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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, 2005

                                       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 9, 2005, there were 40,937,891 shares of the Registrant's common stock
  outstanding.

**FILENET CORPORATION****Index**

                                                                                    Page
                                                                                  Number **PART I.        FINANCIAL INFORMATION**

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

     Item 2.        Management's Discussion and Analysis of Financial Condition
                      and Results of Operations  ..................................  15

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

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

     **PART II.       OTHER INFORMATION**

     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

I**tem 1.  Unaudited Condensed Consolidated Financial Statements

                                    FILENET CORPORATION**
                      UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                         *(in thousands, except per share amounts)*

                                                          March 31,              December 31,
                                                        **2005                      2004****ASSETS**
Current assets:
  Cash and cash equivalents                            $   235,113               $   123,217
  Short-term investments available for sale                130,680                   211,196
  Accounts receivable, net                                  40,198                    35,878
  Prepaid expenses and other current assets                 12,730                    12,179
  Deferred income taxes                                      3,681                     3,681 
  Total current assets                                     422,402                   386,151

  Property, net                                             19,918                    21,738
  Long-term investments available for sale                   9,585                    14,256
  Goodwill                                                  26,896                    27,268
  Intangible assets, net                                     5,591                     6,188
  Deferred income taxes                                     36,063                    36,028
  Other assets                                               2,283                     2,037 
   Total assets                                        $   522,738               $   493,666 **LIABILITIES AND STOCKHOLDERS' EQUITY**
Current liabilities:
  Accounts payable                                     $    14,153               $    13,868
  Accrued compensation and benefits                         27,443                    33,674
  Customer deposits and advances                             8,484                     9,007
  Unearned maintenance revenue                              71,552                    47,145
  Income tax payable                                         9,009                     5,374
  Other accrued liabilities                                 12,081                    14,201 
    Total current liabilities                              142,722                   123,269

  Unearned maintenance revenue and other liabilities         4,819                     2,533
  Commitments and contingencies (Note 10)

Stockholders' equity:
  Preferred stock - $0.10 par value; 7,000,000 shares
    authorized; none issued and outstanding
  Common stock - $0.01 par value; 100,000,000 shares
    authorized; 41,790,050 issued and  40,692,050
    shares outstanding at March 31, 2005; and
   41,690,989 shares issued and 40,592,982 shares
    outstanding at December 31, 2004                       285,813                   284,490
  Deferred compensation                                     (6,122)                   (6,530)
  Retained earnings                                        101,784                    93,512
  Accumulated other comprehensive income                     8,289                    10,959
  Treasury stock, at cost; 1,098,000 shares                (14,567)                  (14,567)
  Net stockholders' equity                                 375,197                   367,864 

    Total liabilities and stockholders' equity         $   522,738               $   493,666 *See accompanying notes to unaudited condensed consolidated financial statements.*

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

                                                     Three Months Ended
                                                          March 31,            .
                                             **2005                  2004**.
Revenue:
  Software                                  $   38,451            $   41,351
  Customer support                              48,333                45,270
  Professional services and education           13,233                12,877 
  Total revenue                                100,017                99,498

Costs:
  Software                                       2,370                 3,523
  Customer support                              10,526                10,292
  Professional services and education           10,384                10,838 
  Total cost of revenue                         23,280                24,653

    Gross Profit                                76,737                74,845

Operating expenses:
  Sales and marketing                           38,182                41,561
  Research and development                      18,630                20,102
  General and administrative                     9,227                 9,233 
  Total operating expenses                      66,039                70,896

Operating income                                10,698                 3,949

Other income, net                                2,028                   927 

Income before income taxes                      12,726                 4,876

Provision for income taxes                       4,454                   878 

Net income                                  $    8,272            $    3,998 

Earnings per share:
  Basic                                     $     0.20            $     0.10
  Diluted                                   $     0.20            $     0.10

Weighted-average shares outstanding:
  Basic                                         40,361                38,280
  Diluted                                       41,706                40,785

*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,        .
                                                 **2005             2004**

 Net income                                     $    8,272       $    3,998 
 Other comprehensive loss:
   Foreign currency translation adjustments         (2,614)            (914)
 Unrealized gain (loss) on securities:
   Unrealized holding gain (loss), net of
   taxes                                               (56)              16 
 Total other comprehensive loss                     (2,670)            (898)
 Comprehensive income                           $    5,602       $    3,100 *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,                                    **2005              2004****Cash flows provided by operating activities:**
Net income                                                 $   8,272        $    3,998
Adjustments to reconcile net income to net cash
   provided by operating activities:
Depreciation and amortization                                  3,840             4,276
Loss on sale of fixed assets                                      15                 4
Provision for doubtful accounts and sales returns                299                 6
Deferred income taxes                                            (35)              (40)
Changes in operating assets and liabilities:
Accounts receivable                                           (5,223)            4,551
Prepaid expenses and other current assets                     (1,193)             (411)
Accounts payable                                                 492              (756)
Accrued compensation and benefits                             (5,893)           (3,261)
Customer deposits and advances                                  (518)            1,762
Unearned maintenance revenue                                  27,122            25,875
Income taxes payable                                           3,582             1,734
Other                                                         (1,426)           (1,774)
Net cash provided by operating activities                     29,334            35,964 **Cash flows provided by (used in) investing activities:**
Capital expenditures                                          (1,585)           (2,726)
Proceeds from sale of property                                     2                48
Purchases of marketable securities                          (283,607)         (356,040)
Proceeds from sales and maturities of marketable
  securities                                                 368,525           352,825 
Net cash provided by (used in) investing activities           83,335            (5,893)**Cash flows provided by financing activities:**
Proceeds from issuance of common stock                         1,323            10,178 
Net cash provided by financing activities                      1,323            10,178 

Effect of exchange rate changes on cash and cash
  equivalents                                                 (2,096)             (528)

Net increase in cash and cash equivalents                    111,896            39,721
Cash and cash equivalents, beginning of period               123,217           100,605 
Cash and cash equivalents, end of period                 $   235,113        $  140,326 

Supplemental cash flow information:
Interest paid                                            $         1        $       22
Income taxes paid / (refunded)                           $       892        $     (950)
.
 *See accompanying notes to unaudited condensed consolidated financial statements.*

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

1.   BASIS OF PRESENTATION

     The  accompanying   unaudited  interim  condensed   consolidated  financial
statements of FileNet  Corporation and subsidiaries (the "Company" or "FileNet")
reflect all adjustments  (consisting of normal recurring  adjustments) necessary
to present  fairly the financial  position of the Company at March 31, 2005, and
the results of its operations,  its comprehensive  operations and its cash flows
for the three  months  ended March 31, 2005 and 2004.  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, 2004 filed with the SEC on
March 15,  2005.  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**.  A  portion  of the  Company's  investments  consist  of
auction rate securities that reset interest rates at auction intervals of 7, 28,
35 or 49 days. These securities are readily saleable at par value on the auction
dates and the carrying  value  approximates  fair value  throughout  the holding
period.  In prior years,  auction rate  securities that reset or matured in less
than 90 days were included in cash  equivalents.  In December  2004, the Company
determined such amounts should properly be classified as short-term investments.
As a result,  in its 2004 Form 10-K the Company  reclassified  these amounts for
all periods presented.  Additionally,  the Company reclassified the accompanying
statement  of cash flows for the three months ended March 31, 2004 to remove the
amounts  from cash  equivalents  and record the net  purchases  or  proceeds  of
auction rate securities as an investing activity.

2.   NEW ACCOUNTING PRONOUNCEMENTS

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

     In  December  2004,  the  FASB  revised   Statement  No.  123  (FAS  123R),
"Share-Based  Payment,"  which requires  companies to expense the estimated fair
value of employee stock options and similar awards based on the grant-date  fair
value of the award.  The cost will be recognized over the period during which an
employee is required to provide  service in exchange for the award,  usually the
vesting  period.  The accounting  provisions of FAS 123R will be effective as of
the  beginning of the first  fiscal year that begins  after June 15,  2005.  The
Company  will  adopt the  provisions  of FAS 123R on  January  1,  2006  using a
modified prospective  application.  Under the modified prospective  application,
FAS 123R will apply to new awards,  unvested  awards that are outstanding on the
effective  date and any awards  that are  subsequently  modified  or  cancelled.
Compensation  expense for outstanding awards for which the requisite service had
not been rendered as of the effective date will be recognized over the remaining

                                       7

service period using the  compensation  cost calculated for pro forma disclosure
purposes under FAS 123 (Note 3 Stock-Based Compensation).  The Company is in the
process of determining how the new method of valuing stock-based compensation as
prescribed  in FAS 123R will be applied to valuing  stock-based  awards  granted
after the effective date and the impact the recognition of compensation  expense
related to such awards will have on its financial statements.

3.   STOCK BASED COMPENSATION

     The Company  currently  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  and net income 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 ended March 31, 2005 and 2004.

                                                          Three Months Ended
                                                               March 31,       .
(in thousands, except per share amounts)           **2005             2004**

 Net income, as reported                           $    8,272       $    3,998

 Deduct:  Total stock-based employee
 compensation expense determined under
 fair value based method for all awards, net
 of related tax effects                                (2,447)          (1,547)
 Pro forma net income                              $    5,825       $    2,451

 Earnings per share:
 Basic earnings per share - as reported            $    0.20        $     0.10
 Basic earnings per share - pro forma                   0.14              0.06

 Diluted earnings per share - as reported          $    0.20        $     0.10
 Diluted earnings per share - pro forma                 0.14              0.06

     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 estimates the expected life of its
stock options based upon historical data.

