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, 2000

                                       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: 0-15997

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

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

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

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


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

As of August 4, 2000, there were 34,306,344  shares of the  Registrant's  common
stock outstanding.

<PAGE>


                               FILENET CORPORATION
                                      Index


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

PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Balance Sheets
         As of  June 30, 2000 (unaudited) and December 31, 1999........    3

         Consolidated Statements of Income (unaudited)
         For the three and six month periods ended June 30, 2000
         and 1999......................................................    4

         Consolidated Statements of Comprehensive Income(unaudited)
         For the three and six month periods ended June 30, 2000
         and 1999......................................................    5

         Consolidated Statements of Cash Flows (unaudited)
         For the six month periods ended June 30, 2000 and 1999........    6

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

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

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.............................................   18

Item 4.  Submission of Matters to a Vote of Security Holders              18

Item 5.  Other Material Events                                            18

Item 6.  Exhibits and Reports on Form 8-K..............................   18

         SIGNATURE.....................................................   19

         INDEX TO EXHIBITS.............................................   20


                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

<TABLE>
<CAPTION>
                                                               June 30,      December 31,
                                                                 2000            1999
                                                             ------------   --------------
                                                             (Unaudited)
 <S>                                                           <C>           <C>
 ASSETS
 Current assets:
   Cash and cash equivalents                                   $  83,267     $   71,528
   Short-term investments                                         39,133         31,581
   Accounts receivable, net                                       70,004         72,736
   Inventories, net                                                3,069          3,399
   Prepaid expenses and other current assets                       9,974          8,080
   Deferred income taxes                                           1,041            938
                                                              -----------   ------------
   Total current assets                                          206,488        188,262

 Property, net                                                    43,775         40,593
 Long-term investments                                             1,881          5,542
Intangible assets, net                                            14,710              -
 Deferred income taxes                                             4,735          4,752
 Other assets                                                      1,663          1,743
                                                              -----------   ------------
     Total assets                                              $ 273,252     $  240,892
                                                              ===========   ============

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
   Accounts payable                                            $  11,022     $   16,642
   Accrued compensation and benefits                              21,213         24,079
   Unearned maintenance revenue                                   25,188         16,286
   Income taxes payable                                            9,528          7,808
   Other accrued liabilities                                      20,577         21,670
                                                              -----------   ------------
   Total current liabilities                                      87,528         86,485

 Unearned maintenance revenue                                      5,906          3,949

 Stockholders' equity:
   Preferred stock - $.10 par value; 7,000,000 shares
     authorized; none issued and outstanding
   Common stock - $.01 par value; 100,000,000 shares
     authorized;  35,377,871 and 33,578,642 shares
     outstanding at June 30, 2000 and December 31, 1999,
     respectively                                                167,502        149,779
   Retained earnings                                              36,471         22,981
   Accumulated other comprehensive operations                     (9,588)        (7,735)
                                                              -----------   ------------
                                                                 194,385        165,025
   Treasury stock, at cost; 1,098,000 shares at
     June 30, 2000 and December 31, 1999 respectively            (14,567)       (14,567)
                                                              -----------   ------------
   Total stockholders' equity                                    179,818        150,458
                                                              -----------   ------------

     Total liabilities and stockholders' equity                $ 273,252     $  240,892
                                                              ===========   ============
See accompanying notes to consolidated financial statements.
</TABLE>

                                       3

<PAGE>

<TABLE>
<CAPTION>
                                                          FILENET CORPORATION
                                                    CONSOLIDATED STATEMENTS OF INCOME
                                                  (In thousands, except per share data)

