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**FORM 10-Q

                              SECURITIES AND EXCHANGE COMMISSION

                                  Washington, D.C. 20549**

  (Mark One)

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

  For the quarterly period ended March 31, 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 1943:
                                                      Yes  |X|  No |_|

  As of May 5, 2004, there were 38,940,147 shares of the Registrant's common stock
  outstanding.

**FILENET CORPORATION****Index**

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

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

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

     Item 3.        Quantitative and Qualitative Disclosures about Market Risk.....  35

     Item 4.        Controls and Procedures........................................  37

     **PART II.       OTHER INFORMATION**..............................................  37

     Item 1.        Legal Proceedings..............................................  37

     Item 6.        Exhibits and Reports on Form 8-K...............................  37

     **SIGNATURE**      ...............................................................  38

     **INDEX TO****EXHIBITS**       ...............................................................  39

                                              2

PART I.  FINANCIAL INFORMATION

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

                                                                 March 31,        December 31,
                                                                     2004                2003 **ASSETS**
        Current assets:
          Cash and cash equivalents                           $   238,327         $   203,305
          Short-term investments available for sale                33,674              32,286
          Accounts receivable, net                                 33,340              38,096
          Prepaid expenses and other current assets                13,511              13,174
          Deferred income taxes                                     3,551               3,551 
          Total current assets                                    322,403             290,412

          Property, net                                            25,810              26,922
          Long-term investments available for sale                 18,983              12,672
          Goodwill                                                 25,822              26,170
          Intangible assets, net                                    7,315               7,979
          Deferred income taxes                                    23,040              23,001
          Other assets                                              4,032               4,692 

          Total assets                                        $   427,405         $   391,848 **LIABILITIES AND STOCKHOLDERS' EQUITY**
        Current liabilities:
          Accounts payable                                    $    10,207         $    11,006
          Accrued compensation and benefits                        24,291              27,648
          Customer deposits and advances                            6,970               5,217
          Unearned maintenance revenue                             64,861              40,691
          Other accrued liabilities                                15,397              16,524 
             Total current liabilities                            121,726             101,086

          Unearned maintenance revenue and other liabilities        3,204               1,614
          Commitments and contingencies (Note 9)

        Stockholders' equity:
          Preferred stock - $0.10 par value; 7,000,000 shares
            authorized; none issued and outstanding
          Common stock - $0.01 par value; 100,000,000 shares      244,252             234,025
            authorized; 39,811,824 issued and 38,713,824
            shares outstanding at March 31, 2004; and
            38,906,640 shares issued and 37,808,640 shares
            outstanding at December 31, 2003
          Retained earnings                                        68,096              64,098
          Accumulated other comprehensive income                    4,694               5,592

          Treasury stock, at cost; 1,098,000 shares               (14,567)            (14,567)
          Net stockholders' equity                                302,475             289,148 

            Total liabilities and stockholders' equity        $   427,405         $   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 data)

                                                        Three Months Ended March 31,      2004             2003    
         Revenue:
           Software                                   $   41,351       $   35,522
           Customer support                               45,270           39,396
           Professional services and education            12,877           12,131 
           Total revenue                                  99,498           87,049 

         Costs:
           Software                                        3,523            3,008
           Customer support                               10,292           10,571
           Professional services and education            10,838           11,080 
           Total cost of revenue                          24,653           24,659

             Gross Profit                                 74,845           62,390

         Operating expenses:
           Sales and marketing                            41,561           34,399
           Research and development                       20,102           19,302
           General and administrative                      9,233            7,826 
           Total operating expenses                       70,896           61,527

         Operating income                                  3,949              863

         Other income, net                                   927            1,045 

         Income before income taxes                        4,876            1,908

         Provision for income taxes                          878              572 

         Net income                                   $    3,998       $    1,336 

         Earnings per share:
           Basic                                      $    0 .10       $     0.04
           Diluted                                    $    0 .10       $     0.04

         Weighted-average shares outstanding:
           Basic                                          38,280           35,942
           Diluted                                        40,785           36,623

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

                                             4
**FILENET CORPORATION**
     UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
                                 (In thousands)

                                                     Three Months Ended
                                                          March 31,          .
                                                   2004                 2003 

 Net income                                   $   3,998            $   1,336 
 Other comprehensive income (loss):
   Foreign currency translation adjustments        (914)               1,997
   Unrealized gain (loss) on securities:
   Unrealized holding gain (loss)                    16                  (10)
 Total other comprehensive income (loss)           (898)               1,987 
 Comprehensive income                         $   3,100            $   3,323 *See accompanying notes to unaudited condensed consolidated financial statements.*

                                       5

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

                                                                                Three Months Ended
                                                                                     March 31,         .
                                                                              2004                2003 
Cash flows from operating activities:
 Net income                                                             $    3,998          $    1,336
 Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                                           4,276               4,907
     Loss on sale of property                                                    4                  37
     Provision for doubtful accounts                                             6                  18
     Deferred income taxes                                                     (40)                 (6)
     Changes in operating assets and liabilities, net of the
      effects of acquisitions:
       Accounts receivable                                                   4,551               4,653
       Prepaid expenses and other current assets                              (411)               (975)
       Accounts payable                                                       (756)             (1,830)
       Accrued compensation and benefits                                    (3,261)              3,034
       Customer deposits and advances                                        1,762               1,048
       Unearned maintenance revenue                                         25,875              15,821
       Income taxes payable                                                  1,734                (385)
       Other                                                                (2,578)               (972)
 Net cash provided by operating activities                              $   35,160          $   26,686 

 Cash flows from investing activities:
 Capital expenditures                                                       (2,726)             (2,507)
 Proceeds from sale of property                                                 48                  68
 Purchases of marketable securities                                        (24,910)            (28,020)
 Proceeds from sales and maturities of marketable securities                17,800              23,655 
 Net cash used in investing activities                                  $   (9,788)         $   (6,804)

 Cash flows from financing activities:
 Proceeds from issuance of common stock                                     10,178                 530 
 Net cash provided by financing activities                              $   10,178          $      530 

 Effect of exchange rate changes on cash and cash equivalents                 (528)              1,755 

 Net increase in cash and cash equivalents                                  35,022              22,167
 Cash and cash equivalents, beginning of year                              203,305             130,154 
 Cash and cash equivalents, end of period                                  238,327             152,321 

 Supplemental cash flow information:
 Interest paid                                                                  22                   7 
 Income taxes paid / (refunded)                                         $     (950)         $      950 *See Note No. 10 for additional non-cash disclosures stock.
   See accompanying notes to unaudited condensed consolidated financial statements.*

                                                     6
**FILENET CORPORATION**
              Notes To Condensed Consolidated Financial Statements
                                   (Unaudited)

1.   BASIS OF PRESENTATION

     The  accompanying   unaudited  interim  condensed   consolidated  financial
     statements of FileNet  Corporation (the "Company" or "FileNet") reflect all
     adjustments  (consisting  of normal  recurring  adjustments)  necessary  to
     present fairly the financial position of the Company at March 31, 2004, the
     results of its operations,  its comprehensive operations and its cash flows
     for the three months ended March 31, 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.

     **Reclassifications**. 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 and has adopted FIN 46R in the first quarter of 2004.
     The  adoption  of FIN 46R did not have 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 did not have a material  impact on the  Company's
     consolidated financial statements.

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
     months ended March 31, 2004 and 2003.

                                       8

                                                                Three Months Ended
                                                                    March 31,         *(In thousands, except per share amounts)*     2004              2003 

    Net income, as reported                              $    3,998        $    1,336

   Deduct:  Total stock-based employee
   compensation expense determined under
   fair value based method for all awards, net
   of related tax effects                                    (1,547)           (2,039)
   Pro forma net income (loss)                                2,451              (703)

   Earnings per share:
   Basic earnings per share - as reported               $      0.10        $     0.04
   Basic earnings (loss) per share - pro forma                 0.06             (0.02)

   Diluted earnings per share - as reported                    0.10              0.04
   Diluted earnings (loss) per share - pro forma        $      0.06        $    (0.02)

          For purposes of computing  proforma net income,  the Company estimates
     the fair value of each option grant and employee  stock purchase plan right
     on the date of grant  using the  Black-Scholes  option-pricing  model.  The
     Black-Scholes  option-pricing model was developed for use in estimating the
     value of traded  options  that have no vesting  restrictions  and are fully
     transferable,  while the options  issued by the Company are subject to both
     vesting and restrictions on transfer.  In addition,  option-pricing  models
     require input of highly subjective assumptions including the expected stock
     price volatility.  The Company uses projected data for expected  volatility
     and expected life of its stock options based upon historical data.