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

                                                   Three Months Ended
                                                       March 31,           .
                                            **2005                 2004**

Expected life (in years)                        5.52                 5.39
Expected volatility                               72%                  51%
Risk free interest rates                        3.87%                3.07%
Expected dividend                                  0%                   0%

                                       8

4.   GOODWILL AND OTHER INTANGIBLE ASSETS

     The  Company's  business  acquisitions  have resulted in goodwill and other
intangible  assets.  Goodwill is recorded at cost and is not  amortized,  but is
tested for  impairment at least annually and would be written down if impairment
were  determined.  Effective  the first day of July of each  year,  goodwill  is
tested for  impairment by  determining  if the carrying  value of each reporting
unit exceeds its fair value.  The Company's  reporting units are consistent with
the  reportable  segments  identified  in Note 7. The Company also  periodically
evaluates whether events and circumstances  have occurred between annual testing
dates that indicate the carrying  value of goodwill may not be  recoverable.  An
impairment  analysis was  performed as of July 1, 2004 in  accordance  with SFAS
142. The results  indicated  there was no  impairment  of goodwill in any of the
three reporting  units.  As of March 31, 2005,  there have been no indicators of
impairment; therefore no interim impairment tests have been performed.

     The following  table presents the changes in goodwill by reporting  segment
during the three months ended March 31, 2005:

*(in thousands)*.
                                                        *Professional
                                           Customer     Services and**Software       Support        Education        Total*
Balance, December 31, 2004   $  15,826     $  6,003         $  5,439    $  27,268

  Foreign currency effect         (216)         (82)            (74)        (372) 

Balance, March 31, 2005      $  15,610     $  5,921         $  5,365    $  26,896

     Foreign currency change relates to the impact of translation on the portion
of goodwill that was recorded on the Company's foreign subsidiaries.

     Identified   intangible  assets  are  recorded  at  cost  less  accumulated
amortization.  These assets are amortized  using the  straight-line  method over
estimated useful lives of three to five years. The determination of useful lives
and  whether or not these  assets are  impaired  involves  judgment.  Long-lived
assets are reviewed for impairment  whenever  events or  circumstances  indicate
that the  carrying  amount of such  assets may not be  recoverable.  The Company
evaluates  these assets for impairment  based on estimated  undiscounted  future
cash flows from these assets.  If the carrying  value of the assets  exceeds the
estimated  future  undiscounted  cash flows,  a loss would be  recorded  for the
excess of the asset's carrying value over the fair value.  While the Company has
not  experienced  impairment of intangible  assets in prior  periods,  it cannot
guarantee  that there will not be  impairment in the future.  Intangible  assets
subject to amortization consist of the following:

*(in thousands)*.
**March 31, 2005                              December 31, 2004**.
                                  *Gross       Accumulated                     Gross      Accumulated**Asset      Amortization         Net         Asset     Amortization         Net*
Acquired technology and
   related intangibles       $   10,480      $   (4,970)    $   5,510    $   10,571      $   (4,496)   $   6,075
Non-compete agreements
   and patents                      367            (286)           81           367            (254)         113 
     Total                   $   10,847      $   (5,256)    $   5,591    $   10,938      $   (4,750)   $   6,188 

                                                             9

     Acquired technology and other intangibles are being amortized over a useful
life of five years,  and  non-compete  agreements are being amortized over three
years.   Patents  were  amortized  over  two  years  and  are  fully  amortized.
Amortization  expense for  intangible  assets was  $553,000 for the three months
ended March 31, 2005 compared to $527,000 for the comparable period in 2004.

     Estimated future amortization expense (assuming no foreign exchange effect)
of purchased intangible assets as of March 31, 2005 is as follows:

                *(in thousands)*.
                **Fiscal Year                      Amount**
                    (Remainder) 2005                 $     1,633
                                2006                       2,116
                                2007                       1,513
                                2008                         329           $     5,591 

5.   EARNINGS PER SHARE

     Basic earnings per share are computed by dividing net income for the period
by the  weighted-average  number of common shares outstanding during the period.
Diluted   earnings  per  share  is  computed  by  dividing  net  income  by  the
weighted-average number of common shares outstanding plus the dilutive effect of
outstanding  stock  options,  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, 2005 and 2004 were  1,345,145
and  2,505,000  shares,  respectively.   The  following  table  sets  forth  the
computation  of basic and diluted  earnings per share for the three months ended
March 31, 2005 and 2004:

                                                  Three Months Ended
                                                         March 31,        .

*(in thousands, except per share amounts)***2005                2004**

Net Income                                  $   8,272          $    3,998

Weighted average common shares
  outstanding                                  40,639              38,413
Unvested restricted stock                        (278)               (133) 
Shares used in computing
  basic earnings per share                     40,361              38,280

Earnings per basic share                    $    0.20          $     0.10

Shares used in computing
  basic earnings per share                     40,361              38,280
Dilutive effect of stock plans                  1,323               2,472
Dilutive effect of weighted average
  common shares of unvested
  restricted stock                                 22                  33 
Shares used in computing
  diluted earnings per share                   41,706              40,785

Earnings per diluted share                  $    0.20          $     0.10

                                       10

6.   ACCUMULATED OTHER COMPREHENSIVE INCOME

     Accumulated other comprehensive  income, net of taxes, for the three months
ended March 31, 2005 is comprised of the following:

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

Balance, December 31, 2004     $   11,235       $     (276)         $   10,959
Three month period changes         (2,614)             (56)             (2,670)
Balance, March 31, 2005        $    8,621       $     (332)         $    8,289 

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

     The accounting policies of the Company's operating segments are the same as
those for the Company as a whole.  The Company  evaluates  performance  based on
stand-alone  segment  gross  profit.  The Company does not  separately  allocate
operating  expenses to these segments,  nor does it allocate  specific assets to
these segments. The Company does not evaluate performance based on the return on
assets or on interest income at the operating segment level. Therefore,  segment
information reported includes only revenues, cost of revenues, and gross profit,
as this  information  is the only  information  currently  provided to the chief
operating decision maker on a segment basis.

                                       11

     Operating  segment  data for the three months ended March 31, 2005 and 2004
is as follows:

                                                       Three months ended
                                                             March 31,
*(in thousands)***2005                 2004**

Software:
  Revenue                                     $     38,451          $    41,351
  Cost of revenue                                    2,370                3,523
      Gross profit                                  36,081               37,828

Customer Support:
  Revenue                                     $     48,333          $    45,270
  Cost of revenue                                   10,526               10,292
      Gross profit                                  37,807               34,978

Professional Services and Education:
  Revenue                                     $     13,233          $    12,877
  Cost of revenue                                   10,384               10,838
    Gross profit                                     2,849                2,039

Total
  Revenue                                     $    100,017          $    99,498
  Cost of revenue                                   23,280               24,653
      Gross profit                                  76,737               74,845

8.       STOCK OPTIONS

     The following is a summary of stock option transactions regarding all stock
option plans for the three months ended March 31, 2005:

*Weighted
                                                                              Average
                                                           Number of        Excercise**Options            Price*

 Balance, December 31, 2004                                6,870,617        $  19.99

       Granted (weighted-average fair value of $13.11)        22,000           23.58
       Exercised                                             (99,061)          13.35
       Canceled                                             (103,719)          26.38
 Balance, March 31, 2005                                   6,689,837        $  20.00

                                       12

     The following  table  summarizes  information  concerning  outstanding  and
exercisable stock options at March 31, 2005:

.
**Options Outstanding                                     Options Exercisable**.

                                             *Weighted
                                              Average         Weighted                           Weighted
                                            Remaining          Average                            Average
         Range of             Number      Contractual         Exercise             Number        Exercise**Exercise Price        Outstanding      Life (Years)           Price        Exercisable           Price*
 1.39   -   12.86          1,401,516             5.35        $   10.99          1,037,972       $   10.40
12.97   -   16.35          1,117,119             6.24            13.94            812,590           13.90
16.54   -   23.47          1,436,527             6.24            19.87          1,243,331           19.98
23.88   -   26.66          1,125,129             7.32            25.73            521,568           24.74
26.75   -   28.19          1,333,754             8.85            27.77            277,355           27.82
28.42   -   41.84            275,792             4.38            30.09            250,718           30.13  1.39   -   41.84          6,689,837             6.68        $   20.00          4,143,534       $   18.13 

9.   ISSUANCE OF RESTRICTED STOCK

     The fair value of restricted stock awards is recorded in the equity section
of the balance sheet as an increase in common stock and a  contra-equity  offset
to deferred compensation. All restricted stock awards vest over time and certain
awards include a feature that allows the stock to vest on an  accelerated  basis
provided  certain  performance  targets are achieved.  Certain  restricted stock
awards  are also  subject  to Change in Control  Agreements  and/or  termination
without cause provisions that could trigger accelerated vesting. Expense related
to the shares is amortized  on a  straight-line  basis over the vesting  period.
Recognition of expense may be  accelerated  if it becomes  probable that certain
performance  targets will be achieved that trigger accelerated vesting for those
shares that contain the acceleration feature. Approximately $408,000 and $45,500
of compensation  expense was recognized for restricted stock awards in the three
months ended March 31, 2005 and 2004, respectively.