                                   Three Months Ended June 30,         Six Months Ended June 30,
                                  -------------------------------   --------------------------------
                                     2000              1999              2000             1999
                                  -------------    --------------   ---------------   --------------
                                  (Unaudited)      (Unaudited)       (Unaudited)       (Unaudited)
 <S>                               <C>             <C>                 <C>               <C>
 Revenue:
   Software                        $    49,629       $    48,651       $    97,741       $   90,635
   Service                              40,686            33,893            80,168           67,320
   Hardware                              4,764             3,545             9,972            9,576
                                  -------------     -------------     -------------     ------------
   Total revenue                        95,079            86,089           187,881          167,531
                                  -------------     -------------     -------------     ------------
 Costs and expenses:
   Cost of software revenue              4,275             4,663             8,564            8,624
   Cost of service revenue              23,076            20,515            46,181           40,819
   Cost of hardware revenue              3,535             1,867             6,426            5,033
   Research and development             13,931            13,234            28,069           26,336
   Amortization of intangibles             254                 -               254                -
   Selling, general and
      administrative                    39,350            40,746            80,296           80,191
   Purchased in process
      research and development           2,984                 -             2,984                -
                                  -------------     -------------     -------------     ------------
   Total costs and expenses             87,405            81,025           172,774          161,003
                                  -------------     -------------     -------------     ------------

 Operating income                        7,674             5,064            15,107            6,528

 Other income, net                       1,328               499             2,520            1,960
                                  -------------     -------------     -------------     ------------

 Income before income taxes              9,002             5,563            17,627            8,488

 Provision for income taxes              1,980             1,669             4,136            2,546
                                  -------------     -------------     -------------     ------------

 Net income                        $     7,022       $     3,894       $    13,491       $    5,942
                                  =============     =============     =============     ============
 Earnings per share:
   Basic                           $      0.21       $      0.12       $      0.40       $     0.19
   Diluted                         $      0.19       $      0.12       $      0.37       $     0.18

 Weighted average shares
  outstanding:
   Basic                                34,183            32,066            33,763           31,990
   Diluted                              36,602            32,563            36,731           32,558

See accompanying notes to consolidated financial statements.
</TABLE>

                                       4
<PAGE>

                               FILENET CORPORATION
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)

 <TABLE>
 <CAPTION>
                                                  Three Months Ended June 30,        Six Months Ended June 30,
                                               --------------------------------   --------------------------------
                                                   2000              1999             2000              1999
                                               --------------   ---------------   --------------   ---------------
                                                (Unaudited)      (Unaudited)       (Unaudited)       (Unaudited)
 <S>                                            <C>              <C>               <C>              <C>
 Net income                                      $     7,022      $      3,894      $    13,491      $      5,942
                                               --------------   ---------------   --------------   ---------------
 Other comprehensive income(loss):
   Foreign currency translation adjustments1            (183)           (1,702)          (1,878)           (4,355)
 Unrealized gains (losses) on securities:
    Unrealized holding gains (losses)2                    32               (64)              25               (80)
                                               --------------   ---------------   --------------   ---------------
 Total other comprehensive income (loss)                (151)           (1,766)          (1,853)           (4,435)
                                               --------------   ---------------   --------------   ---------------
 Comprehensive income                            $     6,871      $      2,128      $    11,638      $      1,507
                                               ==============   ===============   ==============   ===============
--------------------------------------------------------------------------------------------------------------------
1net of tax effect of $122 and $1,135 for the three  months  ended June 30, 2000
and 1999,  respectively  and net of tax  effect of $1,252 and $2,903 for the six
months ended June 30, 2000 and 1999, respectively

2net of tax  benefit of $(21) and tax effect of $43 for the three  months  ended
June 30,  2000 and 1999,  respectively  and net of tax  benefit of $(17) and tax
effect of $53 for the six months ended June 30, 2000 and 1999, respectively

 See accompanying notes to consolidated financial statements.
 </TABLE>

                                       5
<PAGE>

                               FILENET CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                             Six Months Ended June 30,
                                                        -----------------------------------
                                                             2000                1999
                                                        ---------------   -----------------
                                                          (unaudited)        (unaudited)
 <S>                                                       <C>               <C>
 Cash flows from operating activities:
 Net income                                                 $   13,491       $     5,942
 Adjustments to reconcile net loss to net cash
   provided by operating activities:
     Purchased in-process research and development               2,984                 -
     Depreciation and amortization                               8,877             8,688
     Provision for doubtful accounts                               158               202
     Deferred income taxes                                         (86)               59
     Changes in operating assets and liabilities,
      net of acquisition:
       Accounts receivable                                       1,066            (9,263)
       Inventories                                                 330              (695)
       Prepaid expenses and other current assets                (1,936)              783
       Accounts payable                                         (5,513)           (5,687)
       Accrued compensation and benefits                        (2,622)              734
       Unearned maintenance revenue                             10,954            10,682
       Income taxes payable                                      1,850             1,845
       Other                                                    (3,649)            7,737
                                                           -------------     ------------
 Net cash provided by operating activities                      25,904            21,027
                                                           -------------     ------------

