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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 June 30, 2004

                                                        OR

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

  For the transition period from ________ to ___________

                               Commission file number: 00-15997

                                     **FILENET CORPORATION**
                   (Exact name of Registrant as specified in its charter)

 **Delaware****95-3757924**.
     (State or other jurisdiction of                            (I.R.S. Employer
      corporation or organization                              Identification No.)

               **3565 Harbor Boulevard, Costa Mesa, CA 92626**.
                   (Address of principal executive offices) (Zip code)

               **(714) 327-3400**.
                    (Registrant's telephone number including area code)

  Indicate by check mark whether the Registrant (1) has filed all reports required to be
  filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
  12 months (or for such shorter period that the Registrant was required to file such
  reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                      Yes  |X|  No |_|

  Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule
  12b-2 of the Securities Exchange Act of 1934:
                                                      Yes  |X|  No |_|

  As of August 5, 2004, there were 39,424,953 shares of the Registrant's common stock
  outstanding.

**FILENET CORPORATION****Index**

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

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

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

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

     Item 4.        Controls and Procedures........................................ 39

     **PART II.       OTHER INFORMATION**

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

     Item 4.        Submission of Matters to a Vote of Security Holders............ 39

     Item 6.        Exhibits and Reports on Form 8-K............................... 40

     **SIGNATURE**      ............................................................... 41

     **INDEX TO EXHIBITS**............................................................. 42

                                       2

PART I.  FINANCIAL INFORMATION

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

                                                                 June 30,    December 31,
                                                                    2004            2003  
  ASSETS
  Current assets:
    Cash and cash equivalents                                $   224,172     $   203,305
    Short-term investments available for sale                     57,790          32,286
    Accounts receivable, net                                      33,821          38,096
    Prepaid expenses and other current assets                     12,879          13,174
    Deferred income taxes                                          3,551           3,551 
    Total current assets                                         332,213         290,412

    Property, net                                                 25,597          26,922
    Long-term investments available for sale                      17,544          12,672
    Goodwill                                                      25,561          26,170
    Intangible assets, net                                         6,679           7,979
    Deferred income taxes                                         23,231          23,001
    Other assets                                                   3,260           4,692 

     Total assets                                            $   434,085     $   391,848 

  LIABILITIES AND STOCKHOLDERS' EQUITY
  Current liabilities:
    Accounts payable                                         $    11,526     $    11,006
    Accrued compensation and benefits                             23,456          27,648
    Customer deposits and advances                                 6,742           5,217
    Unearned maintenance revenue                                  60,288          40,691
    Other accrued liabilities                                     15,455          16,524 
      Total current liabilities                                  117,467         101,086

    Unearned maintenance revenue and other liabilities             3,208           1,614
    Commitments and contingencies (Note 11)

  Stockholders' equity:
    Preferred stock - $0.10 par value; 7,000,000 shares
      authorized; none issued and outstanding
    Common stock - $0.01 par value; 100,000,000 shares           254,743         234,025
      authorized; 40,464,950 issued and 39,366,950
      shares outstanding at June 30, 2004; and
      38,906,640 shares issued and 37,808,640 shares
      outstanding at December 31, 2003
    Retained earnings                                             70,255          64,098
    Accumulated other comprehensive income                         2,979           5,592
    Treasury stock, at cost; 1,098,000 shares                    (14,567)        (14,567)
    Net stockholders' equity                                     313,410         289,148 

      Total liabilities and stockholders' equity             $   434,085     $   391,848 *See accompanying notes to unaudited condensed consolidated financial statements.*

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

                                            Three Months Ended June 30,       Six Months Ended June 30,
                                                   2004           2003             2004           2003   .
 Revenue:

   Software                                  $   32,677     $   33,555       $   74,028     $   69,077
   Customer support                              47,072         41,760           92,342         81,156
   Professional services and education           14,337         11,802           27,214         23,933 
   Total revenue                                 94,086         87,117          193,584        174,166 

 Costs:
   Software                                       3,128          3,608            6,651          6,616
   Customer support                               9,942          9,968           20,234         20,539
   Professional services and education           11,154         10,335           21,992         21,415 
   Total cost of revenue                         24,224         23,911           48,877         48,570

     Gross Profit                                69,862         63,206          144,707        125,596

 Operating expenses:

   Sales and marketing                           39,198         34,856           80,759         69,255
   Research and development                      19,703         19,680           39,805         38,982
   General and administrative                     9,394          8,326           18,627         16,152 
   Total operating expenses                      68,295         62,862          139,191        124,389

 Operating income                                 1,567            344            5,516          1,207

 Other income, net                                1,066          1,620            1,993          2,665 

 Income before income taxes                       2,633          1,964            7,509          3,872

 Provision for income taxes                         474            512            1,352          1,084 

 Net income                                  $    2,159     $    1,452        $   6,157    $     2,788 

 Earnings per share:
   Basic                                     $     0.06     $     0.04        $    0.16    $     0.08
   Diluted                                   $     0.05     $     0.04        $    0.15    $     0.08

 Weighted-average shares outstanding:
   Basic                                         38,854         36,173            38,567       36,057
   Diluted                                       41,099         37,296            40,942       36,960

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

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

                                                     Three Months Ended             Six Months Ended
                                                            June 30,                     June 30,      .
                                                        2004       2003              2004       2003   .

 Net income                                        $   2,159   $   1,452         $   6,157   $   2,788 

 Other comprehensive income (loss):
   Foreign currency translation adjustments           (1,474)      3,363            (2,388)      5,360
 Unrealized losses on securities:
    Unrealized holding losses                           (241)        (28)             (225)        (38)

 Total other comprehensive income (loss)              (1,715)      3,335            (2,613)      5,322 

 Comprehensive income                              $     444   $   4,787         $   3,544   $   8,110 *See accompanying notes to unaudited condensed consolidated financial statements*.

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

                                                                     Six Months Ended
                                                                          June 30,         .

                                                                    2004             2003  .
Cash flows from operating activities:
 Net income                                                   $    6,157       $    2,788
 Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                                 8,338            9,937
     Loss on sale of property                                         12               28
     Provision for doubtful accounts                                  31               26
     Deferred income taxes                                          (230)           1,731
     Changes in operating assets and liabilities,
      net of the effects of acquisitions:
       Accounts receivable                                         3,848            8,918
       Prepaid expenses and other current assets                     252            1,212
       Accounts payable                                              606           (1,188)
       Accrued compensation and benefits                          (3,959)           1,633
       Customer deposits and advances                              1,540           (3,363)
       Unearned maintenance revenue                               21,536            9,965
       Income taxes payable                                        2,127             (808)
       Other                                                  $   (1,127)      $   (2,628)
 Net cash provided by operating activities                    $   39,131       $   28,251 
 Cash flows from investing activities:
 Capital expenditures                                             (6,137)          (5,030)
 Proceeds from sale of property                                       52               66
 Note receivable                                                     331                -
 Cash paid for acquisition                                             -           (8,073)
 Purchases of marketable securities                              (60,904)         (60,199)
 Proceeds from sales and maturities of marketable
  securities                                                      29,715           64,305 
 Net cash used in investing activities                        $  (36,943)      $   (8,931)

 Cash flows from financing activities:
 Proceeds from issuance of common stock                           20,481            4,187 
 Net cash provided by financing activities                    $   20,481       $    4,187 
 Effect of exchange rate changes on cash and cash
  equivalents                                                     (1,802)           3,669 
 Net increase in cash and cash equivalents                    $   20,867       $   27,176
 Cash and cash equivalents, beginning of year                    203,305          130,154 
 Cash and cash equivalents, end of period                     $  224,172       $  157,330 
 Supplemental cash flow information:
 Interest paid                                                $      25        $       32
 Income taxes paid/(refunded)                                 $    (798)       $    2,638
_____________________________________
   See Notes 4 and 10 for additional non-cash disclosures.
   *See accompanying notes to unaudited condensed consolidated financial statements*.

                                                 6

                               FILENET CORPORATION
              Notes To Condensed Consolidated Financial Statements
                                   (Unaudited)

1.   BASIS OF PRESENTATION

     The  accompanying   unaudited  interim  condensed   consolidated  financial
     statements of FileNet  Corporation (the "Company" or "FileNet") reflect all
     adjustments  (consisting  of normal  recurring  adjustments)  necessary  to
     present fairly the financial  position of the Company at June 30, 2004, the
     results of its operations,  its comprehensive operations and its cash flows
     for the  three  and six  months  ended  June  30,  2004 and  2003.  Certain
     information  and  footnote   disclosures  normally  included  in  financial
     statements have been condensed or omitted pursuant to rules and regulations
     of the Securities and Exchange Commission (the "SEC"), although the Company
     believes  that the  disclosures  in the  condensed  consolidated  financial
     statements  are  adequate  to  ensure  the  information  presented  is  not
     misleading.  These condensed  consolidated  financial  statements should be
     read in conjunction  with the consolidated  financial  statements and notes
     thereto  contained  in the  Company's  Annual  Report  on Form 10-K for the
     fiscal year ended  December  31, 2003 filed with the SEC on March 12, 2004.
     The  results of  operations  for the interim  periods  are not  necessarily
     indicative  of the  operating  results  for the year,  or any other  future
     period.

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

2.   NEW ACCOUNTING PRONOUNCEMENTS

          In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable
     Interest   Entities."  In  general,   a  variable   interest  entity  is  a
     corporation,  partnership,  trust,  or any other legal  structure  used for
     business  purposes  that  either (a) does not have  equity  investors  with
     voting rights or (b) has equity  investors  that do not provide  sufficient
     financial  resources  for the  entity to  support  its  activities.  FIN 46
     requires a variable interest entity to be consolidated by a company if that
     company  is subject  to a  majority  of the risk of loss from the  variable
     interest  entity's  activities  or  entitled  to receive a majority  of the
     entity's residual returns or both. The consolidation requirements of FIN 46
     apply  immediately to variable  interest entities created after January 31,
     2003. With respect to variable interest entities created before January 31,
     2003, in December 2003 the FASB issued FIN 46R, which,  among other things,
     revised  the  implementation  date to the  first  fiscal  years or  interim
     periods ending after March 15, 2004,  with the exception of Special Purpose
     Entities ("SPE").  The consolidated  requirements apply to all SPE's in the
     first fiscal year or interim  period  ending after  December 15, 2003.  The
     Company  has  determined  that it does not have  any  SPE's to which  these
     interpretations  apply.  The  adoption  of FIN  46R in  2004  has not had a
     material impact on the Company's consolidated financial statements.

          In May  2003,  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of both Liabilities and Equity."
     SFAS  No.  150  establishes  standards  for how an  issuer  classifies  and
     measures certain financial  instruments with  characteristics  of both debt
     and equity and requires an issuer to classify the following  instruments as
     liabilities in its balance sheet:

     o    a  financial   instrument  issued  in  the  form  of  shares  that  is
          mandatorily  redeemable and embodies an unconditional  obligation that
          requires  the  issuer  to redeem it by  transferring  its  assets at a
          specified  or  determinable  date or upon an event  that is certain to
          occur;

                                       7

     o    a financial instrument, other than an outstanding share, that embodies
          an obligation to repurchase the issuer's equity shares,  or is indexed
          to  such  an  obligation,  and  requires  the  issuer  to  settle  the
          obligation by transferring assets; and

     o    a financial instrument that embodies an unconditional  obligation that
          the issuer  must  settle by  issuing a  variable  number of its equity
          shares if the  monetary  value of the  obligation  is based  solely or
          predominantly  on (1) a  fixed  monetary  amount,  (2)  variations  in
          something other than the fair value of the issuer's equity shares,  or
          (3) variations  inversely  related to changes in the fair value of the
          issuer's equity shares.