10.  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. Rental expense is recorded on a straight-line basis
over the life of the lease and 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, 2005 were as follows:

     (in thousands)                                                .
     2005 (remaining 9 months)                       $      13,987
     2006                                                   13,461
     2007                                                   11,268
     2008                                                    9,786
     2009                                                    7,401
     2010                                                    6,310
     Thereafter                                              3,029  Total                                           $      65,242 

                                       13
**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 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  $2.8  million  as of March 31,  2005.
Approximately  $1.4  million  was issued in local  currency  in Europe and Asia,
while the balance was issued in the United States. Approximately $0.5 million of
the $2.8 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 fair value
of such guarantees and indemnities is considered nominal.

     **Legal Proceedings**

     In the normal  course of  business,  the  Company  is  subject to  ordinary
routine  litigation and claims incidental to its business.  The Company monitors
and  assesses  the  merits  and risks of pending  legal  proceedings.  While the
results of litigation and claims cannot be predicted with certainty,  based upon
its current  assessment the Company  believes that the final outcome of existing
legal  proceedings  will either be resolved in its favor or, if resolved against
it, will not have a materially  adverse  effect on its  consolidated  results of
operations or financial condition.

11.  FOREIGN CURRENCY TRANSACTIONS

     The  Company  is  exposed  to foreign  exchange  rate  fluctuations  due to
intercompany   accounts   between  the  U.S.  parent  company  and  the  foreign
subsidiaries.  The Company is also exposed to foreign exchange rate fluctuations
as the financial  statements of foreign  subsidiaries  are translated  into U.S.
dollars for  consolidation  purposes.  The Company  purchases  foreign  exchange
contracts  to  mitigate  the effect of  exchange  gains and  losses on  recorded
foreign currency denominated  monetary assets and liabilities.  The Company does
not use foreign  exchange  contracts for  speculative or trading  purposes.  All
outstanding forward contracts are marked-to-market on a monthly basis with gains
and losses included in other income (expense) in the consolidated  statements of
operations.  The Company opens new hedge contracts each quarter that will mature
within three months.  The  counterparties to these contracts are major financial
institutions. The Company uses commercial rating agencies to evaluate the credit
quality of the  counterparties  and does not  anticipate  nonperformance  by any
counterparties.  The Company does not  anticipate a material loss resulting from
any credit risks related to any of these institutions.

                                       14

12.  INCOME TAXES

     The Company's combined federal, state and foreign annual effective tax rate
applied to the three months ended March 31, 2005 was 35% compared to 18% for the
comparable period in 2004. The increased effective tax rate applied to the three
months ended March 31, 2005 was  primarily due to i) the mix of income earned by
domestic  operations versus the foreign  subsidiaries,  and ii) the absence of a
valuation allowance reversal that benefited the Company's rate in 2004.

13.  RELATED-PARTY-TRANSACTIONS

     On June 5, 2002,  the  Compensation  Committee  of the  Company's  Board of
Directors  (the  "Board")  approved a loan to Mr.  Roberts  for $1.9  million to
enable him to  purchase a home in Orange  County,  California.  Mr.  Roberts has
repaid  this loan in full as of  December  10,  2004.  Mr.  Roberts  made  total
payments  of  $2,020,576  including  $120,576  in  interest  and  $1,900,000  in
principal.

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

     In addition to historical  information  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 factors described under the heading "Risk Factors" and in other documents we
file from time to time with the Securities and Exchange Commission.  Our filings
with the  Securities  and Exchange  Commission,  including our Annual Reports on
Form  10-K,  Quarterly  Reports on Form  10-Q,  Current  Reports on Form 8-K and
amendments  to those  filings,  pursuant  to  Sections  13(a)  and  15(d) of the
Securities   Exchange   Act  of  1934,   are   available   free  of   charge  at
www.filenet.com,  when such reports are available at the Securities and Exchange
Commission Web site.

**Overview**

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

                                       15

     We generate revenue by selling software licenses, delivering implementation
and education  services,  and by providing  technical  support to our customers.
Software  revenue  consists of fees earned from the  licensing  of our  software
products to our customers.  Implementation  and education services are sold on a
fee for service  basis,  and  technical  support and  software  maintenance  are
provided  pursuant  to service  contracts.  Annual fees for  software  technical
support and  software  maintenance  are  received in advance and  recognized  as
revenue over the duration of the contract.

     Our earnings results are highly  sensitive to fluctuations in revenue.  The
nature of our cost structure is essentially  fixed,  with employee  compensation
and benefits being the single  largest  expense.  These expenses  represent more
than 50% of our cost  structure.  Costs  associated  with variable  compensation
expense and third party royalty  expenses  fluctuate  with  revenue.  Our future
profitability  is contingent  upon revenue  growth  achieved  through  continued
investments in internally developed or acquired software  technologies that gain
market acceptance.

*Software*

     The  FileNet P8  platform  provides  our  customers  with  enterprise-level
software that is scalable and flexible to handle  demanding  content  challenges
and manage  complex  business  processes.  The  FileNet P8  platform  provides a
framework  for  functional  expansion  to provide  enhanced  content and process
management  across  an  enterprise   through  FileNet's  product  suites;   each
emphasizing a different aspect of the ECM solution set, with functions  designed
to meet a customer's  individual ECM or BPM needs. Each suite can be implemented
by a customer individually, but remains expandable to include additional FileNet
content and process management capabilities.  Solutions and applications,  built
by third party partners or our customers using FileNet P8 software, are designed
to manage documents and all forms of 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.

     We license  our ECM  software  to  companies  in the  insurance,  financial
services,   government,   manufacturing,    telecommunications   and   utilities
industries,  both directly to the end user and through  partners.  The growth in
software  license  revenue is affected by the  strength of general  economic and
business  conditions,  as  well  as the  competitive  position  of our  software
products. Our enterprise software business is characterized by long sales cycles
and timing of a few large software license  transactions  that can substantially
affect our  operating  results.  In the past several years the economy has shown
slow growth in the software  industry  resulting  in customer  delays or limited
spending for technology  capital.  The ability to meet regulatory and compliance
requirements has become  increasingly  critical for large public  enterprises in
order to maintain proper  documentation for all key transactions.  We believe we
are well  positioned  to grow our revenue  through our  software  products  that
address  our  current  and  prospective  customers'  regulatory  compliance  and
business process improvement requirements.  However, we believe software revenue
will continue to be affected by future economic conditions.

*Customer Support*

     We  offer  product   support  on  a  global  basis  to  ensure   successful
implementation of our products and customer  satisfaction.  Our support offering
also  includes  the right to new  versions.  Our  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.

                                       16

     Our  customers  typically  purchase  support at the time they  acquire  new
software  licenses and renew their software license support  contracts  annually
provided  their systems are still in service.  The growth of support  revenue is
influenced  by the renewal rate of the existing  customer base and the amount of
new support  contracts  associated  with the sale of new software  licenses.  We
believe that our customer  support revenue will continue to grow as we sell more
new software licenses and our customers  continue to renew their product support
contracts.

*Professional Services and Education*

     Our  worldwide  professional  services  organization  provides  consulting,
implementation,  development and other technical  services and training services
to our licensed customers and authorized  ValueNet Partners.  These services are
provided by our internal  employees  and through a network of qualified  service
providers  hired  on  a  fee  for  service  basis.  Our  professional   services
organization  offers a comprehensive  methodology to help our customers  design,
install, integrate, customize and deploy our products. These services range from
the management of large-scale  implementations  of our products billed on a time
and  material  basis  to  short-term  fixed  price  services  such  as  software
installation and implementation  packages,  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.  The purpose of our education services is to allow our
customers to further enhance the usability of our software  products  throughout
their enterprise.

*Research and Development*

     We have made and expect to  continue  to make  substantial  investments  in
research and development,  through internal and offshore development activities,
third party  licensing  agreements  and  through  technology  acquisitions.  Our
development  efforts  focus on our FileNet P8 platform as we continue to develop
and  enhance  our  enterprise  content  and  process  management   capabilities.
Additionally,  we license  and embed third  party  software  that is designed to
expand the  functionality  of our products  through a variety of agreements with
the  producers  of this  software  and we intend to increase the number of third
party  licensing  agreements.  We expect  research and  development  to remain a
significant portion of our cost structure throughout 2005.

**Critical Accounting Policies and Estimates**

     The condensed  consolidated financial statements of FileNet are prepared in
conformity with accounting principles generally accepted in the United States of
America.  The condensed  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.

     We  continually  evaluate our  estimates  and  judgments,  including  those
related to revenue recognition, valuation of intangible assets, reserves for bad
debt and sales returns and income taxes. We base our estimates on historical and
projected results that we believe are reasonable. These estimates form the basis
for making  judgments about the carrying values of assets and liabilities and by
their nature,  are subject to an inherent degree of uncertainty.  Actual amounts
could differ from our estimates and could have a significant  adverse  effect on
our  operating  results  and  financial  position.  The  significant  accounting
policies  we  believe  are  most  critical  to aid in  fully  understanding  and
evaluating our reported financial results include the following:

                                       17
***Revenue Recognition***.  The nature of our business commonly includes multiple
elements in our  arrangements  and requires us to make judgments for determining
the timing and the amount of revenue to recognize.  These judgments include, but
are not limited to,  determining  the allocation of revenue in multiple  element
arrangements  based on vendor  specific  objective  evidence and determining the
creditworthiness  of a customer to assess the  probability  of  collection  of a
transaction.

