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**FORM 10-Q

                              SECURITIES AND EXCHANGE COMMISSION

                                  Washington, D.C. 20549**

  (Mark One)

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

  For the quarterly period ended September 30, 2002

                                                        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 |_|

  As of November 11, 2002, there were 35,905,953 shares of the Registrant's common stock
  outstanding.

**FILENET CORPORATION**
                                             Index

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

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

     Item 2.        Management's Discussion and Analysis of Financial Condition
                      and Results of Operations  ..................................  14

     Item 3.        Quantitative and Qualitative Disclosures about Market Risk.....  26

     Item 4.        Controls and Procedures........................................  27

     **PART II.       OTHER INFORMATION**..............................................  27

     Item 1.        Legal Proceedings..............................................  27

     Item 6.        Exhibits and Reports on Form 8-K...............................  27

     **SIGNATURE**      ...............................................................  28

     **CERTIFICATIONS** ...............................................................  29

     **INDEX TO****EXHIBITS**       ...............................................................  31

                                                2

**PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

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

                                                           September 30,   December 31,
                                                                   2002        2001 **ASSETS**
    Current assets:
      Cash and cash equivalents                              $ 101,462     $ 107,502
      Short-term investments                                    46,726        64,660
      Accounts receivable, net                                  43,738        36,909
      Inventories, net                                           2,575         2,993
      Prepaid expenses and other current assets                 12,840         9,521
      Deferred income taxes                                      2,877     2,779 
      Total current assets                                     210,218       224,364

    Property, net                                               37,568        44,206
    Long-term investments                                       28,129             -
    Goodwill                                                    16,572         9,953
    Intangible assets, net                                       3,139           182
    Deferred income taxes                                       21,429        21,445
    Other assets                                                 5,028     1,489 

        Total assets                                         $ 322,083 $ 301,639 **LIABILITIES AND STOCKHOLDERS' EQUITY**
    Current liabilities:
      Accounts payable                                       $   7,615     $   8,282
      Customer deposits                                          3,076         4,848
      Accrued compensation and benefits                         22,262        17,804
      Unearned maintenance revenue                              40,074        30,996
      Income taxes payable                                       2,746         3,999
      Other accrued liabilities                                 12,353    13,685 
      Total current liabilities                                 88,126        79,614

    Unearned maintenance revenue and other liabilities           4,597         6,200
    Commitments and contingencies (Note 9)

    Stockholders' equity:
      Preferred stock - $.10 par value; 7,000,000 shares
        authorized; none issued and outstanding                      -             -
      Common stock - $.01 par value; 100,000,000 shares
        authorized; 36,741,049 shares issued and 35,643,049
        shares outstanding at September 30, 2002; and
        36,389,682 shares issued and 35,291,682 shares
        outstanding at December 31, 2001                       203,401       199,526
      Retained earnings                                         49,393        44,906
      Accumulated other comprehensive loss                      (8,867)  (14,040)
                                                               243,927       230,392
      Treasury stock, at cost; 1,098,000 shares                (14,567)  (14,567)
      Net stockholders' equity                                 229,360   215,825 

        Total liabilities and stockholders' equity           $ 322,083 $ 301,639 *See accompanying notes to unaudited condensed consolidated financial statements.*

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

                                           Three Months Ended       Nine Months Ended
                                              September 30,          September 30,        2002       2001       2002          2001  
 Revenue:
   Software                             $ 30,538  $  26,932    $  96,128     $  88,463
   Customer Support                       37,838     33,372      111,682        95,201
   Professional services and education    12,751     17,489       43,078        53,423
   Hardware                                1,975      2,788      6,682        10,836  
   Total revenue                          83,102     80,581    257,570       247,923  

 Costs:
   Software                                2,484      2,253        7,239         5,636
   Customer Support                        9,604      9,042       29,499        32,494
   Professional services and education    11,361     14,025       38,003        47,356
   Hardware                                1,337      2,565      4,847         8,039  
   Total cost of revenue                  24,786     27,885       79,588        93,525

     Gross Profit                         58,316     52,696      177,982       154,398

 Operating expenses:
   Research and development               17,764     16,936       53,993        52,548
   Selling, general and administrative    39,793     40,287      121,636       127,064
   In-process research and development         -          -        400             -  
   Total operating expenses               57,557     57,223      176,029       179,612

 Operating income (loss)                     759     (4,527)       1,953       (25,214)

 Other income, net                         1,045      1,671      3,874         1,505  

 Income (loss) before income taxes         1,804     (2,856)       5,827       (23,709)

 Provision (benefit) for income taxes        415       (628)     1,340        (5,215) 

 Net income (loss)                      $ 1,389    $ (2,228)   $ 4,487      $(18,494) 

 Earnings (loss) per share:
   Basic                                $   0.04   $  (0.06)     $  0.13      $  (0.53)
   Diluted                              $   0.04   $  (0.06)     $  0.12      $  (0.53)

 Weighted average shares outstanding:
   Basic                                  35,629     35,008       35,511        35,096
   Diluted                                36,445     35,008       36,803        35,096

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

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

                                                 Three Months              Nine Months
                                               Ended September 30,    Ended September 30,       2002        2001        2002         2001  

 Net income (loss)                           $ 1,389    $ (2,228)   $ 4,487   $  (18,494) 
 Other comprehensive income (loss):
   Foreign currency translation adjustments      156       2,642         5,147       (1,986)
 Unrealized gains on securities:
    Unrealized holding gains                      12          72         26          163  
 Total other comprehensive income (loss)         168       2,714      5,173       (1,823) 
 Comprehensive income (loss)                 $ 1,557    $    486    $ 9,660   $  (20,317) *See accompanying notes to unaudited condensed consolidated financial statements.*

                                                5
**FILENET CORPORATION**
                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                        (In thousands)

                                                                   Nine Months Ended September 30,             2002          2001   
     Cash flows from operating activities:
     Net income (loss)                                                $   4,487         $ (18,494)
     Adjustments to reconcile net income (loss) to net cash
       provided by operating activities:
         Purchased in-process research and development                      400                 -
         Depreciation and amortization                                   16,160            18,166
         Loss on sale of fixed assets                                        13               262
         Provision for doubtful accounts                                    354               800
         Deferred income taxes                                               16            (8,896)
         Changes in operating assets and liabilities, net of
           the effects of
           acquisition:
           Accounts receivable                                           (5,526)           42,115
           Inventories                                                      417               313
           Prepaid expenses and other current assets                     (3,100)             (421)
           Accounts payable                                                (861)           (7,115)
           Accrued compensation and benefits                              3,918            (5,633)
           Customer deposits and advances                                (1,781)            3,284
           Accrued legal fees                                                 -            (2,478)
           Unearned maintenance revenue                                   6,870            13,360
           Income taxes payable                                          (1,199)           (2,881)
           Other                                                         (4,213)     1,406  
     Net cash provided by operating activities                           15,955     33,788  

     Cash flows from investing activities:
     Capital expenditures                                                (8,592)          (15,103)
     Proceeds from sale of property                                          44               287
     Note receivable from officer                                        (1,900)                -
     Cash paid for acquisition                                           (9,359)                -
     Purchases of marketable securities                                (103,529)         (108,953)
     Proceeds from sales and maturities of marketable securities         94,621     86,803  
     Net cash used in investing activities                              (28,715)   (36,966) 

     Cash flows from financing activities:
     Proceeds from issuance of common stock                               3,875             5,386
     Principal payments on capital lease obligations                     (1,293)      (519) 
     Net cash provided by financing activities                            2,582      4,867  

     Effect of exchange rate changes on cash and cash equivalents         4,138     (1,212) 

     Net increase (decrease) in cash and cash equivalents                (6,040)              477
     Cash and cash equivalents, beginning of year                       107,502    101,497  
     Cash and cash equivalents, end of period                         $ 101,462  $ 101,974  

     Supplemental cash flow information:
     Interest paid                                                    $      65  $      57  
     Income taxes paid                                                $   2,897  $   6,794  *See accompanying notes to unaudited condensed consolidated financial statements.*

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

1.   BASIS OF PRESENTATION

     The  accompanying   unaudited  interim  condensed   consolidated  financial
     statements  of FileNET  Corporation  (the  "Company")  reflect  adjustments
     (consisting of normal  recurring  adjustments)  necessary to present fairly
     the financial position of the Company at September 30, 2002, the results of
     its  operations  and its  comprehensive  operations  for the three and nine
     months  ended  September  30, 2002 and 2001 and its cash flows for the nine
     months ended September 30, 2002 and 2001. 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 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,  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,
     2001 filed with the SEC on March 28, 2002.  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  condensed
     consolidated   financial  statements  to  conform  to  the  current  year's
     presentation.

2.   RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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

     In June 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets," which the Company  adopted  January 1, 2002. SFAS No. 142 requires
     that goodwill and other intangible  assets with indefinite  useful lives no
     longer be amortized, but instead be tested for impairment at least annually
     and written down when impaired.  SFAS No. 142 requires purchased intangible
     assets other than  goodwill to be amortized  over their useful lives unless
     these  lives are  determined  to be  indefinite.  In  accordance  with this
     Standard,  the Company no longer  amortizes  goodwill and  indefinite  life
     intangible  assets but  evaluates  their  carrying  value  annually or when
     events or circumstances indicate that their carrying value may be impaired.
     Assembled  workforce  no  longer  meets  the  definition  of  a  separately
     identified  intangible  asset under the provisions of SFAS No. 141, and the
     unamortized  balance of $182,000 was reclassified as goodwill at January 1,
     2002. The Company ceased  amortizing the goodwill  balance of $10.1 million
     from its 2000  acquisition of Applications  Partner,  Inc. as of January 1,
     2002. The Company had no indefinite life intangible assets as of January 1,
     2002. In accordance with SFAS No. 142, the Company is required to perform a
     two-step transitional  impairment review. The first step of this review was
     completed by June 30, 2002 with the  determination of the fair value of the
     Company's  reporting  units in order to identify  whether the fair value of
     each reporting unit is less than its carrying amount. In the event that the
     fair value of the  reporting  unit is less than the  carrying  amount,  the
     second  step of the test would be  required to  determine  if the  carrying
     value of goodwill exceeds the implied value. The Company determined that it
     did not have a transitional impairment of goodwill and as of Septemeber 30,
     2002,  no  impairment  of goodwill has  been  recognized.  Goodwill will be
     tested  for  impairment  annually  on July 1st of each year or  earlier  if
     indicators of potential impairment exist. If estimates change, a materially
     different impairment conclusion could result.

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

                                       7

     fiscal  years  beginning  after  December  15,  2001.  The adoption of this
     Standard on January 1, 2002 did not have a material impact on the Company's
     financial position and results of operations.

     In November 2001, the FASB  announced  Emerging  Issues Task Force ("EITF")
     Topic No.  D-103,  "Income  Statement  Characterization  of  Reimbursements
     Received for Out-of-Pocket Expense Incurred",  is required to be applied in
     financial  reporting  periods  beginning  after December 15, 2001. The EITF
     requires   companies   to   characterize    reimbursements   received   for
     out-of-pocket   expenses  as  revenues  in  the  statement  of  operations.
     Historically,   the  Company  has  netted   reimbursements   received   for
     out-of-pocket  expenses  against the related  expenses in the  statement of
     operations.  Application of this EITF requires that  comparative  financial
     statements for prior periods be  reclassified  to comply with the guidance.
     The Company  adopted  this EITF as of January 1, 2002 and has  reclassified
     its prior  period  consolidated  financial  statements  to  conform  to the
     current  presentation.  The  adoption  of this EITF did not have a material
     effect on total revenues or gross margin  percentages  and has no impact on
     results of operations as it required an equivalent increase to both revenue
     and cost of revenue.  Revenue and cost of revenue increased by $512,000 for
     the three months ended September 30, 2001 and increased by $1.7 million for
     the nine months ended September 30, 2001.  Comparable  numbers for 2002 are
     not available as out-of-pocket  expenses are  characterized as revenue upon
     invoicing.