 Cash flows from investing activities:
 Capital expenditures                                          (12,568)           (8,898)
 Proceeds from sale of equipment                                   419             1,313
 Cash paid for acquisitions                                    (20,000)                -
 Purchases of marketable securities                            (16,521)          (28,048)
 Proceeds from sales and maturities of marketable
  securities                                                    17,842            15,600
                                                           -------------     ------------
 Net cash used by investing activities
                                                               (30,828)          (20,033)
                                                           -------------     ------------
 Cash flows from financing activities:

 Proceeds from issuance of common stock                         17,723             2,340
                                                           ------------      ------------
 Net cash provided by financing activities                      17,723             2,340
                                                           ------------      ------------
 Effect of exchange rate changes on cash and cash
   equivalents                                                  (1,060)           (1,658)
                                                           ------------      ------------

 Net increase in cash and cash equivalents
                                                                11,739             1,676
 Cash and cash equivalents, beginning of year
                                                                71,528            55,820
                                                           ------------      ------------
 Cash and cash equivalents, end of period                   $   83,267        $   57,496
                                                           ============      ============

 Supplemental cash flow information:
 Interest paid                                            $         14        $        9
 Income taxes paid                                        $      2,336        $       46


See accompanying notes to consolidated financial statements.
</TABLE>
                                      6
<PAGE>


                               FILENET CORPORATION
                   Notes To Consolidated Financial Statements
                                   (Unaudited)

1.   In the opinion of the management of FileNET  Corporation  ("the  Company"),
     the  accompanying   unaudited  consolidated  financial  statements  reflect
     adjustments  (consisting  of normal  recurring  adjustments)  necessary  to
     present  fairly the financial  position of the Company at June 30, 2000 and
     the results of its operations,  its  comprehensive  operations and its cash
     flows for the three  month and six month  periods  ended June 30,  2000 and
     1999.  Certain  information and footnote  disclosures  normally included in
     financial  statements have been condensed or omitted  pursuant to rules and
     regulations of the Securities and Exchange Commission ("SEC"), although the
     Company  believes  that  the  disclosures  in  the  consolidated  financial
     statements  are  adequate  to  ensure  the  information  presented  is  not
     misleading.  These  consolidated  financial  statements  should  be read in
     conjunction with the consolidated  financial  statements and notes thereto,
     and Management's Discussion and Analysis of Financial Condition and Results
     of Operations contained in the Company's Annual Report on Form 10-K for the
     fiscal year ended December 31, 1999 and the Company's  Quarterly  Report on
     form 10Q for the quarter  ended March 31, 2000.  The results of  operations
     for the interim  periods are not  necessarily  indicative  of the operating
     results for the year.

2.   On May 18,  2000,  the Company  acquired  certain  assets from  Application
     Partners   Incorporated  (API)  for  $20.0  million.  The  acquisition  was
     accounted for as an asset purchase, and the purchase price was allocated as
     follows (in thousands):

              Assembled workforce                            $      386
              Goodwill                                           14,578
              In-process research and development                 2,984
              Prepaid expense                                     2,000
              Fixed assets                                           78
                                                            ------------
              Total purchase price                           $   20,026
                                                            ============

     The amount  allocated to assembled  workforce  is being  amortized  over an
     estimated  useful life of three years.  The amount allocated to goodwill is
     being amortized over an estimated useful life of five years.  Additionally,
     retention  payments of $2.0  million were  recorded as a prepaid  asset and
     will be expensed based upon defined future employment requirements.