     We derive revenue from the following sources: (1) software,  which includes
software  licenses,   (2)  customer  support  revenues,   which  include  annual
maintenance agreements, and (3) professional services, which include consulting,
implementation and training services.

     The  provisions  of  Statement  of  Position  No.  97-2,  Software  Revenue
Recognition,  issued by the American Institute of Certified Public  Accountants,
governs the basis for our software revenue  recognition.  Accordingly,  software
license  revenue  is  recognized  when:  (1) we  enter  into a  legally  binding
arrangement  with a customer  for the  license of  software;  (2) we deliver the
products;  (3)  customer  payment is deemed  fixed or  determinable  and free of
contingencies or significant  uncertainties;  and (4) collection is probable. We
must make  judgments and estimates to determine  whether or not the certainty of
these elements has been met.

     Our software  license  arrangements  often include  multiple  elements that
consist of software, post- contract customer support agreements and professional
services such as consulting,  implementation and training.  We recognize revenue
in  multiple  element   arrangements   using  the  residual  method  of  revenue
recognition in accordance  with SOP 98-9.  Under the residual  method,  the fair
value of the undelivered  elements is deferred and the remaining  portion of the
arrangement  fee is allocated to the  delivered  elements and is  recognized  as
revenue,  assuming  all other  revenue  recognition  criteria  have been met. If
evidence of fair value for each undelivered  element of the arrangement does not
exist,  all revenue from the  arrangement  is  recognized  when evidence of fair
value is determined or when all elements of the arrangement are delivered.

     Vendor  specific  objective  evidence  ("VSOE") of fair value for  customer
support is  determined  by  reference  to the price our  customers  pay for such
support when sold separately;  that is, the renewal rates paid by our customers.
Revenue from customer support  contracts is recognized  ratably over the term of
the  arrangement,  which  is  typically  12  months.  VSOE  of  fair  value  for
professional  services is based upon the  established  pricing  and  discounting
practices for those services when sold  separately.  Historically,  we have been
able to establish VSOE for customer  support and professional  services,  but we
may modify our pricing  practices  in the future,  which could result in changes
in, or the  inability  to  support,  VSOE of fair  value  for these  undelivered
elements.  If this occurs,  our future  revenue  recognition  for  multi-element
arrangements could differ  significantly from our historical results. A majority
of our  professional  service  revenue is derived from time and materials  based
contracts  that  typically  range  from  three  months to one year in  duration.
Revenue is recognized on such  contracts as time is incurred and approved by the
customer.  We also provide fixed price pre-packaged  services that are one month
or less in  duration.  Revenue  from such  short-term  fixed price  contracts is
recognized  upon  completion  of the work and  customer  acceptance.  Short-term
fixed-price  contracts of a repetitive  nature are more readily  estimable  than
long-term  contracts.  Our ability to make judgments  about revenue and cost for
these types of contracts has in the past been accurate. We have limited exposure
to cost overruns in professional  service engagements as any additional services
are  pre-approved by our customers in time and material  contracts and our fixed
price contracts are normally very short term in nature and highly estimable.

     We use judgment in assessing  whether fees are fixed and  determinable  and
probable of collection at the time of sale.  Since customers who have previously
deployed our products somewhere within their enterprise  comprise  approximately
90% of  software  sales,  our  ability  to  assess  the  credit-worthiness  of a
transaction is supported by the  collection  history we have with that customer.
In the past our ability to judge the  probability  of collection has been highly
accurate and we expect that this will continue. Our standard payment terms range
from net 30 to net 90 days.  Payments  that are due within 90 days are deemed to
be fixed or  determinable  based on our  successful  collection  history on such

                                       18

arrangements. To the extent we elect to provide extended payment terms beyond 90
days for  competitive or other reasons,  revenue is recognized  when the amounts
become  due.  Historically,  sales  returns  and bad debt  write-offs  have been
insignificant and within management's expectations. However, any adverse changes
in these trends could impact the timing of revenue recognition in the future.

     In addition to direct  customer  sales, we sell through third party channel
partners.  Our channel partners do not inventory our software products;  rather,
shipments  are made only when the  partner  places an order for a  specific  end
user. We require our channel partners to provide us with the name and address of
all end users at the time an order is placed  and,  in many  cases,  we ship our
products  directly  to the end  user.  Software  license  revenue  from  channel
partners is  recognized  when an end user is  identified,  product is  delivered
either  to a  channel  partner  or to their  designated  end-user  and all other
revenue recognition  criteria are met. As our channel partners only purchase our
product for specific end users, we are not subject to channel  inventory returns
or price protection issues.

     ***Allowance for Doubtful Accounts and Sales Returns***.  We make judgments as to
our ability to collect  outstanding  receivables and provide  allowances for the
portion of receivables when collection  becomes doubtful.  We perform an initial
evaluation of 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.  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. Even though we have large
transactions,  these tend to be with large,  well  capitalized and credit worthy
customers. We also maintain a sales returns allowance based on historical return
rates.  While we are not legally required to accept sales returns,  we have done
so on certain  occasions for our customers.  Product  returns have  historically
been minimal and within our  expectations.  If we elect to accept a higher level
of returns in the future for customer relations or other reasons, our results of
operations  could  be  materially  affected.  If the  historical  data we use to
calculate the  allowance  for doubtful  accounts or if estimates do not properly
reflect future  returns,  then a change in the  allowances  would be made in the
period in which such a  determination  is made and results of operations in that
period could be materially affected.

     ***Goodwill  and Other  Intangible  Assets***.  Our  business  acquisitions  have
resulted in goodwill and other intangible  assets.  Goodwill is recorded at cost
and is not  amortized,  but is tested for impairment at least annually and would
be written down if impairment were  determined.  Effective the first day of July
of each year,  goodwill is tested for  impairment by determining if the carrying
value of each  reporting  unit exceeds its fair value.  Our reporting  units are
consistent  with  the  reportable   segments  identified  in  Note  7.  We  also
periodically  evaluate  whether events and  circumstances  have occurred between
annual  testing  dates that  indicate the carrying  value of goodwill may not be
recoverable.  We  performed  an  impairment  analysis  as of  July  1,  2004  in
accordance  with SFAS 142.  The results  indicated  there was no  impairment  of
goodwill in any of the three reporting  units. As of March 31, 2005,  there have
been no indicators of  impairment;  therefore no interim  impairment  tests have
been performed.

     Identified   intangible  assets  are  recorded  at  cost  less  accumulated
amortization.  These assets are amortized  using the  straight-line  method over
estimated useful lives of three to five years. The determination of useful lives
and  whether or not these  assets are  impaired  involves  judgment.  Long-lived
assets are reviewed for impairment  whenever  events or  circumstances  indicate
that the  carrying  amount of such  assets may not be  recoverable.  We evaluate
these assets for impairment  based on estimated  undiscounted  future cash flows
from these  assets.  If the carrying  value of the assets  exceeds the estimated
future  undiscounted  cash flows, a loss would be recorded for the excess of the
asset's  carrying  value  over the  fair  value.  While we have not  experienced
impairment of intangible assets in prior periods, we cannot guarantee that there
will not be impairment in the future.

                                       19

     Determining  the fair value of a reporting unit is judgmental in nature and
involves the use of significant  estimates and assumptions.  These estimates and
assumptions include revenue growth rates and operating margins used to calculate
projected  future  cash  flows,  future  economic  and  market  conditions,  and
determination  of  appropriate  market  comparables.  We  base  our  fair  value
estimates on assumptions we believe to be reasonable but that are  unpredictable
and  uncertain.  Actual  future  results  may differ  from those  estimates.  In
addition,  we make certain judgments and assumptions in allocating shared assets
and  liabilities  to  determine  the carrying  values for each of our  reporting
units.  Future  events,   such  as  a  significant   decrease  in  our  revenue,
profitability or market capitalization, or a change in technology could cause us
to  conclude  that  impairment  indicators  exist  and  that  goodwill  or other
intangible assets  associated with our acquisitions are impaired.  Any resulting
impairment loss could have an adverse impact on our results of operations.

     ***Income Taxes***.  We exercise  significant  judgment in determining our income
tax provision due to transactions,  credits and calculations  where the ultimate
tax  determination  is uncertain.  Uncertainties  arise as a consequence  of the
actual source of taxable  income  between  domestic and foreign  locations,  the
outcome of tax audits and the ultimate  utilization of tax credits.  Although we
believe our estimates are reasonable,  the final tax determination  could differ
from our recorded  income tax  provision  and  accruals.  In such case, we would
adjust the income tax  provision in the period in which the facts that give rise
to the revision become known.  These adjustments could have a material impact on
our income tax provision and our net income for that period.