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

          For  public  entities,  SFAS  No.  150 is  effective  for  mandatorily
     redeemable  financial  instruments  entered into or modified  after May 31,
     2003 and is effective for all other  financial  instruments as of the first
     interim period beginning after June 15, 2003.

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

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

3.   STOCK BASED COMPENSATION

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

                                       8

                                                           Three Months Ended         Six Months Ended
                                                                June 30,                   June 30,      .

 *(In thousands, except per share amounts)*      2004          2003          2004         2003  .

 Net income, as reported                             $   2,159     $   1,452     $   6,157    $   2,788

 Deduct:  Total stock-based employee
 compensation expense determined under
 fair value based method for all awards, net
 of related tax effects                                 (2,137)       (2,062)       (3,676)      (4,101) 

 Pro forma net income (loss)                         $      22     $    (610)    $   2,481    $  (1,313)

 Earnings (loss) per share:
 Basic earnings per share - as reported              $     .06     $     .04     $      .16   $    .08
 Basic earnings (loss) per share - pro forma               .00          (.02)           .07       (.04)

 Diluted earnings per share - as reported                  .05           .04            .15        .08
 Diluted earnings (loss) per share - pro forma       $     .00     $    (.02)    $      .06   $   (.04)

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

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

                                    Three Months Ended           Six Months Ended
                                           June 30,                    June 30,      .

                                      2004        2003            2004         2003  .

     Expected life (in years)        5.28         5.0            5.28         5.0
     Expected volatility               67%         64%       51% - 67%         66%
     Risk free interest rates        3.72%       3.31%           3.40%       3.56%
     Expected dividend                  0%          0%              0%          0%

4.   ACQUISITIONS

          On April 2, 2003, the Company  completed a stock purchase  acquisition
     of 100% of Shana  Corporation  ("Shana"),  an electronic  forms  management
     company.  This strategic  acquisition provided technology and experience to
     expand the Company's  Electronic  Content  Management ("ECM") offering with
     Enterprise Forms Management  capability,  which contributed to the purchase
     price and resulted in  goodwill.  The  purchase  price for the  acquisition
     consisted of $8.55 million in cash consideration, less $938,000 of acquired
     cash,  plus  $184,000  in  acquisition   expenses  and  $277,000  paid  for
     Non-Compete Agreements.

                                       9

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

          *(In thousands)*.
          Shana Corporation                                  April 2, 2003 .

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

          The Company allocated the purchase price for this acquisition based on
     fair value.  Statement of Financial  Accounting Concepts No. 7 defines fair
     value as the  amount  at which an asset (or  liability)  could be bought or
     sold in a current transaction between willing parties,  that is, other than
     in a forced or liquidation sale.

          The  acquisition of Shana resulted in acquired  technology,  technical
     manuals and design documents, and customer maintenance relationships. Since
     Shana had recently  completed Version 4.1 of its eForms product,  there was
     no  in-process  research  and  development  underway  at  the  time  of the
     acquisition.  Shana's  technology  manuals  and  design  documents  are the
     "roadmaps"  for the  eForms  technology  and will be used by FileNet in its
     product  development.  Recurring  maintenance  revenues  are  expected  and
     estimable for Shana's  customers  based on the older and newer  versions of
     eForms technology.  The acquired technology of $4.0 million,  the technical
     manuals and design  documents  of $600,000,  and the  customer  maintenance
     relationships of $800,000 were assigned a useful life of five years.

          Although  the  goodwill  stemming  from the Shana  stock  purchase  is
     non-deductible  for Canadian tax purposes,  a Section 338(g)  election will
     result in the  reduction  of taxable  income for U.S.  tax purposes on this
     transaction by treating goodwill as tax deductible

5.   GOODWILL AND PURCHASED INTANGIBLE ASSETS

          In acquisitions  accounted for using the purchase method,  goodwill is
     recorded as the  difference,  if any,  between the aggregate  consideration
     paid  for an  acquisition  and  the  fair  value  of the net  tangible  and
     identified  intangible  assets  acquired.   Goodwill  and  indefinite  life
     intangibles  are not  amortized,  but are  reviewed at least  annually  for
     possible  impairment.   Intangible  assets  with  definite  lives  must  be
     amortized over their estimated useful lives.

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

                                       10
.
     *(In thousands)*                         Balance at         Foreign       Balance at
                                           December 31,       Currency          June 30,
     ***Goodwill by Reporting Segment***               2003          Change             2004 .

      Software                             $    15,144     $     (353)     $    14,791
      Customer Support                           5,858           (136)           5,722
      Professional Services and
        Education                                5,168           (120)           5,048

           Total                           $    26,170     $     (609)     $    25,561 

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

          Intangible assets subject to amortization consist of the following:

                                              June 30, 2004                                December 31, 2003           .
*(In thousands)*                    Gross       Accumulated                        Gross      Accumulated
***Intangible Assets***   Asset      Amortization          Net           Asset     Amortization           Net  .

Acquired technology and
other intangibles             $   9,700           (3,181)    $   6,519      $   10,020           (2,272)    $   7,748
Non-compete agreements              304             (144)          160             317              (90)          227
Patents                              28              (28)            -              28              (24)            4      Total                    $  10,032           (3,353)    $   6,679      $   10,365           (2,386)    $   7,979 

          Acquired  technology  is being  amortized  over a useful  life of five
     years,  patents with a two year life are fully  armortized and  non-compete
     agreements are being amortized over three years.  Amortization  expense for
     intangible  assets was  $513,000  for the three  months ended June 30, 2004
     compared  to  $494,000  for the  comparable  period  in 2003.  Amortization
     expense for amortizing  intangible assets was $1,040,000 for the six months
     ended June 30, 2004 compared to $677,000 for the comparable period in 2003.

          Estimated  future  amortization  expense  (excluding  foreign exchange
     effect) of purchased intangible assets as of June 30, 2004 is as follows:

           *(In thousands)*.
           **Fiscal Year                      Amount**.
               *(Remainder)* 2004                 $     1,028
                           2005                       2,024
                           2006                       1,958
                           2007                       1,373
                           2008                         296      $     6,679 

                                       11

6.       EARNINGS PER SHARE

          Basic  earnings  per share is computed by  dividing net income for the
     period by the  weighted-average  number of common shares outstanding during
     the period.  Diluted  earnings per share is computed by dividing net income
     by the  weighted-average  number  of  common  shares  outstanding  plus the
     dilutive  effect of outstanding  stock options,  shares  issuable under the
     employee stock  purchase plan and restricted  stock issued to key executive
     management  using the treasury  stock method.  The number of  anti-dilutive
     options  excluded  from the EPS  calculation  for the three  and  six-month
     period ended June 30, 2004 were 2,245,812 and 2,375,506 shares, compared to
     1,123,000  and 903,000 for the  comparable  periods in 2003.  The following
     table sets forth the  computation  of basic and diluted  earnings per share
     for the three and six-month period ended June 30, 2004 and 2003:

                                                 Three Months Ended               Six Months Ended
                                                       June 30,                        June 30,         .

*(In thousands, except per share amounts)*       2004            2003            2004            2003  .

 Net Income                                  $   2,159       $   1,452       $   6,157        $   2,788

 Shares used in computing                       38,853          36,173          38,567          36,057
   basic earnings per share
 Dilutive effect of stock plans                  2,246           1,123           2,376             903 
 Shares used in computing
   diluted earnings per share                   41,099          37,296          40,943          36,960

 Earnings per basic share                    $    0.06       $    0.04       $    0.16        $    0.08
 Earnings per diluted share                  $    0.05       $    0.04       $    0.15        $    0.08

7.        ACCUMULATED OTHER COMPREHENSIVE INCOME

          Accumulated other  comprehensive  income for the six months ended June
     30, 2004 is comprised of the following:

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

     Balance, December 31, 2003             $     5,645           $     (53)           $     5,592
     Six month period changes                    (2,388)               (225)                (2,613) 
     Balance, June 30, 2004                 $     3,257           $    (278)           $     2,979

                                                          12

8.       OPERATING SEGMENT DATA

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

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

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

          The accounting  policies of the Company's  operating  segments are the
     same as  those  described  in Item 2 -  Critical  Accounting  Policies  and
     Estimates - except that the disaggregated financial results of the segments
     reflect allocation of certain functional expense categories consistent with
     the basis and manner in which Company management  internally  disaggregates
     financial  information  for the  purpose of  assisting  in making  internal
     operating decisions. The Company evaluates performance based on stand-alone
     segment operating income. Because the Company does not evaluate performance
     based on the  return  on  assets or on  interest  income  at the  operating
     segment  level,  assets and interest  income are not tracked  internally by
     segment. Therefore, such information is not presented.

                                       13

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

                                              Three months ended                       Six months ended
(In thousands)                                      June 30,                                June 30,        .

                                             2004              2003                2004               2003  .

Software
  Revenue                             $    32,677       $    33,555          $    74,028       $    69,077
  Operating loss                          (22,739)          (16,220)             (38,600)          (29,221)

Customer Support
  Revenue                             $    47,072       $    41,760          $    92,342       $    81,156
  Operating income                         22,906            17,130               42,460            31,916

Professional Services and
  Education
  Revenue                             $    14,337       $    11,802          $    27,214       $    23,933
  Operating income (loss)                    1400             (566)                1,656           (1,488)

Total
  Revenue                             $    94,086       $    87,117          $   193,584       $   174,166
  Operating income                          1,567               344                5,516             1,207

9.       STOCK OPTIONS

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

     .
                                                                                       Weighted
                                                               Number of                Average
                                                                 Options         Exercise Price .

     Balance, March 31, 2004                                   7,394,641             $    17.68

          Granted (weighted-average fair value of $13.91)        161,000                  27.23
          Exercised                                             (532,668)                 14.22
          Canceled                                               (66,977)                 19.79 
     Balance, June 30, 2004                                    6,955,996             $    18.08 

                                                        14

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

 .
 **Options Outstanding                                              Options Exercisable**.

                                                   Weighted
                                                    Average
                                                  Remaining    Weighted Average                        Weighted Average
 Range of Exercise             Number           Contractual            Exercise             Number             Exercise
             Price        Outstanding           Life (Years)              Price        Exercisable                Price  
 $     1.39 - 9.50            806,105                  3.43          $     8.01            801,524           $     7.99
      9.75 - 12.86          1,134,584                  7.38               12.35            561,575                11.99
     12.97 - 14.19          1,105,559                  6.93               13.47            636,666                13.54
     14.39 - 18.45          1,113,864                  6.91               16.90            732,553                16.90
     19.53 - 25.00          1,201,436                  6.03               22.84          1,082,147                22.98
     25.28 - 41.84          1,594,448                 8.09               27.99            482,153                28.81 $    1.39 - 41.84          6,955,996                  6.72          $    18.08          4,296,618          $     16.97 

10.      ISSUANCE OF RESTRICTED STOCK

          The Company awarded 132,500 shares of restricted  stock to ten members
     of the senior  management  team on March 9, 2004. This award was made under
     the 2002  Incentive  Award  Plan.  These  shares of  restricted  stock vest
     December 31,  2008,  and include a feature that allows the stock to vest on
     an accelerated basis provided certain performance targets are achieved.