     In July 2002, the FASB issued SFAS 146,  "Accounting  for Costs  Associated
     with Exit or Disposal Activities," which addresses financial accounting and
     reporting  for  costs  associated  with  exit or  disposal  activities  and
     supersedes EITF Issue 94-3,  "Liability  Recognition  for Certain  Employee
     Termination Benefits and Other Costs to Exit an Activity (including Certain
     Costs  Incurred  in  a  Restructuring)."   SFAS  146  requires  that  costs
     associated  with exit or disposal  activities be  recognized  when they are
     incurred  rather  than at the date of a  commitment  to an exit or disposal
     plan.  SFAS 146 also  establishes  that the liability  should  initially be
     measured and recorded at fair value.  The Company will adopt the provisions
     of SFAS 146 for  exit or  disposal  activities  that  are  initiated  after
     December 31, 2002.

3.   ACQUISITIONS

     On April 2, 2002, the Company  acquired  certain assets and assumed certain
     liabilities of eGrail, Inc.  ("eGrail"),  a Web content management company,
     for $9.0 million in cash. This strategic  acquisition  provides  additional
     Web Content  Management  ("WCM")  software  application  capabilities  that
     expand the Company's  position in the Enterprise Content Management ("ECM")
     market,  which contributed to the purchase price that resulted in goodwill.
     In accordance with SFAS No. 141,  "Business  Combinations," the acquisition
     has been  accounted  for  under the  purchase  method  of  accounting.  The
     purchase  price for the  acquisition  consisted  of $9.0  million  cash and
     direct  acquisition costs of $359,000.  The purchase price was allocated as
     follows (in thousands):

                Net tangible assets                        $    581
                Goodwill                                      5,793
                Patents                                          24
                Acquired technology                           3,300
                In-process research and development             400
                Liabilities assumed                            (739)   $  9,359  

     The amount  allocated to in-process  research and  development and acquired
     technology was determined through established  valuation  techniques in the
     high-technology   industry  by  an   independent   third-party   appraiser.
     In-process  research and development was expensed upon acquisition  because
     technological   feasibility   had  not  been   established  and  no  future
     alternative uses existed. New product development underway at eGrail at the
     time of the  acquisition  included the next generation of their Web Content
     Management  product  that was in the early  stages  of  design  and only 5%
     complete at the date of the  acquisition.  The cost to complete the project
     was estimated at  approximately  $3.0 million to occur over a  twelve-month
     period.  As of September  30, 2002 the Company has  incurred  approximately
     $1.9 million of research and development  expenses  related to the project.
     The remaining purchase price was primarily allocated to tangible assets and
     goodwill.  The  acquired  technology  of $3.3 million was assigned a useful
     life of five years and  patents of $24,000  were  assigned a useful life of
     two years. In accordance with SFAS No. 142,  goodwill will not be amortized
     but will be reviewed for  impairment  on an annual  basis.  Goodwill is tax
     deductible for this asset purchase.

                                       8

     Actual results of operations of the acquired  eGrail  business,  as well as
     assets and liabilities of the acquired eGrail business, are included in the
     unaudited  condensed  consolidated  financial  statements  from the date of
     acquisition. Therefore, the Company's financial results for the nine months
     ended  September 30, 2002 include the actual  results of the aquired eGrail
     business from the date of acquisition.  The pro forma results of operations
     data for the nine-month periods ended September 30, 2001 and 2002 presented
     below assume that the  acquisition had been made at the beginning of fiscal
     2001. The pro forma data is presented for  informational  purposes only and
     is not  necessarily  indicative of the results of future  operations nor of
     the actual results that would have been achieved had the acquisitions taken
     place at the beginning of fiscal 2001 (in thousands):

                                          Nine Months Ended September 30,
                                               2000               2001        
       Revenue                          $   258,322        $   251,895
       Net Income (Loss)                      3,120            (26,035)
       Earnings (Loss) per share:
          Basic                         $      0.09        $     (0.74)
          Diluted                       $      0.08        $     (0.74)

     Alliant Partners acted as financial  advisors to eGrail in this transaction
     and was paid  approximately  $500,000 by eGrail.  John Savage,  a member of
     FileNET's  Board of Directors and the Audit Committee of FileNET's Board of
     Directors,  is  Managing  Partner of  Alliant  Partners  and,  accordingly,
     recused  himself  from  all  discussions  related  to the  transaction  and
     abstained from voting on this transaction.

4.   GOODWILL AND PURCHASED INTANGIBLE ASSETS

     In  acquisitions  accounted  for using the  purchase  method,  goodwill  is
     recorded as the  difference,  if any,  between the aggregate  consideration
     paid  for an  acquisition  and  the  fair  value  of the net  tangible  and
     identified  intangible  assets  acquired.  Statement  No. 142 requires that
     ratable  amortization  of  goodwill  and  indefinite  life  intangibles  be
     replaced  with  periodic  review and  analysis  of  goodwill  for  possible
     impairment.  Intangible  assets with definite  lives must be amortized over
     their  estimated  useful lives. On January 1, 2002 the Company adopted SFAS
     No. 142, and as a result, goodwill is no longer amortized. Summarized below
     are the  effects on net income  (loss)  per share data if the  Company  had
     followed the amortization  provisions of SFAS 142 for all periods presented
     (in thousands, except per share amounts):

                                                  Three Months Ended       Nine Months Ended
                                                     September 30,            September 30,
                                                   2002         2001     2002         2001  
     Net income (loss):
       As reported                             $  1,389    $  (2,228)    $ 4,487    $ (18,494)
       Add: goodwill amortization,
         net of taxes                                 -          608        -        1,787 

          Adjusted net income (loss)           $  1,389    $  (1,620) $ 4,487    $ (16,707)

     Basic net income (loss) per share:
       As reported                             $   0.04    $   (0.06)    $  0.13    $   (0.53)
       Add: goodwill amortization, net of taxes       -         0.02        -         0.05 

          Adjusted basic net income (loss)
          per share                            $   0.04    $   (0.04) $  0.13    $   (0.48)

     Diluted net income (loss) per share:
       As reported                             $   0.04    $   (0.06)    $  0.12    $   (0.53)
       Add: goodwill amortization, net of taxes       -         0.02        -         0.05 

          Adjusted diluted net income (loss)
          per share                            $   0.04    $   (0.04) $ 0.12     $   (0.48)

                                       9

     A portion of goodwill and  intangible  assets were allocated to our Ireland
     subsidiary  and therefore the following  tables reflect  amounts  resulting
     from foreign exchange translation.

     The  following  table  presents  the changes in goodwill  allocated  to the
     reportable segments during the first nine months of 2002 (in thousands):

                             Balance at                                   Foreign      Balance at
                            December 31,                                 Currency    September 30,
                                   2001    Acquired    Adjustments    Fluctuation            2002  

   Software                   $  4,914     $  3,654       $     90       $    318        $  8,976
   Customer support              3,271          406             60            212           3,949
   Professional services
    and education                1,768        1,733             32            114           3,647
   Hardware                          -            -              -              -               -  
     Total                    $  9,953     $  5,793       $    182       $    644        $  16,572 

     The acquired  goodwill resulted from the acquisition of the eGrail business
     in April 2002.  The  adjustments  were due to the  reclassification  of the
     assembled  workforce  intangible to goodwill at January 1, 2002 as a result
     of the adoption of SFAS 142.

     Acquired  technology and patents are the Company's only  intangible  assets
     subject to amortization under Statement No. 142. These assets were recorded
     in connection  with the April 2002 eGrail  acquisition and are comprised of
     the following as of September 30, 2002 (in thousands):

                                                                 Foreign
                                              Accumulated       Currency
                                    Gross    Amortization    Fluctuation        Net  

         Acquired technology     $  3,468         $  (347)       $    (1)  $  3,120
         Patents                       25              (6)             -         19  $  3,493         $  (353)       $    (1)  $  3,139  

     Acquired technology is being amortized over a useful life of five years and
     patents are being  amortized over a useful life of two years.  Amortization
     expense for amortizing  intangible assets was $176,400 for the three months
     ended  September 30, 2002 and $344,500 for the nine months ended  September
     30, 2002 and  estimated  future  amortization  expense  (excluding  foreign
     exchange effect) of purchased intangible assets as of September 30, 2002 is
     as follows (in thousands):

                               Fiscal
                                 Year            Amount 
            2002 (remaining 3 months)      $    168,190
                                 2003           672,760
                                 2004           663,190
                                 2005           660,000
                                 2006           660,000
                                 2007           165,000 $  2,989,140 

5.   EARNINGS (LOSS) PER SHARE

     Basic  earnings  (loss) per share is computed by dividing net income (loss)
     for the period by the weighted average number of common shares  outstanding
     during the period.  Diluted  earnings per share is computed by dividing net
     income by the weighted average number of common shares outstanding plus the
     dilutive effect of outstanding  stock options and shares issuable under the

                                       10

     employee stock purchase plan using the treasury stock method.  The dilutive
     loss  per  share  excludes  these  adjustments,  as  the  impact  would  be
     antidilutive.  The antidilutive  effect for the three and nine months ended
     September 30, 2001 would have been 772 and 1,239 shares, respectively.  The
     following  table sets forth the  computation of basic and diluted  earnings
     (loss) per share for the three and nine months ended September 30, 2002 and
     2001:

     *(In thousands, except per share amounts)*      Three Months Ended        Nine Months Ended
                                                      September 30,             September 30,
                                                   2002           2001      2002         2001  

       Net income (loss)                      $   1,389      $  (2,228) $  4,487    $ (18,494) 

       Shares used in computing
          basic earnings (loss) per share        35,629         35,008      35,511       35,096
       Dilutive effect of stock plans         $     816      $       -  $  1,292    $       -  
       Shares used in computing
          diluted earnings (loss) per share      36,445         35,008      36,803       35,096

        Earnings (loss) per basic share       $    0.04      $   (0.06)   $   0.13    $   (0.53)
        Earnings (loss) per diluted share     $    0.04      $   (0.06)   $   0.12    $   (0.53)

6.   ACCUMULATED OTHER COMPREHENSIVE LOSS

     Accumulated other  comprehensive loss as of September 30, 2002 is comprised
     of the following:

                                             Foreign        Unrealized        Accumulated
                                            Currency           Holding              Other
                                         Translation             Gains      Comprehensive
       *(in thousands)*                 Adjustment           (Losses)        Operations  

            Balance, December 31, 2001     $ (14,079)         $    39          $ (14,040)
            Current period changes             5,147       26      5,173  
            Balance September 30, 2002     $  (8,932) $    65  $  (8,867) 

7.   OPERATING SEGMENT DATA

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

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

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

                                       11

     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 and nine months ended  September 30,
     2002 and 2001 are as follows:

                                               Three Months Ended              Nine Months Ended
                                                  September 30,                  September 30,
        *In thousands*      2002            2001         2002          2001   
       Software
         Revenue                         $   30,538      $   26,932     $   96,128     $   88,463
         Operating loss                     (14,822)        (17,343)       (40,272)       (46,807)

       Customer Support
         Revenue                         $   37,838      $   33,372     $  111,682     $   95,201
         Operating income                    16,156          12,984         44,343         25,944

       Professional Services and
         Education Revenue               $   12,751      $   17,489     $   43,078     $   53,423
         Operating income (loss)               (742)            191         (2,421)        (3,586)

       Hardware
         Revenue                         $    1,975      $    2,788     $    6,682     $   10,836
         Operating income (loss)                167            (359)        303           (765)  

       Total
         Revenue                         $   83,102      $   80,581     $  257,570     $  247,923
         Operating income (loss)                759          (4,527)         1,953        (25,214)

8.   STOCK OPTIONS

     The following is a summary of stock option transactions regarding all stock
     options plans for the nine months ended September 30, 2002:

                                                           Number of           Weighted
                                                             Options   Exercise Price 
     Balances, December 31, 2001                           8,010,453            $ 15.56
        Granted (weighted average fair value of $7.02)     1,247,530              13.82
        Exercised                                           (181,760)              9.56
        Canceled                                            (421,869)           21.42 

     Balances, September 30, 2002                          8,654,354            $ 15.14

                                                    12

     The following  table  summarizes  information  concerning  outstanding  and
     exercisable stock options at September 30, 2002:

                                    Options Outstanding                 Options Exercisable     
                                            Weighted
                                             Average        Weighted                       Weighted
                                           Remaining         Average                        Average
          Range of              Number   Contractual        Exercise          Number       Exercise
    Exercise Price         Outstanding          Life           Price     Exercisable          Price  
  $ 1.39 - $  9.00           1,785,120          5.06         $  7.95       1,599,166        $  8.00
    9.17 -   12.86           1,762,094          8.12           11.68         666,798          10.76
   12.97 -   14.81           1,650,232          8.35           13.58         605,369          13.73
   15.16 -   22.53           1,874,810          8.12           17.81         772,541          17.97
   23.47 -   41.84           1,582,098          7.30           25.57       1,030,023          25.88  
  $ 1.39 - $ 41.84           8,654,354          7.38         $ 15.14       4,673,897        $ 14.73

     The Company accounts for its stock-based  compensation  plans in accordance
     with APB Opinion No. 25,  "Accounting  for Stock Issued to Employees,"  and
     related  interpretations.  The following table summarizes the Company's net
     income  (loss)  and net income  (loss)  per share on a pro forma  basis had
     compensation  cost for the Company's  stock-based  compensation  plans been
     determined  based  on the  provisions  of SFAS  No.  123,  "Accounting  for
     Stock-Based Compensation" for the nine months ended September 30, 2002:

        *(In thousands, except per share amounts)*
           Net income - as reported                      $   4,487
           Net loss - pro forma                             (2,060)
           Diluted earnings per share - as reported           0.12
           Basic and diluted loss per share - pro forma  $   (0.06)

     The fair  value of each  option  grant was  estimated  on the date of grant
     using the Black-Scholes  option-pricing  model using an expected volatility
     of 70%,  risk-free interest rates of 2.16% to 4.81% and an expected life of
     one year from vest date. Pro forma compensation cost of shares issued under
     the  Employee  Qualified  Stock  Purchase  Plan is  measured  based  on the
     discount from market value on the date of purchase in accordance  with SFAS
     No. 123.

