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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, 2001

                                       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
incorporation 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 |_|

As of May 10, 2001, there were 35,331,451 shares of the Registrant's common
stock outstanding.

**FILENET CORPORATION**
                                      Index

                                                                          Page
                                                                        Number
------- ----------------------------------------------------------------------

**PART I.  FINANCIAL INFORMATION**

Item 1.  Consolidated Balance Sheets
         As of  March 31, 2001 (unaudited) and December 31, 2000..........   3

         Consolidated Statements of Operations (unaudited)
         For the three months ended March 31, 2001 and 2000...............   4

         Consolidated Statements of Comprehensive Operations (unaudited)
         For the three months ended March 31, 2001 and 2000...............   5

         Consolidated Statements of Cash Flows (unaudited)
         For the three months ended March 31, 2001 and 2000...............   6

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

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.......  19

**PART II OTHER INFORMATION**

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

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

        **SIGNATURE**........................................................  20

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

                                       2
**PART I.  FINANCIAL INFORMATION
Item 1.  Consolidated Financial Statements

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

                                                               March 31,    December 31,
                                                                 2001          2000
                                                             -------------  -----------
                                                              (Unaudited)
**ASSETS**
 Current assets:
   Cash and cash equivalents                                 $ 109,252      $ 101,497
   Short-term investments                                       46,445         36,960

   Accounts receivable, net                                     67,136         90,166
   Inventories, net                                              2,858          3,393
   Prepaid expenses and other current assets                    12,307          9,682
   Deferred income taxes                                         5,720          5,660
                                                             ----------     ----------
   Total current assets                                        243,718        247,358

 Property, net                                                  51,346         49,757
 Long-term investments                                               0            999
Intangible assets, net                                          12,438         13,457
 Deferred income taxes                                          10,267         10,278
 Other assets                                                    1,648          1,721
                                                             ----------     ----------

     Total assets                                            $ 319,417      $ 323,570
                                                             ==========     ==========

**LIABILITIES AND STOCKHOLDERS' EQUITY**
 Current liabilities:
   Accounts payable                                          $   9,657      $  16,638
   Accrued compensation and benefits                            22,132         26,245
   Unearned maintenance revenue                                 31,939         20,892
   Income taxes payable                                          5,332          9,679
   Other accrued liabilities                                    24,783         18,421
                                                             ----------     ----------
   Total current liabilities                                    93,843         91,875

 Unearned maintenance revenue                                    6,138          6,738

 Stockholders' equity:
   Preferred stock - $.10 par value; 7,000,000 shares
     authorized; none issued and outstanding                         0              0
   Common stock - $.01 par value; 100,000,000 shares
     authorized; 36,253,386 shares issued and 35,155,386
     shares outstanding at March 31, 2001; and 35,940,876
     shares issued and 34,842,876 shares outstanding at
     December 31, 2000                                         192,280        189,057
   Retained earnings                                            55,957         61,528
   Accumulated other comprehensive operations                  (14,234)       (11,061)
                                                             ----------     ----------
                                                               234,003        239,524
   Treasury stock, at cost; 1,098,000 shares at
     March 31, 2001 and December 31, 2000 respectively         (14,567)       (14,567)
                                                             ----------     ----------
   Total stockholders' equity                                  219,436        224,957
                                                             ----------     ----------

     Total liabilities and stockholders' equity              $ 319,417      $ 323,570
                                                             ==========     ==========
*See accompanying notes to consolidated financial statements.*

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

                                                                     Three Months Ended
                                                                          March 31,
                                                           -------------------------------------
                                                                  2001               2000
                                                           ------------------   -----------------
                                                              (Unaudited)        (Unaudited)
                Revenue:
                  Software                                     $ 32,729            $ 48,112
                  Service                                        45,885              39,482
                  Hardware                                        5,356               5,208
                                                               ---------           ---------
                  Total revenue                                  83,970              92,802
                                                               ---------           ---------

                Costs and expenses:
                  Cost of software revenue                        2,041               3,930
                  Cost of service revenue                        28,495              23,105
                  Cost of hardware revenue                        3,488               3,250
                                                               ---------           ---------
                     Total Cost of revenue                       34,024              30,285

                  Gross Profit                                   49,946              62,517

                Operating expenses:
                  Research and development                       16,088              14,138
                  Selling, general and administrative            42,382              40,946
                  Amortization of intangibles                       777                   0
                                                               ---------           ---------
                     Total operating expenses                    59,247              55,084

                Operating income (loss)                          (9,301)              7,433

                Other income, net                                 1,670               1,192
                                                               ---------           ---------

                Income (loss) before income taxes                (7,631)              8,625
                Provision (benefit) for income taxes             (2,060)              2,156
                                                               ---------           ---------

                Net income (loss)
                                                               $ (5,571)           $  6,469
                                                               =========           =========

                Earnings (loss) per share:
                  Basic                                        $ (0.16)            $   0.19
                  Diluted                                      $ (0.16)            $   0.18

                Weighted average shares outstanding:
                  Basic                                          34,998              33,344
                  Diluted                                        34,998              36,858

*See accompanying notes to consolidated financial statements.*

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

                                                                    Three Months Ended March 31,
                                                                 --------------------------------
                                                                       2001              2000
                                                                 ----------------- --------------
                                                                    (Unaudited)       (Unaudited)

                 Net income (loss)                               $    (5,571)      $       6,469
                                                                 ----------------- --------------
                 Other comprehensive income(loss):
                   Foreign currency translation adjustments
                    (net of tax benefit of $(2,126) and $(1,130)
                    for the three months ended March 31, 2001         (3,189)             (1,695)
                    and 2000, respectively)
                 Unrealized gains (losses) on securities:
                    Unrealized holding gains (losses)
                     (net of tax effect of $11 and tax benefit
                     of $(5) for the three months ended                   16                  (7)
                     March 31, 2001 and 2000, respectively)

                                                                 ----------------- --------------
                 Total other comprehensive loss                       (3,173)             (1,702)
                                                                 ----------------- --------------
                 Comprehensive income (loss)                     $    (8,744)      $       4,767
                                                                 ================= ==============