     We  recognize  deferred  income tax assets and  liabilities  based upon the
differences  between the financial  statement carrying amounts and the tax bases
of assets and  liabilities.  Such deferred income taxes primarily  relate to the
timing  of the  recognition  of  certain  revenue  items  and the  timing of the
deductibility  of certain  reserves  and accruals  for income tax  purposes.  We
regularly  review the deferred  tax assets for  recoverability  and  establish a
valuation  allowance when it is more likely than not that some portion or all of
the  deferred tax assets will not be  realized.  In 2004 we  concluded  that the
valuation   allowance   associated  with  domestic  NOL's  and  other  temporary
differences  should be fully  reversed  as a result of the  cumulative  domestic
profits in recent years and future domestic  projections.  However,  we could be
required to record  additional  valuation  allowance  against the  deferred  tax
assets if we are unable to generate  sufficient  future taxable income,  fail to
benefit from our tax planning strategies or if there is a material change in the
actual  effective tax rates or time periods within which the  underlying  timing
differences become taxable or deductible.  Increases in the valuation  allowance
could have a material  adverse  impact on our income tax  provision  and our net
income. The remaining portion of the valuation  allowance of $15 million related
to stock  option  deductions  will result in an increase to  additional  paid in
capital should the Company generate sufficient taxable income in future years to
utilize the net operating loss carryforwards recorded as a deferred tax asset.

                                       20
**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,
                                                 **2005              2004**
Revenue:
   Software                                        38.5 %            41.6 %
   Customer support                                48.3              45.5
   Professional services and education             13.2              12.9 
Total Revenue                                     100.0             100.0

Cost of revenue:
   Software                                         2.4               3.5
   Customer support                                10.5              10.4
   Professional services and education             10.4              10.9 
      Total cost of revenue                        23.3              24.8 

Gross Profit                                       76.7              75.2

Operating expenses:
Sales and marketing                                38.2              41.8
Research and development                           18.6              20.2
General and administrative                          9.2               9.2 
      Total operating expenses                     66.0              71.2

Operating income                                   10.7               4.0
Other income, net                                   2.0               0.9 
Income before income tax                           12.7 %             4.9 %

**Revenue**

     Total  revenue in the quarter  ended  March 31,  2005  compared to the same
period in 2004 was  virtually  unchanged  with an  increase  of less than half a
percentage  point.  Our software  segment  showed a 7.0% decline in revenue year
over year.  Fluctuation in software revenue is attributable to the timing of one
or a few large enterprise  transactions when comparing quarters.  Revenue in our
service segments increased when comparing the first quarter of 2005 to the first
quarter of 2004. A high rate of renewal in our customer  support  segment and an
increase in professional  services and education  revenue offset the decrease in
software revenue.

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

                                       21
**Revenue by Geography**

                                           Three Months Ended
                                                March 31,                     .
                                                                   *% Increase/**(in thousands)***2005           2004***decrease***$ Total Revenue**
 Total United States Revenue        $   68,597     $   68,000             0.9%

 Europe, Middle East and Africa         25,538         25,317             0.9%
 Canada, Latin America and Asia          5,882          6,181            (4.8%)
 Total International Revenue            31,420         31,498            (0.2%)

 Total Revenue                      $  100,017     $   99,498             0.5%

 **% of Total Revenue**
 United States Revenue                    68.6 %         68.3 %
 International Revenue                    31.4 %         31.7 %
 Total Revenue Contribution              100.0 %        100.0 %

     Revenue  generated  in the United  States  grew by 0.9% in the first  three
months of 2005  compared to the same period in 2004.  This  increase  during the
three-month  period  is  primarily  due  to the  increase  in  service  revenue.
International  revenue  represented  approximately 31.4% of total revenue in the
first three months of 2005  compared to  approximately  31.7% for the same three
months in 2004. The factors driving software license and service revenue changes
will be more fully discussed in the *Revenue by Reporting Segment* section below.

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

                                       22
***Revenue by Reporting Segment***.  The following table sets forth total revenue
by  reporting  segment  and as a  percentage  of total  revenue  for the periods
indicated:

**Revenue by Reporting Segment**

                                   Three Months Ended
                                        March 31,                        .
                                                             *% Increase/**(in thousands)***2005            2004***(decrease)***$ Total Revenue**
   Software                 $  38,451       $  41,351              (7.0%)
   Customer Support            48,333          45,270               6.8%
   Professional Services and
   Education                   13,233          12,877               2.8%
   Total Revenue            $ 100,017       $  99,498               0.5%

**% of Total Revenue**
   Software                      38.5%           41.6%             (3.1%)
   Customer Support              48.3%           45.5%              2.8%
   Professional Services
   and Education                 13.2%           12.9%              0.3%
   Total Revenue
   Contribution                 100.0%          100.0%

     ***Software***.  Software  revenue  consists of fees earned from the licensing of
our software  products to our customers.  Software revenue  decreased by 7.0% in
the three-month period ended March 31, 2005 compared to the same period in 2004.
As we have seen in prior quarters, fluctuation in buying patterns and the number
of large enterprise transactions that close in any particular quarter can affect
our level of software sales quarter to quarter. One customer accounted for 9% of
total  revenue  in the  first  quarter  of  2004.  There  were  no  individually
significant sales of this size in the first quarter 2005, which accounts for the
year-to-year  decrease.  This buying  behavior  creates an  environment  that is
unpredictable  and we believe this will continue in the near term. In the longer
term we believe spending on enterprise  content  management and business process
management  software will be a priority as companies look to automate regulatory
and compliance  requirements.  Additionally,  we believe there will be increased
demand for our ECM products driven by the need for large organizations to manage
their unstructured content.

     ***Customer  Support***.  Customer  support  revenue  consists  of  revenue  from
software maintenance contracts, time and material revenues and the sale of spare
parts and  supplies.  Maintenance  contracts  entitle our  customers  to receive
technical  support,  enhancements  and  upgrades  to new  versions  of  software
releases  when and if  available.  Time and  material  revenue is  derived  from
services  provided to the customer  that are not  included in their  maintenance
contract   entitlements.   Customer   support  revenue  is  generated  from  new
maintenance  contracts for current year  software  sales and from the renewal of
existing  maintenance   contracts  for  previously  sold  software  licenses  on
installed systems. Customer support revenue increased by 6.8% in the three-month
period  ended  March 31,  2005  compared  to the same  period  in 2004.  We have
historically  experienced a high contract  maintenance renewal rate and continue
to see this same high level of renewal,  but are continuing to encounter pricing
pressures  from  our  customers   during   contract   negotiation  and  renewal.
Accordingly,  the rate of software revenue growth may not directly  correlate to
the same growth for customer support revenue experienced in the past.

                                       23
***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 2.8% in the three months ended March 31, 2005  compared to
the same period in 2004. Professional services revenue is dependent on the level
and the nature of software sales in prior periods. Professional services revenue
grows more  rapidly  when  customers  purchase  new  systems  for a large  scale
implementation or purchase our FileNet P8 product to replace legacy systems,  as
opposed to existing customers  purchasing add-on licenses for installed systems.
The increase in  professional  services and education  revenue we experienced in
the first three months of 2005 compared to the same period in 2004 was primarily
attributable  to the increase in P8 software  license  sales.  Based on software
revenue  sales for the past  year we do not  believe  the  level of  demand  for
professional  services and  education  services will change  significantly  from
current levels.

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

**Cost of Revenue by Reporting Segment**

                                        Three Months Ended
                                            March 31,                               .
                                                                        *% Increase/**(in thousands)*       2005                2004          *(decrease)***$ Total Cost of Revenue**
Software                        $     2,370         $     3,523             (32.7%)
Customer Support                     10,526              10,292               2.3%
Professional Services and
Education                            10,384              10,838              (4.2%)
Total Cost of Revenue           $    23,280         $    24,653              (5.6%)

**% Total Cost of Revenue**
Software                                6.2%                8.5%             (2.3%)
Customer Support                       21.8%               22.7%             (0.9%)
Professional Services and
Education                              78.5%               84.2%             (5.7%)
Total Cost of Revenue as a %
of Revenue                             23.3%               24.8%             (1.5%)

     ***Software***. Cost of software revenue includes royalties paid to third parties
for  technology  used in our  products to enhance  features  and  functionality,
referral fees, amortization of acquired technology, media costs, and the cost to
manufacture and distribute  software.  The cost of software  revenue in absolute
dollars  decreased by 32.7% when comparing the three months ended March 31, 2005
to the same three months in 2004.  The cost of software  revenue as a percent of
software  revenue  decreased 2.3  percentage  points in the  three-month  period
comparison.  Costs will fluctuate  period to period based on the mix of products
sold  containing  third  party  royalties  and fees.  A majority  of the current
quarter  decrease is due to royalty costs being $0.9 million less than the prior
year  quarter.  However,  we  anticipate  continuing  to  integrate  third party
technology  with our  software  which  could  lower our margins in the future by
several  percentage points from current levels.  Going forward we anticipate the
cost of software revenue to be approximately 8%-10% of software revenue.