9.   LEGAL PROCEEDINGS

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

10.  RELATED PARTY TRANSACTIONS

     In  July  2001,  the  Compensation  Committee  of the  Company's  Board  of
     Directors  entered into discussions  with Lee Roberts,  the Company's Chief
     Executive  Officer,  regarding a secured loan by the Company to Mr. Roberts
     to enable him to  purchase  a home in Orange  County,  California.  In July
     2001, the Compensation  Committee forwarded its recommendation to the Board
     to approve, in principle,  a secured loan, in the amount of $1.2 million to
     Mr. Roberts.  In September 2001, the Compensation  Committee  approved,  in
     principle,  an increase  in the  previously  requested  loan amount to $1.9
     million,  subject to review of final loan  documents  and  approval  of the
     Board.  In May 2002,  the  Compensation  Committee  reviewed  proposed loan
     documentation  for  a  secured  loan  to  Mr.  Roberts  and  forwarded  its
     recommendation  to the Board to approve  the loan on the terms set forth in
     the loan  documents.  The loan  documents  provided  that the loan would be
     secured by the real estate purchased by Mr. Roberts.  Subsequently, on June
     5,  2002,  the  Board  approved  the loan  documents  and the  loan.  As of
     September 30, 2002, FileNET has an outstanding secured note receivable from

                                       13

     Mr.   Roberts  in  the  amount  of  $1.9   million   that  relates  to  the
     above-referenced  loan and is  included  in other  assets on the  condensed
     consolidated  balance  sheet.  The note bears  interest at 2.89% per annum.
     Accrued interest on the principal  balance of this note is payable annually
     beginning  February 15, 2003 and on each February 15th thereafter until the
     entire  principal  balance  becomes due. The entire  outstanding  principal
     balance of this note and any  accrued  interest  is due and  payable at the
     earliest  of (a)  June 7,  2005,  (b) one  year  after  termination  of Mr.
     Roberts' employment by the Company, or (c) ninety (90) days after voluntary
     termination of employment by Mr. Roberts. The difference between the stated
     interest rate of the note and a fair value interest rate of 7% was recorded
     as a  discount  that is  being  amortized  over  the  term  of the  note to
     compensation  expense using the effective  interest method. The loan to Mr.
     Roberts is permitted  under  Section 13 of the  Securities  Exchange Act of
     1934 as amended by Section 402 of the  Sarbanes-Oxley  Act on July 30, 2002
     because it was  outstanding  on that  date,  however,  its terms  cannot be
     renewed or materially modified after July 30, 2002.

1.  FOREIGN CURRENCY TRANSACTIONS

     As of  September  30,  2002,  the  Company  had  forward  foreign  exchange
     contracts   outstanding   totaling   approximately   $14,590,485   in  nine
     currencies.  These  contracts  were opened on the last  business day of the
     quarter and mature within three months. Accordingly, the fair value of such
     contracts is zero at September 30, 2002.

**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 in "Risk Factors That May
Affect  Future  Results"  below and in the notes to our  consolidated  financial
statements  for the year ended  December  31, 2001.  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  our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.

**Overview**

FileNET  Corporation  develops,  markets,  implements  and  services  Enterprise
Content Management ("ECM") and Business Process Management software products and
eBusiness applications and solutions for selected vertical markets. Our software
products enable  organizations  to improve  operational  efficiency and leverage
their  content  resources  through the  delivery  of  efficient,  flexible,  and
scalable  enterprise  process management  solutions.  We also offer professional
services and training for the  implementation  of these software  solutions,  as
well as 24 hours a day, seven days a week technical  support and services to our
customers on a global basis.

**Significant Accounting Policies**

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

***Revenue Recognition.***  Revenues  from  sales of software  licenses  sold  through
direct and  indirect  channels,  which 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 is not recognized  until such elements are
known  or  resolved.  Software  license  revenue  for  arrangements  to  deliver
unspecified  additional  software  products in the future is recognized  ratably
over the term of the arrangement,  beginning with the initial shipment.  Revenue
from  post-contract  customer support is recognized ratably over the term of the

                                       14

contract. Revenue from professional services and education is recognized as such
services are  delivered  and  accepted by the  customer.  Anticipated  losses on
fixed-price  professional  services  contracts are recognized in the period when
they become known.  We recognize  other revenue at the time of product  delivery
and  accrue  any  remaining  costs,  including  vendor  obligations.   Based  on
historical  experience,  we maintain a sales return  allowance for the estimated
amount of potential  returns.  While such returns have historically been minimal
and within our expectations of the allowances  established,  we cannot guarantee
that we will  continue to  experience  the same return rates that we have in the
past.

***Accounts Receivable.***  We evaluate the creditworthiness of our customers prior to
order fulfillment and we perform ongoing credit  evaluations of our customers to
adjust  credit  limits  based on  payment  history  and the  customer's  current
creditworthiness.  We monitor  collections  from our  customers  and  maintain a
provision for estimated credit losses that is based on historical experience and
on  specific  customer   collection  issues.   While  such  credit  losses  have
historically  been within our  expectations and the provisions  established,  we
cannot  guarantee that we will continue to experience the same credit loss rates
that we  have  in the  past.  Since  our  revenue  recognition  policy  requires
customers to be  creditworthy,  our accounts  receivable  are based on customers
whose payment is reasonably  assured.  Our accounts  receivable are derived from
sales to a wide variety of customers. We do not believe a change in liquidity of
any one customer or our inability to collect from any one customer  would have a
material adverse impact on our financial position.

***Deferred Income Taxes.***  Deferred  income  taxes  reflect  the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial  reporting  purposes and the amounts used for income tax purposes.  We
maintain a valuation  allowance  against a portion of the deferred tax asset due
to  uncertainty  regarding the future  realization  based on historical  taxable
income,  projected  future  taxable  income,  and  the  expected  timing  of the
reversals  of  existing  temporary  differences.  If we operate at a loss or are
unable to  generate  sufficient  future  taxable  income we could be required to
increase the valuation  allowance  against all or a  significant  portion of our
deferred  tax  assets  which  would  result  in a  substantial  increase  to our
effective  tax rate  and  could  result  in a  material  adverse  impact  on our
operating results.

***Accounting for the Impairment or Disposal of Long-Lived Assets.***   We account for
the  impairment  and  disposition  of long-lived  assets in accordance  with the
Statement of Financial  Accounting  Standards ("SFAS") No. 144,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed
Of." In accordance with SFAS No. 144,  long-lived assets to be held are reviewed
for events or changes in  circumstances  that indicate that their carrying value
may not be recoverable. In August 2001, the Financial Accounting Standards Board
("FASB")  issued  SFAS No.  144,  "Accounting  for  Impairment  or  Disposal  of
Long-Lived Assets." This statement addresses financial  accounting and reporting
for the  impairment  of  long-lived  assets and for the  disposal of  long-lived
assets.  SFAS No. 144 superseded SFAS No. 121, and is effective for fiscal years
beginning  after December 15, 2001. We evaluate the carrying value of intangible
assets for impairment of value based on  undiscounted  future cash flows,  which
are subject to change.  While we have not  experienced  impairment of intangible
assets in prior periods,  we cannot  guarantee that there will not be impairment
in the future.  Any future impairment charge would negatively affect our results
of operations.

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

**Results of Operations**

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

                                                  Three Months Ended            Nine Months Ended
                                                     September 30,                September 30,         2002         2001       2002         2001   

  Revenue:
     Software                                      36.7%        33.4%          37.3%        35.7%
     Customer support                              45.5         41.3           43.4         38.4
     Professional services and education           15.4         21.7           16.7         21.5

                                                      15

     Hardware                                       2.4          3.6       2.6          4.4   
  Total Revenue                                   100.0        100.0          100.0        100.0

  Cost of revenue:
     Software                                       3.0          2.8            2.8          2.3
     Customer support                              11.5         11.2           11.4         13.1
     Professional services and education           13.7         17.5           14.8         19.1
     Hardware                                       1.6          3.1        1.9          3.2  
        Total cost of revenue                      29.8         34.6       30.9         37.7  

  Gross Profit                                     70.2         65.4       69.1         62.3  

  Operating expenses
  Research and development                         21.4         21.0           21.0         21.2
  Selling, general and administrative              47.9         50.0           47.2         51.3
  In-process research and development                 -            -        0.1            -  
        Total operating expenses                   69.3         71.0           68.3         72.5

  Operating income (loss)                           0.9         (5.6)           0.8        (10.2)
  Other income, net                                 1.3          2.1        1.5          0.6  
  Income (loss) before income tax                   2.2%        (3.5)%      2.3%        (9.6)%**Revenue**

Total  revenue  increased  to $83.1  million,  or 3% for the three  months ended
September 30, 2002 from $80.6  million for the three months ended  September 30,
2001.  International  revenue  accounted  for 29% of  total  revenue,  or  $24.4
million, for the three months ended September 30, 2002 and 22% of total revenue,
or $17.8 million,  for the three months ended September 30, 2001.  Total revenue
was $257.6  million  for the nine  months  ended  September  30, 2002 and $247.9
million for the comparable nine months ended September 30, 2001, representing an
increase of $9.7  million,  or 4%.  International  revenue  accounted for 28% of
total revenue,  or $71.2 million,  for the nine months ended  September 30, 2002
and 25% of total revenue, or $62.3 million,  for the nine months ended September
30, 2001. These increases in revenue were primarily attributable to increases in
software  and  customer  support  revenue   partially  offset  by  decreases  in
professional services and hardware revenues as more fully discussed below.

*Software:*  Software  revenue  consists of fees earned from the  licensing of our
software products to customers. Software revenues increased to $30.5 million, or
13% for the three months  ended  September  30, 2002 from $26.9  million for the
three months ended September 30, 2001. Software revenue represented 37% of total
revenue for the three months ended  September  30, 2002  compared to 33% for the
comparable period of 2001.  Software revenue  increased to $96.1 million,  or 9%
for the nine months  ended  September  30, 2002 from $88.5  million for the nine
months ended  September  30, 2001.  Software  revenue  represented  37% of total
revenue for the nine months  ended  September  30, 2002  compared to 36% for the
comparable  period of 2001.  These increases in software  revenue were primarily
due to a small increase in demand for our products in both the United States and
internationally. We remain, however, in an uncertain economic environment and in
a prolonged  slowdown in IT spending  that could cause our  software  revenue to
decline. We do not anticipate market conditions to improve  significantly in the
near term.