*See accompanying notes to consolidated financial statements.*

                                       5
**FILENET CORPORATION**
                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                               (In thousands)
                                                                           Three Months Ended March 31,
                                                                         --------------------------------
                                                                             2001              2000
                                                                         --------------    --------------
                                                                          (unaudited)       (unaudited)
 Cash flows from operating activities:
 Net income (loss)                                                       $     (5,571)     $      6,469
 Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
     Depreciation and amortization                                              5,980             4,311
     Provision for doubtful accounts                                              199                63
     Deferred income taxes                                                        (75)               43
     Changes in operating assets and liabilities, net of
      acquisition:
       Accounts receivable                                                     20,697            (4,833)
       Inventories                                                                535               794
       Prepaid expenses and other current assets                               (2,813)             (133)
       Accounts payable                                                        (6,838)           (3,659)
       Accrued compensation and benefits                                       (3,820)           (1,457)
       Customer advances                                                        6,217               186
       Unearned maintenance revenue                                            10,754             8,405
       Income taxes payable                                                    (4,133)              524
       Other                                                                    1,973               851
                                                                         --------------    --------------
         Net cash provided by operating activities                             23,105            11,564
                                                                         --------------    --------------

 Cash flows from investing activities:
 Capital expenditures                                                          (7,156)           (3,862)
 Proceeds from sale of equipment                                                   53               411
 Purchases of marketable securities                                           (32,261)          (13,028)
 Proceeds from sales and maturities of marketable securities                   22,403             4,300
                                                                         --------------    --------------
         Net cash used by investing activities                                (16,961)          (12,179)
                                                                         --------------    --------------

 Cash flows from financing activities:
 Proceeds from issuance of common stock                                         3,222            14,660
                                                                         --------------    --------------
         Net cash provided by financing activities                              3,222            14,660
                                                                         --------------    --------------

 Effect of exchange rate changes on cash and cash equivalents                  (1,611)             (660)
                                                                         --------------    --------------

 Net increase in cash and cash equivalents                                      7,755            13,385
 Cash and cash equivalents, beginning of year                                 101,497            71,528
                                                                         --------------    --------------
 Cash and cash equivalents, end of period                                $    109,252      $     84,913
                                                                         ==============    ==============

 Supplemental cash flow information:
 Interest paid                                                           $         10      $         11
 Income taxes paid                                                       $      2,084      $      1,736

*See accompanying notes to consolidated financial statements.*

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

1.       BASIS OF PRESENTATION

         The accompanying unaudited interim consolidated financial statements of
         FileNET Corporation (the "Company") reflect adjustments (consisting of
         normal recurring adjustments) necessary to present fairly the financial
         position of the Company at March 31, 2001 and the results of its
         operations, its comprehensive income and its cash flows for the three
         months ended March 31, 2001 and 2000, respectively. Certain information
         and footnote disclosures normally included in financial statements have
         been condensed or omitted pursuant to rules and regulations of the
         Securities and Exchange Commission ("SEC"), although the Company
         believes that the disclosures in the consolidated financial statements
         are adequate to ensure the information presented is not misleading.
         These consolidated financial statements should be read in conjunction
         with the consolidated financial statements and notes thereto, and
         Management's Discussion and Analysis of Financial Condition and Results
         of Operations contained in the Company's Annual Report on Form 10-K for
         the fiscal year ended December 31, 2000 filed by Company with the SEC
         on March 27, 2001. The results of operations for the interim periods
         are not necessarily indicative of the operating results for the year.

         Certain reclassifications have been made to the prior year's
         consolidated financial statements to conform with the current year's
         presentation.

2.       RECENT ACCOUNTING PRONOUNCMENTS

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
         Statement of Financial Accounting Standards ("SFAS") No. 133,
         "Accounting for Derivative Instruments and Hedging Activities." SFAS
         No. 133 as amended, is effective for fiscal years beginning after June
         15, 2000. SFAS 133, as amended, establishes accounting and reporting
         standards for derivative instruments including certain derivative
         instruments embedded in other contracts that were not formerly
         considered derivatives and now may meet the definition of a derivative.
         Additionally, this standard will require the Company to record all
         derivatives on the balance sheet at fair value. For derivatives that
         are hedges, changes in the fair value of derivatives will be offset by
         the change in fair value of the hedged assets, liabilities, or firm
         commitments. The Company adopted this standard effective January 1,
         2001 with no significant effect to the results of operations, financial
         position, or cash flows.

3.       EARNINGS (LOSS) PER SHARE

         Basic earnings (loss) per share is computed by dividing net income for
         the period by the weighted average number of common shares outstanding
         during the period. Diluted earnings per share is computed by dividing
         net income by the weighted average number of common shares plus the
         dilutive effect of outstanding stock options and shares issuable under
         the employee stock purchase plan using the treasury stock method. The
         dilutive loss per share excludes these dilutive adjustments. The
         following table sets forth the computation of basic and diluted
         earnings (loss) per share for the three months ended March 31, 2001 and
         2000:

                                                                             Three Months Ended March 31,
                                                                           -------------------------------
                                                                                 2001              2000
                                                                           ---------------- -----------------
              Net income (loss)                                             $    (5,571)     $     6,469
                                                                           ================ =================

              Shares used in computing basic earnings (loss) per share           34,998           33,344
              Dilutive effect of stock plans                                          0            3,514
                                                                           ---------------- -----------------
              Shares used in computing diluted earnings (loss) per share         34,998           36,858
                                                                           ================ =================

              Earnings (loss) per basic share                               $     (0.16)     $      0.19

              Earnings (loss) per diluted share                             $     (0.16)     $      0.18

                                       7

4.       ACCUMULATED OTHER COMPREHENSIVE LOSS

         In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."  SFAS No. 130 requires enterprises to report
         comprehensive income and its components in general-purpose financial statements.  SFAS No. 130 was effective for the Company
         beginning January 1, 1998.  Accordingly, the Company has prepared Statements of Comprehensive Operations for the three
         months ended March 31, 2001.  Accumulated other comprehensive operations as of  March 31, 2001 is comprised of the following:

                                                                                                   Accumulated
                                                        Foreign Currency         Unrealized              Other
                                                             Translation            Holding      Comprehensive
                       (In thousands)                         Adjustment     Gains (Losses)         Operations
                                                        -----------------  -----------------  -----------------
                        Balance, December 31, 2000        $     (11,023)      $        (38)     $     (11,061)
                        Current period changes                   (3,189)                16             (3,173)
                                                        -----------------  -----------------  -----------------
                        Balance March 31, 2001            $     (14,212)      $        (22)     $     (14,234)
                                                        =================  =================  =================

5.       OPERATING SEGMENT DATA

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

         The Company's reportable operating segments include Software, Hardware,
         Customer Support, and Professional Services and Education. The Software
         operating segment develops and markets the Company's line of eProcess
         enabled Web Content Management software solutions and eBusiness
         applications. The Hardware operating segment manufactures and markets
         the Company's line of OSAR libraries. The Customer Support segment
         provides after-sale support for software, as well as providing software
         upgrades pursuant to the Company's right to new versions program. The
         Professional Services and Education segment provides fee-based
         implementation and technical services related to the Company's products
         and provides training.

         The financial results of the segments reflect allocation of certain
         functional expense categories consistent with the basis and manner in
         which Company management internally disaggregates financial information
         for the purpose of assisting in making internal operating decisions
         which are not the same as GAAP reporting. The Company evaluates
         performance based on stand-alone segment operating results. Because the
         Company does not evaluate performance based on the return on assets at
         the operating segment level, assets are not tracked internally by
         segment. Therefore, segment asset information is not presented.

         Operating segments data for the three months ended March 31, 2001 and
         2000 are as follows:

                                                         Three months ended March 31,
                      In thousands                          2001              2000
                                                       ---------------------------------
                     Software
                       Revenue                          $   32,729      $   48,112
                       Operating income (loss)             (15,535)             44

                     Customer Support
                       Revenue                              28,165          24,846
                       Operating income                      8,290           7,262

                     Professional Services and
                     Education
                       Revenue                              16,746          13,402
                       Operating income (loss)              (2,406)            (57)

                                       8

                     Hardware
                       Revenue                               5,356           5,208
                       Operating income                        317              83

                     Other
                       Revenue                                 974           1,234
                       Operating income                         33             101

                     Total
                       Revenue                              83,970          92,802
                       Operating income (loss)          $   (9,301)     $    7,433

6.       LEGAL PROCEEDINGS

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

         In March 1997, Eastman Kodak Company purchased the Wang imaging
         business unit that has responsibility for this litigation. On July 30,
         1997, the Court permitted Eastman and Kodak Limited of England to be
         substituted in the litigation in place of Wang.

         The Company has moved for summary judgment on noninfringement as to
         each of the five patents in the suit, and for summary judgment of
         invalidity as to one of the patents. Eastman moved for summary judgment
         as to our unenforceability defense on one of the patents. In July 1998,
         the Magistrate Judge assigned to the case heard oral arguments on our
         motion for summary judgment that U.S. Patent 4,918,588 is not infringed
         and is invalid. The Magistrate Judge has not yet decided these motions.
         At an April 24, 2001 Status Conference before the Trial Court, the
         Court indicated that the remaining motions would be reassigned to a
         different Magistrate Judge.  The Court also set a trial date of October
         29, 2001, at which time, depending on dispostition of the pending
         motions, issues relating to liability for infringement under one or
         more of the patents in suit may be tried.

         If it should be determined that the patents at issue in the litigation
         are valid and are infringed by any of the Company's products, including
         Watermark products, it will, depending on the product, redesign the
         infringing products or seek to obtain a license to market the products.
         The Company cannot assure you that it will be able to successfully
         redesign the infringing products or obtain a license on acceptable
         terms. Based on its analysis of these patents and their respective file
         histories, the Company believes that it has meritorious defenses to
         these claims; however, the ultimate outcome or any resulting potential
         loss cannot be determined at this time. As of December 31, 2000, the
         Company accrued a $2.5 million liability for potential settlement costs
         and other expenses.

         Subsequent to December 31, 1998, the former shareholders of Saros
         Corporation filed a demand for mandatory arbitration to release
         approximately 375,700 shares of our stock which were held in escrow
         pursuant to the Agreement and Plan of Merger dated January 17, 1996
         among FileNET Corporation, FileNET Acquisition Corporation and Saros
         Corporation and for damages. The Company and the Shareholders' Agent
         had agreed to mediate the matter, but the Saros Shareholders' Agent
         cancelled the mediation prior to the scheduled date and renewed their
         demand for mandatory arbitration. A binding arbitration proceeding took
         place during the period March 5, 2001 through March 23, 2001. On April
         24, 2001 the arbitrators issued an interim decision denying all claims
         asserted by the Shareholders' Agent against the Company, sustaining all
         claims asserted by the Company, and awarding all of the shares of stock
         held in escrow.  The arbitrators requested additional briefing on

                                       9

         issues pertaining to a possible award of attorney's fees and costs,
         which, if awarded, would be included in the final award to be issued in
         conformance with the interim decision.

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

7.       SUBSEQUENT EVENTS

         In April 2001, the Company announced measures to reduce its workforce.
         As a result of this workforce reduction, the Company expects to incur a
         one-time charge of $2.5-$3.0 million by the end of the second quarter
         of fiscal 2001.

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

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E
of the Securities 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. These forward-looking statements are subject to a number of
risks and uncertainties, including those discussed below and in the notes to our
financial statements for the year ended December 31, 2000. The actual results
that we achieve may differ materially from any forward-looking statements, which
reflect management's opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revisions to these
forward-looking statements. Readers should carefully review the risk factors
described below and in other documents we file from time to time with the
Securities and Exchange Commission, including Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 and the Quarterly Reports on Form 10-Q filed
by us in 2001.