                                       24
***Customer  Support***.  Cost of customer  support revenue  includes the cost of
compensation  and  benefits  paid to customer  support  personnel,  facility and
technology  infrastructure  expenses  in our call  centers,  supplies  and spare
parts.  The cost of customer  support  revenue as a percent of customer  support
revenue  decreased by 0.7 percentage  points in the three months ended March 31,
2005 compared to the same period in 2004. The cost of customer  support  revenue
in absolute dollars  increased $0.2 million in these  comparable  periods due to
minor increases in variable compensation,  third-party maintenance and a variety
of other expense items. The reduction in cost of customer support revenue,  as a
percentage of the revenue is  attributable  to  efficiencies  in the delivery of
technical  support,  which  allows for  increased  revenue  without a comparable
increase in cost.  We expect the cost of customer  support  revenue to remain at
approximately 21%-24% 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 5.7 percentage points in the three
months  ended  March 31,  2005 as  compared  to the same  period  in 2004.  This
decrease in cost of professional  services and education revenue as a percent of
professional  services and education revenue is primarily  attributable to lower
costs  associated with reduced employee  headcount  resulting in $0.5 million in
lower benefit costs and lower variable employee  compensation.  In the near-term
we  expect  professional  services  and  education  costs  as  a  percentage  of
professional  services  and  education  revenue  to vary  from  period to period
depending on the utilization rates of internal  resources,  the level of revenue
and the mix between internal and external service providers, but to average in a
range between 80%-82% of revenue.

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

**Operating Expenses**

                                           Three Months Ended
                                                March 31,                       .
                                                                     *% Increase/**(in thousands)***2005              2004***(decrease)***$ Total Operating Expenses**
Research and Development           $   18,630       $    20,102            (7.3%)
Marketing and Sales                    38,182            41,561            (8.1%)
General and Administrative              9,227             9,233            (0.1%) 
Total Operating Expenses           $   66,039       $    70,896            (6.9%)

**% Total Operating Expenses**
Research and Development                 18.6%             20.2%           (1.6%)
Marketing and Sales                      38.2%             41.8%           (3.6%)
General and Administrative                9.2%              9.3%           (0.1%) 
Operating Expense as a % of
Revenue                                  66.0%             71.3%           (5.3%)

                                       25
***Research and Development***.  Our research and development efforts are focused
on enhancing and maintaining our Enterprise Content Management capabilities. Our
efforts focus on our product suites including Business Process Manager,  Content
Manager,  Image Manager,  Email Manager,  Records Manager,  Forms Manager,  Team
Collaboration Manager, Web Content Manager and other capabilities.

     Our research and development  expense consists primarily of personnel costs
for internal software development; third party contracted development resources,
and related facilities costs. Research and development expense decreased 7.3% in
the three  months  ended March 31, 2005  compared to the same period in 2004 due
primarily  to lower  internal  personnel  and  facility  expense of $1.5 million
resulting  from  decreased  headcount.  The  number  of  internal  research  and
development  personnel  was 401 on March 31,  2005  compared to 452 on March 31,
2004.  We  currently  have 94  contract  workers  in India  developing  software
compared to 99 one year ago. This  reduction  resulted in a decrease in research
and development expense as a percent of revenue by 1.6 percentage points for the
three months ended March 31, 2005 compared to the same period in 2004.  Offshore
development  cost  remained  constant  at  approximately  $2.0  million  for the
comparable  periods.  We intend to modestly  increase  research and  development
headcount in the short term to invest in adding  functionality to our Filenet P8
platform,  increase support for industry standards,  and extend the scalability,
manageability,  and  openness of the Filenet P8  architecture.  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 range between  18%-20% of revenue  assuming
revenue growth in the near term.

     ***Selling and  Marketing***.  We sell our products  through a direct sales force
and our  indirect  channel  sales  partners.  The  majority  of our  selling and
marketing  expense is salaries,  benefits,  sales commissions and other expenses
related to the direct and indirect sales force, and personnel cost for marketing
and market development  programs.  Selling and marketing expense as a percent of
revenue  decreased by 3.6 percentage points for the three months ended March 31,
2005  compared  to the same  period in 2004.  In  absolute  dollars  selling and
marketing  expense  decreased  by 8.1% for the three months ended March 31, 2005
compared to the same period in 2004.  Approximately $1.9 million of the decrease
in absolute  dollars  was  attributable  to reduced  compensation  and  benefits
resulting from lower headcount.  Headcount was 534 as of March 31, 2005 compared
to 582 as of March 31,  2004.  Reduced  spending in  programs,  travel,  and the
annual sales kickoff meeting held in the first quarter accounted for the balance
of the  decrease.  We  expect  expense  levels  in future  quarters  to  reflect
incremental  hiring in sales and increased  marketing program expense related to
lead generation and brand awareness and we expect selling and marketing  expense
to range between 38%-40% of revenue in the near-term.

     ***General and Administrative***. Our general and administrative expense consists
primarily of salaries,  benefits,  and other expenses related to personnel costs
for  finance,  information  technology,   legal,  human  resources  and  general
management  and  the  cost  of  outside  professional   services.   General  and
administrative  expense as a percent of revenue and in absolute dollars remained
constant in the three months ended March 31, 2005 compared to the same period in
2004. We expect  general and  administrative  expense to range between 8%-10% of
revenue in the near-term.

     ***Other Income,  Net***. Other income, net consists primarily of interest income
earned on our cash and investments,  and other items including  realized foreign
exchange  gains and losses and  interest  expense.  Other  income,  net of other
expenses, was $2.0 million for the three months ended March 31, 2005 compared to
$1.1  million  during the three months  ended March 31,  2004.  Interest  income
increased  $0.9  million  in the first  quarter  of 2005  compared  to the first
quarter in 2004.  This increase is  attributable  to a higher cash balance and a
higher  weighted  average  interest rate earned on cash,  cash  equivalents  and
investments  which was  2.44%  during  the three  months  ended  March 31,  2005
compared to 1.48% for the same period in 2004.

                                       26
***Provision for Income Taxes***. Our combined federal,  state and foreign annual
effective  tax rate  applied to the three  months  ended March 31, 2005 was 35%,
compared to 18% for the comparable  period in 2004. The increased  effective tax
rate applied to the three months  ended March 31, 2005 was  primarily  due to i)
the mix of income earned by domestic operations versus the foreign subsidiaries,
and ii) the absence of a valuation allowance reversal that benefited our rate in
2004.

**Liquidity and Capital Resources**

     As of March 31, 2005, cash and cash equivalents and investments were $375.4
million,  an increase of $26.7 million from $348.7 million at December 31, 2004.
Cash,  cash  equivalents  and  investments  include $299.3 million in the United
States  and  $76.1  million  held by our  foreign  subsidiaries.  Cash  and cash
equivalents  consist of high quality and highly liquid investments in short-term
money  market  funds,  United  States  government  agency  discount  notes,  and
corporate notes. Cash equivalent  investments  include instruments with original
maturities  of 90  days  or  less.  Short-term  investments  include  investment
instruments  with  maturities  of greater than 90 days and less than 365 days as
well as auction rate securities  that reset interest rates at auction  intervals
ranging from 7, 28, 35, or 49 days. Long-term  investments consist of high grade
corporate and government  securities with maturities  greater than 12 months and
less than three years.

     Our two major  sources of cash in the past two fiscal  years have been cash
generated from  operations and cash  generated  from financing  activities.  The
amount of these sources can fluctuate  depending on  operational  activities and
stock price as more fully discussed  below.  Cash flow from operations was $29.3
million for the three months ended March 31, 2005  compared to $36.0 million for
the same three months in 2004.  Cash provided by financing  activities  was $1.3
million in the three months ended March 31, 2005  compared to $10.2  million for
the same period in 2004.

     Net  income is a primary  source of cash  from  operating  activities.  Net
income was $8.3  million and $4.0  million for the three  months ended March 31,
2005 and 2004,  respectively.  Depreciation and amortization added to net income
to provide  cash from  operating  activities  - although the amount has declined
year to year due to tight budgetary control over capital spending.  Depreciation
and  amortization  was $3.8 million in the first  quarter of 2005 down from $4.3
million in the first quarter of 2004. Our cash from  operations is also impacted
by changes in working  capital  accounts.  Changes in  accounts  receivable  and
unearned  revenue have typically had the largest  impact on our cash flows.  The
days sales  outstanding  metric,  which is  calculated  by dividing  quarter-end
accounts receivable by average daily sales for the quarter, was 36 days at March
31, 2005  compared to 30 days at of March 31, 2004.  We attempt to structure our
sales  contracts  to require a majority of payments in 30 days or less,  and all
payments in 90 days or less. To the extent that competitive pressures require us
to extend our terms,  it would result in a decrease to our operating cash flows.
Our annual customer support agreements are typically prepaid at the beginning of
the  support  period,  resulting  in a large  cash  inflow  and a  corresponding
increase in unearned  maintenance  revenue.  This has  historically  resulted in
significant  cash inflows in the first quarter,  when the largest portion of our
support agreements renews. This trend continued in the first quarter of 2005.

     Net cash generated from investing  activities was $83.3 million compared to
net cash used in investing  activities of $5.9 million in the three months ended
March  31,  2005 and  2004,  respectively.  Capital  spending  has  been  fairly
consistent and under tight budgetary  control and accounted for net cash used of
$1.6 million in the first  quarter of 2005 and $2.7 million in the first quarter
of  2004.  We do not  expect  capital  expenditure  levels  in  2005  to  differ
significantly from the level of the past year.  Significant changes in cash from
investing  activities  have resulted from the purchase and sale of  investments.
Excess cash from  operations  is invested in high quality debt  instruments  and
securities,  and the timing of purchases  and  maturities of  investments  could
result in significant short-term fluctuations in net cash used or generated from
investing  activities.  During  the first  quarter  of 2005,  most  auction-rate
securities were sold which resulted in an increase in cash and cash  equivalents
and at the same time generated the large increase from proceeds from the sale of
marketable  securities  that is  reflected in the first  quarter of 2005.  As we

                                       27

continue to generate excess cash, we expect to invest such amounts in marketable
securities  and thus  continue  to show a net use of cash  related to  investing
activities.  However,  based on the nature of our  investment  policy,  all such
investments are available in the short term if needed for any reason.