*Customer  Support:*  Customer  support revenue  consists of revenue from software
maintenance  contracts,  "fee for service"  revenues and the sale of spare parts
and supplies.  Customer support revenue  increased to $37.8 million,  or 13% for
the three  months  ended  September  30,  2002 from $33.4  million for the three
months ended September 30, 2001.  Customer  support  revenue  represented 45% of
total revenue for the three months ended  September 30, 2002 compared to 41% for

                                       16

the comparable  period of 2001.  Customer  support  revenue  increased to $111.7
million,  or 17% for the nine months ended September 30, 2002 from $95.2 million
for  the  nine  months  ended  September  30,  2001.  Customer  support  revenue
represented  43% of total  revenue for the nine months ended  September 30, 2002
compared to 38% for the  comparable  period of 2001.  The  increases in customer
support  revenue were  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 along with a high rate of renewal on
the existing base. However, the occurrence of a prolonged economic slowdown that
continues to reduce  software  revenue  would result in a decrease in the future
growth rate of customer support revenue.

*Professional Services and Education:* Professional services and education revenue
is generated  primarily from consulting and implementation  services provided to
end users of our software products,  technical  consulting  services provided to
our  resellers  and  training  services  provided  to end users  and  resellers.
Professional  services are  generally  performed  on a time and material  basis.
Professional  services and education revenue decreased to $12.8 million,  or 27%
for the three months ended  September  30, 2002 from $17.5 million for the three
months ended  September 30, 2001.  Professional  services and education  revenue
represented  15% of total revenue for the three months ended  September 30, 2002
compared to 22% for the  comparable  period in 2001.  Professional  services and
education revenue  decreased to $43.1 million,  or 19% for the nine months ended
September 30, 2002 compared to $53.4 million for the comparable  period of 2001.
Professional services and education revenue represented 17% of total revenue for
the nine months  ended  September  30, 2002  compared to 22% for the  comparable
period in 2001. The economic slow down, particularly in North America,  resulted
in fewer and  smaller  consulting  engagements.  This slow  down,  coupled  with
pricing pressures,  has negatively impacted  professional services and education
revenues and we do not expect a significant improvement in the near future.

*Hardware:*  Hardware  revenue  is  generated  primarily  from the sale of 12-inch
Optical Storage And Retrieval ("OSAR") libraries.  Hardware revenue decreased to
$2.0  million,  or 29% for the three months ended  September  30, 2002 from $2.8
million  for the  three  months  ended  September  30,  2001.  Hardware  revenue
represented  2.4% of total revenue for the three months ended September 30, 2002
compared to 3.5% for the comparable  period of 2001.  Hardware revenue decreased
to $6.7 million,  or 38% for the nine months ended September 30, 2002 from $10.8
million for the comparable period of 2001.  Hardware revenue represented 2.6% of
total revenue for the nine months ended  September 30, 2002 compared to 4.4% for
the  comparable  period of 2001. The decline in hardware  revenue  reflects that
hardware  is not a  strategic  focus for us and we expect  hardware  revenue  to
continue to decrease as a percent of total revenue.

**Cost of Revenue**

Total cost of revenue  decreased to $24.8  million,  or 11% for the three months
ended  September 30, 2002 from $27.9 million for the comparable  period in 2001.
Total cost of revenue  decreased  to $79.6  million,  or 15% for the nine months
ended  September 30, 2002 from $93.5 million for the comparable  period in 2001.
The decrease for the three month  comparison is primarily due to the decrease in
the cost of professional  services and education revenue as discussed below. The
nine month  decrease is  primarily  due to  decreases  in  customer  support and
professional services cost of revenue as discussed below.

*Software:*  Cost of software  revenue  includes  royalties paid to third parties,
amortization of acquired technology, partner commissions,  software media costs,
and the cost to  manufacture  and  distribute  software.  The  cost of  software
revenue  increased to $2.5 million,  or 9% for the three months ended  September
30, 2002 from $2.3 million for the three months ended September 30, 2001.  These
costs  represented 8% of the related software revenue for the three months ended
September  30,  2002  and  September  30,  2001.  The cost of  software  revenue
increased to $7.2 million,  or 28% for the nine months ended  September 30, 2002
from $5.6 million for the nine months  ended  September  30,  2001.  These costs
represented 8% and 6% of the related  software revenue for the nine months ended
September  30, 2002 and 2001,  respectively.  The  increases in cost of software
revenue for the three and nine months ended  September  30, 2002 compared to the
same periods in 2001 are primarily  the result of increased  royalty fees due to
increased  utilization of third party software products in 2002 and the addition
of amortization of acquired technology,  which was $173,000 and $337,000 for the
three and nine months ended September 30, 2002,  respectively,  compared to none
in 2001.  Going forward we anticipate  cost of software  revenue as a percent of
software revenue to remain comparable to current levels.

*Customer  Support:*  Cost of customer  support revenue includes costs of customer
support personnel, cost of supplies and spare parts, and the cost of third-party
hardware  maintenance.  The cost of customer  support revenue  increased to $9.6
million,  or 7% for the three months ended  September 30, 2002 from $9.0 million
for the three months ended September 30, 2001.  These costs  represented 25% and
27% of the related customer support revenue for the three months ended September
30, 2002 and 2001, respectively.  The cost of customer support revenue decreased
to $29.5 million,  or 9% for the nine months ended September 30, 2002 from $32.5
million for the nine months ended  September 30, 2001.  These costs  represented
26% and 34% of the related  customer  support  revenue for the nine months ended
September  30,  2002 and 2001,  respectively.  The  increase in cost of customer

                                       17

support  revenue in absolute  dollars for the three months ended  September  30,
2002  compared to the same period in 2001 is  primarily  attributable  to higher
variable  compensation and benefit costs. The decreases in both cost of customer
support  revenue in absolute  dollars and as a  percentage  of customer  support
revenue for the nine months ended  September 30 2002 compared to the same period
in 2001 is primarily  attributable to lower  compensation  cost as a result of a
reduction  in  workforce  in the first  half of 2001.  The  decrease  in cost of
customer  support revenue  expressed as a percentage of customer support revenue
is due to  automation  and  process  improvements  that  allowed  growth  in the
customer  base,  which  generated  increased  revenue,  without  a  proportional
increase in support personnel and cost. Going forward we expect customer support
cost of revenue to remain  relatively  stable in  absolute  dollars for the near
term.

*Professional Service and Education:*  Cost of professional services and education
revenue consists primarily of costs of professional services personnel, training
personnel,  and third-party  independent  consultants.  The cost of professional
services and education revenue decreased to $11.4 million,  or 19% for the three
months ended  September  30, 2002 from $14.0  million for the three months ended
September  30,  2001.  These  costs  represented  89%  and  81% of  the  related
professional services and education revenue for the three months ended September
30, 2002 and 2001, respectively. The cost of professional services and education
revenue  decreased to $38.0 million,  or 20% for the nine months ended September
30, 2002 from $47.4 million for the nine months ended September 30, 2001.  These
costs represented 88% and 89% of the related professional services and education
revenue for the nine months ended September 30, 2002 and 2001, respectively. The
decrease in absolute  dollars was primarily  attributable  to a reduction in the
use of  third-party  independent  consultants,  as well as lower  commission and
variable   compensation  expense,  all  directly  related  to  the  decrease  in
professional  services revenue.  We expect  professional  services and education
costs as a percentage of  professional  services and  education  revenue to vary
from period to period depending on the utilization  rates of internal  resources
and the mix between the use of internal  resources  and third party  independent
consultants.

*Hardware:*  Cost  of  hardware  revenue  includes  the  cost  of  assembling  and
distributing  our  OSAR  library  products,  the  cost of  hardware  integration
personnel,  and warranty costs. The cost of hardware  revenue  decreased to $1.3
million,  or 50% for the three months ended September 30, 2002 from $2.6 million
for the three months ended September 30, 2001.  These costs  represented 65% and
92% of the related  hardware  revenue for the three months ended  September  30,
2002 and 2001,  respectively.  The cost of hardware  revenue  decreased  to $4.8
million,  or 40% for the nine months ended  September 30, 2002 from $8.0 million
for the nine months ended  September 30, 2001.  These costs  represented 72% and
74% of the related hardware revenue for the nine months ended September 30, 2002
and 2001, respectively.  The decrease in absolute dollars is directly related to
the decrease in sales of OSAR library products.

**Operating Expenses***Research and Development:* Research and development expense primarily consists of
costs of  personnel to support  product  development.  Research and  development
expense  increased to $17.8 million,  or 5% for the three months ended September
30, 2002 from $16.9 million for the three months ended  September 30, 2001,  and
represented  21% of total  revenue for these  respective  periods.  Research and
development  expense increased to $54.0 million, or 3% for the nine months ended
September  30, 2002 from $52.5  million for the nine months ended  September 30,
2001, and represented  21% of total revenues for each period.  The increase year
over year is primarily  the result of increased  compensation  and benefit costs
associated with additional headcount from the eGrail acquisition that took place
in April 2002.

Our  research  and  development  efforts  are  focused  on  developing  our  ECM
capabilities.  These  efforts  will focus on  improvements  in Business  Process
Management,   Content   Management,   Web  Content   Management  and  associated
applications to provide a richer product offering to our customers. We intend to
complement internal development with third party software through OEM agreements
and may execute  additional  technology  acquisitions.  New product  development
underway at eGrail at the time of the  acquisition  included the next generation
of their Web Content  Management  product that was in the early stages of design
and only 5% complete at the date of the  acquisition.  The cost to complete  the
project was estimated at approximately $3.0 million to occur over a twelve-month
period.  As of September  30, 2002 the Company has incurred  approximately  $1.9
million of research and development expenses related to the project.

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

                                       18
*Selling, general and administrative:* Selling, general and administrative expense
consists primarily of salaries,  benefits,  sales commissions and other expenses
related to the direct and in-direct sales force; various marketing expenses; the
cost  of  other  market  development  programs;  personnel  costs  for  finance,
information technology,  legal, human resources and general management;  and the
cost of outside  professional  services.  Selling,  general  and  administrative
expense  decreased to $39.8 million,  or 1% for the three months ended September
30, 2002 from $40.3 million for the three months ended  September 30, 2001,  and
represented 48% and 50% of total revenues for these respective periods. Selling,
general and  administrative  expense decreased to $121.6 million,  or 4% for the
nine months  ended  September  30, 2002 from $127.1  million for the nine months
ended  September 30, 2001,  and  represented  47% and 51% of total  revenues for
these  respective  periods.  The decreases in 2002 were primarily due to reduced
recruitment  and  advertising  expenses,  as well as  reduced  sales  commission
expense.  The elimination of goodwill  amortization,  which was $751,000 for the
three months ended September 30, 2001 and $2.3 million for the nine months ended
September 30, 2001,  also  contributed  to this decrease (see  "Amortization  of
Goodwill and Intangible Assets" below).

We expect operating expenses to remain at or slightly above these current levels
for the near term.

**Amortization of Goodwill and Identifiable Intangible Assets**

In connection  with our  acquisition of certain assets from API on May 18, 2000,
the  purchase  price  amount  allocated  to goodwill of $14.6  million was being
amortized  over a useful life of five years and assembled  workforce of $386,000
was being amortized over a useful life of three years.  These amortization costs
were  recorded  in  selling,  general  and  administrative  expense.  We  ceased
amortizing  goodwill and  assembled  workforce as of the  beginning of the first
quarter of 2002 in  compliance  with SFAS No. 142. In  contrast,  we  recognized
$751,000 of  amortization  expense in the three months ended  September 30, 2001
and $2.3 million of amortization  expense in the nine months ended September 30,
2001.  Assembled  workforce  no longer  meets  the  definition  of a  separately
identified  intangible  asset under the  provisions  of SFAS No. 141,  "Business
Combinations,"  and the  unamortized  balance of $182,000  was  reclassified  as
goodwill  at  January  1,  2002.  SFAS No.  142 is  effective  for new  business
combinations  that occur  after June 30,  2001.  Accordingly,  goodwill  of $5.8
million  that  was  recorded  in  April  2002  in  connection  with  the  eGrail
acquisition will not be amortized.  We had no indefinite life intangible  assets
as of January 1, 2002. We will evaluate the carrying value of goodwill  annually
or when  events or  circumstances  indicate  that  their  carrying  value may be
impaired. In accordance with SFAS No. 142, we are required to perform a two-step
transitional  impairment  review.  We completed the first step of this review by
June 30, 2002 with the determination of the fair value of our reporting units in
order to identify whether the fair value of each reporting unit is less than its
carrying amount.  In the event that the fair value of the reporting unit is less
than the  carrying  amount,  the second  step of the test would be  required  to
determine  if the  carrying  value of goodwill  exceeds the  implied  value.  We
determined that we did not have a transitional  impairment of goodwill and as of
September 30, 2002, no impairment of goodwill has ben recognized.  Goodwill will
be  tested  for  impairment  annually  on July 1st of each  year or  earlier  if
indicators of potential  impairment  exist.  If estimates  change,  a materially
different impairment conclusion could result.