**Overview**

FileNET Corporation develops, markets and services eProcess enabled Web Content
Management software solutions and packaged eBusiness applications for selected
vertical markets. Our enterprise software solutions enable organizations to
improve operational efficiency and leverage their content resources by
delivering efficient, flexible, and scalable eBusiness process solutions. By
linking customers, business partners, suppliers, and employees, our software
solutions help organizations increase productivity, customer satisfaction, and
revenue. We also offer professional services and training for the implementation
of these software solutions, as well as 24 x 7 technical support and services to
our customers on a global basis.

Revenue from sales of software licenses, which generally do not contain multiple
elements, are recognized upon shipment of the related product if the
requirements of Statement of Position ("SOP") 97-2, as amended, are met. If the
requirements of SOP 97-2, including evidence of an arrangement, delivery, fixed
or determinable fee, collectibility or vendor-specific evidence about the value
of an element are not met at the date of shipment, revenue recognition is
deferred until such elements are known or resolved. We recognize other revenue
at the time of product delivery and accrue any remaining costs, including
insignificant vendor obligations. Revenue from post-contract customer support is
recognized ratably over the term of the contract. Revenue from professional
services is recognized as such services are delivered and accepted by the
customer.

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

                                       10
**Results of Operations**

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

                                                         Three months ended March 31,
                                                            2001             2000
                                                       ---------------------------------
             Revenue:
                Software                                      39.0%              51.8%
                Customer support                              33.5               26.8
                Professional services and education           19.9               14.5
                Hardware                                       6.4                5.6
                Other                                          1.2                1.3
                                                          ----------         ----------
             Total Revenue                                   100.0              100.0

             Cost of revenue:
                Software                                       2.4                4.2
                Customer support                              13.3               11.4
                Professional services and education           19.7               12.4
                Hardware                                       4.2                3.5
                Other                                          1.0                1.1
                                                          ----------         ----------
                   Total cost of revenue                      40.6               32.6

             Gross Profit                                     59.4               67.4

             Operating expenses:
             Research and development                         19.1               15.3
             Selling, general and administrative              50.5               44.1
             Amortization of goodwill and other
             intangibles                                       0.9                0.0
                                                          ----------         ----------
                   Total operating expenses                   70.5               59.4

             Operating income (loss)                         (11.1)               8.0
             Other income, net                                 2.0                1.3
                                                          ----------         ----------
             Net income before tax                            (9.1)%              9.3%

**Revenue**

Total revenue was $84.0 million for the three months ended March 31, 2001 and
$92.8 million for the comparable three months ended March 31, 2000, representing
a decrease of $8.8 million, or 9%. The decrease was primarily attributable to
lower software revenue as discussed below.

Software revenue consists of fees earned from the licensing of our software
products to customers. Software revenue decreased by 32% or $15.4 million to
$32.7 million for the three months ended March 31, 2001 from $48.1 million for
the three months ended March 31, 2000. Software revenue represented 39% of total
revenue for the three months ended March 31, 2001 compared to 51.8% for the
comparable period of 2000. This decrease was primarily attributable to the
effects of the general economic slowdown which affected the software industry
and resulted in delayed/cancelled orders and a reduced number of large scale
deployments.

Customer support revenue consists of revenue from software maintenance contracts
and "fee for service" revenues. Customer support revenue increased by 13% or
$3.3 million to $28.2 million for the three months ended March 31, 2001 from
$24.9 million for the three months ended March 31, 2000. This increase in
customer support revenue was primarily due to the growth in our base of
customers who receive ongoing maintenance as a result of new customer sales and
sales of additional products to our installed base. Customer support revenue
represented 33.5% of total revenues for the three months ended March 31, 2001
compared to 26.8% for the comparable period of 2000.

                                       11

Professional services and education revenue is generated primarily from
consulting and implementation services provided to end users of our software
products, technical consulting services provided to our resellers and training
services. Professional services are generally performed on a time and material
basis. Professional services and education revenue increased by 25% or $3.3
million to $16.7 million for the three months ended March 31, 2001 from $13.4
million for the three months ended March 31, 2000. As a percent of total
revenue, professional services and education revenue represented 19.9% for the
three months ended March 31, 2001 compared to 14.5% for the comparable period in
2000. This increase was primarily attributable to an increase in custom
development projects and an increase in sales of prepackaged service offerings,
which include both consulting and training. We plan to continue to focus on
expanding our professional services capabilities to support our solutions and
applications strategy.

Hardware revenue is generated primarily from the sale of 12-inch optical storage
and retrieval libraries ("OSARs"). Hardware revenue increased by 4% or $0.2
million to $5.4 million for the three months ended March 31, 2001 from $5.2
million for the three months ended March 31, 2000. Hardware revenue represented
6.4% of total revenue for the three months ended March 31, 2001 as compared to
5.6% of total revenue for the comparable period in 2000. We anticipate hardware
revenue will remain relatively constant for future quarters in 2001.

Other revenue is generated primarily from the sale of spare parts and supplies
and is classified as service revenue. Other revenue decreased by 17% or $0.2
million to $1.0 million for the three months ended March 31, 2001 from $1.2
million for the three months ended March 31, 2000.  Other revenue represented
1.2% of total revenue for the three months ended March 31, 2001 as compared to
1.3% of total revenue for the comparable period in 2000. This decrease in other
revenue was primarily due to a decrease in demand for spare parts and supplies.
We anticipate other revenue will continue to represent a small percentage of
total revenue throughout 2001.

International revenues accounted for 32% of total revenue or $26.5 million for
the three months ended March 31, 2001 and 28% or $25.9 million for the three
months ended March 31, 2000. We expect international revenue to continue to
represent a significant percentage of total revenue.

**Cost of Revenue**

Total cost of revenue increased to $34.0 million for the three months ended
March 31, 2001 from $30.3 million for the three months ended March 31, 2000,
representing an increase of $3.7 million, or 12%. This increase was primarily
due to increases in the cost of our service segments offset in part by decreases
in software cost directly related to decreased software revenue, our highest
margin product line.