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

                                              Three Months Ended
                                                   March 31,         2004            2003  

          Expected term (in years)         5.39               5.0
          Expected volatility                51%               66%
          Risk free interest rates         3.07%             3.61%
          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 provides technology and experience to
     expand  the  Company's  ECM  offering  with  Enterprise   Forms  Management
     capability,  which  contributed  to the  purchase  price  and  resulted  in
     goodwill. The purchase price for the acquisition consisted of $8.55 million
     in cash  consideration,  less $938,000 of acquired  cash,  plus $184,000 in
     acquisition expenses and $277,000 paid for Non-Compete Agreements.

                                       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 will
     result in the  reduction  of taxable  income for U.S.  tax purposes on this
     transaction.

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.   SFAS  No.  142  requires  that
     amortization  of goodwill and indefinite  life  intangibles be discontinued
     and replaced  with  periodic  review and analysis for possible  impairment.
     Intangible  assets  with  definite  lives  must  be  amortized  over  their
     estimated useful lives.

          The  following  table  presents  the changes in goodwill by  reporting
     segment during the three months ended March 31, 2004:

                                              10
*(In thousands)*
                                                 Balance at       Foreign       Balance at
                                                December 31,     Currency         March 31,
     ***Goodwill by Reporting Segment***                     2003        Change             2004 

     Software                                   $    15,144     $    (203)     $    14,941
     Customer Support                                 5,858           (77)           5,781
     Professional Services and Education              5,168           (68)           5,100

          Total                                 $   26,170      $    (348)     $    25,822 

          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.

          Acquired technology,  technical manuals and design documents, customer
     maintenance  relationships,  patents,  and  non-compete  agreements are the
     Company's only intangible  assets subject to  amortization  under Statement
     No. 142.

          Changes in these assets are summarized as follows for the three months
     ended March 31, 2004:

  *(In thousands)**Balance at                      Foreign      Balance at
                                             December 31,                    Currency        March 31,****Intangible Assets**                                 2003      Amortized        Change            2004*

  Acquired technology and other intangibles   $    7,748     $    (459)     $    (167)     $    7,122
  Non-compete agreements                             227           (28)            (6)            193
  Patents                                              4            (3)            (1)              -     Total                                  $    7,979     $    (490)     $    (174)     $    7,315 

          Acquired  technology  is being  amortized  over a useful  life of five
     years,  patents  are being  amortized  over a useful  life of two years and
     non-compete  agreements are being amortized over three years.  Amortization
     expense for amortizing  intangible assets was $527,000 for the three months
     ending  March 31, 2004  compared to $183,000 for the  comparable  period in
     2003 (excluding  foreign exchange  effect).  Estimated future  amortization
     expense (excluding foreign exchange effect) of purchased  intangible assets
     as of March 31, 2004 is as follows:

                *(In thousands)***Fiscal Year              Amount**
                  (Remainder) 2004         $     1,566
                              2005               2,056
                              2006               1,989
                              2007               1,401
                              2008                 303 
                                           $     7,315 

                                       11

6.   EARNINGS PER SHARE

          Basic  earnings  per share are computed by dividing net income for the
     period by the  weighted-average  number of common shares outstanding during
     the period.  Diluted  earnings per share is computed by dividing net income
     by the  weighted-average  number  of  common  shares  outstanding  plus the
     dilutive  effect of outstanding  stock options,  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 months ended March
     31, 2004 and 2003 were  2,505,000  and 681,000  shares,  respectively.  The
     following  table sets forth the  computation of basic and diluted  earnings
     per share for the three months ended March 31, 2004 and 2003:

                                                                                   Three Months Ended
        *(In thousands, except per share amounts)*                                        March 31,              2004             2003 

         Net Income                                                        $      3,998       $    1,336

         Weighted average common shares outstanding                              38,313           35,942
         Weighted average common shares of unvested restricted stock*               (33)               - 
         Shares used in computing basic earnings per share                       38,280           35,942

         Earnings per basic share                                          $        .10       $      .04

         Shares used in computing basic earnings per share                       38,280           35,942
         Dilutive effect of stock plan                                            2,472              681
         Dilutive effect of weighted average common shares
          of unvested restricted stock                                               33                - 
         Shares used in computing diluted earnings per share                     40,785           36,623

         Earnings per diluted share                                        $        .10       $      .04 ** See Note 10 - Restricted Stock*

7.   ACCUMULATED OTHER COMPREHENSIVE INCOME

          Accumulated  other  comprehensive  income for the three  months  ended
     March 31, 2004 is comprised of the following:

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

     Balance, December 31, 2003             $     5,645            $      (53)            $    5,592
     Three month period changes                    (914)                   16                   (898)Balance, March 31, 2004                $     4,731            $      (37)            $    4,694 

                                       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.  This combination is predicated on the reduced scale and
     change in the nature of on-going hardware  operations.  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, previously the 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  described  in Item 2 -  Critical  Accounting  Policies  and
     Estimates - 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.

          Operating  segments data for the three months ended March 31, 2004 and
     2003 are as follows:

     *(In thousands)*

                                                   Three months ended
                                                         March 31,               2004              2003 

     Software
       Revenue                           $      41,351       $    35,522
       Operating loss                          (16,066)          (14,747)

     Customer Support
       Revenue                           $      45,270            39,396
       Operating income                         19,747            16,585

     Professional Services and
     Education
       Revenue                           $      12,877            12,131
       Operating income (loss)                     268              (975)

     Total:
       Revenue                           $      99,498            87,049
       Operating income                          3,949               863 

                                       13

9.   STOCK OPTIONS

          The following is a summary of stock option transactions  regarding all
     stock option plans for the three months ended March 31, 2004:

     .
                                                                                    Weighted-
                                                              Number of              Average
                                                                Options       Exercise Price 

     Balance, December 31, 2003                                 7,642,743         $    16.31

           Granted (weighted-average fair value of $11.74)        674,200              28.23
           Exercised                                             (772,684)             13.18
           Canceled                                              (149,618)             18.93 
     Balance, March 31, 2004                                    7,394,641         $    17.68 

          The following table summarizes  information concerning outstanding and
     exercisable stock options at March 31, 2004:

.
**Options Outstanding                                           Options Exercisable**
                                          Weighted-Average                                          Weighted-Average
                                                 Remaining     Weighted-Average                             Exercise
 Range of Exercise             Number          Contractual             Exercise                                Price
             Price        Outstanding          Life (Years)               Price          Number          Exercisable 
  $    1.39 - 9.50            940,122                 3.64           $     8.01         934,527           $     8.00
      9.75 - 12.86          1,232,733                 7.58                12.32         583,160                11.93
     12.97 - 14.19          1,209,276                 7.20                13.46         644,523                13.54
     14.39 - 18.45          1,266,506                 7.11                16.85         767,618                16.93
     19.53 - 25.00          1,268,866                 6.28                22.82       1,101,309                22.96
     25.28 - 41.84          1,477,138                 8.19                28.07         493,614                28.76   $   1.39 - 41.84          7,394,641                 6.84           $    17.68       4,524,751           $    16.72 

10.  ISSUANCE OF RESTRICTED STOCK

          The Company awarded 132,500 shares of restricted  stock to ten members
     of the senior  management  team on March 9, 2004. This award was made under
     the 2002  Incentive  Award  Plan.  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 are valued at  approximately  $3.6  million  based on the
     March 9, 2004  closing  price of $27.47 per share.  The grant value of $3.6
     million 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 over a five-year
     period on a straight-line basis.  Additional  recognition of expense may be
     accelerated  if it becomes  probable that certain  performance  targets are
     achieved  that  trigger  accelerated  vesting  of  the  restricted  shares.
     Approximately  $45,000 of compensation  expense was recognized in the three
     months ended March 31, 2004.