**Other Income, Net**

Other income,  net consists  primarily of interest income earned on our cash and
cash  equivalents,  short and long-term  investments,  and other items including
foreign exchange gains and losses,  the gain (loss) on sale of fixed assets, and
interest expense.  Other income, net was $1.0 million for the three months ended
September 30, 2002  compared to other income,  net of $1.7 million for the three
months ended September 30, 2001. This decrease was primarily  related to reduced
interest  income as a result of lower  interest  rates in 2002 compared to 2001.
Other income,  net for the nine months ended September 30, 2002 was $3.9 million
compared to other  income,  net of $1.5  million for the  comparable  nine-month
period in 2001.  This increase was  primarily  due to a one-time  charge of $4.0
million for a legal  settlement that was recorded in the second quarter of 2001.
Included  in other  income,  net in the second  quarter of 2002 is a net gain on
foreign  exchange  of $1.1  million  related  to the  strengthening  of the euro
against the U.S. dollar during the quarter.

**Income Taxes**

Our combined federal,  state and foreign annual effective tax rate for the three
and nine  months  ended  September  30,  2002,  is 23%  compared  to 22% for the
comparable  periods in 2001.  FileNET  management will continue weighing various
factors  for the  remainder  of the year to  assess  the  recoverability  of its
recorded  deferred assets and the need for any valuation  allowance against such
amounts.  Any adjustment to the valuation  allowance  could affect the effective
tax rate in subsequent quarters.

                                       19
**Liquidity and Capital Resources**

At September 30, 2002,  combined cash, cash equivalents and investments  totaled
$176.3  million,  an increase of $4.1  million  from  December  31,  2001.  Cash
provided by operating activities during the nine months ended September 30, 2002
totaled  $16.0  million  and  resulted  primarily  from an  increase in unearned
maintenance  revenue related to prepaid  maintenance  contracts,  an increase in
accrued  compensation and benefits,  net income, and additions to net income for
depreciation  and  amortization   expense,   offset  by  increases  in  accounts
receivable  and an  increase  in  prepaid  expenses.  Cash  used  for  investing
activities  totaled  $28.7  million and included  capital  expenditures  of $8.6
million,  a $1.9 million note receivable  from an officer,  $9.4 million for the
eGrail acquisition,  and net purchases of marketable securities of $8.9 million.
Cash provided by financing  activities  totaled $2.6 million and was a result of
proceeds  received  from the  exercise  of  employee  stock  options  and  stock
purchases  under the employee  stock purchase plan offset by payments on capital
lease  obligations.  Exchange rate changes  during the first nine months of 2002
provided an increase in cash of $4.1 million.

Accounts receivable  increased to $43.7 million at September 30, 2002 from $36.9
million at December 31, 2001. This increase is primarily a result of higher days
sales   outstanding  due  to  slightly  slower  overall   collections.   Current
liabilities  increased to $88.1 million at September 30, 2002 from $79.6 million
at December  31,  2001  primarily  due to an  increase  in unearned  maintenance
revenue from $31.0  million at December  31, 2001 to $40.0  million at September
30, 2002.  This  increase is  primarily  the result of the growth in our base of
annual  support  contracts  resulting  from  new  customer  sales  and  sales of
additional products to the existing base. Additionally,  a significant number of
maintenance  contracts  renew  early  in the  year  and  are  amortized  ratably
throughout  the year  resulting in the lower balance in unearned  maintenance by
December 31.

We have a $5.0 million  multi-currency  revolving line of credit available until
June 27, 2003.  Borrowings under the arrangement are unsecured and bear interest
at one hundred and twenty-five  basis points over the London  Interbank  Offered
Rate. A standby letter of credit fee of one hundred and twenty five basis points
per annum and a  commitment  fee of fifty basis  points is assessed  against any
undrawn amounts. There were no borrowings outstanding against our line of credit
at September 30, 2002.  We have been using the line of credit as collateral  for
issuance  of letters of credit  valued at  approximately  $500,000 in Europe for
certain  government sales contracts and a small number of vendor  contracts.  We
are subject to certain financial covenants that include, but are not limited to,
compliance  with specific  balance sheet ratios,  no two  consecutive  quarterly
losses, an aggregate loan limit to the officers not to exceed $5.0 million,  and
a capital expenditure limit under this line of credit. As of September 30, 2002,
we were in compliance with all covenants.

Contractual cash obligations include third party license  agreements,  operating
leases for our 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.  The following table summarizes  future minimum payments required
under these contractual obligations at September 30, 2002:

    *(In thousands)*
      2002 (remaining three months)               $    3,735
      2003                                            14,718
      2004                                            11,020
      2005                                             9,635
      2006                                             8,867
      Thereafter                                       1,993    Total                                       $   49,968  

Other  contractual  cash  obligations  include a short-term  capital  lease that
expires  December 31, 2002 and has a remaining  cash  commitment  of $511,000 at
September 30, 2002.

We expect  capital  expenditures  to be slightly  above  current  levels for the
remainder  of 2002.  We believe  that our present cash  balances  together  with
internally  generated  funds and  credit  lines will be  sufficient  to meet our
working  capital  and  capital  expenditure  needs for at least the next  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

                                       20

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.  These contracts  mature every three
months  at the end of each  quarter.  We open new  hedge  contracts  on the last
business  day of each  quarter  that  will  mature  at the end of the  following
quarter. The counterparties to these contracts are major financial institutions.
We use  commercial  rating  agencies  to  evaluate  the  credit  quality  of the
counterparties and do not anticipate nonperformance by any counterparties. We do
not anticipate a material loss resulting from any credit risks related to any of
these institutions.

**Recent Accounting Pronouncements**

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

In June 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets," which we adopted  January 1, 2002.  SFAS No. 142 requires that goodwill
and other intangible assets with indefinite useful lives no longer be amortized,
but instead be tested for  impairment  at least  annually  and written down when
impaired.  SFAS No. 142 requires purchased intangible assets other than goodwill
to be amortized  over their useful live unless these lives are  determined to be
indefinite. In accordance with this Standard, we no longer amortize goodwill and
indefinite life intangible  assets but evaluate their carrying value annually or
when events or circumstances indicate that their carrying value may be impaired.
Assembled  workforce no longer meets the  definition of a separately  identified
intangible  asset under the provisions of SFAS No. 141,  Business  Combinations,
and the unamortized  balance of $182,000 was reclassified as goodwill at January
1, 2002.  We ceased  amortizing  the goodwill  balance of $10.1 million from our
2000  acquisition of Applications  Partner Inc. as of January 1, 2002. We had no
indefinite life intangible assets as of January 1, 2002. In accordance with SFAS
No. 142, we are required to perform a two-step  transitional  impairment review.
We  completed  the  first  step of  this  review  by  June  30,  2002  with  the
determination  of the fair  value of our  reporting  units in order to  identify
whether the fair value of each reporting unit is less than its carrying  amount.
In the event that the fair value of the reporting unit is less than the carrying
amount,  the  second  step of the test would be  required  to  determine  if the
carrying value of goodwill  exceeds the implied value. We determined that we did
not have a transitional  impairment of goodwill and as of September 30, 2002, no
impairment  of  goodwill  has  been  recognized.  Goodwill  will be  tested  for
impairment  annually  on July  1st of each  year or  earlier  if  indicators  of
potential   impairment  exist.  If  estimates  change,  a  materially  different
impairment conclusion could result.

In August 2001,  the FASB issued SFAS No. 144,  "Accounting  for  Impairment  or
Disposal of Long-Lived Assets." This Statement  addresses  financial  accounting
and  reporting for the  impairment of long-lived  assets and for the disposal of
long-lived assets and discontinued operations.  SFAS No. 144 superseded SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed  Of," and is effective  for fiscal years  beginning  after
December 15, 2001. The adoption of this Standard on January 1, 2002 did not have
a material impact on our financial position and results of operations.

In November 2001, the FASB announced  Emerging  Issues Task Force ("EITF") Topic
No. D-103,  "Income Statement  Characterization  of Reimbursements  Received for
Out-of-Pocket  Expense  Incurred",  is  required  to  be  applied  in  financial
reporting periods beginning after December 15, 2001. The EITF requires companies
to characterize  reimbursements  received for out-of-pocket expenses as revenues
in the  statement of  operations.  Historically,  we have netted  reimbursements
received  for  out-of-pocket  expenses  against  the  related  expenses  in  the
statement of  operations.  Application  of this EITF requires  that  comparative
financial  statements  for prior  periods  be  reclassified  to comply  with the
guidance.  We adopted this EITF as of January 1, 2002 and have  reclassified our
prior  period  consolidated  financial  statements  to  conform  to the  current
presentation.  The adoption of this EITF did not have a material effect on total
revenues or gross margin  percentages and has no impact on results of operations
as it  required  an  equivalent  increase  to both  revenue and cost of revenue.
Revenue  and cost of revenue  for the three  months  ended  September  30,  2001
increased  by $512,000  and  increased by $1.7 million for the nine months ended
September  30,  2001.  Comparable  numbers for 2002 are not  available as out-of
pocket expenses are characterized as revenue upon invoicing.

In July 2002, the FASB issued SFAS 146,  "Accounting  for Costs  Associated with
Exit or Disposal Activities," which addresses financial accounting and reporting
for costs associated with exit or disposal  activities and supersedes EITF Issue
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs  to  Exit  an   Activity   (including   Certain   Costs   Incurred   in  a
Restructuring)."  SFAS 146 requires that costs  associated with exit or disposal
activities  be  recognized  when they are incurred  rather than at the date of a
commitment  to an exit or  disposal  plan.  SFAS 146 also  establishes  that the

                                       21

liability should initially be measured and recorded at fair value. We will adopt
the  provisions of SFAS 146 for exit or disposal  activities  that are initiated
after December 31, 2002.

**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 agreed to adopt the euro as
their common legal currency from that date. The legacy currencies remained legal
tender in these  countries as a denomination of the euro between January 1, 1999
and January 1, 2002.  Beginning on January 1, 2002,  euro-denominated  bills and
coins are now  issued  for cash  transactions.  For a period of up to six months
from this date, both legacy  currencies and the euro were legal tender.  By July
1, 2002, the participating  countries withdrew all legacy currencies and now use
the euro.

We have made the necessary  changes to our internal  business systems to support
transactions  denominated in the euro,  including  establishing euro price lists
for affected countries. We have been transacting in the euro currency since 1999
and have  evaluated the impact the euro has had on our  financial  condition and
results of  operations.  Based on this  evaluation  to date, we currently do not
believe  that  there  has been or 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:

***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.*** 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;
     o    general domestic and international economic and political conditions;
     o    the discretionary nature of our customers' budget and purchase cycles
          and the absence of long-term customer purchase commitments;
     o    the tendency to realize a substantial percentage of our revenue in the
          last weeks, or even days, of each quarter;
     o    the potential for delays or deferrals of customer orders;
     o    the budget cycles of our customers;
     o    the size, complexity and timing of individual transactions;
     o    changes in foreign currency exchange rates and the impact of the euro
          currency;
     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    project overruns associated with fixed price contracts;
     o    acquisitions by us and our 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
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

                                       22

projected revenue may 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  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.  Our  future  financial
performance will depend primarily on the continued growth of the markets 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.  These  intensely  competitive  markets can
change rapidly.  There are multiple  competitors of ours 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.  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  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 and results of operations.

***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.  Our future  success  also  depends,  in part,  on our  ability to
execute  on  our  strategy  of  developing  a  framework  for  Business  Process
Management solutions for the ECM market. 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  products  and  enhancements.  In
addition,   these  products  and   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  that we  will  not  experience  significant  future  delays  in  product
introduction. From time to time, our competitors or we may announce new software
products,  capabilities  or  technologies  that have the potential to replace or
shorten the life cycles of our existing software products. We cannot assure that
announcements of currently planned or other new software products will not cause
customers to delay their  purchasing  decisions in anticipation of such software
products,  and such delays could have a material  adverse effect on our business
and operating results.