Cost of software revenue includes royalties paid to third parties, media costs,
and the cost to manufacture and distribute software. The cost of software
revenue decreased by 49% to $2.0 million for the three months ended March 31,
2001 from $3.9 million for the three months ended March 31, 2000 representing 6%
and 8% of the related software revenue for the three months ended March 31, 2001
and 2000, respectively. The decrease in absolute dollars is directly related to
decreased revenue. The decrease as a percentage of software revenue is primarily
attributable to lower fixed distribution costs for the three months ended March
31, 2001 compared to the comparable period in 2000, as well as a reduction in
royalty costs directly related to the lower volume of revenue and the unbundling
and discontinuation of certain third party products.

Cost of customer support revenue includes customer support personnel, supplies,
and the cost of third-party hardware maintenance. The cost of customer support
revenue increased by 6% to $11.2 million for the three months ended March 31,
2001 from $10.6 million for the three months ended March 31, 2000 representing
40% and 43% of the related customer support revenue for the three months ended
March 31, 2001 and 2000, respectively. This decrease as a percentage of customer
support revenue is primarily attributable to process improvement that allowed
growth in the customer base without a proportional increase in support personnel
and cost.

Cost of professional services and education revenue consists primarily of
professional services personnel, training personnel, and third-party
contractors. The cost of professional services and education revenue increased
by 43% to $16.5 million for the three months ended March 31, 2001 from $11.5
million for the three months ended March 31, 2000 representing 99% and 86% of
the related professional services and education revenue for the three months
ended March 31, 2001 and 2000, respectively. This increase was primarily due to
growth in personnel to support expected increases in deployment of applications
and solutions, which associated expense was not fully absorbed by increases in
revenue.

Cost of hardware revenue includes the cost of assembling our OSAR library
products, the cost of hardware integration personnel, warranty costs, as well as
the distribution costs of these products. The cost of hardware revenue increased
by 6% to $3.5 million for the three months ended March 31, 2001 from $3.3
million for the three months ended March 31, 2000 representing 65% and 63% of
the related hardware revenue for the three months ended March 31, 2001 and 2000,
respectively. The increased cost of hardware revenue as a percent of hardware
revenue was primarily due to increased unabsorbed facility costs.

                                       12

Cost of other revenue includes the cost of supplies and spare parts as well as
the distribution costs of these products. The cost of other revenue decreased by
20% to $0.8 million for the three months ended March 31, 2001 from $1.0 million
for the three months ended March 31, 2000 representing 80% and 83% of the
related other revenue for the three months ended March 31, 2001 and 2000,
respectively. The cost of other revenue is primarily determined by supplier
pricing.

**Operating Expenses**

Research and development expense primarily consists of personnel costs to
support product development. Research and development expense increased by 14%
to $16.1 million for the three months ended March 31, 2001 from $14.1 million
for the three months ended March 31, 2000, representing 19% and 15% of total
revenue for the three months ended March 31, 2001 and 2000, respectively. This
increase in absolute dollars was primarily due to market driven increases in
salaries and recruiting costs as a result of the intense competitive environment
for software engineers and an increase in the rates of contract developers. The
increase in research and development as a percentage of total revenue for the
three months ended March 31, 2001 over the comparable period in 2000 can be
directly related to the decrease in total revenues for the three months ended
March 31, 2001 as described above.

We expect that competition for qualified technical personnel will remain intense
for the foreseeable future and may result in higher levels of compensation
expense for us. We believe that research and development expenditures, including
compensation of technical personnel, are essential to maintaining our
competitive position and expect these costs will continue to constitute a
significant percentage of total revenue.

Sales and marketing expense consists primarily of salaries, benefits, sales
commissions and other expenses related to the direct and in-direct sales force,
various marketing expenses and cost of other market development programs.
General and administrative expense consist primarily of personnel costs for
finance, information technology, legal, human resources and general management,
as well as outside professional services. Selling, general and administrative
expense increased by 3% to $42.4 million for the three months ended March 31,
2001 from $41.0 million for the three months ended March 31, 2000, representing
50% and 44% of total revenue for the three months ended March 31, 2001 and
2000, respectively. The increase in absolute dollars for the three months ended
March 31, 2001 over the comparable period in 2000 was minimal; primarily as a
result of overall reduced spending offset in part by increases in legal fees
and facilities. The increase in selling, general and administrative expense as
a percent of total revenue for these same periods is primarily due to a lower
revenue base for the three months ended March 31, 2001 compared to March 31,
2000.

**Amortization of Intangibles and In-process Research and Development**

In connection with our acquisition of certain assets from Application Partners
Incorporated ("API") on May 18, 2000, the purchase price amount allocated to
goodwill of $14.6 million is being amortized over a useful life of five years
and assembled workforce of $386,000 is being amortized over a useful life of
three years. Amortization expense for the purchased intangible assets was
$777,000 for the three months ended March 31, 2001 There were no similar costs
in the same period of 2000. Based upon an independent third party appraisal,
$3.0 million of the purchase price was allocated to in-process research and
development which was immediately expensed. The in-process research and
development expenses related to new product projects that were under development
at the date of the acquisition and were expected to eventually lead to new
products but had not yet established feasibility and for which no future
alternative use was identified. The valuation of the in-process research and
development projects was based upon the discounted expected future net cash
flows of the products over their expected life, reflecting the estimated percent
of completion of the projects and an estimate of the costs to complete the
projects. New product development projects underway at API at the time of the
acquisition included Sequis, an eService application which we estimated to be
88% complete at the date of the acquisition. The cost to complete the project
was estimated at $300,000 to occur over a three-month period. We incurred
approximately $356,000 of research and development expenses related to the
project which was 100% complete as of September 30, 2000.

                                       13
**Other Income, Net**

Other income, net consists primarily of interest income earned on our cash and
cash equivalents, short and long-term investments, and other items including
foreign exchange gains and losses, the gain on sale of fixed assets, other items
of income, and interest expense. Other income, net of other expenses, was $1.7
million for the three months ended March 31, 2001 compared to $1.2 million for
the three months ended March 31, 2000. The increase was primarily attributable
to increases in interest income directly related to higher cash balances.