                                       14

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 March 31,
     2004 were as follows:

                                                 (In thousands) 
       2004 (remaining 9 months)                   $     7,988
       2005                                             11,060
       2006                                             10,493
       2007                                              9,617
       2008                                              8,589
       2009                                              6,154
       Thereafter                                          938 Total                                       $    54,839 **Product Warranties**

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

          The following table  represents the warranty  activity and balance for
     the three months ended March 31, 2004 and 2003:

          .
          (In thousands)                              2004              2003 

          Beginning balance at January 1         $     479         $     728
               Additions                               329               964
               Deductions                             (332)           (1,213) Ending balance at March 31             $     476         $     479 **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.  Guarantees  and  indemnities  to customers in  connection  with
     product  sales and service  generally  are subject to limits based upon the
     amount of the related  product sales or service.  Payment by the Company is
     conditioned  upon the other party filing a claim  pursuant to the terms and
     conditions of the  agreement.  The Company may challenge this claim and may

                                       15

     also have recourse  against third parties for certain  payments made by the
     Company.  Predicting  the  maximum  potential  future  payment  under these
     agreements  is not  possible  due to the  unique  facts  and  circumstances
     involved  with  each  agreement.  Historically,  the  Company  has  made no
     payments under these agreements.

          In  connection  with  certain  facility  leases and other  performance
     guarantees,  the Company has  guaranteed  payments on behalf of some of its
     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 March
     31, 2004.  Unsecured bank  guarantees  increased by $1.2 million during the
     three months  ended March 31, 2004 for  performance  guarantees  related to
     workers  compensation  liability  insurance and a company  sponsored  sales
     event to be held in April 2005.  Approximately  $1.3  million was issued in
     local  currency  in Europe and Asia,  while the  balance  was issued in the
     United States. Approximately $0.6 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 March 31, 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

          As of March  31,  2004,  the  Company  had  forward  foreign  exchange
     contracts outstanding totaling approximately $5.1 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 March 31, 2004.

13.  INCOME TAXES

          The Company's combined federal, state and foreign annual effective tax
     rate for the three  months  ended March 31, 2004 is 18% compared to 30% for
     the comparable  period 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 and
     reductions in the deferred tax valuation allowance.  The decreased tax rate
     in the three  months ended March 31, 2004 was  primarily  due to the mix of
     income earned by domestic operations versus the foreign  subsidiaries,  and
     the partial release of the valuation allowance against income from domestic
     operations as net operating loss carryforwards were utilized.

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

                                       16

     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
     a payment in December 2003 of  approximately  $294,000 toward the principal
     loan  balance  of $1.9  million.  As of  March  31,  2004,  FileNet  has an
     outstanding  secured note receivable balance from Mr. Roberts in the amount
     approximately of $1.6 million that relates to the above-referenced loan and
     is included in other assets on the consolidated  balance sheet. The accrued
     interest  balance as of March 31,  2004 was  approximately  $9,000.  Please
     reference  Note No, 4 of our  December  31,  2003  Report  10-K  filing 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
     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**

          FileNet develops and markets software that helps our customers address
     their  electronic  content and business  process  management  requirements.
     Electronic content is unstructured data with various object characteristics
     and attributes.  Electronic or unstructured  content  includes,  but is not
     limited to: Web content,  forms, word documents and scanned images that are
     not easily  managed by  relational  databases.  We market these  enterprise
     software  solutions  to  primarily  Global 2000  customers  in the banking,
     insurance,  government,  utilities and telecom  industries located in North
     America, Europe and Asia.

                                       17

     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 five
     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.

     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 solutions. 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.

                                       18
**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
     non-standard  terms and conditions.  Contract  interpretation  is sometimes
     required to determine the appropriate  accounting,  including how the price
     should be allocated  among the  deliverable  elements and when to recognize
     revenue.

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

          For arrangements with multiple  elements,  we allocate revenue to each
     element  of a  transaction  based  upon its fair  value  as  determined  in
     reliance on vendor specific  objective  evidence 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.  Revenue  and  cost  is  recognized  using  the
     percentage-of-completion   method  for  fixed-price  consulting  contracts.
     However,  revenue  and  profit  are  subject to  revision  as the  contract
     progresses  and  anticipated  losses on fixed-price  professional  services
     contracts are recognized in the period when they become known. Professional
     services are not  required  for the  software to  function.  We do not make
     changes to the standard software code in the field.

                                       19
***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 the  allowances  established by us, we cannot
     guarantee that we will continue to experience the same return rates that we
     have in the past.

          ***Goodwill and Other Intangible Assets***. Goodwill is recorded at cost and
     is not  amortized.  Goodwill and other  intangible  assets with  indefinite
     useful lives are tested for  impairment at least  annually and written down
     when  impaired.  On the first day of July of each year,  goodwill is tested
     for  impairment by determining if the carrying value of each reporting unit
     exceeds its fair value. We also  periodically  evaluate  whether events and
     circumstances  have  occurred  which  indicate  that the carrying  value of
     goodwill may not be recoverable.  We engaged an independent  valuation firm
     to determine the business  enterprise value for each of our three reporting
     units  and to  perform  an  impairment  analysis  as of  July  1,  2003  in
     accordance with SFAS 142. The analysis indicated there was no impairment of
     goodwill in any of the three reporting  units. As of March 31, 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 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 and are reviewed
     for impairment whenever events or circumstances  indicate that the carrying
     amount of such  assets may not be  recoverable.  We evaluate  the  carrying
     value of long-lived assets and certain  identifiable  intangible assets for
     impairment of value based on undiscounted  future cash flows resulting from
     the use of the asset  and its  eventual  disposition.  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.

                                       20

          We are continually  assessing the valuation  allowance  related to our
     deferred tax assets. As of March 31, 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
     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 profitability continue as expected, we would likely remove the
     entire  valuation  allowance  later in 2004.  We would  realize a one-time,
     non-cash  benefit by  decreasing  our tax  expense  (causing an increase in
     earnings) by approximately $10.0 million to $12.0 million. Additionally, we
     would   record  a  non-cash   charge  to   increase   additional   reported
     paid-in-capital by approximately $9.0 million.

          ***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.

                                       21
**Results of Operations**

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

                                                        Three Months Ended March 31,    2004              2003    

Revenue:
   Software                                               41.6%             40.8%
   Customer support                                       45.5              45.3
   Professional services and education                    12.9              13.9   

Total revenue                                            100.0             100.0

Cost of revenue:
   Software                                                3.5               3.5
   Customer support                                       10.4              12.1
   Professional services and education                    10.9              12.7   

Total cost of revenue                                     24.8              28.3   

Gross Profit                                              75.2              71.7

Operating expenses:
   Sales and marketing                                    41.8              39.5
   Research and development                               20.2              22.2
   General and administrative                              9.2               9.0   
Total operating expenses                                  71.2              70.7   

Operating income                                           4.0               1.0
Other income, net                                          0.9               1.2   
Income before income tax                                   4.9%              2.2%  

                                              22
**Revenue**

          As more fully discussed below, total revenue increased by 14.3% in the
     quarter  ended  March 31, 2004  compared  to the same  period in 2003.  The
     increase in total revenue during this period is primarily  attributable  to
     the increased  demand for our software  products and customer  support.  We
     believe that the demand for our software and services is due to an increase
     in the growth of  unstructured  content  within  our  coustomer  base.  Our
     products  enable  customers  to  manage  this  content  and use it in their
     business processes.

          ***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***(In thousands)**% Increase/* Three months ended March 31,                    **2004                 2003***Decrease*

              Total United States Revenue                 $  68,000          $    59,457              14.4%

              Europe, Middle East and Africa                 25,317               22,134              14.4%
              Canada, Latin America and Asia                  6,181                5,458              11.4% 

              Total International Revenue                    31,498               27,592              14.2% 
              Total Revenue                               $  99,498            $  87,049              14.3%

              United States Revenue                            68.3%                68.3%                -
              International Revenue                            31.7%                31.7%                - .
              Total Revenue Contribution                      100.0%               100.0%                  

          International revenue represented 31.7% of total revenue and increased
     at nearly the same rate as domestic  revenue during this period as compared
     to the same period in 2003. We believe the same content  management factors
     mentioned above drive international  revenue growth and are not regional in
     nature.  We  expect  international  revenue  to  continue  to  represent  a
     significant  percentage of total revenue.  However,  international revenues
     will be adversely affected if the U.S. dollar  strengthens  against certain
     major  international  currencies or if  international  economic  conditions
     remain relatively weak.