     Based upon an independent third party appraisal, the Company allocated $3.0
     million to in-process  research and development which was an element of the
     purchase price. The in-process research and development expenses related to
     new  product  projects  that  were  under  development  at the  date of the
     acquisition  and were expected to  eventually  lead to new products but had
     not yet established feasibility and for which no future alternative use was
     identified.  The  valuation  of the  in-process  research  and  development
     projects was based upon the  discounted  expected  future net cash flows of
     the products over their expected life,  reflecting the estimated percent of
     completion  of the  projects  and an estimate of the costs to complete  the
     projects.  New product development  projects underway at API at the time of
     the acquisition included Sequis, an eService application which we estimated
     was 88%  complete at the date of the  acquisition.  The  estimated  cost to
     complete  the project  will  aggregate  approximately  $300,000 and will be
     incurred over a three-month period. Since the date of acquisition,  we have
     incurred approximately $80,000 related to the project.

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

4.   The following table is a  reconciliation  of the earnings and share amounts
     used in the  calculation of basic  earnings per share and diluted  earnings
     per share for the three and six months ended June 30, 2000 and 1999.

   <TABLE>
   <CAPTION>
                                                       Three Months ended June 30,       Six Months ended June 30,
                                                    ------------------------------------------------------------------
                                                           2000             1999             2000             1999
                                                    ---------------  ---------------  ---------------  ---------------
   <S>                                              <C>              <C>              <C>              <C>
   Net income                                        $       7,022    $       3,894    $      13,491    $      5,942
                                                    ===============  ===============  ===============  ==============

                                       7
<PAGE>

   Weighted average basic shares outstanding                34,183           32,066           33,763          31,990
      Effect of dilutive stock options                       2,419              497            2,968             568
                                                    ---------------  ---------------  ---------------  ---------------
   Weighted average diluted shares outstanding              36,602           32,563           36,731          32,558
                                                    ===============  ===============  ===============  ===============

      Basic earnings per share                                0.21             0.12             0.40            0.19
      Diluted earnings per share                              0.19             0.12             0.37            0.18

   </TABLE>

5.   In June 1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
     Statement  of  Financial  Accounting  Standard  (SFAS) No. 130,  "Reporting
     Comprehensive   Income."  SFAS  No.  130  requires  enterprises  to  report
     comprehensive  income  and  its  components  in  general-purpose  financial
     statements. SFAS No. 130 was effective for the Company beginning January 1,
     1998.  Accordingly,  the Company has prepared  Statements of  Comprehensive
     Operations for the six month period ended June 30, 2000.  Accumulated other
     comprehensive operations as of June 30, 2000 is comprised of the following:


<TABLE>
<CAPTION>
                                                                        Accumulated
                                 Foreign Currency     Unrealized            Other
                                   Translation          Holding         Comprehensive
(In thousands)                      Adjustment       Gains (Losses)       Operations
                                 -----------------  -----------------  -----------------
<S>                              <C>                <C>                <C>
 Balance, December 31, 1999       $        (7,638)   $          (97)    $        (7,735)
 Current period changes                    (1,878)               25              (1,853)
                                 -----------------  -----------------  -----------------
 Balance June 30, 2000            $        (9,516)   $          (72)    $        (9,588)
                                 =================  =================  =================
</TABLE>

6.   The Company has prepared  operating segment  information in accordance with
     SFAS  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 groups,  in
     deciding  how to  allocate  resources  and in  assessing  performance.  The
     operating segments are managed separately because each segment represents a
     strategic  business unit that offers  different  products or services.  The
     results of the segments reflect  allocation of certain  functional  expense
     categories  consistent with its internal reporting which is not the same as
     GAAP reporting.