**Income Taxes**

The combined federal, state and foreign annual effective tax rate for the three
months ended March 31, 2001 was 27% compared to 25% for the comparable period in
2000. The rate increase is attributable to the decrease of taxable income
generated in lower tax jurisdictions located outside of North America. FileNET
management will be weighing various evidence throughout the year to assess the
reliability of its recorded deferred assets and the need for any valuation
allowance against such amounts.

**Liquidity and Capital Resources**

At March 31, 2001, combined cash, cash equivalents and investments totaled
$155.7 million, an increase of $16.2 million from the end of 2000. Cash provided
by operating activities during the three months ended March 31, 2001 totaled
$23.1 million and resulted primarily from a decrease in accounts receivable, an
increase in unearned maintenance revenue related to prepaid maintenance
contracts; and additions to net income for depreciation and amortization expense
offset by decreases in accounts payable and accrued compensation and benefits.
Cash used by investing activities totaled $17.0 million and was a result of
capital expenditures of $7.2 million and net purchases of marketable securities
of $9.8 million. Cash provided by financing activities totaled $3.2 million and
was a result of proceeds received from the exercise of employee stock options
and the employee stock purchase plan.

Accounts receivable decreased to $67.1 million at March 31, 2001 from $90.2
million at December 31, 2000. This decrease is primarily a result of decreased
revenue. Current liabilities increased to $93.8 million at March 31, 2001 from
$91.9 million at December 31, 2000. The increase in current liabilities is
primarily a result of increases in unearned maintenance revenue and other
accrued liabilities which include customer deposits and advances, offset by
decreases in accounts payable and income tax payable.

We have a $20 million commercial line of credit that expires in June 2001.
Borrowings under the arrangement are unsecured and bear interest at one hundred
basis points over the London Interbank Offered Rate. A commitment fee of fifteen
basis points is assessed against any undrawn amounts. As of September 30, 2000,
there were no borrowings outstanding against the credit line.

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

**Other Financial Instruments**

  We enter into forward foreign exchange contracts as a 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. We are exposed to market risk on the forward exchange contracts
as a result of changes in foreign exchange rates; however, the market risk
should be offset by changes in the valuation of the underlying exposures. Gains
and losses on these contracts, which equal the difference between the forward
contract rate and the prevailing market spot rate at the time of valuation, are
recognized in the consolidated statement of operations. The counterparties to
these contracts are major financial institutions. We use commercial rating
agencies to evaluate the credit quality of the counterparties. We do not
anticipate a material loss resulting from any credit risks related to any of
these institutions.

**Other Matters*****European Monetary Union.*** On January 1, 1999, 11 of the 15 member countries of
the European Union established fixed conversion rates between their existing
sovereign currencies and the EURO. These countries have agreed to adopt the EURO
as their common legal currency from that date. These countries will issue
sovereign debt exclusively in EURO and will re-denominate outstanding sovereign
debt. Effective on this date, these countries no longer control their own

                                       14

monetary policies by directing independent interest rates for the legacy
currencies. Instead, the authority to direct monetary policy, including money
supply and official interest rates for the EURO, is exercised by the new
European Central Bank.

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

We have made the necessary interim changes to our internal business systems to
support transactions denominated in the EURO, including establishing EURO price
lists for affected countries. A plan to complete the system changes to fully
implement EURO reporting requirements is scheduled for third quarter this year.
We have evaluated the impact the conversion to the EURO will have on our
financial condition and results of operations. Based on this evaluation to date,
we currently do not believe that there will be a material impact on our
financial condition or results of operations as a result of the EURO conversion.

***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**

Our business, financial condition, operating results and prospects can be
impacted by a number of factors, including but not limited to those set forth
below and elsewhere in this report, any one of which could cause our actual
results to differ materially from recent results or from our anticipated future
results. Factors that may affect our business, financial condition and results
of operations include:

***Current Economic Conditions May Affect Results***.  During the first quarter of 2001,
we experienced a decrease in software revenue.  We believe that this decrease is
primarily due to a macro economic slowdown which may continue for several
quarters.  The slowdown has decreased our visibility and increased the risk to
our revenue stream.

***Our Quarterly Operating Results May Fluctuate in Future Periods.*** Prior growth
rates in our revenue and operating results should not necessarily be considered
indicative of future growth or operating results. 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. These factors include, but are not limited to, the following:

o        the industry wide slow down in IT spending and our diminished sales
         visibility;
o        discretionary nature of our customer's budget and purchase cycles and
         the absence of long-term customer purchase commitments;
o        the tendency to realize a substantial amount of revenue in the last
         weeks, or even days, of each quarter;
o        the delay or deferral of customer orders;
o        the budget cycle of our custoers;
o        the size, complexity and timing of individual transactions;
o        the changes in foreign currency exchange rates, impact of the EURO
         currency;
o        general domestic and international economic and political conditions;
o        the length of our sales cycle;
o        variations in the productivity of our sales force;
o        the level of software product sold and price competition;
o        the timing of new software introductions and software enhancements by
         us and our competitors;
o        the mix of sales by products, software, services and distribution
         channels;
o        acquisitions by competitors;
o        our ability to develop and market new software products and control
         costs;
o        the quality of our customer support; and
o        the level of international sales.

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

                                       15

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 will cause significant fluctuations in operating results from
quarter to quarter. As a result of these factors, revenues and operating results
for any quarter are subject to fluctuations and are not predictable with any
significant degree of accuracy. Therefore, we believe that period-to-period
comparisons of our results of operations should not be relied upon as
indications of future performance. Moreover, such factors could cause our
operating results in a given quarter to be below the expectations of public
market analysts and investors. In either case, the price of our common stock
could decline materially.

***The Market in Which We Operate is Highly Competitive.*** The markets we serve are
highly competitive and we expect competition to intensify. Our future financial
performance will depend primarily on the continued growth of the market for our
software products and services as well as the purchase of our products by
customers in these markets. If the markets we serve fail to grow or grow more
slowly than we currently anticipate, our business, financial condition and
operating results would be harmed. This intensely competitive market is highly
fragmented and rapidly changing and there are certain competitors of ours with
substantially greater sales, marketing, development and financial resources. 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. In order to be successful in the future, we must respond to
technological change, customer requirements and competitors' current software
products and innovations. We cannot assure you that we will be able to continue
to compete effectively in our target markets or that future competition will not
have a material adverse effect on our business, financial condition or results
of operations. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of the
markets 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, any of which could have a material adverse effect on our
business, financial condition or results of operations.