          These shares were valued at  approximately  $3.6 million  based on the
     March 9, 2004  closing  price of $27.47 per share.  The grant value of $3.6
     million is  recorded  in the  equity  section  of the  balance  sheet as an
     increase  in  common   stock  and  a   contra-equity   offset  to  deferred
     compensation. Expense related to the shares is amortized on a straight-line
     basis through December 31, 2008.  Recognition of expense may be accelerated
     if it becomes  probable that certain  performance  targets will be achieved
     that trigger  accelerated  vesting of the restricted shares.  Approximately
     $188,407 and $233,956 of compensation  expense were recognized in the three
     and six-month periods ended June 30, 2004, with no acceleration.

11.      COMMITMENTS AND CONTINGENCIES

         **Leases**

          The Company leases its corporate offices,  sales offices,  development
     and  manufacturing  facilities,  and other equipment  under  non-cancelable
     operating leases,  some of which have renewal options and generally provide
     for  escalation of the annual rental  amount.  Amounts  related to deferred
     rent are recorded in other accrued liabilities on the consolidated  balance
     sheet.  Future  annual  minimum  lease  payments  under all  non-cancelable
     operating  leases with an initial term in excess of one year as of June 30,
     2004 were as follows:

                                       15
*(In thousands)*.
        2004 (remaining 6 months)                       $       6,295
        2005                                                    8,514
        2006                                                   10,882
        2007                                                    9,920
        2008                                                    8,670
        2009                                                    6,322
        Thereafter                                              5,844 Total                                           $      56,447 **Product Warranties**

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

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

         *(In thousands)*                               2004              2003 .

          Beginning balance at January 1          $    479          $    728
            Additions                                  578               396
            Deductions                                (693)             (636)Ending balance at June 30               $    364          $    488 **Guarantees and Indemnities**

          The Company has made guarantees and  indemnifications,  under which it
     may be required to make payments to a guaranteed or indemnified  party,  in
     relation  to  certain  transactions.  In  connection  with the sales of its
     products,  the Company provides  intellectual  property  indemnities to its
     customers.  Guarantees  and  indemnities  to customers in  connection  with
     product  sales and service  generally  are subject to limits based upon the
     amount of the related  product sales or service.  Payment by the Company is
     conditioned  upon the other party filing a claim  pursuant to the terms and
     conditions of the  agreement.  The Company may challenge this claim and may
     also have recourse  against third parties for certain  payments made by the
     Company.  Predicting  the  maximum  potential  future  payment  under these
     agreements  is not  possible  due to the  unique  facts  and  circumstances
     involved  with  each  agreement.  Historically,  the  Company  has  made no
     payments under these agreements.

          In  connection  with  certain  facility  leases and other  performance
     guarantees,  the Company has  guaranteed  payments on behalf of some of its
     domestic and foreign subsidiaries.  To provide subsidiary  guarantees,  the
     Company  obtains  unsecured bank  guarantees  from local banks.  These bank
     guarantees  totaled an equivalent of approximately  $2.5 million as of June
     30, 2004. Approximately $1.5 million was issued in local currency in Europe
     and Asia, while the balance was issued in the United States.  Approximately
     $0.6 million of the $2.5 million is secured by cash deposit.

                                       16

          The Company  indemnifies  its  directors  and  officers to the maximum
     extent permitted under the laws of the State of Delaware.

          The  Company  has not  recorded a  liability  for the  guarantees  and
     indemnities described above in the accompanying consolidated balance sheet,
     as the estimated fair value of these items is de minimis. Also, the maximum
     amount of potential  future  payments under such guarantees and indemnities
     is not  determinable,  other than as described above. The Company's product
     warranty  liability as of June 30, 2004 is disclosed in this item under the
     heading "Product Warranties."

         **Legal Proceedings**

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

12.      FOREIGN CURRENCY TRANSACTIONS

          As of  June  30,  2004,  the  Company  had  forward  foreign  exchange
     contracts outstanding totaling approximately $1.4 million in 10 currencies.
     These  contracts  were opened on the last  business  day of the quarter and
     mature within three months.  Accordingly,  the fair value of such contracts
     is zero at June 30, 2004.

13.      INCOME TAXES

          The Company's combined federal, state and foreign annual effective tax
     rate for the three  months  ended June 30, 2004 is 18%  compared to 26% for
     the comparable period in 2003. The Company's  combined  federal,  state and
     foreign annual effective tax rate for the six months ended June 30, 2004 is
     18% compared to 28% for the  comparable  period in 2003.  The provision for
     income taxes differs from the tax computed at the federal  statutory income
     tax rate due primarily to earnings considered as permanently  reinvested in
     foreign  operations  with lower tax rates and  reductions  in the  domestic
     deferred tax valuation  allowance as net operating loss  carryforwards were
     utilized.  The  decreased  tax rate in six months  ended June 30,  2004 was
     primarily due to the mix of income earned by domestic operations versus the
     foreign subsidiaries.

          The Company is continually  assessing the valuation  allowance related
     to its deferred tax assets.  As of June 30, 2004, the Company has a net tax
     deferred asset of  approximately  $26.6 million and valuation  allowance of
     approximately  $24.3 million.  The Company will continue  weighing  various
     factors throughout the year to assess the need for any valuation allowance.
     Recoverability  of the  deferred  tax  assets  is  dependent  on  continued
     profitability from operations,  as well as the geographic region generating
     the profits.  Should the Company's level of domestic profitability continue
     at the current rate, it would likely remove the entire valuation  allowance
     later in 2004. A one-time, non-cash benefit would be realized by decreasing
     tax expense (causing an increase in earnings) by approximately $7.0 million
     to  $9.0  million.   Additionally,   a  non-cash   increase  to  additional
     paid-in-capital of approximately $9.0 million would be recorded.

                                       17

14.      RELATED-PARTY TRANSACTIONS

          In July 2001,  the  Compensation  Committee of the Company's  Board of
     Directors  (the "Board")  entered into  discussions  with Lee Roberts,  the
     Company's Chief Executive Officer,  regarding a secured loan by the Company
     to Mr.  Roberts for $1.9 million to enable him to purchase a home in Orange
     County,  California. The note bears interest at 2.89% per annum. On June 5,
     2002, the Board approved the loan.

          Mr.  Roberts is current  with all  payments  and  obligations  of this
     agreement.  Mr. Roberts made two payments,  of $37,000 in February 2003 and
     $53,000 in February 2004, toward the accrued interest balance in accordance
     with the terms and conditions of the loan agreement.  Mr. Roberts also made
     two payments in December 2003 and June 2004 of  approximately  $294,000 and
     $331,000, respectively,  toward the principal loan balance of $1.9 million.
     As of June 30, 2004, the outstanding balance on the secured note receivable
     from Mr. Roberts is  approximately  $1.275 million and is included in other
     assets on the  consolidated  balance sheet. The accrued interest balance as
     of June 30, 2004 was approximately $22,000.  Please reference Note No. 4 of
     our  December  31, 2003 Report  10-K filing for  additional  details of the
     terms and conditions of this loan.

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

          This Quarterly Report on Form 10-Q contains forward-looking statements
     within the meaning of the Private Securities Litigation Reform Act of 1995,
     Section 21E of the  Securities  and Exchange Act of 1934,  as amended,  and
     Section 27A of the  Securities  Act of 1933, as amended,  and is subject to
     the safe harbors  created by those sections.  Words such as  "anticipates,"
     "expects,"  "intends," "plans,"  "believes,"  "seeks,"  "estimates," "may,"
     "will" and variations of these words or similar expressions are intended to
     identify forward-looking statements. In addition, any statements that refer
     to expectations, projections or other characterizations of future events or
     circumstances,  including any underlying  assumptions,  are forward-looking
     statements.  These statements are not guarantees of future  performance and
     are subject to risks,  uncertainties  and assumptions that are difficult to
     predict.   Therefore,  our  actual  results  could  differ  materially  and
     adversely  from those  expressed  in any  forward-looking  statements  as a
     result of various factors. We undertake no obligation to revise or publicly
     release the results of any revisions to these  forward-looking  statements.
     Readers should carefully review the risk factors  described below under the
     heading  "Risk  Factors  That  May  Affect  Future  Results"  and in  other
     documents  we file  from  time to time  with the  Securities  and  Exchange
     Commission,  including  our Annual  Report on Form 10-K for the fiscal year
     ended  December 31,  2003.  Our filings  with the  Securities  and Exchange
     Commission, including our Annual Reports on Form 10-K, Quarterly Reports on
     Form 10-Q,  Current  Reports on Form 8-K and  amendments to those  filings,
     pursuant  to Sections  13(a) and 15(d) of the  Securities  Exchange  Act of
     1934,  are available free of charge at  www.filenet.com,  when such reports
     are available at the Securities and Exchange Commission Web site.

         **Overview**

          We develop, market, sell and support a software platform and framework
     for Enterprise Content Management.  Enterprise Content Management,  or ECM,
     refers to the broad range of functions used by  organizations of all types,
     including  businesses and governmental  agencies,  to control and track the
     information,   or  content,   that  is  important  to  the   organization's
     operations, whether that information is used internally, such as sales data
     or product  specifications,  or  externally,  such as content  provided  to
     customers  through a Web site. The content our software  manages,  commonly
     called unstructured  content,  includes,  but is not limited to: Web pages,

                                       18

     word processing documents,  spreadsheets,  HTML, XML, PDF, document images,
     email messages and other electronic content.  Our software offers customers
     the ability to  configure,  design,  build and deploy ECM solutions to meet
     the needs of their  particular  business or  organization.  These solutions
     allow customers to manage content throughout their organizations,  automate
     and streamline their business processes,  and provide the broad-spectrum of
     connectivity needed to support their critical and everyday decision making.

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

         Software

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

         Services and Support

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

         Professional Services and Education

          Our worldwide  professional services organization provides consulting,
     development,   architecture  and  other  technical  services  and  training
     services to our licensed  customers and  authorized  ValueNet  Partners and
     Global System  Integrators.  These services are provided  through  in-house
     employees  and  through a network  of  qualified  partners.  Our  worldwide
     professional  services  organization offers a comprehensive  methodology to
     architect,  install,  integrate,  customize and deploy our solutions. These

                                       19

     services range from the management of  large-scale  implementations  of our
     products to prepackaged  standard  services such as software  installation,
     but do not include modifications to the standard software.  Our educational
     curriculum includes training courses for end users,  application developers
     and system administrators through media-based and instructor-led training.