***Protection of our intellectual property and other proprietary rights is limited,
which could result in the use of our  technology by  competitors  or other third
parties. There is risk of third-party claims of infringement, which could expose
us to litigation and other costs.*** Our success  depends,  in part, on our ability
to protect our  proprietary  rights to the  technologies  used in our  principal
products.  We rely on a combination  of copyrights,  trademarks,  trade secrets,
patents,  confidentiality  procedures and contractual  provisions to protect our
proprietary rights in our software products.  We cannot assure that our existing
or future copyrights,  trademarks,  trade secrets, patents or other intellectual
property  rights will have  sufficient  scope or strength to provide  meaningful
protection  or a  commercial  advantage  to us.  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
and results of operations.

                                       23

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

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

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

***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 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 and operational personnel
and consultants. There is competition for such personnel;  particularly software
developers,  professional service consultants and other technical personnel, and
pay scales in the software  industry  have  significantly  increased.  We cannot
assure that in the future we will be successful in attracting and retaining such
personnel.

***A  significant  percent 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  25%-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    the burden of complying with a wide variety of complex foreign laws,
          regulations and treaties;
     o    the possibility of difficulties in collecting accounts receivable; and
     o    longer payment cycles.

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

                                       24
***If our products contain errors we could incur unplanned expenses and delays that
could result in reduced revenue, lower profits, and harmful publicity.*** Software,
services and products as complex as those we sell are  susceptible  to errors or
failures,  especially when first introduced or deployed.  Our software  products
are often  intended  for use in  applications  that are critical to a customer's
business.  As a result,  our customers may rely on the effective  performance of
our  software  to a  greater  extent  than  the  market  for  software  products
generally.  Despite  internal  testing  and  testing  by current  and  potential
customers,  new  products  or  enhancements  may  contain  undetected  errors or
performance problems that are discovered only after a product has been installed
and used by  customers.  Errors or  performance  problems  could cause delays in
product introduction and shipments or could require design modifications, either
of which could lead to a loss in or delay of revenue. These problems could cause
a diversion of development resources, harm our reputation or result in increased
service or warranty  costs, or require the payment of monetary  damages,  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 causing fluctuations in
the market price of our stock, which would impact shareholder value.*** The trading
price  of our  common  stock  has  fluctuated  in the  past  and is  subject  to
significant  fluctuations  in response to the following  factors,  among others,
some of which are beyond our control:

     o    variations in quarterly operating results;
     o    fluctuations in our order levels;
     o    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 general stock market prices and volume, which
          are particularly common among highly volatile securities of
          Internet and software companies; and
     o    other general economic and political conditions.

In recent months,  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.

***We depend on a single source for certain hardware components and revenue related
to  these  products  could be at risk if we were  unable  to  obtain  inventory.***
Certain  components  for the Company's  proprietary  12-inch OSARs are available
only from a single  source.  Any  inability to obtain  components in the amounts
needed on a timely basis could result in delays in product  shipments that could
have an adverse  effect on the  Company's  operating  results.  The  Company has
qualified 5 1/4-inch  optical storage and retrieval  devices from an alternative
source  which could be utilized by the  Company's  customers in the event of any
interruptions in the delivery of components for the Company's own OSAR product.

***Acquisitions  of  companies or  technologies  may result in  disruptions  to our
business and diversion of management attention,  which could cause our financial
performance to suffer.*** As part of our business strategy,  we frequently evaluate
strategic acquisition opportunities.  For example, on April 2, 2002, we acquired
certain assets and assumed  certain  liabilities of eGrail,  Inc., a Web content
management company,  for a purchase price of $9.0 million in cash. 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; and
     o    the potential loss of key personnel of the acquired company.

                                       25

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.

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

Our exposure to market rate risk for changes in interest rates relates primarily
to our investment  portfolio.  We have not used derivative financial instruments
in our investment portfolio.  We place our investments with high-quality issuers
and,  by  policy,  limit the amount of credit  exposure  to any one  issuer.  We
protect  and  preserve  our  invested  funds by  limiting  default,  market  and
reinvestment risk. Our investments in marketable securities consist primarily of
high-grade  corporate and  government  securities  with  maturities of less than
three years.  Investments purchased with an original maturity of three months or
less are considered to be cash  equivalents.  We classify all of our investments
as available-for-sale.  Available-for-sale securities are carried at fair value,
with unrealized gains and losses,  net of tax, reported in a separate  component
of stockholders'  equity.  Average  maturity of our investment  portfolio is 4.5
months;  therefore  the  movement of interest  rates  should not have a material
impact on our balance sheet or income statement.

The following table provides information about our cash and cash equivalents and
our investment portfolio at September 30, 2002 (dollars in thousands):

                                                                  Weighted
                                                                   Average
    Portfolio                               Balance              Yield  
    Cash and Equivalents-Domestic            $   52,793               1.79%
    Cash and Equivalents-International           48,669               2.97%
    Short Term Municipals - Taxable               8,089               2.03%
    Commercial Paper                              2,996               1.93%
    Corporate                                     7,249               2.38%
    Governments/Agencies                         56,521               2.38%
      Total                                  $  176,317               2.37%

The contractual maturities of investments at September 30, 2002 are shown below.
Actual maturities may differ from contractual  maturities  because the issuer of
the securities  may have the right to repurchase  such  securities.  The Company
classifies short-term  investments in current assets as all such investments are
available for current operations.

*(In thousands)                                            Estimated**Cost          Fair Value*
Debt Securities
  Due in one year or less:
     Short-term munis-taxable       $     5,751       $      5,752
     Commercial paper                     2,996              2,996
     Corporate                            3,535              3,536
     Governments/Agencies                34,381             34,442
Due in one to three years:
     Taxable Munis                        2,334              2,337      Commercial Paper                         -                  -      Corporate                            3,699              3,714      Government/Agencies                 22,054             22,078  Total                              $    74,750       $     74,855 

                                       26
**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.
As of September 30, 2002, we had forward foreign exchange contracts  outstanding
totaling  approximately  $14,590,485 in nine  currencies.  These  contracts were
opened on the last business day of the quarter and mature within three months.

Cumulative other  comprehensive  loss decreased $5.2 million for the nine months
ended September 30, 2002 due to unrealized  foreign currency  translation  gains
resulting from the  strengthening of the euro against the U.S. dollar during the
second quarter of 2002.

Management believes  that  inflation  has  not had a  significant  impact on the
prices of our products, the cost of our materials,  or our operating results for
the three and nine months ended September 30, 2002 and 2001.

**Item 4.  Controls and Procedures**

     (a)  We maintain  disclosure  controls and procedures  that are designed to
          ensure that information  required to be disclosed in our reports under
          the Securities Exchange Act of 1934 is recorded, processed, summarized
          and reported within the time periods  specified in the SEC'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 timely decisions regarding
          required  disclosure.  In  designing  and  evaluating  the  disclosure
          controls and procedures,  management  recognized that any controls and
          procedures, no matter how well designed and operated, can provide only
          reasonable assurance of achieving the desired control objectives,  and
          management   necessarily   was  required  to  apply  its  judgment  in
          evaluating  the  cost-benefit  relationship  of possible  controls and
          procedures.

          Within 90 days prior to the date of this  report,  we  carried  out an
          evaluation,  under the supervision and with the  participation  of our
          management,  including our Chief Executive Officer and Chief Financial
          Officer,  of the  effectiveness  of the  design and  operation  of our
          disclosure controls and procedures.  Based on the foregoing, our Chief
          Executive  Officer  and Chief  Financial  Officer  concluded  that our
          disclosure controls and procedures were effective.

     (b)  Changes in internal controls. There were no significant changes in our
          internal controls or in other factors that could significantly  affect
          our internal controls subsequent to the date of the evaluation.

**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)  **Reports on Form 8-K**
          On August 14, 2002, the Registrant filed a report on Form 8-K relating
          to the Registrant's Regulation FD Disclosure and Certifications of the
          Chief Executive Officer and Chief Financial Officer.

                                       27
**SIGNATURE**

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

                                 **FILENET CORPORATION**November 13, 2002*Date*
                            By:  */s/  Sam M. Auriemma*
                                 Sam M. Auriemma, Senior Vice President, Finance
                                 (Principal Financial and Accounting Officer)
                                 and Chief Financial Officer

                                       28
**CERTIFICATION**

I, Lee D. Roberts, Chief Executive Officer, certify that:

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

2.   Based on my knowledge,  this  quarterly  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 quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  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
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  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  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

November 13, 2002*Date**/s/ Lee D. Roberts*
                                         Lee D. Roberts
                                         Chief Executive Officer

                                       29
**CERTIFICATION**

I, Sam M. Auriemma, Chief Financial Officer, certify that:

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

2.   Based on my knowledge,  this  quarterly  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 quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  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
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  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  quarterly
          report is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

November 13, 2002*Date**/s/ Sam M. Auriemma*
                                         Sam M. Auriemma
                                         Chief Financial Officer

                                       30
**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, filed on July 21, 1987; 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,  filed on July 21, 1987;
          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  Quarterly  Report 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).*

10.1*     Second  Amended  and  Restated  Credit  Agreement  (Multi-currency)  by and
          between  the  Registrant  and Bank of America  National  Trust and  Savings
          Association dated June 30, 1999,  effective June 30, 1999 *(filed as Exhibit
          10.1 to  Registrant's  Quarterly  Report on Form 10-Q for the quarter ended
          June 30,  1999) as  amended  by a Waiver  and  First  Amendment  to  Credit
          Agreement  dated as of June 29, 2001 and by a letter  amendment dated as of
          April 5, 2002.*

10.1.1*   Waiver  and  First  Amendment to Credit Agreement  (Multi-currency)  by and
          between the Registrant and Bank of America, N.A., formerly known as Bank of
          America  National  Trust and  Savings  Association,  dated  June 29,  2001,
          effective  June 29,  2001  *(filed as Exhibit  10.1 to  Registrant's  Annual
          Report on Form 10-K filed for the year ended December 31, 2001).*

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

10.2*+    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).*

10.3*+    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,
          filed on June 10, 1992;  Registration  No.  33-48499)*,  the first Amendment
          thereto *(filed as Exhibit 4(d) to the Registrant's  registration  statement
          on Form S-8, filed on October 4, 1993; Registration No. 33-69920)*,  and the
          Second  Amendment   thereto  *(filed  as  Appendix  A  to  the  Registrant's
          Definitive Proxy Statement on Schedule 14A for the Registrant's 1994 Annual
          Meeting of Stockholders, filed on April 29, 1994).*

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

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

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

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

                                       31

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  Quarterly  Report on Form 10-Q for the quarter ended
          September 30, 1999).*

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

10.10*+   Written  Compensation  Agreement  and  Non-Statutory Stock Option Agreement
          (with  Notice  of Grant of  Stock  Option  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).

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).

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

                                       32
**Exhibit 10.14.1

                                                            Effective as of 2002

                           2002 STOCK OPTION AGREEMENT

                              TERMS AND CONDITIONS**

     These *Terms and Conditions* constitute a part of the Stock Option Agreement,
concerning   certain  Options  granted  by  FileNET   Corporation,   a  Delaware
corporation  hereinafter referred to as "Company," to the grantee of the Company
(or a  Subsidiary  of the  Company)  listed on the Notice of Grant,  hereinafter
referred to as  "Optionee."  These Terms and  Conditions and the Notice of Grant
are collectively referred to as the "Agreement."

     WHEREAS,  the Company  wishes to afford the  Optionee  the  opportunity  to
purchase shares of its $0.01 par value Common Stock;

     WHEREAS,  the Company wishes to carry out The 2002 Incentive  Award Plan of
FileNET  Corporation,  as the same may be amended from time to time (the "Plan")
(the terms of which are hereby incorporated by reference and made a part of this
Agreement); and

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

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

                                   **ARTICLE I.****DEFINITIONS**

     Whenever the following  terms are used in this  Agreement,  they shall have
the  meaning  specified  below  unless  the  context  clearly  indicates  to the
contrary.  The masculine pronoun shall include the feminine and neuter,  and the
singular the plural, where the context so indicates.  Capitalized terms used but
not defined in this Agreement  shall have the meaning  ascribed to such terms in
the Plan.