***We Must Develop and Sell New Products in Order to Keep Up With Rapid
Technological Change.*** 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. Our future success also depends,
in part, on our ability to execute on our strategy of developing Web Content
Management and business-to-business solutions. This strategy may require us to
develop and maintain relations with technology partners. We may not be
successful in maintaining these relationships or 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 difficulties that could delay or prevent
the successful development, introduction and sale of these enhancements. In
addition, these enhancements may not adequately meet the requirements of the
marketplace and may not achieve any significant degree of market acceptance. If
we fail to successfully maintain or establish relationships with technology
partners or to execute on our integrated product solution strategy, or if
release dates of any future products or enhancements are delayed, or if these
products or enhancements fail to achieve market acceptance when released, our
business operating results and financial condition could be materially harmed.
In the past, we have experienced delays in the release dates of enhancements and
new releases to our products and we cannot assure you that we will not
experience significant future delays in product introduction. From time to time,
we or our competitors may announce new software products, capabilities or
technologies that have the potential to replace or shorten the life cycles of
our existing software products. We cannot assure you that announcements of
currently planned or other new software products will not cause customers to
delay their purchasing decisions in anticipation of such software products, such
delays could have a material adverse effect on our business and operating
results.

***Protection of Our Intellectual Property and Other Proprietary Rights is
Limited and There is Risk of Third-Party Claims of Infringement.*** 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, confidentiality procedures and
contractual provisions to protect our proprietary rights in our software
products. We cannot assure you that our existing or future copyrights,
trademarks, trade secrets or other intellectual property rights will have
sufficient scope or strength to provide meaningful protection or a commercial
advantage to us. We currently have no software patents. 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. Our inability to protect our intellectual
property may have a material adverse effect on our business, financial condition
or results of operations.

                                       16

We may, from time to time, be notified that we are infringing certain
patent or intellectual property rights of others. While there are no material
actions, other than those discussed in this report, currently pending against us
for infringement of patent or other proprietary rights of third parties, we
cannot assure that third parties will not initiate infringement actions against
us in the future. Combinations of technology acquired through past or future
acquisitions and our technology will create new software products and technology
that also may give rise to claims of infringement. Infringement actions can
result in substantial costs and diversion of resources, regardless of the merits
of the actions. If we were found to infringe upon the rights of others, we
cannot assure that we could redesign the infringing products or could obtain
licenses on acceptable terms, if 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, may have a
material adverse effect on our business, financial condition or results of
operations.

***We Depend on Certain Strategic Relationships.*** In order to expand the
distribution of our products and broaden our product offerings, we have
established strategic relationships with a number of indirect channel partners
and other consultants that provide marketing and sales opportunities for us. We
have entered into key formal and informal agreements with other companies such
as Hewlett-Packard Company, IBM Global Services, Microsoft Corporation, SAP AG,
Siebel Systems Inc, Sun Microsystems, Inc., and Vignette Corporation. Certain of
these agreements do not have minimum purchase requirements and/or are cancelable
at will. We cannot assure you that these companies will not reduce or
discontinue their relationships with, or support of, FileNET and our products.
Our failure to maintain these relationships, or to establish new relationships
in the future, could harm our business, financial condition and results of
operations.

We currently license certain software from third parties, including software
that is integrated with internally developed software and used in our products
to perform key functions. In the past, we have had difficulty renewing certain
licenses. The failure to continue to maintain these licenses would prohibit us
from selling certain products. We cannot assure you that such third parties will
remain in business, that they will continue to support their software products
or that their software products will continue to be available to us on
acceptable terms. The loss or inability to maintain any of these software
licenses could result in shipment delays or reductions in software shipments
until equivalent software can be developed, identified, licensed, and
integrated. This could adversely affect our business, financial condition or
results of operations.

***We Must Retain and Attract Key Executives and Personnel.*** 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 also believe our future success will depend in large
part upon our ability to attract and retain additional highly skilled
management, technical, marketing, product development, operational personnel and
consultants. Competition for such personnel, particularly software developers,
professional service consultants and other technical personnel, is intense, and
pay scales in the software industry have significantly increased. We cannot
assure you that in the future we will be successful in attracting and retaining
such personnel.

***We are Subject to Many Risks Internationally.*** Historically, we have derived
approximately 30% of our total revenue from international sales through our
worldwide network of subsidiaries and channel partners. International business
is subject to certain risks including, but not limited to, the following:

o        tariffs and trade barriers;
o        varying technical standards;
o        political and economic instability;
o        reduced protection for intellectual property rights in certain
         countries;
o        difficulties in staffing and maintaining foreign operations;
o        difficulties in managing foreign distributors;
o        varying requirements for localized products;
o        potentially adverse tax consequences;
o        currency restrictions and currency exchange fluctuations including
         those related to the EURO;
o        adoption of the EURO and uncertainties surrounding the EURO conversion;
o        the burden of complying with a wide variety of complex foreign laws,
         regulations and treaties; and
o        the possibility of difficulties in collecting accounts receivable,
         longer payment cycles.

                                       17

Any of these factors could have a material adverse effect on our business,
financial condition or results of operations in the future.

***Our Business Will Suffer if Our Software Contains Errors.*** Software and products
as complex as those we sell are susceptible to errors or failures, especially
when first introduced or when new versions are released. Our software products
are often intended for use in applications that are critical to a customer's
business. As a result, our customers may rely on the effective performance of
our software to a greater extent than the market for software products
generally. Despite internal testing and testing by current and potential
customers, new products or enhancements may contain undetected errors or
performance problems that are discovered only after a product has been installed
and used by customers. Errors or performance problems could cause delays in
product introduction and shipments or could require design modifications, either
of which could lead to a loss in or delay in 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, any of
which could harm our business, operating results and financial condition. 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.

