. 150 related to mandatorily  redeemable financial instruments of certain
     nonpublic  entities  and  certain  mandatorily  redeemable   noncontrolling
     interests for public and nonpublic entities.

          For  public  entities,  SFAS  No.  150 is  effective  for  mandatorily
     redeemable  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.

          For  mandatorily  redeemable  noncontrolling  interests that would not
     have to be classified as liabilities by a subsidiary under the exception in
     paragraph 9 of SFAS No. 150, but would be classified as  liabilities by the
     parent, the  classification and measurement  provisions of SFAS No. 150 are
     deferred  indefinitely.  For other  mandatorily  redeemable  noncontrolling
     interests  that were  issued  before  November  5,  2003,  the  measurement
     provisions   of  SFAS  No.  150  are  deferred   indefinitely.   For  those
     instruments,   the   measurement   guidance  for   redeemable   shares  and
     noncontrolling  interests  in  other  literature  shall  apply  during  the
     deferral period.

          SFAS No. 150 is to be implemented  by reporting the cumulative  effect
     of a change in accounting  principle.  We do not have financial instruments
     with characteristics of both debt and equity and therefore, the adoption of
     SFAS No. 150 has not had a material  impact on our  consolidated  financial
     statements.

                                       30

          In March 2004,  The FASB issued EITF Issue No. 03-1 (EITF 03-1),  "The
     Meaning of Other  Than-Temporary  Impairment and Its Application to Certain
     Investments" which provides new guidance for assessing impairment losses on
     investments.  Additionally,  EITF 03-1 includes new disclosure requirements
     for investments  that are deemed to be temporarily  impaired.  In September
     2004, the FASB delayed the accounting provisions for EITF 03-1; however the
     disclosure  requirements  remain  effective for annual periods ending after
     June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance
     is issued.

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

          o    Information Technology spending trends;

          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 sales and price competition;

          o    the   timing  of  new   software   introductions   and   software
               enhancements by us and our competitors; or,

          o    seasonality in technology purchases.

          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.

                                       31
***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  with the
     consolidation of the ECM market. 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.  In
               addition,  large hardware firms 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 its IBM Global Services  business unit. Our customers may
               view this type of vertical  integration  of software  development
               and  system   integration   capabilities  as  a  key  competitive
               advantage.

          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.

          ***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.  This  contribution  percentage will fluctuate quarter to
     quarter.  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.

                                       32
***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,  resulting  in reduced  revenue***.  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
     enterprise content management  solutions market.  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,  these markets may not
     continue to grow as we  anticipate,  or our products and  solutions may not
     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  must  develop  and  sell  new  products  to  keep  up  with  rapid
     technological  change  in  order  to  achieve  future  revenue  growth  and
     profitability***. The market for our software and services is characterized by
     rapid technological developments,  evolving industry standards,  changes in
     customer   requirements   and  frequent  new  product   introductions   and
     enhancements.  Our ability to continue to sell  products  will be dependent
     upon our ability to continue to enhance our existing  software and services
     offerings, develop and introduce, in a timely manner, new software products
     incorporating  technological advances and respond to customer requirements.
     For  example,  two new  product  suites  that we predict  will  address new
     markets include Records Manager and Team Collaboration Manager. The Records
     Manager  Suite was  released  in the  third  quarter  of 2004 and  provides
     customers with the  capability to  systematically  apply record  management
     principles to content.  The Team  Collaboration  Manager Suite that enables
     customers  to  initiate  collaborative  tasks at any point in a process  is
     expected to be available in late 2004 or early 2005.

          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,  sale  and
     implementation  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 may  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.
     Announcements of currently planned or other new software products may 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. 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 are  dependent  upon  customers  concentrated  in a small number of
     industries.  A significant  decline in one of those industries could result
     in reduced  revenue***.  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  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 we
     could  fail  to meet  our  revenue  objectives.  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.

                                       33
***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. We expect to invest approximately 20% of annual revenue in
     research  and  development  efforts in the near term.  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 due to revenue  recognition  rules that  require new
     products be tested in the market to validate pricing and acceptance.

          ***We are increasing  our use of third party software  developers and may
     have difficulty enforcing or managing our agreements with them, which could
     delay new product  introductions and reduce revenue***.  To help manage costs,
     we  have  contracted  with  third  party  software  development   companies
     overseas, particularly in India, where labor costs are lower, to perform an
     increasing  portion of our software  development and software  localization
     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 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 may not be  successful  in  attracting  and  retaining  such
     personnel in the future.