         Research and Development

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

     **Critical Accounting Policies and Estimates**

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

          ***Revenue Recognition***. FileNet accounts for the licensing of software in
     accordance with the American Institute of Certified  Accountants  ("AICPA")
     Statement of Position  ("SOP") 97-2,  "Software  Revenue  Recognition."  We
     enter into contracts for the sale of our products and services.  Certain of
     these contracts  relate to single  elements and contain  standard terms and
     conditions,   while  other   agreements   contain   multiple   elements  or
     non-standard  terms and conditions.  Contract  interpretation  is sometimes
     required to determine the appropriate  accounting,  including how the price
     should be allocated  among the  deliverable  elements and when to recognize
     revenue.

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

          For arrangements with multiple  elements,  we allocate revenue to each
     element  of a  transaction  based  upon its fair  value  as  determined  in
     reliance on vendor specific  objective  evidence using the residual method.
     This evidence of fair value for all elements of an  arrangement is based on
     the  normal  pricing  and  discounting  practices  for those  products  and
     services when sold  separately.  If fair value of any  undelivered  element
     cannot be determined  objectively,  we defer the revenue until all elements
     are  delivered,  services  have  been  performed  or until  fair  value can
     objectively be determined.

                                       20

          Customer  support  contracts  are  renewable  on an  annual  basis and
     provide after-sale  support for our software,  as well as software upgrades
     under our right to new versions program, on a when-and-if-available  basis.
     Revenue from post-contract  customer support is recognized ratably over the
     term of the arrangement, which is typically 12 months.

          Professional    services    revenue   consists   of   consulting   and
     implementation  services provided to end users of our software products and
     technical  consulting  services  provided  to  our  resellers.   Consulting
     engagements  average from one to three months.  Revenue from these services
     and from training  classes is recognized as such services are delivered and
     accepted by the  customer.  Professional  services are not required for the
     software to function.  We do not make changes to the standard software code
     in the field.

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

          ***Goodwill***. Goodwill is recorded at cost and is not amortized.  Goodwill
     is tested for  impairment at least annually and written down when impaired.
     Effective  the  first day of July of each  year,  goodwill  is  tested  for
     impairment by  determining  if the carrying  value of each  reporting  unit
     exceeds its fair value. We also  periodically  evaluate  whether events and
     circumstances  have occurred in between  annual testing dates that indicate
     the  carrying  value of goodwill  may not be  recoverable.  We performed an
     impairment  analysis as of July 1, 2003 in  accordance  with SFAS 142.  The
     results  indicated  there was no impairment of goodwill in any of the three
     reporting  units.  As of June 30, 2004,  there have been no  indicators  of
     impairment, and no impairment of goodwill has been recognized. If estimates
     change, a materially different impairment conclusion could result.

          ***Long-Lived Assets***. Property, plant and equipment and intangible assets
     are recorded at cost less accumulated  depreciation or  amortization.  They
     are amortized using the straight-line method over estimated useful lives of
     generally  three to five  years.  The  determination  of  useful  lives and
     whether or not these  assets are  impaired  involves  judgment.  Long-lived
     assets  are  reviewed  for  impairment  whenever  events  or  circumstances
     indicate that the carrying amount of such assets may not be recoverable. We
     evaluate the carrying value of long-lived  assets and certain  identifiable
     intangible assets for impairment of value based on undiscounted future cash
     flows resulting from the use of the asset and its eventual disposition.  If
     impairment were indicated, we would be required to write the related assets
     down to their fair  values.  While we have not  experienced  impairment  of
     intangible assets in prior periods, we cannot guarantee that there will not
     be impairment in the future.

                                       21
***Deferred  Income  Taxes***.  Deferred  income  taxes  reflect the net tax
     effects of temporary differences between the carrying amounts of assets and
     liabilities  for  financial  reporting  purposes  and the amounts  used for
     income tax purposes. We maintain a valuation allowance against a portion of
     the deferred tax asset (related to domestic  operations) due to uncertainty
     regarding  the  future  realization  based on  historical  taxable  income,
     projected  future taxable income,  and the expected timing of the reversals
     of existing temporary differences. If we operate at a loss or are unable to
     generate sufficient future taxable income, we could be required to increase
     the  valuation  allowance  against  all  or a  significant  portion  of our
     deferred tax assets,  which would result in a  substantial  increase to our
     effective  tax rate and could  result in a material  adverse  impact on our
     operating  results.  Conversely,  if we continue  to  generate  profits and
     ultimately  determine that it is more likely than not that all or a portion
     of the  remaining  deferred  tax assets will be  utilized to offset  future
     taxable  income,  the valuation  allowance could be decreased or eliminated
     all together,  thereby resulting in a substantial temporary decrease to our
     effective tax rate and an increase to additional paid-in capital.

          We are continually  assessing the valuation  allowance  related to our
     deferred tax assets.  As of June 30, 2004, we have a net tax deferred asset
     of  approximately  $26.8 million and valuation  allowance of  approximately
     $24.3 million.  We will continue  weighing  various factors  throughout the
     year to assess the need for any valuation allowance.  Recoverability of the
     deferred  tax  assets  is  dependent   on  continued   profitability   from
     operations, as well as the geographic region generating the profits. Should
     our level of domestic  profitability continue at the current rate, we would
     likely  remove  the  entire  valuation  allowance  later in 2004.  We would
     realize a one-time, non-cash benefit by decreasing our tax expense (causing
     an increase in earnings)  by  approximately  $7.0 million to $9.0  million.
     Additionally,   we  would   record  a  non-cash   increase  to   additional
     paid-in-capital of approximately $9.0 million.

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

                                       22
**Results of Operations**

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

                                                     Three Months Ended                   Six Months Ended
                                                          June 30,                            June 30,       .

                                                    2004            2003              2004             2003  .

Revenue:
   Software                                         34.8%           38.5%             38.2%            39.7%
   Customer support                                 50.0            48.0              47.7             46.6
   Professional services and education              15.2            13.5              14.1             13.7 
Total Revenue                                      100.0           100.0             100.0            100.0

Cost of revenue:
   Software                                          3.3             4.1               3.4              3.8
   Customer support                                 10.5            11.4              10.4             11.8
   Professional services and education              11.9            11.9              11.4             12.3 
      Total cost of revenue                         25.7            27.4              25.2             27.9 
Gross Profit                                        74.3            72.6              74.8             72.1

Operating expenses:
Sales and marketing                                 41.7            40.0              41.7             39.8
Research and development                            20.9            22.6              20.6             22.4
General and administrative                          10.0             9.6               9.6              9.2 
      Total operating expenses                      72.6            72.2              71.9             71.4 
Operating income                                     1.7              .4               2.9               .7
Other income, net                                    1.1             1.9               1.0              1.5 
Income before income tax                             2.8%            2.3%              3.9%             2.2%

                                                                       23
**Revenue**

          As more fully discussed below,  total revenue increased by 8.0% in the
     quarter  ended  June  30,  2004  compared  to the same  period  in 2003 and
     increased 11.1% in the six-month period ended June 30, 2004 compared to the
     same  period in 2003.  We believe  that the  increase  in total  revenue is
     attributable  to an increase in the growth of  unstructured  content within
     our customer base creating a demand for our products and services to manage
     this content and automate it for use in their business processes.

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

**Revenue by Geography**

                                            Three Months Ended                                Six Months Ended
                                                 June 30,                                         June 30,                 .
                                                             % Increase/                                       % Increase/
*(In thousands)*       2004          2003       decrease               2004           2003        decrease  .

Total United States Revenue     $   66,288     $   57,708         14.9%         $  134,288     $  117,165           14.6%

Europe, Middle East and Africa      22,225         23,521         (5.5%)            47,542         45,655            4.1%
Canada, Latin America and Asia       5,573          5,888         (5.3%)            11,754         11,346            3.6%
Total International Revenue         27,798         29,409         (5.5%)            59,296         57,001            4.0%

Total Revenue                   $   94,086     $   87,117          8.0%         $  193,584     $  174,166           11.1%

United States Revenue                 70.5%          66.2%                            69.4%          67.3%
International Revenue                 29.5%          33.8%    30.6%          32.7%
Total Revenue Contribution           100.0%         100.0%                           100.0%         100.0%

          Revenue  generated in the United States grew by 14.6% in the first six
     months  of 2004  compared  to the same  period  in 2003 and by 14.9% in the
     second  quarter of 2004 over the  comparable  prior year  quarter.  As more
     fully  discussed  below,  this increase is primarily due to the increase in
     service  revenue.  The revenue  growth in the United  States was  partially
     offset by  reduced  international  revenue  in the  second  quarter of 2004
     compared to the same quarter a year ago.  International revenue represented
     approximately 31% of total revenue in the first six months of 2004 compared
     to  approximately  33% for the same six months in 2003. We believe the same
     content  management  factors  mentioned above drive  international  revenue
     growth in the long term and are not regional in nature,  but are subject to
     minor periodic fluctuations like those experienced in the second quarter of
     2004.  We  expect   international   revenue  to  continue  to  represent  a
     significant  opportunity  for us. However,  international  revenues will be
     adversely  affected if the U.S.  dollar  strengthens  against certain major
     international currencies or if international economic conditions weaken.

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

         **Revenue by Reporting Segment**

                                            Three Months Ended                               Six Months Ended
                                                 June 30,                                        June 30,                  .
                                                             % Increase/                                       % Increase/
*(In thousands)*   2004             2003     (decrease)           2004              2003       (decrease) .

Software                      $   32,677       $   33,555         (2.6%)     $   74,028       $   69,077             7.2%
Customer Support                  47,072           41,760         12.7%          92,342           81,156            13.8%
Professional Services and
Education                         14,337           11,802         21.5%          27,214           23,933            13.7%
Total Revenue                 $   94,086       $   87,117          8.0%      $  193,584       $  174,166            11.1%

Software                            34.7%            38.5%        (3.8)%           38.2%            39.7%           (1.4)%
Customer Support                    50.0%            47.9%         2.1%            47.7%            46.6%            1.1%
Professional Services and
Education                           15.3%            13.6%         1.7%            14.1%            13.7%            0.3%
Total Revenue Contribution         100.0%           100.0%                        100.0%           100.0%

          ***Software***.  Software revenue consists of fees earned from the licensing
     of our software  products to our customers.  Software revenue  decreased by
     2.6% in the  three-month  period ended June 30, 2004,  compared to the same
     period in 2003,  primarily  attributable  to a small decrease in demand for
     our software  products during the second quarter of 2004 and delays in some
     customer procurement cycles. However, due to higher software revenue in the
     first quarter of 2004,  software revenue increased by 7.2% in the six-month
     period ended June 30, 2004  compared to the same period in 2003. We believe
     spending on enterprise  content  management and business process management
     software  will be a priority  in the near term,  but is subject to customer
     buying patterns that can fluctuate.  In the long-term we believe there will
     be  increased  demand for our ECM  products  that is driven by the need for
     large organizations to manage unstructured content

          ***Customer  Support***.  Customer  support revenue consists of revenue from
     software maintenance contracts,  time and material revenues and the sale of
     Optical Storage and Retrieval ("OSAR") libraries, spare parts and supplies.
     Maintenance  contracts entitle our customers to receive technical  support,
     enhancements and upgrades to new versions of software  releases when and if
     available.  Customer support revenue  increased by 12.7% in the three-month
     period  ended  June  30,  2004  compared  to the  same  period  in 2003 and
     increased 13.8% in the six-month period ended June 30, 2004 compared to the
     same  period  in 2003.  Customer  support  revenue  is  generated  from new
     maintenance contracts for new system sales and from the renewal of existing
     maintenance  contracts for previously  sold software  licenses on installed
     systems.  We have  historically  experienced  a high  contract  maintenance
     renewal rate and  continue to see this same high level of renewal,  but are
     continuing  to  encounter  pricing  pressures  from  our  customers  during
     contract negotiation and renewal. Accordingly, the rate of software revenue
     growth may not  directly result in the  same  growth for  customer  support
     revenue experienced in the past.