          ***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***(In thousands)**% Increase/*Three months ending March 31,                  **2004             2003***(Decrease)*

    Software                                  $  41,351         $ 35,522              16.4%
    Customer Support                             45,270           39,396              14.9%
    Professional Services and Education          12,877           12,131               6.1%
    Total Revenue                             $  99,498        $  87,049              14.3%

    Software                                       41.6%            40.8%               .8%
    Customer Support                               45.5%            45.3%               .2%
    Professional Services and Education            12.9%            13.9%             (1.0%)

    Total Revenue Contribution                    100.0%           100.0%                   

                                       23
***Software***.  Software revenue consists of fees earned from the licensing
     of our software  products to our customers.  Software revenue  increased by
     16.4% in the first  three  months of 2004  compared  to the same  period in
     2003. The increase in software revenue during this period was primarily due
     to an increase in demand for enterprise content management solutions driven
     by the growth in  unstructured  content in our customer base.  Customers in
     our key vertical industries of banking,  insurance,  government and telecom
     continued to purchase new systems and add-on  licenses to existing  systems
     to help them  manage  content  and  records.  We  believe  IT  spending  on
     enterprise content management and business process management software will
     show steady improvement throughout 2004.

          ***Customer  Support***.  Customer  support revenue consists of revenue from
     software maintenance contracts,  "fee for service" revenues and the sale of
     Optical Storage and Retrieval ("OSAR") libraries, spare parts and supplies.
     Maintenance  contracts entitle our customers to receive technical  support,
     enhancements and upgrades to new versions of software  releases when and if
     available.  Customer support revenue  increased by 14.9% in the first three
     months ended March 31, 2004  compared to the same period in 2003.  Customer
     support revenue is generated from new maintenance  contracts for new system
     sales,  and  from  the  renewal  of  existing  maintenance   contracts  for
     previously   sold  software   licenses  on  installed   systems.   We  have
     historically  experienced a high contract maintenance renewal rate, but are
     continuing  to  experience  pricing  pressures  from our  customers  during
     contract negotiation and renewal. Accordingly, the rate of software revenue
     growth may not directly translate into the same growth for customer support
     revenue.

          ***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 6.1% in the three
     months ended March 31, 2004 compared to the same period in 2003.  Increases
     in  professional  services  revenue growth  typically lags behind  software
     revenue growth by 90 to 180 days as our customers  implement  their content
     management   projects  that  include   consulting  and  training  services.
     Furthermore,  professional  services  revenue is dependent on the level and
     the  nature  of  software  sales in prior  periods.  Professional  services
     revenue  grow more rapidly  when new  customers  purchase new systems for a
     large-scale  implementation - as opposed to existing  customers  purchasing
     add-on  licenses  for  installed  systems.  A  significant  majority of our
     software  sales  during  the  last  twelve  months  have  been to  existing
     customers. We believe we will experience a moderate, but steady improvement
     in  professional  services and  education  revenue  during the balance 2004
     based on the software revenue trends we experienced during the last half of
     2003 and the first quarter of 2004.

**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***(In thousands)**% Increase/*Three months ending March 31,                    **2004           2003***(Decrease)*

     Software                                    $   3,523     $    3,008             17.1%
     Customer Support                               10,292         10,570             (2.6%)
     Professional Services and Education            10,838         11,081             (2.2%)
     Total Cost of Revenue                       $  24,653     $   24,659                0%

     Software                                          8.5%           8.5%               0%
     Customer Support                                 22.7%          26.8%            (4.1%)
     Professional Services and Education              84.2%          91.3%            (7.1%)

     Total Cost of Revenue as a % of Revenue          24.8%          28.3%            (3.5%)

                                       24
***Software***.  Cost of software revenue  includes  royalties paid to third
     parties for  technology  embedded in our  products to enhance  features and
     functionality,  amortization of acquired  technology,  media costs, and the
     cost to manufacture and distribute  software.  The cost of software revenue
     as a percent of software  revenue was  unchanged  in the three months ended
     March 31,  2004  compared  to the same  period  in 2003.  The  increase  in
     absolute cost of software revenue during this period is primarily due to an
     increase  in royalty  costs  based on higher  revenues  and a higher mix of
     products sold that contain third party  software  products.  This cost will
     fluctuate  period  to  period  based  on the  mix  of  products  sold.  The
     amortization of acquired technology resulting from the Shana acquisition in
     April 2003 is another cost element that has  increased the absolute cost of
     software  revenue.  Going forward we anticipate cost of software revenue to
     increase  slightly to approximately  10% of software revenue as we continue
     to integrate third-party technology with our products.

          ***Customer  Support***.  Cost of customer support revenue includes the cost
     of customer  support  personnel,  facility  and  technology  infrastructure
     expenses  in our  call  centers,  supplies  and  spare  parts.  The cost of
     customer support revenue in absolute dollars was relatively  unchanged year
     over year.  However,  the cost of customer  support revenue as a percent of
     customer support revenue  decreased by 4.1% in the first three months ended
     March 31, 2004 compared to the same period in 2003.  This reduction in cost
     of customer  support revenue is attributable to efficiency  improvements in
     the  delivery of technical  support,  which  allows for  increased  revenue
     without a  comparable  increase in expense.  We expect the cost of customer
     support revenue to average  approximately  25% 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 7.1% in the first three months
     ended March 31,  2004 as  compared  to the same  period in 2003.  A reduced
     employee headcount and lower variable employee compensation  contributed to
     maintaining  reduced  operating  costs on slightly  increased  professional
     services and education  revenue during the period.  We expect  professional
     services and education costs as a percentage of  professional  services and
     education   revenue  to  vary  from  period  to  period  depending  on  the
     utilization  rates of internal  resources and the mix between  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***% Increase/*Three months ending March 31,                   **2004           2003***(Decrease)*

     Research and Development                 $    20,102     $   19,302             4.1%
     Marketing and Sales                           41,561         34,399            20.8%
     General and Administrative                     9,233          7,826            18.0%
     Total Operating Expenses                 $    70,896     $   61,527            15.2%

     Research and Development                        20.2%          22.2%           (2.0%)
     Marketing and Sales                             41.8%          39.5%            2.3%
     General and Administrative                       9.3%           9.0%             .3%

     Operating Expense as a % of Revenue             71.3%          70.7%             .6% 

                                       25
***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. These efforts focus on existing products and
developing  additional  capabilities for our FileNet P8 platform and suites such
as Business Process Management, Web Content Management, Records Management, Team
Collaboration and other capabilities.

     Our research and development  expense consists primarily of personnel costs
for software developers;  third party contracted development efforts and related
facilities  costs.  Research and  development  expense  increased by 4.1% in the
three  months  ended  March 31, 2004  compared  to the same period in 2003.  The
number of research and development  personnel was 452 on March 31, 2004 compared
to 455 on March 31, 2003.

     The majority of the $800,000 increase in research and development  expenses
during the three months ended March 31, 2004 compared to the same period in 2003
is attributable to increased  offshore  development  expense partially offset by
reduced  internal  employee  expense.  We currently have 91 contractors in India
developing  software compared to 35 contractors one year ago. We believe we will
be able to lower our per-developer  cost through the 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  19% of revenue
for 2004.

     ***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  increased by
20.8% or $7.2 million,  in the three months ended March 31, 2004 compared to the
same period in 2003.  Approximately $5.2 million of the increase is attributable
to  higher  salaries  and  benefits  along  with  higher  variable  compensation
generated by higher revenue.  The total number of sales and marketing  personnel
increased  by 25  employees,  at a  higher  salary  mix,  from  557 to 582  when
comparing  March 31,  2004 to the same  period in 2003.  We expect  selling  and
marketing expense to remain at approximately 41% 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  increased  18% in the three months ended March 31, 2004
compared to the same period in 2003. The increase in general and  administrative
expense of $1.4 million between the comparative  periods  reflects higher salary
costs due to increased  headcount as well as increased legal and accounting fees
associated with recently mandated  compliance  regulations and cancellation of a
facility  lease.  We expect  general  and  administrative  expense  to remain at
approximately 9% of revenue in the near-term.