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

                                       34
***The  limitation  of  liability  provisions  contained  in our  license
     agreements may not be effective as a result of existing or future  federal,
     state or local laws or ordinances or unfavorable  judicial  decisions***.  Our
     license agreements with our customers typically contain provisions designed
     to limit our  exposure to  potential  product  liability  claims.  Although
     product liability claims to date have been immaterial, the sale and support
     of our products entails the risk of such claims, which could be substantial
     in  light  of our  customers'  use of  such  products  in  mission-critical
     applications. If a claimant brings a product liability claim against us, it
     could have a material adverse effect on our business, results of operations
     and financial  condition.  Even if our  software is not at fault,  we could
     suffer  material  expense and  material  diversion  of  management  time in
     defending any such lawsuits.

          ***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. 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.

          ***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.  Our  existing  or  future
     copyrights,  trademarks,  trade  secrets,  patents  or  other  intellectual
     property  rights  may not 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, which could expose us to
     litigation and other costs***.  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

                                       35

     diversion of resources, regardless of the merits of the actions. If we were
     found to infringe upon the rights of others, we may not be able to redesign
     the infringing  products to avoid further  infringement or 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 BEA Systems Inc., EMC  Corporation,
     ILOG Corporation and Verity,  Inc. Certain of these agreements have minimum
     purchase  requirements and/or require prepayments which usage is limited to
     a  specific   timeframe,   while  others  do  not  have  minimum   purchase
     requirements  and/or are  cancelable  at will.  We cannot assure that these
     companies  will not reduce or  discontinue  their  relationships  with,  or
     support  of,  FileNet  and  our  products.  If we fail  to  maintain  these
     relationships,  or to establish new  relationships in the future,  it 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.  We would be unable to sell theses
     products  if we do not  maintain  these  licenses,  which  would  result in
     reduced  revenue***.  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.

          ***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;

                                       36

          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 111 days; 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, 2004
     and 2003,  using a modeling  technique that measures the change in the fair
     values  arising  from a  hypothetical  50 basis points and 100 basis points
     adverse  movement in the levels of interest  rates  across the entire yield
     curve,  which are  representative  of  historical  movements in the Federal
     Funds Rate with all other variables held constant.  The analysis covers our
     investment and is based on the weighted-average maturity of our investments
     as of September 30, 2004 and 2003. 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  $341,000 at September 30, 2004 and approximately $258,000 at
     September  30, 2003.  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   $681,000  at  September   30,  2004  and
     approximately $515,000 at September 30, 2003.

          The  following  table  provides   information   about  our  investment
     portfolio at September 30, 2004:

         .
                                                             Estimated Fair
          (In thousands)                          Cost                Value 
          Debt Securities
            Due in one year or less:
               Short-term munis-taxable     $    8,500           $    8,500
               Corporate                         8,545                8,533
               Governments/Agencies             57,009               56,792 
          Total due in one year                 74,054               73,825

          Due in one to three years:
               Corporate                         2,087                2,079
               Government/Agencies              13,860               13,804 
           Total due in three years             15,947               15,883 

              Grand total                   $   90,001           $   89,708 

                                       37

          Actual maturities may differ from contractual  maturities  because the
     issuer of the securities may have the right to repurchase such  securities.
     We classify  investments  maturing in less than one year in current  assets
     and investments  maturing greater than one year are classified as long-term
     investments.

     **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,  2004,  we  had  forward  foreign   exchange   contracts
     outstanding  totaling  approximately $3.1 million in ten currencies.  These
     contracts  were opened on the last  business  day of the quarter and mature
     within three months.

          Cumulative other comprehensive income or loss is incurred when account
     balances denominated in a foreign currency are translated into U.S. dollars
     in accordance with FASB No. 52, or when investments are revalued to current
     fair market value in  accordance  with FASB No. 115. Our  cumulative  other
     comprehensive  income  and  loss  is  due  primarily  to  translation.  The
     resulting gains or losses from translation are charged or credited to other
     comprehensive  income and are accumulated and reported in the  stockholders
     equity section of our consolidated balance sheet.