                                       25
***Professional   Services  and  Education***.   Professional  services  and
     education revenue is generated from consulting and implementation  services
     to end  users  of our  software  products,  technical  consulting  services
     provided to our resellers, and training services. No modifications are made
     to our  standard  base  product  code  once the  software  has  been  sold.
     Professional services and education revenue increased by 21.5% in the three
     month  period  ended June 30, 2004  compared to the same period in 2003 and
     13.7% in the  six-month  period  ended June 30,  2004  compared to the same
     period in 2003. Professional services revenue is dependent on the level and
     the  nature  of  software  sales in prior  periods.  Professional  services
     revenue grows more rapidly when customers  purchase new systems for a large
     scale  implementation  or purchase our FileNet P8 product to replace legacy
     systems,  as opposed to existing  customers  purchasing add-on licenses for
     installed  systems.  The  increase  in  professional  services  revenue  we
     experienced  in the first six months of 2004 compared to the same period in
     2003 was  primarily  attributable  to an  increased  demand for  consulting
     services to existing  customers that migrate their custom  applications  to
     the new FileNet P8 platform.  Based on software  revenue sales for the past
     two  quarters  we do not  believe  the  level of  demand  for  professional
     services and  education  services  will change  significantly  from current
     levels.

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

         **Cost of Revenue by Reporting Segment**

                                    Three Months Ended                            Six Months Ended
                                         June 30,                                          June 30,                
                                                          % Increase/                                   % Increase/
*(In thousands)*     2004           2003     (decrease)            2004            2003    (decrease) 

Software                     $    3,128      $   3,608        (13.3)%       $   6,651      $    6,616         0.5%
Customer Support                  9,942          9,968         (0.3)%          20,234          20,539        (1.5)%
Professional Services and
Education                        11,154         10,335          7.9%           21,992          21,415         2.7%
Total Cost of Revenue        $   24,224      $  23,911          1.3%        $  48,877      $   48,570         0.6%

Software                            9.6%          10.8%        (1.2)%             9.0%            9.6%       (0.6)%
Customer Support                   21.1%          23.9%        (2.7)%            21.9%           25.3%       (3.4)%
Professional Services and
Education                          77.8%          87.6%        (9.8)%            80.8%           89.5%       (8.7)%
Total Cost of Revenue
as a % of Revenue                  25.7%          27.5%                          25.2%           25.9%

          ***Software***.  Cost of software revenue  includes  royalties paid to third
     parties for  technology  embedded in our  products to enhance  features and
     functionality,  amortization of acquired  technology,  media costs, and the
     cost to manufacture and distribute  software.  The cost of software revenue
     in absolute  dollars  decreased 13.3% when comparing the three months ended
     June 30, 2004 to the same three months in 2003 and the six month comparison
     for  these  two  years  resulted  in a slight  0.5%  increase.  The cost of
     software revenue as a percent of software revenue  decreased 1.2 percentage
     points and 0.6 percentage  points in the three and six-month  periods ended
     June 30, 2004, compared to the same periods in 2003. While these costs will
     fluctuate  period to period  based on the mix of products  sold  containing
     third party product, our royalty costs have decreased due to more favorable
     royalty rates that have been negotiated during the renewal process over the
     past year.  However,  going  forward  we  anticipate  the cost of  software
     revenue to increase slightly to approximately 10% of software revenue as we
     continue to integrate third-party technology with our products.

                                       26
***Customer  Support***.  Cost of customer support revenue includes the cost
     of customer  support  personnel,  facility  and  technology  infrastructure
     expenses  in our  call  centers,  supplies  and  spare  parts.  The cost of
     customer support revenue as a percent of customer support revenue decreased
     by 2.7  percentage  points  and 3.4  percentage  points  in the  three  and
     six-month periods ended June 30, 2004 compared to the same periods in 2003.
     The cost of customer  support revenue in absolute dollars also decreased in
     these  comparable  periods.  This  reduction  in cost of  customer  support
     revenue,  as a  percentage  of the  revenue  and  in  absolute  dollars  is
     attributable  to  efficiency  improvements  in the  delivery  of  technical
     support,  which allows for increased revenue without a comparable  increase
     in expense. We expect the cost of customer support revenue to remain fairly
     constant as a percent of customer support revenue for the near future.

          ***Professional Services and Education***. Cost of professional services and
     education revenue consists primarily of the costs of professional  services
     personnel,  training personnel,  and third-party  contractors.  The cost of
     professional  services and education revenue,  as a percent of professional
     services and education revenue,  decreased by 9.8 percentage points and 8.7
     percentage points in the three and six-month periods ended June 30, 2004 as
     compared to the same periods in 2003. This decrease in cost of professional
     services and education  revenue as a percent of  professional  services and
     education revenue is primarily attributable to higher professional services
     and  education  revenue in 2004  compared  to 2003,  along with lower costs
     associated  with reduced  employee  headcount and lower  variable  employee
     compensation.  We expect  professional  services and  education  costs as a
     percentage  of  professional  services and  education  revenue to vary from
     period to period depending on the utilization rates of internal  resources,
     the level of revenue  and the mix between  internal  and  external  service
     providers.

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

           **Operating Expenses**

                                            Three Months Ended                               Six Months Ended
                                                  June 30,                                        June 30,             .
                                                            % Increase/                                    % Increase/
(In thousands)                      2004            2003     (decrease)            2004            2003     (decrease) .

Research and Development      $   19,703      $   19,680           0.1%      $   39,805      $   38,982           2.1%
Marketing and Sales               39,198          34,856          12.5%          80,759          69,255          16.6%
General and Administrative         9,394           8,326          12.8%          18,627          16,152          15.3%
Total Operating Expenses      $   68,295      $   62,862           8.6%      $  139,191      $  124,389          11.9%

Research and Development            20.9%           22.6%         (1.6)%           20.6%           22.4%         (1.8)%
Marketing and Sales                 41.7%           40.0%          1.7%            41.7%           39.8%          2.0%
General and Administrative          10.0%            9.6%          0.4%             9.6%            9.3%          0.3%
Operating Expense as a % of
Revenue                             72.6%           72.2%                          71.9%           71.4%

                                                             27
***Research and Development***.  Our research and development efforts are focused
on enhancing and  maintaining  our Enterprise  Content  Management  capabilities
within the  FileNet P8  product  line.  These  efforts  focus on our  FileNet P8
platform and suites such as Business Process Management, Web Content Management,
Records Management, Team Collaboration and other capabilities.

     Our research and development  expense consists primarily of personnel costs
for internal software developers;  third party contracted  development resources
and related facilities costs. Research and development expense was approximately
the same in the three and six-month  periods ended June 30, 2004 compared to the
same periods in 2003.  However,  this quarter the expense mix changed with lower
internal personnel costs and higher offshore  development expense. The number of
internal research and development personnel was 446 on June 30, 2004 compared to
472 on June 30, 2003. We currently have 94 contract  workers in India developing
software compared to 48 one year ago.

     Research and development  expense  decreased as a percent of revenue by 1.6
percentage  points and 1.8 percentage  points for the three and six months ended
June 30, 2004  compared to the same periods in 2003.  This decrease is primarily
attributable  to  increased  revenue  levels  without  a  corresponding  expense
increase due to lower internal personnel and facility expense resulting from the
decreased  headcount  that more than offset the increased  offshore  development
expense.  We believe we will be able to further decrease our per-developer  cost
through the expanded use of offshore  resources,  however in the near term, some
duplicate expenses will be incurred as our development programs are transitioned
to  these  offshore  development   resources.   We  believe  that  research  and
development  expenditures,  including  compensation of technical personnel,  are
essential  to  maintaining  our  competitive  position.  We expect  research and
development expense to be at approximately 20% of revenue for the near term.

     ***Selling and  Marketing***.  We sell our products  through a direct sales force
and our  indirect  channel  sales  partners.  The  majority  of our  selling and
marketing  expense is salaries,  benefits,  sales commissions and other expenses
related to the direct and indirect sales force, and personnel cost for marketing
and market development  programs.  Selling and marketing expense as a percent of
revenue  increased by 1.7 percentage  points and 2.0  percentage  points for the
three and six-months ended June 30, 2004 compared to the same period in 2003. In
absolute dollars selling and marketing  expense increased by 12.5% and 16.5% for
the three and six-months ended June 30, 2004.  Approximately $9.3 million of the
year to date increase is attributable to organizational changes that resulted in
higher  salaries,   higher  variable   compensation  and  associated   benefits.
Additionally,  we  experienced  higher  travel  expense  and  we  granted  merit
increases  in 2004.  We  expect  selling  and  marketing  expense  to  remain at
approximately 41% of revenue in the near-term.

     ***General and Administrative***. Our general and administrative expense consists
primarily of salaries,  benefits,  and other expenses related to personnel costs
for  finance,  information  technology,   legal,  human  resources  and  general
management  and  the  cost  of  outside  professional   services.   General  and
administrative  expense as a percent of revenue  increased 0.4 percentage points
and 0.3 percentage points in the three and six-month periods ended June 30, 2004
compared  to  the  same  periods  in  2003.  In  absolute  dollars  general  and
administrative  expenses  increased  12.8% and 15.3% in the three and  six-month
periods ended June 30, 2004 compared to the same periods in 2003.  The increases
in general and administrative  expense between the comparative  periods reflects
higher salary costs and benefits due to increased headcount as well as increased
legal and  accounting fees  associated  with  compliance  to  recently  mandated
corporate governance  regulations.  We expect general and administrative expense
to remain at approximately 10% of revenue in the near-term.

     ***Other Income, Net***. Other income, net consists  primarily of interest income
earned on our cash and investments,  and other items including  foreign exchange
gains and losses and interest expense.  Other income, net of other expenses, was
$1,066,500  and  $1,993,500  for the three and six-month  periods ended June 30,
2004 compared to $1,619,500  and  $2,664,900  during for the three and six-month
periods  ended  June  30,  2003.  We  experienced  a  foreign  exchange  gain of
approximately  $748,000  in the second  quarter of 2003 that did not  reoccur in
2004. The weighted  average  interest rate earned on cash, cash  equivalents and
investments  was 1.60%  during the six months  ended June 30,  2004  compared to
1.43% for the same period in 2003.

                                       28
***Provision for Income Taxes***. Our combined federal,  state and foreign annual
effective  tax rate for the three and  six-month  periods ended June 30, 2004 is
18% compared to 26% and 28% for the  comparable  periods in 2003.  The provision
for income taxes differs from the tax computed at the federal  statutory  income
tax rate due  primarily to earnings  considered  as  permanently  reinvested  in
foreign  operations with lower tax rates and reductions in our domestic deferred
tax  valuation  allowance.  The  decreased  tax rate in the three and  six-month
period ended June 30, 2004 was  primarily due to the mix of income earned by our
domestic operations versus the foreign subsidiaries.