     ***Interest,  Other  Income and  Expenses,  Net***.  Other  income,  net consists
primarily of interest income earned on our cash and cash equivalents,  short and
long-term  investments,  and other items  including  foreign  exchange gains and
losses and interest expense.  Other income, net of other expenses,  was $927,000
for the three  months ended March 31, 2004  compared to $1.0 million  during the
same period in 2003.  The weighted  average  interest rate earned on cash,  cash
equivalents  and  investments  was 1.36% during the three months ended March 31,
2004 compared to 1.48% for the same period in 2003.

                                       26
***Provision for Income Taxes***. Our combined federal,  state and foreign annual
effective  tax rate for the three months ended March 31, 2004 is 18% compared to
30% for the  comparable  period 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  and
reductions  in our deferred tax valuation  allowance.  The decreased tax rate in
the three  months  ended March 31, 2004 was  primarily  due to the mix of income
earned by our  domestic  operations  versus the  foreign  subsidiaries,  and the
partial  release  of  the  valuation  allowance  against  income  from  domestic
operations as net operating loss carryforwards were utilized.

**Liquidity and Capital Resources**

     At March 31, 2004,  combined cash, cash equivalents and investments totaled
$291.0 million, an increase of $42.7 million from December 31, 2003.

     Cash provided by operating  activities  during the three months ended March
31, 2004 totaled  $35.2  million and  resulted  primarily  from:  an increase in
unearned  maintenance revenue related to prepaid maintenance  contracts of $25.9
million;  a decrease in accounts  receivable of $2.9 million;  depreciation  and
amortization  expense  of $4.3  million;  and net  income of $4.0  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  $10.2  million and was a
result of proceeds  received  from the  exercise of employee  stock  options and
stock  purchases  under the employee stock purchase plan. Cash used in investing
activities was $9.8 million for the purchase of marketable securities.

     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.

                                       27
**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;
and have adopted FIN 46R in the first  quarter of 2004.  The adoption of FIN 46R
did not have 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.

                                       28

     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 did not have a material impact on our consolidated financial statements.

**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  annual  report and our other  public  filings.  Many of these
risks are beyond our control and are driven by factors  that we cannot  predict.
The following discussion highlights some of these risks:

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

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

     **o**    IT 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.

                                       29
***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  2003,  EMC
          Corporation,  a data  storage  hardware  company,  acquired one of our
          competitors,  Documentum. Other large, well-capitalized 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.

     Our  inability  to  license  future   releases  of  technology  from  these
competitive vendors could limit the technical capabilities of our products.

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

     ***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.

                                       30
***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 new and  emerging  market for  content
management  solutions.  This market is developing rapidly,  and while we believe
this  market  is  growing  and  will  continue  to  grow,  particularly  as  new
regulations  are introduced  that focus on  controlling  the flow of information
within organizations to ensure compliance with disclosure and other obligations,
there  can be no  assurance  that  these  markets  will  continue  to grow as we
anticipate, or that our products and solutions will gain acceptance within these
markets. If the markets we serve, particularly the market for enterprise content
management  solutions,  fail  to  grow or grow  more  slowly  than we  currently
anticipate, or if our products and solutions do not gain acceptance within these
markets,  our  business,  financial  condition  and  operating  results would be
harmed.

     ***We must  execute  on our  strategy  of  offering  a  unified  platform  and
framework for Enterprise  Content  Management that gains customer  acceptance or
our revenue may suffer.***  This  strategy  may require us to develop and  maintain
relations with technology  partners.  If we fail to successfully  execute on our
integrated  product  solution  strategy or if we fail to  maintain or  establish
relationships  with  technology  partners,  or if  release  dates of any  future
products or enhancements are delayed,  or if these products or enhancements fail
to achieve market acceptance when released,  our business  operating results and
financial condition could be materially harmed. In the past, we have experienced
delays in the release dates of enhancements and new releases to our products and
we  cannot  assure  that we will not  experience  significant  future  delays in
product  introduction.  From  time to time,  either  our  competitors  or we may
announce new  software  products,  capabilities  or  technologies  that have the
potential  to  replace  or  shorten  the life  cycles of our  existing  software
products.  We cannot assure that announcements of currently planned or other new
software  products will not cause customers to delay their purchasing  decisions
in anticipation of such software products, and such delays could have a material
adverse effect on our business and operating results.

     ***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 products  that we predict will
address new markets will be made available in the second half of this year. Team
Collaboration  Manager  suite that enables  customers to initiate  collaborative
tasks at any point in a process and Records  Manager  Suite that  systematically
applies  record  management  principles  to  content  are  both  expected  to be
available  in the  second  half  of  this  year.  We may  not be  successful  in
developing,  marketing and  releasing  these new products or new versions of our
products that respond to technological developments, evolving industry standards
or changing customer requirements. We may also experience technical difficulties
that could delay or prevent the successful development, introduction and sale of
these products and enhancements.  In the past, we have experienced delays in the
release  dates of  enhancements  and new  releases to our products and we cannot
assure  that we  will  not  experience  significant  future  delays  in  product
introduction. From time to time, our competitors or we may announce new software
products,  capabilities  or  technologies  that have the potential to replace or
shorten the life cycles of our existing software products. We cannot assure that
announcements of currently planned or other new software products will not cause
customers to delay their  purchasing  decisions in anticipation of such software
products,  and such delays could have a material adverse effect on our sales. 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.

                                       31
***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 a
limited  number of  customers  in a limited  number of  industry  segments  will
continue to account for a large portion of our revenue in the future.  If we are
not  successful at obtaining  significant  new customers or if a small number of
customers  cancel or delay their orders for our products,  then 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.

     ***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 cannot assure that in the
future we will be successful in attracting and retaining such personnel.

                                       32
***If our  products  contain  errors,  we could incur  unplanned  expenses and
delays  that  could  result in  reduced  revenue,  lower  profits,  and  harmful
publicity.***  Software,  services and products,  as complex as those we sell,  are
susceptible to errors or failures, especially when first introduced or deployed.
Our  software  products  are often  intended  for use in  applications  that are
critical to a customer's  business.  As a result,  our customers may rely on the
effective  performance  of our software to a greater  extent than the market for
software products generally. Despite internal testing and testing by current and
potential customers,  new products or enhancements may contain undetected errors
or  performance  problems  that are  discovered  only  after a product  has been
installed  and used by customers.  Errors or  performance  problems  could cause
delays  in  product   introduction   and  shipments  or  could  require   design
modifications,  either  of which  could  lead to a loss in or delay of  revenue.
These  problems  could  cause a diversion  of  development  resources,  harm our
reputation  or result in  increased  service or warranty  costs,  or require the
payment  of  monetary  damages.  While our  license  agreements  with  customers
typically contain provisions designed to limit our exposure to potential product
liability  claims,  it is possible that such limitation of liability  provisions
may not be effective under the laws of certain jurisdictions.

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

     **o**    difficulties  in the  integration  of  the  operations,  products  and
          personnel of the acquired companies;

     **o**    the incurrence of debt;

     **o**    liabilities  and risks that are not known or  identifiable at the time
          of the acquisition;

     **o**    difficulties in retaining the acquired company's customer base;

     **o**    valuations  of  acquired  assets  or  businesses  that are  less  than
          expected; or

     **o**    the potential loss of key personnel of the acquired company.

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

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

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

                                       33
***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 diversion
of  resources,  regardless  of the  merits of the  actions.  If we were found to
infringe upon the rights of others,  we cannot assure that we could redesign the
infringing  products  to avoid  further  infringement  or that we  could  obtain
necessary  licenses to use the infringed rights on acceptable  terms, or at all.
Additionally,  significant  damages for past  infringement  could be assessed or
future litigation relative to any such licenses or usage could occur. An adverse
disposition of any claims or the advent of litigation  arising out of any claims
of  infringement  could  result in  significant  costs or reduce our  ability to
market any affected products.