Section 1.1.Cause

     "Cause" shall mean: (i) Optionee's  commission of any act of theft,  fraud,
embezzlement or dishonesty; or (ii) Optionee's willful or intentional misconduct
adversely affecting the business or affairs of the Company or any Subsidiary; or

(iii) Optionee's  unauthorized use or disclosure of confidential  information or
trade secrets of the Company or any Subsidiary.  The foregoing  definition shall
not be deemed to be inclusive  of all acts or omissions  that the Company or any
Subsidiary  may  consider  as grounds  for the  dismissal  or  discharge  of any
Optionee.

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

     Effective  as of the date set forth on the  Notice of  Grant,  the  Company
irrevocably grants to the Optionee the option to purchase any part or all of the
aggregate number of shares of its Common Stock set forth on the Notice of Grant,
all upon the terms and conditions set forth in this Agreement (the "Option").

Section 2.2.Purchase Price

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

Section 2.3.Consideration to Company

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

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

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

Section 3.2.Duration of Exercisability

     The  installments  provided  for in Section 3.1 are  cumulative.  Each such
installment  that  becomes  exercisable  pursuant  to Section  3.1 shall  remain
exercisable until it becomes unexercisable under Section 3.3.

                                       2
Section 3.2.1.Expiration of Option

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

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

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

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

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

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

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

Section 3.3.Special Tax Consequences

     The  Optionee  acknowledges  that,  to the extent that the  aggregate  fair
market value of stock with respect to which  "incentive  stock options"  (within
the meaning of Section 422 of the Code,  but without regard to Section 422(d) of
the Code),  including all or such portion of the Option  elected by the Optionee
to be treated as an incentive  stock option,  are exercisable for the first time
by the Optionee during any calendar year (under the Plan and all other incentive
stock option  plans of the Company and any  Subsidiary  of the Company)  exceeds
$100,000, such options shall be treated for all purposes as not qualifying under
Section  422 of  the  Code  and  therefore  shall  be  subject  to  taxation  as
non-qualified  options.  The Optionee  further  acknowledges  that the rules set
forth in the preceding  sentence shall be applied by taking options into account
in the order in which they were granted.  For purposes of these rules,  the fair
market value of stock shall be determined as of the time the option with respect
to such stock option is granted.

Section 3.4.Acceleration of Option

     (a)  This  Option,  to the extent  outstanding  at the time of a  Corporate
          Transaction, but not otherwise fully exercisable,  shall automatically
          accelerate  so  that  this  Option  shall,  immediately  prior  to the
          effective date of the Corporate  Transaction,  become  exercisable for

                                       3

          all of the Option Shares at the time subject to this Option and may be
          exercised for any or all of those Option Shares as fully-vested shares
          of Common Stock. No such acceleration of this Option,  however,  shall
          occur if and to the  extent  this  Option is, in  connection  with the
          Corporate Transaction:  (i) to be assumed by the successor corporation
          (or  parent  or  subsidiary  thereof)  or to  be  substituted  with  a
          comparable  right to purchase  or receive,  for each share of optioned
          stock  subject  to the  Option  immediately  prior  to  the  Corporate
          Transaction,   the  consideration   (whether  stock,  cash,  or  other
          securities  or  property)  received in the  Corporate  Transaction  by
          holders of Common Stock for each share held on the  effective  date of
          the transaction;  or (ii) to be replaced with a cash incentive program
          of the successor  corporation  which  preserves the spread existing on
          the Option shares at the time of the Corporate Transaction (the excess
          of the Fair  Market  Value of such Option  shares  over the  aggregate
          exercise price payable for those shares,  appropriately  adjusted) and
          provides for subsequent pay-out in accordance with the Option exercise
          schedule. The determination of Option comparability under clause shall
          be made by the Plan  Administrator,  and such  determination  shall be
          final, binding and conclusive.

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

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

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

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

     (a)  Except as  provided  in Section  4.1(b),  during the  lifetime  of the
          Optionee,  only he or she may  exercise  the  Option  (or any  portion
          thereof),  unless  it has been  disposed  of with the  consent  of the
          Committee  pursuant  to a DRO.  After the death of the  Optionee,  any
          exercisable  portion  of the Option  may,  prior to the time when such
          portion becomes  unexercisable  under Section 3.3, be exercised by his
          or her  personal  representative  or by any person  empowered to do so
          under the deceased  Optionee's  will or under the then applicable laws
          of descent and distribution.

                                       4

     (b)  Notwithstanding Section 4.1(a), with the consent of the Administrator,
          the  Optionee  may  transfer  the Option to any one or more  Permitted
          Transferees, subject to the following terms and conditions:

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

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

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

Section 4.2.Partial Exercise

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

Section 4.3.Manner of Exercise

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

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

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

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

     (d)  Full cash  payment to the Company for the shares with respect to which
          the  Option,   or  portion  thereof,   is  exercised.   However,   the
          Administrator may, in its discretion,  (i) allow a delay in payment up
          to 30 days from the date the Option, or portion thereof, is exercised;
          (ii) allow  payment,  in whole or in part,  through  the  delivery  of
          shares of Common  Stock which have been owned by the  Optionee  for at
          least six months,  duly  endorsed  for  transfer to the Company with a

                                       5

          Fair  Market  Value on the  date of  delivery  equal to the  aggregate
          exercise price of the Option or exercised portion thereof; (iii) allow
          payment,  in whole or in part,  through  the  surrender  of  shares of
          Common Stock then  issuable  upon exercise of the Option having a Fair
          Market  Value on the date of Option  exercise  equal to the  aggregate
          exercise price of the Option or exercised portion thereof;  (iv) allow
          payment,  in whole  or in part,  through  a broker  cashless  exercise
          procedure whereby the Optionee delivers a notice that the Optionee has
          placed a market  sell  order with a broker  with  respect to shares of
          Common Stock then issuable  upon exercise of the Option,  and that the
          broker  has  been  directed  to pay a  sufficient  portion  of the net
          proceeds  of the sale to the  Company  in  satisfaction  of the Option
          exercise  price,  and payment of such  proceeds is made to the Company
          upon  settlement  of such  sale;  or (v)  allow  payment  through  any
          combination   of  the   consideration   provided   in  the   foregoing
          subparagraphs  (ii), (iii) and (iv). The Administrator may also permit
          other forms of payment in its  discretion  as  authorized by the Plan;
          and

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

Section 4.4.Conditions to Issuance of Stock Certificates.

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

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

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

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

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

Section 4.5Rights as Stockholder

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

                                       6
**ARTICLE V.****OTHER PROVISIONS**Section 5.1.Administration

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

Section 5.2.Option Not Transferable

     Except as provided in Section  4.1(b),  neither the Option nor any interest
or right  therein or part  thereof  shall be liable for the debts,  contracts or
engagements of the Optionee or his successors in interest or shall be subject to
disposition  by  transfer,   alienation,   anticipation,   pledge,  encumbrance,
assignment  or  any  other  means  whether  such  disposition  be  voluntary  or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any  other  legal  or  equitable  proceedings  (including  bankruptcy),  and any
attempted disposition thereof shall be null and void and of no effect; provided,
however,  that this  Section 5.2 shall not prevent  transfers  by will or by the
applicable  laws of  descent  and  distribution  or,  with  the  consent  of the
Committee, pursuant to a DRO.

Section 5.3.Shares to Be Reserved

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

Section 5.4Notices

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

                                       7
Section 5.5Titles

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

Section 5.6Construction

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

Section 5.7Conformity to Securities Laws

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

Section 5.8More Favorable Terms of Severance Programs Take Precedence

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

Section 5.9Data Privacy

     As a  condition  of the  grant  of the  Option,  Optionee  consents  to the
collection,  use,  processing and transfer of personal data as described in this
paragraph. Optionee understands that the Company and its Affiliates hold certain
personal  information about Optioneee,  including  Optionee's name, home address
and  telephone  number,   date  of  birth,  social  security  number  or  global
identification number, salary, nationality, job title, any shares of the Company
stock or the  Company  positions  held,  details  of all  options  or any  other
entitlement  to  shares  awarded,  canceled,   exercised,  vested,  unvested  or
outstanding in Optionee's  favor, for the purpose of managing and  administering
the Plan  ("Data").  Optionee  further  understands  that the Company and/or its
Affiliates will transfer Data amongst themselves as necessary for the purpose of
implementation, administration and management of Optionee's participation in the
Plan,  and  that the  Company  and/or  any of its  Affiliates  may each  further
transfer Data to any third parties assisting the Company in the  implementation,
administration  and  management  of the Plan.  Optionee  understands  that these
recipients may be located in the United States,  the European  Economic Area, or
elsewhere.  Optionee  authorizes  them to  receive,  possess,  use,  retain  and
transfer  the  Data,  in   electronic  or  other  form,   for  the  purposes  of
implementing,  administering and managing Optionee's  participation in the Plan,

                                       8

including  any  requisite  transfer  of  such  Data as may be  required  for the
administration  of the Plan and/or the subsequent  holding of shares of stock on
Optionee's  behalf to a broker or other third party with whom Optionee may elect
to deposit any shares of stock  purchased under the Plan.  Optionee  understands
that Optionee may, at any time, review Data, require any necessary amendments to
it or withdraw the consents herein in writing by contacting the Secretary of the
Company.  Withdrawal  of consent  may,  however,  affect  Optionee's  ability to
exercise or realize benefits from the Option.

                                       9
**FileNET Corporation**
                                                                  ID: 95-3757924

                                        **Form of Notice of Grant of Stock Options
                                                            and Option Agreement****Employee Name                                      Option Number:        xxxxxxx
Street Address                                     Plan:                 xxxxxxx
City, CA USA Zip Code**

Effective_______________, you have been  granted  a(n) [Incentive/Non-Qualified]
Stock Option to buy _________ shares of  FileNET Corporation (the Company) stock
at $____________ per share.

The total option price of the shares granted is $_______________.

Shares in each period will become fully vested on the date shown.

     **Shares****Vest Type****Full Vest****Expiration**

        xxx            xxxxxxxxx             xxxxxxxx               xxxxxxxx
        xxx            xxxxxxxxx             xxxxxxxx               xxxxxxxx

By your signature and the Company's  signature  below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the 2002 Incentive Award Plan and the Option Agreement, all of which are located
on and may be accessed via FileNET's Intranet, ***now***.

 
 FileNET Corporation                         Date

 
 Employee Name                               Date

                                                                   Date:
                                                                   Time:

                                       10
**Exhibit 10.14.2

                                                            Effective as of 2002

                               FILENET CORPORATION
                    NON-QUALIFIED 2002 STOCK OPTION AGREEMENT
                            FOR INDEPENDENT DIRECTORS

                              TERMS AND CONDITIONS**

     These *Terms and Conditions* constitute a part of the Stock Option Agreement,
concerning   certain  Options  granted  by  FileNET   Corporation,   a  Delaware
corporation  hereinafter  referred to as  "Corporation,"  to the director of the
Corporation  listed  on  the  Notice  of  Grant,   hereinafter  referred  to  as
"Optionee."  These Terms and Conditions and the Notice of Grant are collectively
referred to as the "Agreement."

     Recitals

     WHEREAS,  the Corporation wishes to carry out The 2002 Incentive Award Plan
of  FileNET  Corporation,  as the same may be  amended  from  time to time  (the
"Plan"), the terms of which are hereby incorporated by reference and made a part
of this Agreement; and

     WHEREAS, in order to provide such directors with a meaningful  incentive to
continue to serve as members of the  Corporation's  Board, the Plan provides for
the automatic  grant to the  Corporation's  Independent  Directors of Options to
purchase the Corporation's common stock over the period of such director's Board
service to the Corporation; and

     WHEREAS, the Optionee is an Independent Director of the Corporation;

     WHEREAS,  all  capitalized  terms in this Agreement  shall have the meaning
assigned to them in the Plan.