**Liquidity and Capital Resources**

     At June 30, 2004,  combined cash, cash equivalents and investments  totaled
$299.5 million,  an increase of $51.3 million and $8.5 million from December 31,
2003 and March 31, 2004, respectively.

     Cash  provided by  operating  activities  during the six month period ended
June 30, 2004 totaled $39.1 million and resulted  primarily from: an increase in
unearned  maintenance revenue related to prepaid maintenance  contracts of $21.5
million;  a decrease in customer  receivables of $3.8 million;  depreciation and
amortization  expense  of $8.3  million;  and net  income of $6.2  million.  The
increase in unearned  maintenance  revenue is primarily the result of the growth
in our base of annual  support  contracts  resulting from new customer sales and
sales of additional products to the existing base.  Additionally,  a significant
number  of  maintenance  contracts  renew  early in the  year and are  amortized
ratably throughout the year resulting in a lower balance in unearned maintenance
by December 31.

     Cash  provided by  financing  activities  totaled  $20.5  million and was a
result of proceeds  received  from the  exercise of employee  stock  options and
stock  purchases  under  the  employee  stock  purchase  plan.

     Net cash used in investing  activities was $36.9 million comprised of $31.2
million for the purchase of marketable securities in excess of proceeds and $6.1
million for capital expenditures.

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

     We  believe  that  our  present  cash  balances  together  with  internally
generated  funds will be  sufficient  to meet our  working  capital  and capital
expenditure needs for at least the next 12 months.

**Other Financial Instruments**

     We conduct business on a global basis in several  currencies.  Accordingly,
we are exposed to movements in foreign  currency  exchange  rates. We enter into
forward foreign exchange contracts to minimize the short-term impact of currency
fluctuations on monetary assets and liabilities  denominated in currencies other
than the  functional  currency  of the  relevant  entity.  We do not enter  into
foreign exchange  forward  contracts for trading  purposes.  Gains and losses on
these  contracts,  which equal the difference  between the forward contract rate
and the prevailing market spot rate at the time of valuation,  are recognized as
other income (expense) in the consolidated statements of operations. We open new
hedge contracts on the last business day of each quarter that will mature at the
end of the following  quarter.  The  counterparties to these contracts are major
financial institutions. We use commercial rating agencies to evaluate the credit
quality  of  the  counterparties  and do not  anticipate  nonperformance  by any
counterparties.  We do not  anticipate a material loss resulting from any credit
risks related to any of these institutions.

                                       29
**New Accounting Pronouncements**

     In  January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
Interest  Entities." In general,  a variable  interest  entity is a corporation,
partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity  investors  with voting rights or (b) has equity
investors that do not provide sufficient  financial  resources for the entity to
support  its  activities.  FIN 46  requires  a  variable  interest  entity to be
consolidated  by a company if that  company is subject to a majority of the risk
of loss from the variable interest entity's  activities or entitled to receive a
majority  of  the  entity's   residual   returns  or  both.  The   consolidation
requirements of FIN 46 apply  immediately to variable  interest entities created
after  January 31, 2003.  With  respect to variable  interest  entities  created
before January 31, 2003, in December 2003 the FASB issued FIN 46R, which,  among
other  things,  revised the  implementation  date to the first  fiscal  years or
interim  periods  ending  after March 15,  2004,  with the  exception of Special
Purpose Entities ("SPE").  The consolidated  requirements  apply to all SPE's in
the first fiscal year or interim  period ending after December 15, 2003. We have
determined that we do not have any SPE's to which these  interpretations  apply.
The  adoption  of  FIN  46R  in  2004  has  not  had a  material  impact  on our
consolidated financial statements.

     In May 2003, FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics  of both Liabilities and Equity." SFAS No. 150
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both debt and equity and requires
an issuer to classify the following  instruments  as  liabilities in its balance
sheet:

     o    a  financial   instrument  issued  in  the  form  of  shares  that  is
          mandatorily  redeemable and embodies an unconditional  obligation that
          requires  the  issuer  to redeem it by  transferring  its  assets at a
          specified  or  determinable  date or upon an event  that is certain to
          occur;

     o    a financial instrument, other than an outstanding share, that embodies
          an obligation to repurchase the issuer's equity shares,  or is indexed
          to  such  an  obligation,  and  requires  the  issuer  to  settle  the
          obligation by transferring assets; and

     o    a financial instrument that embodies an unconditional  obligation that
          the issuer  must  settle by  issuing a  variable  number of its equity
          shares if the  monetary  value of the  obligation  is based  solely or
          predominantly  on (1) a  fixed  monetary  amount,  (2)  variations  in
          something other than the fair value of the issuer's equity shares,  or
          (3) variations  inversely  related to changes in the fair value of the
          issuer's equity shares.

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

     For public entities,  SFAS No. 150 is effective for mandatorily  redeemable
financial  instruments  entered  into or  modified  after  May 31,  2003  and is
effective for all other  financial  instruments  as of the first interim  period
beginning after June 15, 2003.

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

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

                                       30
**Other Matters*****Environmental   Matters***.  We  are  not  aware  of  any  issues  related  to
environmental  matters that have, or are expected to have, a material  affect on
our business.

**Risk Factors That May Affect Future Results**

     Except for the historical  information  and discussions  contained  herein,
statements   contained  in  this  Form  10-Q  may  constitute  "forward  looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995. These statements are based on current expectations and assumptions that
involve a number of risks,  uncertainties  and other  factors  that could  cause
actual results to differ  materially from recent results or from our anticipated
future  results.  We operate in a rapidly  changing  economic and  technological
environment that presents numerous risks. Prospective and existing investors are
strongly urged to carefully consider the various cautionary statements and risks
set forth in this quarterly  report and our other public filings.  Many of these
risks are beyond our control and are driven by factors  that we cannot  predict.
The following discussion highlights some of these risks:

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

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

     o    Information Technology spending trends;

     o    general domestic and international economic and political conditions;

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

     o    the tendency to realize a substantial percentage of our revenue in the
          last weeks, or even days, of each quarter;

     o    the potential for delays or deferrals of customer orders;

     o    the size, complexity and timing of individual transactions;

     o    the length of our sales cycle;

     o    the level of software sales and price competition;

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

     o    seasonality in technology purchases.

     The  decision  to  implement  our  products  is subject to each  customer's
resources and budget  availability.  Our quarterly sales generally include a mix
of medium sized orders,  along with several large  individual  orders,  and as a
result,  the loss or delay of an individual large order could have a significant
impact on our quarterly  operating results and revenue.  Our operating  expenses
are based on projected  revenue trends and are generally fixed.  Therefore,  any
shortfall from projected revenue may cause significant fluctuations in operating
results  from  quarter to  quarter.  As a result of these  factors,  revenue and
operating  results  for any  quarter  are  subject to  fluctuations  and are not
predictable with any significant degree of accuracy.  Therefore, we believe that
period-to-period  comparisons of our results of operations  should not be relied
upon as indications of future  performance.  Moreover,  such factors could cause
our operating  results in a given quarter to be below the expectations of public
market  analysts and  investors.  In either case,  the price of our common stock
could decline materially.

                                       31
***The  markets in which we operate  are highly  competitive  and we cannot be
sure that we will be able to continue to compete effectively, which could result
in lost  market  share and  reduced  revenue***.  The  markets  we serve are highly
competitive and we expect competition to intensify with the consolidation of the
ECM market.  We have multiple  competitors and there may be future  competitors,
some  of  which  have  or  may  have  substantially  greater  sales,  marketing,
development  and financial  resources.  As a consequence,  our present or future
competitors may be able to develop software  products  comparable or superior to
those  offered by us, offer lower priced  products or adapt more quickly than we
do to new technologies or evolving customer requirements.

         Other competitive risks include, but are not limited to:

     o    We  anticipate   significant  future  consolidation  as  the  software
          industry matures. Large  well-established  software firms like Oracle,
          IBM and  Adobe may enter  our  market  by  adding  content  management
          features to their  existing  suite of  products.  In  addition,  large
          hardware  firms may enter our market by acquiring our  competitors  to
          pursue revenue growth opportunities;

     o    Many of our competitors are also our  distribution  channel  partners.
          For example,  IBM competes with us in the content  management  market,
          but also  implements  our  software  solutions  through its IBM Global
          Services  business  unit. Our customers may view this type of vertical
          integration   of   software   development   and   system   integration
          capabilities as a key competitive advantage.

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

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

     ***A significant portion of our revenue is derived  internationally and we are
subject  to many risks  internationally,  which  could put our  revenue at risk***.
Historically,  we have  derived  approximately  30% of our  total  revenue  from
international  sales through our worldwide  network of subsidiaries  and channel
partners.  This  contribution  percentage  will  fluctuate  quarter to  quarter.
International  business is subject to certain risks  including,  but not limited
to, the following:

     o    political and economic instability;

     o    tariffs and trade barriers;

     o    varying technical standards and requirements for localized products;

     o    reduced  protection  for  intellectual   property  rights  in  certain
          countries;

     o    difficulties in staffing and maintaining foreign operations;

     o    difficulties in managing foreign distributors;

     o    multiple overlapping tax regimes;

     o    currency restrictions and currency exchange fluctuations;

     o    the burden of complying  with a wide variety of complex  foreign laws,
          regulations and treaties;

     o    spreading our management resources to cover multiple countries; or,

     o    longer  collection  cycles and higher risk of  non-collection  and bad
          debt expense.

     Any of these factors could reduce the amount of revenue we realize from our
international operations in the future.

                                       32
***The market for content management  solutions may not grow as we anticipate,
and may decline,  and our products may not gain  acceptance  within this market,
resulting  in reduced  revenue***.  Our future  financial  performance  will depend
primarily on the continued  growth of the markets for our software  products and
services as well as our ability to capture a larger share of those markets.  Our
primary product offerings address the content management  solutions market. This
market is  developing  rapidly,  and while we believe this market is growing and
will continue to grow, particularly as new regulations are introduced that focus
on controlling the flow of information within organizations to ensure compliance
with disclosure and other obligations, these markets may not continue to grow as
we anticipate,  or that our products and solutions will gain  acceptance  within
these markets.  If the markets we serve,  particularly the market for enterprise
content management solutions, fail to grow or grow more slowly than we currently
anticipate, or if our products and solutions do not gain acceptance within these
markets,  our  business,  financial  condition  and  operating  results would be
harmed.

     ***We must  execute  on our  strategy  of  offering  a  unified  platform  and
framework for Enterprise  Content  Management that gains customer  acceptance or
our revenue may suffer***.  This  strategy  may require us to develop and  maintain
relations with technology  partners.  If we fail to successfully  execute on our
integrated  product  solution  strategy or if we fail to  maintain or  establish
relationships  with  technology  partners,  or if  release  dates of any  future
products or enhancements are delayed,  or if these products or enhancements fail
to achieve market acceptance when released,  our business  operating results and
financial condition could be materially harmed.