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

     ***We  currently  license  certain  software  from  third  parties,  including
software that is integrated with internally  developed  software and used in our
products to perform key functions. 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;

                                       34
**o**    developments in our  relationships  with our customers,  resellers and
          suppliers;

     **o**    our announcements of significant  contracts,  acquisitions,  strategic
          partnerships or joint ventures;

     **o**    general conditions in the software and computer industries;

     **o**    fluctuations  in general  stock  market  prices and volume,  which are
          particularly  common among highly volatile  securities of Internet and
          software companies;

     **o**    acquisitions in the past have been primarily cash based  transactions.
          Future  acquisitions  may include  stock,  which could  dilute EPS and
          possibly reduce shareholder value;

     **o**    we may not be able to  hedge  all  foreign  exchange  risk  due to the
          significant  fluctuation  of the Euro to the US Dollar and our ability
          to predict the mix of sales orders  denominated in the Euro at the end
          of each fiscal quarter;

     **o**    reduced  stock value may  restrict  our access to equity  financing to
          fund further acquisitions using stock;

     **o**    industry  analyst opinions may increase our stock price volatility and
          reduce shareholder value; and,

     **o**    other general economic and political conditions.

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

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

     Our  exposure to market rate risk for  changes in  interest  rates  relates
primarily to our investment  portfolio.  We have not used  derivative  financial
instruments  in  our  investment  portfolio.   We  place  our  investments  with
high-quality  issuers and, by policy, limit the amount of credit exposure to any
one issuer.  We protect and  preserve our  invested  funds by limiting  default,
market and reinvestment  risk. Our investments in marketable  securities consist
primarily of high-grade  corporate and government  securities with maturities of
less than three years.  Investments purchased with an original maturity of three
months or less are  considered  to be cash  equivalents.  We classify all of our
investments as available-for-sale.  Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity.  Average maturity of our investment portfolio
is 76 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 March 31, 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 March 31, 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  $223,000  at  March  31,  2004  and
approximately  $286,000 at March 31, 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  $446,000  at March  31,  2004 and
approximately $573,000 at March 31, 2003.

                                       35

     The following table provides information about our cash equivalents and our
investment portfolio at March 31, 2004 (dollars in thousands):

     **Estimated Fair***(In thousands***Cost                  Value**
     Debt Securities
      Due in one year or less:
       Short-term munis-taxable       $    6,286             $    6,291
       Corporate                          13,358                 13,357
       Governments/Agencies               14,022                 14,026 
     Total due in one year                33,666                 33,674

     Due in one to three years:
       Corporate                           2,157                  2,155
       Government/Agencies                16,821                 16,828 
     Total due in three years             18,978                 18,983 
      Grand total                     $   52,644             $   52,657 

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

**Foreign Currency Fluctuations and Inflation**

     Our  performance  can be  affected  by changes in foreign  currency  values
relative to the U.S.  dollar in relation to our revenue and operating  expenses.
We have entered  into  forward  foreign  exchange  contracts  primarily to hedge
amounts  due from and the net assets of  selected  subsidiaries  denominated  in
foreign currencies  (mainly in Europe and Asia Pacific) against  fluctuations in
exchange rates. We have not entered into forward foreign exchange  contracts for
speculative or trading purposes. Our accounting policies for these contracts are
based on our designation of the contracts as hedging transactions.  The criteria
we  use  for   designating  a  contract  as  a  hedge  include  the   contract's
effectiveness   in  risk  reduction  and   one-to-one   matching  of  derivative
instruments  to underlying  transactions.  Gains and losses on foreign  exchange
contracts are recognized in income in the same period as gains and losses on the
underlying  transactions.  If an underlying  hedged  transaction were terminated
earlier than initially  anticipated,  the offsetting gain or loss on the related
forward  foreign  exchange  contract  would be  recognized in income in the same
period. In addition,  since we enter into forward contracts only as a hedge, any
change in currency  rates would not result in any material net gain or loss,  as
any gain or loss on the underlying foreign currency denominated balance would be
offset  by the  gain or loss on the  forward  contract.  Our  forward  contracts
generally  have an original  maturity of three months.  As of March 31, 2004, we
had forward foreign exchange contracts  outstanding totaling  approximately $5.1
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 decreased by $898,000 for the three
months  ended  March 31, 2004 due to  unrealized  foreign  currency  translation
losses  resulting from the weakening of the Euro against the U.S.  dollar during
the 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 months ended March 31, 2004.

                                       36
**Item 4.   Controls and Procedures**

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

     As of March 31, 2004,  the end of the quarter  covered by this  report,  an
evaluation was carried out under the supervision and with the  participation  of
the Company's  management,  including the Company's Chief Executive  Officer and
the Company's Chief Financial  Officer,  of the  effectiveness of the design and
operation of the Company's disclosure controls and procedures as required by SEC
Rule 13a - 15(b). Based on the foregoing,  the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective at the reasonable assurance level.

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

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

     See Note 11 to Consolidated Financial Statements.

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

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

     (b)  Reports on Form 8-K
          On April 22, 2004 FileNet furnished a report on Form 8-K under Item 12
          announcing its financial results for the quarter ended March 31, 2004.

                                       37
**SIGNATURE**

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

                               **FILENET CORPORATION**May 7, 2004    By:    */s/ Sam M. Auriemma*
Date                  Sam M. Auriemma, Senior Vice President and Chief Financial Officer
                     (Principal Financial and Accounting Officer, Authorized Signatory)

                                       38
**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).

                                                               39

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

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

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

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

    10.21         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).

    14*           Code of Conduct  (filed as Exhibit 14 to  Registrant's  Annual  Report on Form 10-K for the year ended
                  December 31, 2003).

    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.

                                                                40
**Exhibit 10.21****RESTRICTED STOCK AGREEMENT**

     THIS RESTRICTED  STOCK  AGREEMENT (the  "Agreement") is made by and between
FileNet   Corporation,    a   Delaware   corporation   (the   "Company"),    and
_______________,  ("Holder"),  effective  as of  ________________,  2004 ("GrantDate").

     WHEREAS,  the  Company  wishes  to award to Holder  shares of Common  Stock
subject to certain Restrictions (as defined below), which award is granted under
the 2002 Incentive Award Plan of FileNet Corporation, as amended and/or restated
from time to time (the "Plan"); and

     WHEREAS, the Committee appointed to administer the Plan has determined that
it  would  be to the  advantage  and  best  interest  of  the  Company  and  its
stockholders to issue the Restricted  Shares provided for herein to Holder as an
inducement  to enter  into or remain in the  service  of the  Company  and as an
incentive for increased efforts during such service.

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

                                   ARTICLE I.
                                  **DEFINITIONS**

     Whenever the following terms are used in this Agreement they shall have the
meaning  specified below unless the context  clearly  indicates to the contrary.
The masculine  pronoun  shall include the feminine and neuter,  and the singular
the plural,  where the context so indicates.  All capitalized  terms used herein
without definition shall have the meaning ascribed to such terms in the Plan.

Section 1.1 - Cause

     "Cause"  shall  have the  meaning  set  forth in the  Holder's  CIC  Letter
Agreement.

Section 1.2 - Change in Control

     "Change in Control"  shall have the meaning set forth in the  Holder's  CIC
Letter Agreement.

Section 1.3 - CIC Letter Agreement

     "CIC Letter  Agreement"  shall mean that certain letter  agreement  between
Holder and the  Company  dated May 15,  2003  pursuant  to which the Company has
agreed to provide Holder with certain  payments and benefits  following a Change
in Control, as the same agreement may be amended,  supplemented or restated from
time to time.

Section 1.4 - Good Reason

     "Good  Reason"  shall have the meaning set forth in the Holder's CIC Letter
Agreement.

Section 1.5 - Involuntary Termination

     "Involuntary  Termination" shall have the meaning set forth in the Holder's
CIC Letter Agreement.

Section 1.6 - Restricted Shares

     "Restricted  Shares"  shall mean the shares of Common Stock  granted  under
this Agreement that are subject to Restrictions.

Section 1.7 - Restrictions

     "Restrictions"  shall mean the vesting  requirements  set forth in Sections
3.1 and 3.4, the forfeiture rights set forth in Section 3.2 and the restrictions
on sale or other transfer set forth in Section 3.3.