     Agreement

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

     1.   Grant of Option.   The  Corporation   hereby  irrevocable   grants  to
          Optionee,  as of the grant date  specifiedon  the Notice of Grant (the
          "Grant Date"), a Non-Qualified  Option to purchase up to the number of
          shares of the  Corporation's  Common Stock, par value $0.01 per share,
          specified on the Notice of Grant (the  "Option").  The exercise  price
          per share of Common  Stock  subject  to the Option is set forth on the
          Notice  of Grant,  which is the  average  of the high and low  selling

          price per share of Common Stock as of the Option Grant Date, and shall
          not be subject to commission or other charge.

     2.   Vesting.

          (a)  The Option shall vest 25% per year on each of the first,  second,
               third and fourth  anniversary of the Option Grant Date,  provided
               the Optionee  continues as an  Independent  Director on each such
               anniversary.

          (b)  Notwithstanding the foregoing:

               (i)  in the event of Termination of Directorship  due to death or
                    Permanent Disability,  the Option shall become automatically
                    100%  vested  and  exercisable  in full  upon  such  date of
                    Termination of Directorship; and

               (ii) in  the  event  of  a  Change  in   Control   or   Corporate
                    Transaction,  the Option  shall  become  automatically  100%
                    vested and  exercisable  in full upon such Change in Control
                    or upon the fifth day immediately preceding the consummation
                    of such Corporate Transaction.

          (c)  In no event  shall  any  portion  of the  Option  vest  following
               Optionee's Termination of Directorship.

          (d)  The  vesting  installments  provided  for in this  Section  2 are
               cumulative.  Each such installment that becomes exercisable shall
               remain  exercisable  until the Option terminates or expires under
               Section 3.

     3.   Option Term and Exercise Period.

          (a)  The Option shall have a term of ten (10) years  measured from the
               Option  Grant  Date and  shall  accordingly  expire,  and  become
               unexercisable  at the close of business on the Option  expiration
               date  specified  on the  Notice  of  Grant,  subject  to  earlier
               termination in accordance with the following paragraph (b).

          (b)  The Option shall terminate and may not be exercised to any extent
               by anyone as of the first to occur of the following events:

               (i)  The expiration of ten (10) years from the Option Grant Date;
                    or

              (ii)  The  expiration  of twelve  (12) months from the date of the
                    Optionee's Termination of Directorship for any reason.

             (iii)  The effective  date of a Corporate  Transaction,  unless the
                    Board  waives  this   provision  in  connection   with  such
                    transaction  and such waiver is consistent  with Rule 16b-3,
                    or unless the Option is, in connection  with such  Corporate
                    Transaction,  either  assumed by the  successor  or survivor

                                       2

                    corporation  (or parent or  subsidiary  thereof) or replaced
                    with a comparable right with respect to share of the capital
                    stock of the successor or survivor corporation (or parent or
                    subsidiary thereof).

          (c)  Upon the Termination of  Directorship,  the portion of the Option
               representing  shares  that  are not at  that  time  vested  shall
               immediately terminate and cease to be outstanding.

     4.   Limited Transferability.

          (a)  Except as may be permitted  pursuant to paragraph (b) below,  the
               Option shall be neither  transferable  nor assignable by Optionee
               other than by will or by the laws of descent and distribution and
               may be exercised  during  Optionee's  lifetime  only by Optionee.
               After the death of the Optionee,  any exercisable  portion of the
               Option may,  prior to the time when such portion  terminates  and
               becomes unexercisable under Section 3, be exercised by his or her
               personal representative or by any person empowered to do so under
               the deceased Optionee's will or under the then applicable laws of
               descent and distribution.

          (b)  Notwithstanding  paragraph (a) above,  the Option may be assigned
               in whole or in part during Optionee's  lifetime to the Optionee's
               spouse  in  accordance  with the  terms of a DRO,  and,  with the
               consent of the  Administrator,  the  Optionee  may  transfer  the
               Option to any one or more Permitted  Transferees,  subject to the
               following terms and conditions:

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

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

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

     5.   Corporate Transaction.  In the event of a Corporate Transaction,  that
          portion of the Option  representing  shares  that are not then  vested
          shall automatically become 100% vested so that the Option shall, as of
          five days prior to the effective date of such  Corporate  Transaction,
          become exercisable in full. Effective as of the Corporate Transaction,
          this Option shall terminate and cease to be exercisable, except to the
          extent the Option is assumed by the successor or survivor  corporation
          (or parent or subsidiary  thereof) or replaced with a comparable right
          with  respect  to  share of the  capital  stock  of the  successor  or
          survivor  corporation  (or  parent  or  subsidiary  thereof)  in  such

                                       3

          Corporate  Transaction,  or unless the Board waives this  provision in
          connection  with  such  Corporate   Transaction  and  such  waiver  is
          consistent with Rule 16b-3.

     6.   Change in Control.  In the event of a Change in Control,  that portion
          of  the  Option   representing   shares  that  are  not  vested  shall
          automatically  become 100% vested so that the Option shall,  as of the
          effective date of such Change in Control, become exercisable in full.

     7.   Manner of Exercising Option. All or a portion of an exercisable Option
          shall be deemed exercised upon delivery of all of the following to the
          Secretary of the Company or his or her designee:

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

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

          (c)  In the event  that the  Option  shall be  exercised  pursuant  to
               Section  4 by any  person or  persons  other  than the  Optionee,
               appropriate  proof of the  right of such  person  or  persons  to
               exercise the Option;

          (d)  Full cash  payment to the Company for the shares with  respect to
               which the Option, or portion thereof, is exercised.  However, the
               Administrator may, in its discretion, (i) allow payment, in whole
               or in part,  through the delivery of shares of Common Stock which
               have been owned by the  Optionee  for at least six  months,  duly
               endorsed  for transfer to the Company with a Fair Market Value on
               the date of delivery equal to the aggregate exercise price of the
               Option or exercised portion thereof; (ii) allow payment, in whole
               or in part,  through the surrender of shares of Common Stock then
               issuable  upon  exercise of the Option having a Fair Market Value
               on the date of Option  exercise  equal to the aggregate  exercise
               price of the Option or  exercised  portion  thereof;  (iii) allow
               payment, in whole or in part, through the delivery of property of
               any kind which constitutes good and valuable consideration;  (iv)
               allow  payment,  in whole or in part,  through a broker  cashless
               exercise program whereby the Optionee  delivers a notice that the
               Optionee  has  placed  a market  sell  order  with a broker  with
               respect to shares of Common Stock then  issuable upon exercise of
               the  Option,  and that the  broker  has  been  directed  to pay a
               sufficient portion of the net proceeds of the sale to the Company
               in satisfaction  of the Option exercise price,  and such proceeds
               is then made to the Company upon  settlement of such sale; or (v)
               allow  payment  through  any  combination  of  the  consideration
               provided in the foregoing  subparagraphs.  The  Administrator may
               also  permit  other  forms  of  payment  in  its   discretion  as
               authorized by the Plan; and

                                       4

          (e)  The  receipt by the  Company  of full  payment  for such  shares,
               including payment of any applicable withholding tax, which in the
               discretion   of  the   Administrator   may  be  in  the  form  of
               consideration  used by the  Optionee to pay for such shares under
               Section 7.

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

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

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

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

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

     9.   Stockholder Rights.  The  holder  of  the  Option  shall  not have any
          stockholder  rights  with  respect  to  the  shares  of  Common  Stock
          purchasable  upon  exercise of the Option until such person shall have
          exercised the Option,  paid the exercise price and  applicable  taxes,
          satisfies  all other  conditions  of  exercise  and become a holder of
          record of the purchased shares.

     10.  Adjustment in Option Shares.

          (a)  Should any  change be made to the  Common  Stock by reason of any
               stock split,  stock  dividend,  recapitalization,  combination of
               shares,   exchange  of  shares  or  other  change  affecting  the
               outstanding  Common  Stock as a class  without the  Corporation's
               receipt  of  consideration,  or  in  the  event  of  a  Corporate
               Transaction or Change in Control,  appropriate  adjustments shall
               be made to (i) the number and/or class of  securities  subject to
               this Option and (ii) the exercise  price in order to reflect such
               change and thereby preclude a dilution or enlargement of benefits
               hereunder.

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

                                       5

     11.  Successors and Assigns.  The provisions of this Agreement  shall inure
          to the  benefit  of,  and be binding  upon,  the  Corporation  and its
          successors and assigns and Optionee,  Optionee's assigns and the legal
          representatives, heirs and legatees of Optionee's estate.

     12.  Notices.  Any  notice  required  to  be  given  or  delivered  to  the
          Corporation  under the terms of this Agreement shall be in writing and
          addressed  to the  Corporation  at  its  principal  corporate  offices
          attention  Corporate  Secretary.  Any notice  required  to be given or
          delivered to Optionee shall be in writing and addressed to Optionee at
          the  address  of  record  indicated  on the  Notice of Grant or to any
          updated address  provided by the Optionee.  By a notice given pursuant
          to this Section 12, either party may  hereafter  designate a different
          address for notices to be given to him. Any notice that is required to
          be given to the Optionee shall,  if the Optionee is then deceased,  be
          given to the Optionee's personal representative if such representative
          has previously  informed the  Corporation of his status and address by
          written notice under this Section 12.

     13.  Construction.  This Agreement and the Option evidenced hereby are made
          and granted  pursuant to the automatic  Option grant program in effect
          under the Plan and are in all  respects  limited by and subject to the
          applicable terms of the Plan.

     14.  Governing Law. The interpretation, performance and enforcement of this
          Agreement  shall be  governed  by the laws of the State of  California
          without resort to that State's conflict-of-laws rules.

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

     16.  Data Privacy Consent.  As a  condition  of the  grant  of the  Option,
          Optionee consents to the collection,  use,  processing and transfer of
          personal  data as described in this  paragraph.  Optionee  understands
          that the Company and its Affiliates hold certain personal  information
          about Optioneee, including Optionee's name, home address and telephone
          number, date of birth, social security number or global identification
          number,  salary,  nationality,  job title,  any shares of the  Company
          stock or the  Company  positions  held,  details of all options or any
          other  entitlement to shares  awarded,  canceled,  exercised,  vested,
          unvested  or  outstanding  in  Optionee's  favor,  for the  purpose of
          managing  and  administering  the  Plan  ("Data").   Optionee  further
          understands  that the Company and/or its Affiliates will transfer Data
          amongst  themselves  as necessary  for the purpose of  implementation,
          administration and management of Optionee's participation in the Plan,
          and that the Company  and/or any of its  Affiliates  may each  further

                                       6

          transfer  Data to any  third  parties  assisting  the  Company  in the
          implementation,  administration  and management of the Plan.  Optionee
          understands that these recipients may be located in the United States,
          the European Economic Area, or elsewhere.  Optionee authorizes them to
          receive,  possess, use, retain and transfer the Data, in electronic or
          other  form,  for the  purposes  of  implementing,  administering  and
          managing Optionee's participation in the Plan, including any requisite
          transfer of such Data as may be required for the administration of the
          Plan and/or the  subsequent  holding of shares of stock on  Optionee's
          behalf to a broker or other third party with whom  Optionee  may elect
          to deposit  any  shares of stock  purchased  under the Plan.  Optionee
          understands that Optionee may, at any time,  review Data,  require any
          necessary  amendments to it or withdraw the consents herein in writing
          by contacting the Secretary of the Company. Withdrawal of consent may,
          however,  affect  Optionee's  ability to exercise or realize  benefits
          from the Option.

                                       7
**FileNET Corporation**
                                                                  ID: 95-3757924

                                        **Form of Notice of Grant of Stock Options
                                                            and Option Agreement****Employee Name                                      Option Number:        xxxxxxx
Street Address                                     Plan:                 xxxxxxx
City, CA USA Zip Code**

Effective_______________, you have been  granted  a(n) [Incentive/Non-Qualified]
Stock Option to buy _________ shares of  FileNET Corporation (the Company) stock
at $____________ per share.

The total option price of the shares granted is $_______________.

Shares in each period will become fully vested on the date shown.

     **Shares****Vest Type****Full Vest****Expiration**

        xxx            xxxxxxxxx             xxxxxxxx               xxxxxxxx
        xxx            xxxxxxxxx             xxxxxxxx               xxxxxxxx

By your signature and the Company's  signature  below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the 2002 Incentive Award Plan and the Option Agreement, all of which are located
on and may be accessed via FileNET's Intranet, ***now***.

 
 FileNET Corporation                         Date

 
 Employee Name                               Date

                                                                   Date:
                                                                   Time:

                                       8
```