     ***We must develop and sell new  products to keep up with rapid  technological
change in order to achieve future revenue growth and  profitability***.  The market
for  our  software  and  services  is  characterized   by  rapid   technological
developments,  evolving industry standards, changes in customer requirements and
frequent new product introductions and enhancements.  Our ability to continue to
sell  products  will be  dependent  upon our  ability to continue to enhance our
existing  software and services  offerings,  develop and introduce,  in a timely
manner, new software products  incorporating  technological advances and respond
to customer  requirements.  For example,  two new products  that we predict will
address new markets will be made available in the second half of this year. Team
Collaboration  Manager  Suite that enables  customers to initiate  collaborative
tasks at any point in a process and Records  Manager  Suite that  systematically
applies  record  management  principles  to  content  are  both  expected  to be
available  in the  second  half  of  this  year.  We may  not be  successful  in
developing,  marketing and  releasing  these new products or new versions of our
products that respond to technological developments, evolving industry standards
or changing customer requirements. We may also experience technical difficulties
that could delay or prevent the successful development, introduction and sale of
these products and enhancements.  In the past, we have experienced delays in the
release  dates of  enhancements  and new  releases  to our  products  and we may
experience significant future delays in product introduction. From time to time,
our  competitors  or we may  announce  new software  products,  capabilities  or
technologies  that have the  potential  to replace or shorten the life cycles of
our existing software products.  Announcements of currently planned or other new
software  products may cause  customers to delay their  purchasing  decisions in
anticipation  of such software  products,  and such delays could have a material
adverse effect on our sales. In addition,  our ability to generate revenues from
the  sale  of  customer   support,   education  and  professional   services  is
substantially  dependent  on our ability to generate  new sales of our  software
products.

                                       33
***We  are  dependent  upon  customers  concentrated  in  a  small  number  of
industries.  A significant  decline in one of those  industries  could result in
reduced  revenue***.  Our customers are  concentrated  in the insurance,  financial
services,   government,   manufacturing,    telecommunications   and   utilities
industries.  We may not be successful in obtaining  significant new customers in
different  industry  segments  and we  expect  that  sales  of our  products  to
customers in a limited number of industry  segments will continue to account for
a large  portion  of our  revenue in the  future.  If we are not  successful  at
obtaining  significant new customers or if a small number of customers cancel or
delay  their  orders for our  products,  then we could fail to meet our  revenue
objectives.  Consolidation  within the financial services and insurance industry
could  further  reduce  our  customers  and  future  prospects.  As  many of our
significant  customers are concentrated in a small number of industry  segments,
if business  conditions in one of those industry segments  decline,  then orders
for our products from that segment may decrease,  which could negatively  impact
our business,  financial  condition and operating results and cause the price of
our common stock to fall.

     ***We must devote substantial  resources to software  development,  and we may
not realize  revenue from our  development  efforts for a substantial  period of
time***.  Introducing  new products that rapidly  address  changing  market demands
requires a continued  high level of investment in research and  development.  We
expect to invest approximately 20% of annual revenue in research and development
efforts in the near term.  The  majority of our  investment  in new and existing
market  opportunities must be made prior to our ability to generate revenue from
these new  opportunities.  These investments of money and resources must be made
based on our  prediction  of new products and services that the market needs and
will accept. As a result,  our operating results could be adversely  affected if
our  predictions  of market  demand are incorrect and we are not able to realize
the  level of  revenues  we  expect  from new  products  or if that  revenue  is
significantly delayed due to revenue recognition rules that require new products
be tested in the market to validate pricing and acceptance.

     ***We are increasing  our use of third party software  developers and may have
difficulty enforcing or managing our agreements with them, which could delay new
product  introductions  and  reduce  revenue***.  To  help  manage  costs,  we have
contracted   with  third  party   software   development   companies   overseas,
particularly  in India,  where labor costs are lower,  to perform an  increasing
portion of our software development and software localization work. As a result,
we will  become  increasingly  dependent  on these third  party  developers  for
continued  development and maintenance of several of our key products. If any of
these third party developers were to terminate their  relationship  with us, our
efforts  to  develop  new  products  and  improve  existing  products  could  be
significantly  delayed  and  our  ability  to  provide  product  support  to our
customers  could be  impaired.  In  addition,  since the majority of these third
party  developers are located outside the United States,  our ability to enforce
our agreements with them may be limited.

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

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

                                       34
***If our  products  contain  errors,  we could incur  unplanned  expenses and
delays  that  could  result in  reduced  revenue,  lower  profits,  and  harmful
publicity***.  Software,  services and products,  as complex as those we sell,  are
susceptible to errors or failures, especially when first introduced or deployed.
Our  software  products  are often  intended  for use in  applications  that are
critical to a customer's  business.  As a result,  our customers may rely on the
effective  performance  of our software to a greater  extent than the market for
software products generally. Despite internal testing and testing by current and
potential customers,  new products or enhancements may contain undetected errors
or  performance  problems  that are  discovered  only  after a product  has been
installed  and used by customers.  Errors or  performance  problems  could cause
delays  in  product   introduction   and  shipments  or  could  require   design
modifications,  either  of which  could  lead to a loss in or delay of  revenue.
These  problems  could  cause a diversion  of  development  resources,  harm our
reputation  or result in  increased  service or warranty  costs,  or require the
payment  of  monetary  damages.  While our  license  agreements  with  customers
typically contain provisions designed to limit our exposure to potential product
liability  claims,  it is possible that such limitation of liability  provisions
may not be effective under the laws of certain jurisdictions.

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

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

     o    the incurrence of debt;

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

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

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

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

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

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

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

                                       35
***We may,  from time to time,  be  notified  that we are  infringing  certain
patent or  intellectual  property  rights of others,  which  could  expose us to
litigation  and other  costs***.  While  there are no  material  actions  currently
pending  against us for  infringement of patent or other  proprietary  rights of
third   parties,   we  cannot  assure  that  third  parties  will  not  initiate
infringement  actions  against  us in the  future.  Combinations  of  technology
acquired through past or future  acquisitions and our technology will create new
software  products  and  technology  that  also  may  give  rise  to  claims  of
infringement. Infringement actions can result in substantial costs and diversion
of  resources,  regardless  of the  merits of the  actions.  If we were found to
infringe  upon  the  rights  of  others,  we may  not be able  to  redesign  the
infringing  products to avoid further  infringement or obtain necessary licenses
to use the  infringed  rights  on  acceptable  terms,  or at all.  Additionally,
significant damages for past infringement could be assessed or future litigation
relative to any such licenses or usage could occur.  An adverse  disposition  of
any claims or the advent of litigation arising out of any claims of infringement
could result in  significant  costs or reduce our ability to market any affected
products.

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

     ***We  currently  license  certain  software  from  third  parties,  including
software that is integrated with internally  developed  software and used in our
products to perform key functions. We would be unable to sell theses products if
we do not maintain these licenses, which would result in reduced revenue***. In the
past, we have had difficulty renewing certain licenses.  The failure to continue
to maintain these licenses would prohibit us from selling certain  products.  We
cannot  assure that such third  parties will remain in business,  that they will
continue to support their software products or that their software products will
continue to be available  to us on  acceptable  terms.  The loss or inability to
maintain  any of these  software  licenses  could  result in shipment  delays or
reductions in software  shipments  until  equivalent  software can be developed,
identified,  licensed,  and  integrated.  In addition,  it is possible that as a
consequence of a merger or acquisition  transaction involving one of these third
parties, certain restrictions could be imposed on our business that had not been
imposed prior to the transaction. This could adversely affect our sales.

     ***Our  stock  price  has  been  and  may  continue  to  be  volatile  causing
fluctuations  in the market price of our stock,  which would impact  shareholder
value***.  The trading price of our common stock has  fluctuated in the past and is
subject to significant  fluctuations in response to the following factors, among
others, some of which are beyond our control:

     o    variations in quarterly operating results;

     o    fluctuations in our order levels;

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

     o    key management changes;

     o    changes in accounting regulations;

     o    changes in joint marketing and development programs;

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

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

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

                                       36

     o    general conditions in the software and computer industries;

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

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

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

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

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

     o    other general economic and political conditions.

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

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

     Our  exposure to market rate risk for  changes in  interest  rates  relates
primarily to our investment  portfolio.  We have not used  derivative  financial
instruments  in  our  investment  portfolio.   We  place  our  investments  with
high-quality  issuers and, by policy, limit the amount of credit exposure to any
one issuer.  We protect and  preserve our  invested  funds by limiting  default,
market and reinvestment  risk. Our investments in marketable  securities consist
primarily of high-grade  corporate and government  securities with maturities of
less than three years.  Investments purchased with an original maturity of three
months or less are  considered  to be cash  equivalents.  We classify all of our
investments as available-for-sale.  Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity.  Average maturity of our investment portfolio
is 105 days;  therefore,  the  movement  of  interest  rates  should  not have a
material impact on our balance sheet or income statement.

     At any time, a significant increase/decrease in interest rates will have an
impact  on the  fair  market  value  and  interest  earnings  of our  investment
portfolio.  We do not  currently  hedge this  interest  rate  exposure.  We have
performed a sensitivity  analysis as of June 30, 2004 and 2003, using a modeling
technique   that  measures  the  change  in  the  fair  values  arising  from  a
hypothetical 50 basis points and 100 basis points adverse movement in the levels
of interest  rates across the entire yield curve,  which are  representative  of
historical  movements in the Federal  Funds Rate with all other  variables  held
constant.   The   analysis   covers   our   investment   and  is  based  on  the
weighted-average  maturity of our  investments as of June 30, 2004 and 2003. The
sensitivity  analysis  indicated  that a  hypothetical  50 basis points  adverse
movement  in  interest  rates  would  result in a loss in the fair values of our
investment   instruments  of  approximately   $323,000  at  June  30,  2004  and
approximately  $249,000 at June 30,  2003.  Similarly a  hypothetical  100 basis
points  adverse  movement in interest  rates would  result in a loss in the fair
values  of our  investments  of  approximately  $646,000  at June  30,  2004 and
approximately $498,000 at June 30, 2003.

                                       37

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

     .
     *(In thousands)***Cost      Estimated Fair Value**.
     Debt Securities
       Due in one year or less:
          Short-term munis-taxable          $     2,500               $     2,500
          Corporate                              15,089                    15,049
          Governments/Agencies                   40,412                    40,241 
     Total due in one year                       58,001                    57,790

     Due in one to three years:
          Government/Agencies                    17,710                    17,544 
      Total due in three years                   17,710                    17,544 

         Grand total                        $    75,711               $    75,334 

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

**Foreign Currency Fluctuations and Inflation**

     Our  performance  can be  affected  by changes in foreign  currency  values
relative to the U.S.  dollar in relation to our revenue and operating  expenses.
We have entered  into  forward  foreign  exchange  contracts  primarily to hedge
amounts  due from and the net assets of  selected  subsidiaries  denominated  in
foreign currencies  (mainly in Europe and Asia Pacific) against  fluctuations in
exchange rates. We have not entered into forward foreign exchange  contracts for
speculative or trading purposes. Our accounting policies for these contracts are
based on our designation of the contracts as hedging transactions.  The criteria
we  use  for   designating  a  contract  as  a  hedge  include  the   contract's
effectiveness   in  risk  reduction  and   one-to-one   matching  of  derivative
instruments  to underlying  transactions.  Gains and losses on foreign  exchange
contracts are recognized in income in the same period as gains and losses on the
underlying  transactions.  If an underlying  hedged  transaction were terminated
earlier than initially  anticipated,  the offsetting gain or loss on the related
forward  foreign  exchange  contract  would be  recognized in income in the same
period. In addition,  since we enter into forward contracts only as a hedge, any
change in currency  rates would not result in any material net gain or loss,  as
any gain or loss on the underlying foreign currency denominated balance would be
offset  by the  gain or loss on the  forward  contract.  Our  forward  contracts
generally have an original maturity of three months. As of June 30, 2004, we had
forward foreign  exchange  contracts  outstanding  totaling  approximately  $1.4
million in ten currencies.  These contracts were opened on the last business day
of the quarter and mature within three months.