Section 1.8 - Termination of Service

     "Termination of Service" shall mean termination of Holder's employment with
the Company (and any of its  subsidiaries)  for any reason,  or  termination  of
Holder's service with the Company (and any of its  subsidiaries) as a consultant
for any reason. The Committee,  in its absolute discretion,  shall determine the
effect of all  matters  and  questions  relating  to a  Termination  of Service,
including without limitation whether a Termination of Service has occurred,  and
whether  the  Termination  of Service  was for Cause,  for Good Reason or was an
Involuntary Termination.

                                  ARTICLE II.
                          **ISSUANCE OF RESTRICTED SHARES**Section 2.1 - Issuance of Restricted Shares

     In consideration of the past services rendered to the Company and for other
good and  valuable  consideration,  on the Grant Date the Company  agrees to and
does hereby issue to Holder ___________  (____) Restricted Shares (*i.e.*,  shares
of Common Stock subject to the  Restrictions  and other  conditions set forth in
this Agreement).

Section 2.2 - No Right to Continued Employment

     Nothing in this Agreement or in the Plan shall confer upon Holder any right
to continue in the employ of the Company,  or as a consultant to the Company, or
shall interfere with or restrict in any way the rights of the Company, which are
hereby  expressly  reserved,  to  discharge  Holder  at any time for any  reason

                                     Page 2

whatsoever,  with or  without  cause,  except to the extent  expressly  provided
otherwise in writing.

Section 2.3 - Adjustments in Restricted Shares

     The  Committee  may adjust the  Restricted  Shares in  accordance  with the
provisions of Section 11 of the Plan.

                                  ARTICLE III.
                                 **RESTRICTIONS**Section 3.1 - Vesting and Lapse of Restrictions

     (a) Subject to Section 3.4 concerning  accelerated  vesting under specified
circumstances,  all  unvested  Restricted  Shares  shall  vest in  full  and all
Restrictions  shall lapse on December 31, 2008,  conditioned  only upon Holder's
continued employment or service with the Company through such date.

     (b) By  resolution,  the Committee  may, on such terms and conditions as it
deems  appropriate,  remove any or all of the  Restrictions  (including  without
limitation,  the Committee may  accelerate  vesting) at any time or from time to
time.

Section 3.2 Forfeiture of Restricted Shares - Termination of Service

     Except as  provided in Section  3.4(b),  upon a  Termination  of Service of
Holder,  all Restricted  Shares  outstanding  as of such  Termination of Service
shall be automatically  forfeited and cancelled effective as of such Termination
of Service,  without  payment to Holder,  and Holder  shall not have any further
rights or entitlements to the Restricted Shares or under this Agreement.

Section 3.3 - Restriction on Transfer of Restricted Shares

     Holder shall not sell, exchange, transfer, alienate,  hypothecate,  pledge,
encumber or assign any Restricted  Shares (or any rights with respect  thereto),
that have not  vested  and have not had their  Restrictions  lapse  pursuant  to
Section 3.1 or 3.4 hereof.  Neither the  Restricted  Shares nor any  interest or
right  therein or part  thereof  shall be liable for the  debts,  contracts,  or
engagements  of Holder or his  successors  in  interest  or shall be  subject to
disposition  by  transfer,   alienation,   anticipation,   pledge,  encumbrance,
assignment  or  any  other  means  whether  such  disposition  be  voluntary  or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any  other  legal  or  equitable  proceedings  (including  bankruptcy)  and  any
attempted disposition thereof shall be null and void and of no effect.

Section 3.4 - Acceleration of Vesting and Lapse of Restrictions

     (a) The  Restricted  Shares shall vest and the  Restrictions  thereon shall
lapse in such amount,  based upon the Company's annual  performance  compared to
certain  performance  criteria targets, as set forth below. For purposes of this
Agreement,  "performance  criteria"  shall mean the Company's  annual  operating

                                     Page 3

income divided by the Company's  annual revenue,  for each of fiscal 2004, 2005,
2006 and 2007,  determined in accordance  with generally  acceptable  accounting
principals consistently applied.

  Fiscal Year     Performance Criteria Target                   Percent Vesting

         2004                   8% or greater           33.3% of original grant
         2005                  10% or greater           33.3% of original grant
         2006                  12% or greater           33.3% of original grant
         2007                  12% or greater           33.3% of original grant

     Within 90 days following the end of each fiscal year,  commencing  with the
fiscal year ending  December  31, 2004 and  continuing  until the earlier of the
fiscal  year  ending  December  31,  2007 or the  earlier  full  vesting  of the
Restricted Shares, the Chief Financial Officer of the Company will determine the
Company's actual performance under the performance criteria.  Within such 90-day
period and on a date that is within the  Company's  open  window for  trading in
Company  securities,  the  Committee  will review the CFO's  determinations  and
certify in writing the extent of the Company's  actual  performance  compared to
the  performance  criteria  targets.  In the  event  (i)  the  Company's  actual
performance  under  the  performance  criteria  equal or exceed  the  applicable
performance  criteria target specified above for such fiscal period and (ii) the
Holder was  employed by the Company as of the last day of the fiscal  period for
which such performance criteria was measured, then 33% of the original number of
Restricted Shares (rounded up to the nearest whole number of shares,) or if less
the remaining  unvested  shares,  shall vest;  the  Committee  shall certify the
number of  Restricted  Shares,  if any,  that so vest.  The date upon  which the
Committee makes this  certification  is referred to as the "Early Vesting Date."
Upon the Early  Vesting  Date,  and provided that the Holder has continued to be
employed by the Company  through  and  including  the end of the fiscal year for
which such  performance  criteria targets were met, the Holder will have a right
to the number of shares that so vested, as certified by the Committee,  free and
clear of any Restrictions.  In no event,  however,  will the Holder vest in more
than the original number of Restricted  Shares issued hereunder and set forth in
Section 1.6.

     (b) In the event of a  Termination  of Service by reason of an  Involuntary
Termination or Holder's  resignation for Good Reason that occurs within eighteen
(18) months following a Change in Control,  then all unvested  Restricted Shares
shall vest in full and the  Restrictions  thereon shall lapse in full  effective
upon such Termination of Service, and Section 3.2 shall be not be applicable.

Section 3.5 - Escrow

     (a) The  Secretary  of the Company or any other  person  designated  by the
Committee  as escrow  agent shall retain  physical  custody of any  certificates
representing  the Restricted  Shares until and to the extent (i) such Restricted
Shares have vested and all  Restrictions  have been removed or lapsed as to such
shares  under  this  Agreement,  or (ii)  such  shares  have been  forfeited  or
cancelled pursuant to Section 3.2. To ensure the delivery of Holder's Restricted
Shares upon  forfeiture,  Holder hereby appoints the Secretary of the Company or
any other  designated  escrow agent as Holder's  attorney-in-fact  to assign and

                                     Page 4

transfer unto the Company (or such designee),  such Restricted  Shares,  if any,
pursuant to Section 3.2.

     (b) The Secretary,  or other escrow agent,  shall not be liable for any act
he or she may do or omit to do with respect to holding the Restricted  Shares in
escrow  and  while  acting  in  good  faith  and in the  exercise  of his or her
judgment.

Section 3.6 - Legend

     The share  certificate or other  evidence of the  Restricted  Shares issued
hereunder  may at the  discretion  of the Company be endorsed with or subject to
the following  legend (in addition to any legend required under applicable state
securities laws):

     THE  SECURITIES  REPRESENTED  BY THIS  CERTIFICATE  ARE  SUBJECT TO CERTAIN
     RESTRICTIONS ON TRANSFER AND FORFEITURES AS SET FORTH IN A RESTRICTED STOCK
     AGREEMENT  BETWEEN THE COMPANY AND THE  STOCKHOLDER,  A COPY OF WHICH IS ON
     FILE WITH THE SECRETARY OF THE ISSUER, AND SUCH SHARES MAY NOT BE, DIRECTLY
     OR INDIRECTLY,  OFFERED, TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED
     OR OTHERWISE  DISPOSED OF UNDER ANY  CIRCUMSTANCES,  EXCEPT PURSUANT TO THE
     PROVISIONS OF SUCH AGREEMENT.