     Net cash  provided by  financing  activities  results  from the proceeds of
common stock related to employee  stock option plans and employee stock purchase
plans.  Cash  generated from this activity was $1.3 million for the three months
ended  March 31,  2005  compared  to $10.2  million for the same period in 2004.
Stock prices  unfavorably  influenced this activity in the first quarter of 2005
with a lower stock price  compared to the first quarter of 2004.  When our stock
price is greater than the exercise price of outstanding stock options, we expect
to generate cash from option exercises.

     The effect of exchange  rate changes on cash and cash  equivalents  held in
foreign currency had the effect of decreasing net cash in the two periods as the
Euro and other currencies weakened against the dollar in those two quarters.

     We have no borrowing arrangements as of March 31, 2005. We believe that our
present  cash  balances,  together  with  internally  generated  funds,  will be
sufficient to meet our working capital and capital expenditures throughout 2005.
See "Risk Factors".

**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  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.

**New Accounting Pronouncements**

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

     In  December  2004,  the  FASB  revised   Statement  No.  123  (FAS  123R),
"Share-Based  Payment,"  which requires  companies to expense the estimated fair
value of employee stock options and similar awards based on the grant-date  fair
value of the award.  The cost will be recognized over the period during which an
employee is required to provide  service in exchange for the award,  usually the
vesting  period.  The accounting  provisions of FAS 123R will be effective as of
the  beginning of the first fiscal year that begins after June 15, 2005. We will
adopt the provisions of FAS 123R on January 1, 2006 using a modified prospective
application. Under the modified prospective application, FAS 123R, will apply to
new awards,  unvested  awards that are outstanding on the effective date and any
awards that are  subsequently  modified or cancelled.  Compensation  expense for
outstanding  awards for which the requisite  service had not been rendered as of
the effective  date will be recognized  over the remaining  service period using

                                       28

the compensation cost calculated for pro forma disclosure purposes under FAS 123
(Note 3 Stock-Based Compensation).  We are in the process of determining how the
new method of valuing stock-based compensation as prescribed in FAS 123R will be
applied to valuing  stock-based  awards granted after the effective date and the
impact the recognition of compensation  expense related to such awards will have
on our 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 quarterly report and our other public  filings.  Many of these
risks are beyond our control and are driven by factors  that we cannot  predict.
The following discussion highlights some of these risks:

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

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

     o    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    information technology spending trends;

     o    the discretionary  nature of our customers' budget and purchase cycles
          and the absence of long-term customer purchase commitments;

     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;

     o    general domestic and international economic and political conditions;

     o    seasonality in technology purchases, and

     o    a significant  portion of our expenses are personnel related and fixed
          and cannot be adjusted  quickly in  response to actual or  anticipated
          revenue trends.

     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

                                       29

upon as indications of future  performance.  Moreover,  such factors could cause
our operating  results in a given quarter to be below the expectations of public
market  analysts and  investors.  In either case,  the price of our common stock
could decline materially.

     ***The  markets in which we operate  are highly  competitive  and we cannot be
sure that we will be able to continue to compete effectively, which could result
in lost  market  share and  reduced  revenue***.  The  markets  we serve are highly
competitive and we expect competition to intensify 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 EMC  either  have  entered  or may enter our  market by adding
          content  management  features to their existing suite of products.  In
          addition,  large hardware or infrastructure 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.

     o    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 partners;

     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 enterprise  content  management  solutions
market. This market is developing  rapidly,  and while we believe this market is
growing  and  will  continue  to  grow,  particularly  as  new  regulations  are
introduced   that  focus  on  controlling   the  flow  of   information   within
organizations to ensure compliance with disclosure and other obligations,  these
markets may not continue to grow as we anticipate, or our products and solutions
may  not  gain  acceptance  within  these  markets.  If the  markets  we  serve,
particularly the market for enterprise  content  management  solutions,  fail to
grow or grow more slowly than we  currently  anticipate,  or if our products and
solutions do not gain acceptance within these markets,  our business,  financial
condition and operating results would be harmed.

     ***We must develop and sell new  products to keep up with rapid  technological
change in order to achieve future revenue growth and  profitability***.  The market
for  our  software  and  services  is  characterized   by  rapid   technological
developments,  evolving industry standards, changes in customer requirements and
frequent new product introductions and enhancements.  Our ability to continue to
sell  products  will be  dependent  upon our  ability to continue to enhance our
existing  software and services  offerings,  develop and introduce,  in a timely
manner, new software products  incorporating  technological advances and respond
to customer requirements.  For example, three new product suites that we predict
can  address  new  markets  include  Records  Manager,  E-Mail  Manager and Team
Collaboration  Manager.  The  Records  Manager  Suite was  released in the third
quarter of 2004 and provides  customers  with the  capability to  systematically
apply records management  principles to content.  E-Mail Manager was released in
late  2004 and  allows  organizations  with  large  numbers  of  email  users to
effectively  manage email  content.  The Team  Collaboration  Manager  Suite was
released during the first quarter of 2005 and is designed to enable customers to
initiate collaborative tasks at any point in a process.

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

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

                                       31
***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 19% of annual revenue in research and development
efforts in the near term.  The  majority of our  investment  in new and existing
market opportunities is made prior to our ability to generate revenue from these
new  opportunities.  These  investments of money and resources are made based on
our  prediction of new products and services that we anticipate 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 a portion of our
software  development of specific products and software  localization work. As a
result,  we will become  increasingly  dependent on these third party developers
for continued  development and support of several of our key products. If any of
these third party developers were to terminate their  relationship  with us, our
efforts  to  develop  new  products  and  improve  existing  products  could  be
significantly  delayed  and  our  ability  to  provide  product  support  to our
customers  could be  impaired.  In  addition,  since the majority of these third
party  developers are located outside the United States,  our ability to enforce
our agreements with them may be limited.

     ***We must retain and attract key  executives  and personnel who are essential
to our business, which could result in increased personnel expenses***. Our success
depends to a  significant  degree upon the  continued  contributions  of our key
management, as well as other marketing, technical and operational personnel. The
loss of the services of one or more key employees could have a material  adverse
effect on our operating results.  We do not have employment  agreements with any
of  the  members  of our  United  States-based  senior  management.  We do  have
employment  contracts with members of our  international  management that commit
them to a notification period.

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

     ***If our products  contain  errors or  performance  problems,  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  performance  problems,  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
often 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.

                                       32
***The limitation of liability  provisions contained in our license agreements
may not be effective as a result of existing or future  federal,  state or local
laws or ordinances or unfavorable  judicial  decisions***.  Our license  agreements
with our customers  typically contain provisions  designed to limit our exposure
to potential product liability claims. Although product liability claims to date
have been  immaterial,  the sale and support of our products entails the risk of
such claims,  which could be  substantial in light of our customers' use of such
products  in  mission-critical  applications.  If a  claimant  brings a  product
liability  claim  against  us, it could  have a material  adverse  effect on our
business, results of operations and financial condition. Even if our software is
not at fault,  we could  suffer  material  expense  and  material  diversion  of
management time in defending any such lawsuits.

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

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

     o    the incurrence of debt;

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

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

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

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

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

     ***Our business is highly  automated for the  execution of marketing,  selling
and  technical  support  functions,  and natural  disasters  that disable  these
systems  could result in a disruption  in our ability to transact  business***.  We
depend on the  integrity of our  information  systems  network  connectivity  to
perform these business  functions.  While  mitigating  measures have been put in
place,   significant  business  interruption  could  occur  at  our  Costa  Mesa
headquarters  facility due to a natural  disaster such as an  earthquake,  which
could cause a prolonged  power  outage and the  inability  for key  personnel to
perform their job functions.

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

                                       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 may  not be able  to  redesign  the
infringing  products to avoid further  infringement or obtain necessary licenses
to use the  infringed  rights  on  acceptable  terms,  or at all.  Additionally,
significant damages for past infringement could be assessed or future litigation
relative to any such licenses or usage could occur.  An adverse  disposition  of
any claims or the advent of litigation arising out of any claims of infringement
could result in  significant  costs or reduce our ability to market any affected
products.

     ***We depend on certain strategic relationships in order to broaden the number
of third party  platforms with which our products are compatible and the loss of
these relationships  could harm our business***.  In order to broaden the number of
third party platforms with which our products are compatible and thereby broaden
the  market  opportunities  for  our  products,  we have  established  strategic
relationships with a number of software and hardware platform vendors, including
companies  such as BEA Systems  Inc.,  Hewlett-Packard  Development  Company LP,
Network Appliance,  Inc., Sun MicroSystems and Veritas Software Corporation.  We
cannot  assure  that  these  companies  will not  reduce  or  discontinue  their
relationships  with,  or support  of,  FileNet and our  products.  If we fail to
maintain these  relationships,  or to establish new relationships in the future,
it could harm our business, financial condition and results of operations.