     Cumulative  other  comprehensive  income decreased by $1.7 million and $2.6
million for the three and six-month period ended June 30, 2004 due to unrealized
foreign  currency  translation  losses  resulting from the weakening of the Euro
against the U.S. dollar during the period.

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

                                       38
**Item 4.   Controls and Procedures**

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

     As of June 30,  2004,  the end of the quarter  covered by this  report,  an
evaluation was carried out under the supervision and with the  participation  of
our management,  including our Chief  Executive  Officer and our Chief Financial
Officer,  of the  effectiveness  of the design and  operation  of our disclosure
controls  and  procedures  as  required  by SEC Rule  13a - 15(b).  Based on the
foregoing,  our Chief Executive  Officer and Chief Financial  Officer  concluded
that our  disclosure  controls and  procedures  were effective at the reasonable
assurance level.

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

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

         See Note 11 to Consolidated Financial Statements.

**Item 4.  Submission of Matters to a Vote of Security Holders**

     (a)  We held our 2004 Annual Meeting of Stockholders at 9:00 a.m. on May 7,
          2004, in Costa Mesa, California.

     (b)  At the annual meeting,  the following six individuals  were elected to
          our  Board of  Directors,  constituting  all  members  of the Board of
          Directors:

     **Nominee                         Affirmative Votes          Votes Withheld**.
      L. George Klaus                        33,724,578               1,968,962
      William P. Lyons                       33,070,456               2,623,084
      Lee D. Roberts                         34,048,575               1,644,965
      John C. Savage                         33,721,603               1,971,937
      Roger S. Siboni                        32,958,270               2,735,270
      Theodore J. Smith                      25,734,661               9,958,879

     (c)  Our stockholders were asked to approve an amendment and restatement of
          our 2002 Incentive Award Plan which (i) increases the number of shares
          of Common Stock  available  for issuance  there under by an additional
          2,000,000 shares,  from 2,800,000 to 4,800,000 shares;  (ii) increases
          the number shares that may be awarded as Restricted Stock,  Restricted
          Stock Units,  Deferred  Stock,  Performance  Awards and Stock Payments
          from 140,000 shares to 700,000 shares,  an increase of 560,000 shares;
          (iii) increases the number of shares automatically granted annually to
          independent   directors  from  7,000  to  10,000   shares;   and  (iv)
          establishes a termination date for the Plan of February 24, 2014.

                                       39

     This  proposal  was  approved  in  accordance  with the  following  vote of
     stockholders:

    **Votes For                   Votes Against              Abstentions**
     20,215,589                      10,077,309                   27,865

     Our  stockholders  were asked to ratify the  appointment  of  Deloitte  and
     Touche LLP as our independent  accountants  for the fiscal year ending December
     31, 2004.  This proposal was approved in accordance with the following vote
     of stockholders:

    **Votes For                   Votes Against              Abstentions**
     35,017,179                         656,257                   20,104

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

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

     (b)  Reports on Form 8-K:
          1)   On July 7, 2004 FileNet furnished a report on Form 8-K under Item
               12 announcing its preliminary  financial  results for the quarter
               ended June 30, 2004.

          2)   On July 19,  2004  FileNet  furnished  a report on Form 8-K under
               Item 12 announcing  its  financial  results for the quarter ended
               June 30, 2004.

                                       40
**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**August 5, 2004               By:    */s/ Sam M. Auriemma*.
Date                                Sam M. Auriemma, Executive Vice President
                                    and Chief Financial Officer
                                    (Principal Financial and Accounting Officer,
                                    Authorized Signatory)

                                       41
**Index to Exhibits**Exhibit No.Exhibit Description

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

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

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

 4.1*         Form of  certificate  evidencing  Common  Stock  (*filed as Exhibit  4.1 to  Registrant's  registration
              statement on Form S-1, Registration No. 33-15004*).

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

 4.3*         Amendment One dated July 31, 1998 and Amendment Two dated November 9, 1998 to Rights  Agreement  dated
              as of November 4, 1988 between FileNet  Corporation and BANKBOSTON,  N.A.  formerly known as The First
              National Bank of Boston (*filed as Exhibit 4.3 to Registrant's  registration statement on Form 10-Q for
              the quarter ended September 30, 1998*).

 4.4*         Amendment  Three dated  November  30, 2001 to Rights  Agreement  dated as of November 4, 1988  between
              FileNet  Corporation  and Equiserve  Trust Company,  N.A.,  successors to BANKBOSTON,  N.A.  (*filed as
              Exhibit 4.4 to Registrant's Annual Report on Form 10-K filed for the year ended December 31, 2001*).

10.2*+        Amended  and  Restated  1995 Stock  Option  Plan of FileNet  (*filed as  Exhibit  99.1 to  Registrant's
              registration statement on Form S-8 filed on October 15, 2001; Registration No. 333-71598*).

10.2.1*+      Amendment to the 1995 Stock Option Plan approved by Registrant's  Board of Directors dated May 7, 2003
              (*filed as Exhibit 10.2.1 to Registrant's  Quarterly Report on Form 10-Q for the quarter ended June 30,
              2003*).

10.2.2*+      Amended  Form  of  1995  Executive  Officer  Stock  Option  Agreement  (*filed  as  Exhibit  10.2.2  to
              Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003*).

10.3*+        Second Amended and Restated 1986 Stock Option Plan of FileNet Corporation,  together with the forms of
              Incentive Stock Option  Agreement and  Non-Qualified  Stock Option  Agreement (filed as Exhibits 4(a),
              4(b) and 4(c), respectively,  to the Registrant's registration statement on Form S-8, Registration No.
              33-48499),  the first  Amendment  thereto  (*filed as  Exhibit  4(d) to the  Registrant's  registration
              statement  on Form S-8,  Registration  No.  33-69920),  and the  Second  Amendment  thereto  (filed as
              Appendix  A to  the  Registrant's  Proxy  Statement  for  the  Registrant's  1994  Annual  Meeting  of
              Stockholders, filed on April 29, 1994*).

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

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

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

10.8*         Lease between the Registrant and C. J. Segerstrom and Sons for the  headquarters  of the Company,  dated
              September 1, 1999 (*filed as Exhibit 10.23 to Registrant's  registration statement on Form 10-Q for the
              quarter ended September 30, 1999*).

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

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

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

                                                                    42

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

32.2          Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
     .
      * Incorporated herein by reference      + Management contract, compensatory plan or arrangement

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

     (2)  Amended and Restated Letter Agreement,  dated May 15, 2003 was entered
          into by and between Registrant and Messrs. Martyn D. Christian,  David
          D.  Despard,  Frederick P. Dillon,  Karl J. Doyle,  Michael W. Harris,
          William J. Kreidler,  Chas W.  Kunkelmann,  Philip  Rugani,  Daniel S.
          Whelan, Franz X. Zihlmann,  Ms. Katharina M. Mueller and Ms. Audrey N.
          Schaeffer.  Mr. Kenneth F. Fitzpatrick  entered in a Letter Agreement,
          dated  September  2,  2003  on   substantially   the  same  terms  and
          conditions.

                                                                    43
**Exhibit 31.1

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

I, Lee D. Roberts, certify that:

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

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

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

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

          a) designed such disclosure  controls and  procedures,  or caused such
     disclosure controls and procedures to be designed under our supervision, to
     ensure that material information relating to the registrant,  including its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly  during the  period in which  this  report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and  procedures  and  presented  in this report our  conclusions  about the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the period covered by this report based on such evaluation; and

          c)  disclosed in this report any change in the  registrant's  internal
     control over financial reporting that occurred during the registrant's most
     recent fiscal quarter (the  registrant's  fourth fiscal quarter in the case
     of an annual report) that has materially affected,  or is reasonably likely
     to materially  affect,  the  registrant's  internal  control over financial
     reporting; and

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,  to the
registrant's  auditors  and the audit  committee  of the  registrant's  board of
directors (or persons performing the equivalent functions):

          a) all significant  deficiencies and material weaknesses in the design
     or  operation  of  internal  control  over  financial  reporting  which are
     reasonably  likely to adversely affect the registrant's  ability to record,
     process, summarize and report financial information; and

          b) any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant's  internal
     control over financial reporting.

Date:    August 6, 2004

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

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

I, Sam M. Auriemma, certify that:

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

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

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

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

          a) designed such disclosure  controls and  procedures,  or caused such
     disclosure controls and procedures to be designed under our supervision, to
     ensure that material information relating to the registrant,  including its
     consolidated  subsidiaries,  is made  known to us by  others  within  those
     entities,  particularly  during the  period in which  this  report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and  procedures  and  presented  in this report our  conclusions  about the
     effectiveness of the disclosure  controls and procedures,  as of the end of
     the period covered by this report based on such evaluation; and

          c)  disclosed in this report any change in the  registrant's  internal
     control over financial reporting that occurred during the registrant's most
     recent fiscal quarter (the  registrant's  fourth fiscal quarter in the case
     of an annual report) that has materially affected,  or is reasonably likely
     to materially  affect,  the  registrant's  internal  control over financial
     reporting; and

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,  to the
registrant's  auditors  and the audit  committee  of the  registrant's  board of
directors (or persons performing the equivalent functions):

          a) all significant  deficiencies and material weaknesses in the design
     or  operation  of  internal  control  over  financial  reporting  which are
     reasonably  likely to adversely affect the registrant's  ability to record,
     process, summarize and report financial information; and

          b) any fraud,  whether or not material,  that  involves  management or
     other employees who have a significant  role in the  registrant's  internal
     control over financial reporting.

Date:   August 6, 2004

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

                                       2

**Exhibit 32.1

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

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

     (i) the  accompanying  Quarterly Report on Form 10-Q of the Company for the
fiscal  period  ended  June 30, 2004 (the  "Report")  fully  complies  with  the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and

     (ii) the  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.

Dated:  August 6, 2004
                                    */s/ Lee D. Roberts*.
                                    Lee D. Roberts
                                    Chairman of the Board and
                                    Chief Executive Officer
                                    (Principal Executive Officer)

**Exhibit 32.2

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

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

     (i) the  accompanying  Quarterly Report on Form 10-Q of the Company for the
fiscal  period  ended  June 30, 2004 (the  "Report")  fully  complies  with  the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and

     (ii) the  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Company.

Dated:  August 6, 2004
                                    */s/ Sam M. Auriemma*.
                                    Sam M. Auriemma
                                    Executive Vice President and
                                    Chief  Financial Officer
                                    (Principal Financial Officer)
```