Section 3.7 - Vested Shares without Restrictions

     (a) As and to the extent the Restricted  Shares vest in accordance with the
terms of this  Agreement,  the  Restrictions on such shares shall lapse and, and
subject to compliance  with Section  3.7(b),  such vested shares of Common Stock
shall be  delivered  to the  Holder  or for the  benefit  of his or her  account
without the legend  referenced in Section 3.6. Such vested shares shall cease to
be  considered  Restricted  Shares  subject to the terms and  conditions of this
Agreement,  and  shall be  shares of  Common  Stock of the  Company  free of all
Restrictions.

     (b) Notwithstanding the foregoing,  vested shares shall not be delivered to
the Holder or for the benefit of or to his  account  unless and until the Holder
shall have paid to the Company in cash or made  provisions  for payment  through
withholding  against  income,  the full  amount  of all  federal  and  state (or
applicable  foreign)  withholding or other  employment  taxes  applicable to the
taxable income of the Holder  resulting from the grant of the Restricted  Shares
or the lapse or removal of the Restrictions.

Section 3.8 - Restrictions on New Shares and Distributions

     In the event of any dividend or other distribution (including ordinary cash
dividends,  and whether in the form of Common Stock, other securities,  or other
property), recapitalization, reclassification, stock split, reverse stock split,
reorganization,   merger,  consolidation,   split-off,  spin-off,   combination,
purchase,  liquidation,  dissolution,  or  sale,  transfer,  exchange  or  other
disposition  of  all or  substantially  all of the  assets  of the  Company,  or
exchange of Common  Stock or other  securities  of the  Company,  or issuance of
warrants or other  rights to purchase  Common Stock or other  securities  of the
Company,  or other similar  transaction or event, is paid, issued,  exchanged or

                                     Page 5

distributed in respect of Restricted Shares, such new or additional or different
shares or  securities or property  (including  cash) which are  attributable  to
Holder  in his  capacity  as  the  owner  of the  Restricted  Shares,  shall  be
considered  to be  Restricted  Shares  and  shall  be  subject  to  all  of  the
Restrictions, unless the Committee shall, in its discretion, otherwise provide.

                                  ARTICLE IV.
                                 **MISCELLANEOUS**Section 4.1 - Administration

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

Section 4.2 - Conditions to Issuance of Stock

     The  Restricted  Shares may be either  previously  authorized  but unissued
shares or issued  shares which have then been  reacquired  by the Company.  Such
shares shall be fully paid and nonassessable.  The Company shall not be required
to issue or deliver  any shares of stock  pursuant  to this  Agreement  prior to
fulfillment of all of the following conditions:

     (i)  The  admission  of such  shares to listing on all stock  exchanges  on
          which such class of stock is then listed, if applicable; and

    (ii)  The  completion of any  registration  or other  qualification  of such
          shares under any state or federal law or under rulings or  regulations
          of the Securities and Exchange Commission or of any other governmental
          regulatory   body,   if   applicable,   or  the   receipt  of  further
          representations  from Holder as to investment  intent or completion of
          other actions necessary to perfect exemptions, as the Committee shall,
          in its absolute discretion, deem necessary or advisable; and

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

                                     Page 6

    (iv)  The lapse of such reasonable  period of time as the Committee may from
          time to time establish for reasons of administrative convenience; and

     (v)  The  receipt by the Company of payment of any  applicable  withholding
          tax.

Section 4.3 - Rights as Stockholder

     Holder  shall  have all the  rights of a  stockholder  with  respect to the
Restricted  Shares,  including  the right to vote and receive all  dividends  or
other distributions paid or made with respect to the Restricted Shares,  subject
to Section 3.8; provided,  however, that in the discretion of the Committee, any
extraordinary  distributions  with  respect to the Common  Stock may be released
from the Restrictions.

Section 4.4 - Withholding Tax

     Holder  agrees that in the event the issuance of the  Restricted  Shares or
the  expiration  or  removal of  Restrictions  thereon  results in the  Holder's
realization of income which for federal,  state or local income tax purposes is,
in the opinion for the Company,  subject to  withholding of tax at source by the
Company,  the Holder will pay to the Company an amount equal to such withholding
tax or the Company may  withhold  such amount from the  Holder's  salary or from
dividends deposited with the Company with respect to the Restricted Stock.

Section 4.5 - Section 83(b) Election

     If the Holder makes an election under Section 83(b) of the Internal Revenue
Code of 1986,  as amended  (the  "Code") to be taxed with  respect to all or any
portion of the  Restricted  Shares as of the date of issuance of the  Restricted
Shares rather than as of the date or dates upon which the Holder would otherwise
be taxable under  Section 83(a) of the Code,  the Holder shall deliver a copy of
such  election to the Company  promptly  after  filing  such  election  with the
Internal  Revenue  Service.  Section  83(b)  elections  must be  filed  with the
Internal Revenue Service within 30 days following the Grant Date.

Section 4.6 - Notices

     Any notice to be given by Holder under the terms of this Agreement shall be
addressed  to the  Secretary  or his or her  office.  Any  notice to be given to
Holder  shall be  addressed to him at the address  given  beneath his  signature
hereto.  By a notice given pursuant to this Section,  either party may hereafter
designate a different  address for notices to be given to him.  Any notice which
is required to be given to Holder shall, if Holder is then deceased, be given to
Holder's personal  representative if such representative has previously informed
the  Company  of his or her status and  address  by  written  notice  under this
Section.  Any notice  shall be deemed  duly given  when  enclosed  in a properly
sealed envelope  addressed as aforesaid,  deposited (with postage  prepaid) in a
post office or branch  post office  regularly  maintained  by the United  States
Postal  Service  or  when  delivered  to a  courier  that  guarantees  overnight
delivery.

                                     Page 7
Section 4.7 - Titles

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

Section 4.8 - Construction

     This Agreement  shall be  administered,  interpreted and enforced under the
internal  laws of the state of  California.  The terms of any change in control,
employment or severance  agreement,  to the extent such other agreement provides
benefits  that  are in  addition  to or  greater  than  those  provided  in this
Agreement, shall supersede and control over the terms of this Agreement.

Section 4.9 - Conformity to Securities Laws

     Holder  acknowledges  that  the Plan and this  Agreement  are  intended  to
conform to the extent  necessary with all  provisions of all applicable  federal
and state laws,  rules and  regulations  and to such  approvals  by any listing,
regulatory or other governmental authority as may, in the opinion of counsel for
the Company, be necessary or advisable in connection therewith.  Notwithstanding
anything  herein  to the  contrary,  the  Plan  shall be  administered,  and the
Restricted Shares is granted,  only in such a manner as to conform to such laws,
rules and regulations. To the extent permitted by applicable law, the Plan, this
Agreement  and the  Restricted  Shares  shall be deemed  amended  to the  extent
necessary to conform to such laws, rules and regulations.

Section 4.10 - Amendments

     This  Agreement  and the Plan may be amended  without the consent of Holder
provided that such  amendment  would not alter,  terminate,  impair or adversely
affect any rights of Holder under this Agreement.

                            *[Signature Page Follows]*

                                     Page 8

     IN WITNESS  WHEREOF,  this Agreement has been executed and delivered by the
parties hereto.

                                         FILENET CORPORATION,
                                         a Delaware corporation

                                         By___________________________________

                                         Title________________________________

HOLDER

_____________________________________
(Name of Holder)

_____________________________________
Address

_____________________________________
City, States Zip

Holder's Taxpayer Identification Number: ________________________

                                     Page 9
**FileNet Corporation**
                   R E S T R I C T E D  S T O C K  A W A R D S

        **Name                            Grant Date            Shares**

        Auriemma, Sam M.                  3-9-04              15,000
        Christian, Martyn                 3-9-04              10,000
        Ercanbrack, Ron L                 3-9-04              15,000
        Roberts, Lee D.                   3-9-04              30,000
        Zihlmann, Franz X.                3-9-04              10,000

                                    Page 10

**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:    May 7, 2004

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

                                       1

**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:   May 7, 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  March 31, 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:  May 7, 2004
                                    */s/ Lee D. Roberts*.
                                    Lee D. Roberts
                                    Chairman of the Board and
                                    Chief Executive Officer
                                    (Principal Executive Officer)

                                       1
**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  March 31, 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:  May 7, 2004
                                    */s/ Sam M. Auriemma*.
                                    Sam M. Auriemma
                                    Senior Vice President and
                                    Chief  Financial Officer
                                    (Principal Financial Officer)

                                       2
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