***Our Stock Price Has Been and May Continue to Be Volatile.*** The trading price of
our common stock has fluctuated in the past and is subject to significant
fluctuations in response to the following factors, some of which are beyond our
control:

o        variations in quarterly operating results;
o        fluctuations in our order levels;
o        changes in earnings estimates by analysts;
o        announcements of technological innovations or new products or product
         enhancements by us or our competitors;
o        key management changes;
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 stock market price and volume, which are particularly
         common among highly volatile securities of Internet and software
         companies; and
o        other general economic and market 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.

Acquisitions of Companies or Technologies May Result in Disruptions to Our
Business and Diversion of Management Attention. In the past, we have made
acquisitions and as part of our business strategy, we frequently evaluate
strategic 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 and amortization expenses related to goodwill
         and other intangible assets or any other unforseen adverse accounting
         treatment;
o        liabilities and risks that are not known or identifiable at the time of
         the acquisition;
o        the potential loss of current customers and/or retention of the
         acquired company's customers; and 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 acquisition and such acquisitions
may harm our business and financial results.

                                       18
**Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk**

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

**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 the Company's revenue and operating expenses.
The impact to net income from foreign exchange transactions and hedging
activities is immaterial for all periods reported. As of March 31, 2001, we had
forward exchange contracts outstanding totaling approximately $3,022,971 in 10
currencies. All of these contracts mature in three months.

Other comprehensive loss reflects an increase of $3.2 million for the three
months ended March 31, 2001 in the unrealized loss due to foreign currency
translation. This increase was primarily attributable to unrealized losses
associated with the weakening of the Euro currency against the U.S. dollar
during the period.

Management believes that inflation has not had a significant impact on the
prices of its products, the cost of its materials, or its operating results for
the three months ended March 31, 2001 and 2000.

**PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings**

See Notes to Consolidated Financial Statements.

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

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

(b)      No reports on Form 8-K were filed during the first quarter of 2001.

                                       19
**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 14, 2001   By:  /s/  Sam M. Auriemma                   
Date                            Sam M. Auriemma, Chief Financial Officer and
                                Senior Vice President, Finance (Principal
                                Financial and Accounting Officer)

                                       20
**INDEX TO EXHIBITS****Exhibit No.   Description**

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

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

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

 4.1*         Form of certificate evidencing Common Stock *(filed as Exhibit 4.1 to the Form S-1,
              Registration No. 33-15004)*.

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

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

10.1*         Second Amended and Restated Credit Agreement (Multicurrency) by and among the
              Registrant and Bank of America National Trust and Savings Association dated
              June 30, 1999, effective June 30, 1999 *(filed as Exhibit 10.1 to Form 10-Q
              for the quarter ended June 30, 1999)*.

10.5*         Lease between the Registrant and C. J. Segerstrom and Sons for the headquarters of the
              Company, dated April 30, 1987 *(filed as Exhibit 10.19 to the Form S-1)*.

10.6*         Third Amendment to the Lease between the Registrant and C. J. Segerstrom and Sons
              dated April 30, 1987, for additional facilities at the headquarters of the Company,
              dated October 1, 1992  *(filed as exhibit 10.7 to Form 10-K filed on April 4, 1997)*.

10.7*         Fifth Amendment to the Lease between the Registrant and C. J. Segerstrom and Sons
              dated April 30, 1987,  for the extension of the term of the lease, dated  March 28,
              1997 *(filed as exhibit 10.8 to Form 10-Q for the quarter ended March 31, 1997)*.

10.8*         1989 Stock Option Plan for Non-Employee Directors of FileNET Corporation, as amended
              by the First Amendment, Second Amendment, Third Amendment thereto *(filed as Exhibit 10.9
              to Form S-4 filed on January 26, 1996; Registration No. 333-00676)*.

10.9*         Amended and Restated 1995 Stock Option Plan of FileNET *(filed as Exhibit 99.1 to
              Form S-8 filed on October 29, 1999; Registration No. 333-89983)*.

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

10.11*        Non-Statutory Stock Option Agreement (with Notice of Grant of Stock Option and
              Special Addendum) between Registrant and Mr. Lee Roberts *(filed as exhibit 99.17 to
              Form S-8 on August 20, 1997)*.

10.12*        Non-Statutory Stock Option Agreement (with Notice of Grant of Stock Option and
              Special Addendum) between Registrant and Mr. Ron Ercanbrack *(filed as exhibit 99.19
              to Form S-8 on August 20, 1997)*.

10.18*        Agreement and Plan of Merger between the Registrant and Watermark Software Inc.
              dated July 18, 1995 *(filed as Exhibit 10.27 to Form 10-Q for the quarter ended July
              2, 1995)*.

10.19*        Agreement and Plan of Merger between the Registrant and Saros Corporation, as
              amended, dated January 17, 1996 *(filed as Exhibits 2.1, 2.2, 2.3, and 2.4 to Form
              8-K on March 13, 1996)*.

** Incorporated herein by reference*

                                       21
**Exhibit No.    Description**

10.20*        Stock Purchase Agreement by and Among FileNET Corporation, IFS Acquisition
              Corporation, Jawaid Khan and Juergen Goersch dated January 17, 1996 and Amendment 1
              to Stock Purchase Agreement dated January 30, 1996 *(filed as Exhibit 10.2 to form
              10-K for the year ended December 31, 1995)*.

10.21*        Amended and Restated FileNET Corporation 1998 Employee Stock Purchase Plan (filed
              as Exhibit 99.15 to Form S-8, filed on August 8, 2000; Registration No. 333-43254).
10.22*        FileNET Corporation International Employee Stock Purchase Plan.  *(filed as Exhibit
              99.16 to Form S-8, filed on August 8, 2000; Registration No. 333-43254)*.

10.23*        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 Form 10Q for the
              quarter ended September 30, 1999)*.

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

10.25*        Written Compensation Agreement and Non-Statutory Stock Option Agreement (with
              Notice of Grant of Stock Option and Special Addendum) between Registrant and Mr.
              Auriemma *(filed as exhibit 99.1 and 99.2 to Form S-8 on April 20, 2001; Registration
              No. 333-59274)*.
** Incorporated herein by reference*

                                       22
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