     ***We  currently  license  certain  software  from  third  parties,  including
software that is integrated with internally  developed  software and used in our
products  to  perform  key  functions.  Also,  certain of our  products  include
publicly available software pursuant to open source license agreements. We would
be unable to sell these  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 until replacement  functionality could
be  developed,  licensed or acquired.  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, licensed or acquired 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.

     ***In addition to our direct  sales  force,  we depend on  relationships  with
systems integrators,  independent software vendors, and value added resellers to
sell our products and  services.  The loss of a large  strategic  partner  could
affect our ability to sell in a specific segment of the market***. We cannot assure
that these  channel  partners  will remain in business or continue to promote or
sell our products or services.  The loss or inability to maintain  these channel
partner  relationships,   or  our  failure  to  establish  new  channel  partner
relationships in the future,  could harm our business,  financial  condition and
results of operations.

     ***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:

                                       34

     o    variations in quarterly operating results;

     o    fluctuations in our order levels;

     o    announcements of technological  innovations or new products or product
          enhancements by us or our competitors;

     o    key management changes;

     o    changes in accounting regulations;

     o    changes in joint marketing and development programs;

     o    developments relating to patents or other intellectual property rights
          or disputes;

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

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

     o    general conditions in the software and computer industries;

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

     o    acquisitions in the past have been primarily cash based  transactions.
          Future acquisitions may include stock, which could dilute earnings per
          share 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  except for  auction-rate
securities that are considered as short term investments for any maturities less
than  365  days.  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. The average maturity of our investment portfolio is 78 days;  therefore,
the movement of interest rates should not have a material  impact on our balance
sheet or  income  statement.

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

     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, 2005 and 2004, 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

                                       35

constant.   The   analysis   covers   our   investment   and  is  based  on  the
weighted-average  maturity of our investments as of March 31, 2005 and 2004. 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  $314,000  at  March  31,  2005  and
approximately  $223,000 at March 31, 2004.  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  $629,000  at March  31,  2005 and
approximately $446,000 at March 31, 2004.

     The following table provides  information about our investment portfolio at
March 31, 2005:

  .
                                                    **Unrealized          Estimated***(in thousands)***Cost       Gain/(Loss)        Fair Value**
  Debt Securities
    Due in one year or less:
       Short-term munis-taxable    $    7,500       $        -         $    7,500
       Corporate                        7,091              (27)             7,064
       Governments/Agencies           116,525             (409)           116,116 
  Total due in one year               131,116             (436)           130,680

  Due in one to three years:
       Government/Agencies              9,687             (102)             9,585 
   Total due in three years             9,687             (102)             9,585

      Grand total                  $  140,803       $     (538)        $  140,265 **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 in an effort to hedge
against the effects of fluctuating  currency  exchange rates on monetary  assets
and liabilities  denominated in currencies other than the functional currency of
the relevant  entity  (mainly in Europe and Asia  Pacific).  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.  Gains  and  losses  on  foreign  exchange
contracts  are  recognized  in income in the same period as the gains and losses
occur. Our forward  contracts have an original  maturity of three months.  These
contracts  were closed on the last business day of the quarter  ending March 31,
2005 and as such there were no  outstanding  forward  contracts  as of March 31,
2005.

     Cumulative  other  comprehensive  income  decreased $2.7 million during the
three-month  period  ended March 31,  2005 due to  unrealized  foreign  currency
translation  loss of $2.6  million  resulting  from  the  weakening  of the Euro
against the U.S. dollar the first three months of 2005.

     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, 2005.

                                       36
**Item 4.   Controls and Procedures*****Conclusion   regarding  the   effectiveness  of  disclosure   controls  and
procedures***.  We maintain disclosure controls and procedures that are designed to
ensure that information  required to be disclosed in our Securities Exchange Act
of 1934 (Exchange Act) reports are recorded, processed,  summarized and reported
within the time periods  specified in the Securities  and Exchange  Commission's
rules and forms and that such information is accumulated and communicated to our
management,  including our Chief Executive Officer and Chief Financial  Officer,
as appropriate,  to allow for timely decisions regarding required disclosure. In
designing and  evaluating  the disclosure  controls and  procedures,  management
recognizes  that any controls and  procedures,  no matter how well  designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives,  and  in  reaching  a  reasonable  level  of  assurance,  management
necessarily  was required to apply its judgment in evaluating  the  cost-benefit
relationship of possible controls and procedures.

     As of March 31, 2005,  the end of the quarter  covered by this  report,  an
evaluation was carried out under the supervision and with the  participation  of
our management,  including our Chief  Executive  Officer and our Chief Financial
Officer,  of the  effectiveness  of the design and  operation of our  disclosure
controls and procedures as required by Securities  Exchange Act of 1934 Rule 13a
- 15(b). Based on the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure  controls and procedures were effective at
the reasonable assurance level.

     ***Changes in internal  control over  financial  reporting***.  There has been no
change in our internal controls over financial  reporting during our most recent
fiscal  quarter  that  has  materially  affected,  or is  reasonably  likely  to
materially affect, our internal controls over financial reporting.

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

     See Note 10 to Condensed Consolidated Financial Statements.

**Item 6.  Exhibits**

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

                                       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 10, 2005                  By: */s/ Sam M. Auriemma*.
Date                               Sam M. Auriemma, Executive 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).

  10.6.1*+   Amendment No. 1 to the FileNet Corporation Amended and Restated 1998 Employee Stock Purchase Plan
             *(filed as exhibit 10.6.1 to Registrant's Current Report of Form 8-K filed on April 11, 2005)*.

  10.6.2*+   Revised Amendment No. 1 to the FileNet Corporation Amended and Restated 1998 Employee Stock Purchase
             Plan *(filed as exhibit 10.6.2 to Registrant's Current Report of Form 8-K filed on April 21, 2005)*.

    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)*.

  10.7.1*+   Amendment  No. 1 to the  FileNet  Corporation  Amended  and  Restated  International  Employee  Stock
             Purchase Plan *(filed as exhibit 10.7.1 to Registrant's  Current Report of Form 8-K filed on April 11,
             2005)*.

  10.7.2*+   Revised Amendment No. 1 to the FileNet Corporation Amended and Restated  International Employee Stock
             Purchase Plan *(filed as exhibit 10.7.2 to Registrant's  Current Report of Form 8-K filed on April 21,
             2005)*.

    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).

                                                                39

   10.10*+   Written  Compensation  Agreement and  Non-Statutory  Stock Option  Agreement (with Notice of Grant of
             Stock Option and Special  Addendum)  between  Registrant and Mr. Sam Auriemma  *(filed as Exhibit 99.1
             and 99.2 to Registrant's  registration  statement on Form S-8, filed on April 20, 2001;  Registration
             No. 333-59274)*.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

   * Incorporated herein by reference                     + Management contract, compensatory plan or arrangement

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

      (2) Amended and Restated Letter  Agreement,  dated May 15, 2003 was entered into by and between  Registrant and
          Messrs.  Martyn D. Christian,  David D. Despard,  Frederick P. Dillon, Karl J. Doyle,  William J. Kreidler,
          Chas W.  Kunkelmann,  Philip  Rugani,  Daniel S. Whelan,  Franz X. Zihlmann,  and Ms. Audrey N.  Schaeffer.
          Amended and Restated  Letter  Agreement with  substantially  the same terms and conditions was entered into
          between  Registrant  and Philip C. Maynard dated August 30, 2004,  and L. Kim  Poindexter  dated January 1,
          2005.

                                                                40
**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)) and internal  control over financial
reporting (as defined in Exchange Act Rules  13-a-15(f)  and  15d-15(f)) 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)  designed  such  internal  control and  procedures,  or caused such
     internal  control  over  financial  reporting  to  be  designed  under  our
     supervision,  to provide reasonable  assurance regarding the reliability of
     financial  reporting  and  the  preparation  of  financial  statements  for
     external  purposes  in  accordance  with  generally   accepted   accounting
     principles;

          c) 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

          d)  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 10, 2005

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

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

I, Sam M. Auriemma, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of FileNet Corporation;

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

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

     4. The  registrant's  other  certifying  officer and I are  responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal  control over financial
reporting (as defined in Exchange Act Rules  13-a-15(f)  and  15d-15(f)) 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)  designed  such  internal  control and  procedures,  or caused such
     internal  control  over  financial  reporting  to  be  designed  under  our
     supervision,  to provide reasonable  assurance regarding the reliability of
     financial  reporting  and  the  preparation  of  financial  statements  for
     external  purposes  in  accordance  with  generally   accepted   accounting
     principles;

          c) 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

          d)  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 10, 2005

                                     */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, 2005 (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 10, 2005
                                    */s/ Lee D. Roberts*.
                                    Lee D. Roberts
                                    Chairman of the Board and
                                    Chief Executive Officer
                                    (Principal Executive Officer)

**Exhibit 32.2

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

     The undersigned  officer of FileNET  Corporation  (the  "Company"),  hereby
certifies, to such officer's knowledge, that:

     (i) the  accompanying  Quarterly Report on Form 10-Q of the Company for the
fiscal  period  ended  March 31, 2005 (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 10, 2005
                                    */s/ Sam M. Auriemma*.
                                    Sam M. Auriemma
                                    Senior Vice President and
                                    Chief  Financial Officer
                                    (Principal Financial Officer)
```