          Other  cumulative  comprehensive  income increased $1.8 million during
     the  three-month  period  ended  September  30,  2004  due  to a  temporary
     strengthening  of the U.S. dollar to the Euro.  However,  cumulative  other
     comprehensive income decreased by $0.8 million during the nine-month period
     ended  September 30, 2004, due to the general  weakening of the U.S. dollar
     to the Euro over this extended period.

          Management believes that inflation has not had a significant impact on
     the prices of our  products,  the cost of our  materials,  or our operating
     results for the three and nine-month period ended September 30, 2004.

     **Item 4. Controls and Procedures**

          We maintain  disclosure  controls and procedures  that are designed to
     ensure  that  information  required to be  disclosed  in our  Exchange  Act
     reports are 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 our
     management,  including  our 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.

                                       38

          As of  September  30,  2004,  the end of the  quarter  covered by this
     report,  an evaluation was carried out under the  supervision  and with the
     participation of our management,  including our Chief Executive Officer and
     our  Chief  Financial  Officer,  of the  effectiveness  of the  design  and
     operation of our disclosure controls and procedures as required by SEC Rule
     13a - 15(b). Based on the foregoing,  our Chief Executive Officer and Chief
     Financial  Officer  concluded that our  disclosure  controls and procedures
     were effective at the reasonable  assurance level. There has been no change
     in our internal  controls over financial  reporting  during our most recent
     fiscal quarter that has  materially  affected,  or is reasonably  likely to
     materially affect, our internal controls over financial reporting.

          ***Section  404 of the  Sarbanes-Oxley  Act***. We have made our Section 404
     compliance project to a top priority for the Company.  However, the process
     is  on going  and we cannot  provide  assurance  that a weakness  requiring
     remediation  will not be discovered and that such weakness,  if discovered,
     can be remediated prior to the compliance date of December 31, 2004.

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

         See Note 11 to Consolidated Financial Statements.

      **Item 6. Exhibits**

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

                                       39
**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 8, 2004        By:    */s/ Sam M. Auriemma*.
*Date*                               Sam M. Auriemma, Executive Vice President
                                    and Chief Financial Officer
                                   (Principal Financial and Accounting Officer,
                                    Authorized Signatory)

                                       40
**Index to Exhibits**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, 2001 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, 2001).

  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, 2001; 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).

  10.6*+         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).

  10.10*+        Written  Compensation  Agreement and  Non-Statutory  Stock Option  Agreement  (with Notice of Grant of
                 Stock Option and Special Addendum) between  Registrant and Mr. Sam Auriemma (filed as Exhibit 99.1 and
                 99.2 to Registrant's  registration  statement on Form S-8, filed on April 20, 2001;  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).

                                                                 41

  10.14*+        The 2002 Incentive Award Plan, as approved by stockholders at the  Registrant's  Annual Meeting on May
                 22, 2002,  together  with the forms of  Incentive  Option  Agreement  and  Non-Qualified  Stock Option
                 Agreement for Independent  Directors (filed as Exhibit 10.14 to Registrant's  Quarterly Report on Form
                 10-Q for the quarter ended June 30, 2002).

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

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

  10.14.4*+      Amended and Restated  2002  Incentive  Award Plan of FileNet  Corporation,  (filed on April 1, 2004 as
                 Appendix B of Registrant's Definitive Proxy Statement for its 2004 Annual Meeting of Stockholders).

  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 10.16 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*+        Form of Restricted  Stock  Agreement  between  Registrant  and certain  Executive  Officers  (filed as
                 Exhibit 10.21 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).

  31.1           Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

  31.2           Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

  32.1           Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

  32.2           Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
_________________________________________________________________________________________________________________________
   * 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.

                                                                 42
**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 8, 2004

                                     */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 8, 2004

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

                                       2

**Exhibit 32.1

                    Certification of Chief Executive Officer**
                Certification Pursuant To 18 U.S.C. Section 1350,
                             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, 2004 (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 8, 2004
                                    */s/ Lee D. Roberts*.
                                    Lee D. Roberts
                                    Chairman of the Board and
                                    Chief Executive Officer
                                    (Principal Executive Officer)

**Exhibit 32.2

                    Certification of Chief Financial Officer**
                Certification Pursuant To 18 U.S.C. Section 1350,
                             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, 2004 (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 8, 2004
                                    */s/ Sam M. Auriemma*.
                                    Sam M. Auriemma
                                    Executive Vice President and
                                    Chief  Financial Officer
                                    (Principal Financial Officer)

                                       2
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