     Operating  segments data for the three and six month periods ended June 30,
     2000 and 1999 are as follows:

        <TABLE>
        <CAPTION>
                                               Three months ended June 30,     Six months ended June 30,
        In thousands                                 2000            1999           2000           1999
                                              ------------------------------  ----------------------------
       <S>                                      <C>             <C>            <C>            <C>
       Software
         Revenue                                $  49,629       $  48,651      $  97,741      $  90,635
         Operating income (loss)                    1,456             939          1,175        (2,725)

       Customer Support
         Revenue                                $  25,657       $  19,629      $  50,503      $  39,522
         Operating income                           6,497           3,269         13,759          7,646

       Professional Services and Education
         Revenue                                $  13,669       $  12,542      $  27,071      $  23,936
         Operating income (loss)                     (267)            309           (324)           373

       Hardware
         Revenue                                $   4,765       $   3,545      $   9,972      $   9,576
         Operating income (loss)                     (252)            397            156            919

       Other
         Revenue                                $   1,359       $   1,722      $   2,594      $   3,862
         Operating income                             240             150            341            315

                                       8
<PAGE>

       Total
         Revenue                                $  95,079       $  86,089      $ 187,881      $ 167,531
         Operating income                           7,674           5,064         15,107          6,528
       </TABLE>

     Included in software  revenue is $21.0 million related to Web based product
     for the three months  period ended June 30, 2000 and $34.4  million for the
     six months period ended June 30, 2000.

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

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

     The Company has moved for summary judgment on noninfringement as to each of
     the five patents in the suit, and for summary  judgment of invalidity as to
     one of the patents.  Eastman moved for summary judgment as to the Company's
     unenforceability  defense  on  one  of  the  patents.  In  July  1998,  the
     Magistrate Judge assigned to the case heard oral arguments on the Company's
     motion for summary judgment that U.S. Patent 4,918,588 is not infringed and
     is invalid.  The Magistrate  Judge has not yet decided these  motions.  The
     Company  believes  that after he has ruled on these  motions,  he will hear
     oral arguments in the remaining  motions in the sequence in which they were
     filed. A trial date has not yet been set.

     If it should be determined  that the patents at issue in the litigation are
     valid  and  are  infringed  by  any of the  Company's  products,  including
     Watermark products,  the Company will,  depending on the product,  redesign
     the infringing products or seek to obtain a license to market the products.
     There can be no  assurance  that the Company  will be able to  successfully
     redesign the infringing  products or obtain a license on acceptable  terms.
     Based on the Company's  analysis of these patents and their respective file
     histories,  the Company believes that it has meritorious  defenses to these
     claims;  however,  the ultimate  outcome or any  resulting  potential  loss
     cannot be determined at this time.

     Subsequent to December 31, 1998, the former  shareholders  of Saros filed a
     demand for  mandatory  arbitration  to release  approximately  two  hundred
     thousand  shares of FileNET stock which were held in escrow pursuant to the
     Agreement  and  Plan of  Merger  dated  January  17,  1996,  among  FileNET
     Corporation,  FileNET Acquisition Corporation,  and Saros, and for damages.
     Mandatory  arbitration  is  scheduled  for  January  9, 2001.  The  Company
     believes that it has  meritorious  reasons for not releasing the shares and
     other  defenses  to the claims;  however,  the  ultimate  or any  resulting
     potential loss cannot be presently determined.

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

                                       9
<PAGE>

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

The following  should be read in  conjunction  with the  unaudited  consolidated
financial  statements  and notes thereto  included in Part I--Item 1 and Factors
That May Affect Future Results in Item 2 of this Quarterly Report,  and with the
audited  consolidated  financial  statements and notes thereto, and Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
contained in our Annual  Report on Form 10-K for the fiscal year ended  December
31, 1999 and our  Quarterly  Report on form 10Q for the quarter  ended March 31,
2000.

Results of Operations

Revenue
 <TABLE>
 <CAPTION>
                                            Three Months Ended June 30,               Six Months Ended June 30,
                                        ------------------------------------    ------------------------------------
 (Dollars in millions)                     2000         1999      % Change        2000         1999       % Change
                                        ------------ -----------  ----------    ----------- ------------ -----------
<S>                                      <C>          <C>              <C>      <C>          <C>               <C>
 Software revenue
   Domestic                               $    35.6    $   32.9          8%      $    67.5    $    59.7         13%
   International                               14.0        15.8        (11%)          30.2         31.0         (3%)
                                         -----------  ----------                -----------  -----------
   Total software revenue                 $    49.6    $   48.7          2%      $    97.7    $    90.7          8%
                                         -----------  ----------                -----------  -----------
     Percentage of total revenue                 52%         57%                      52%          54%

 Customer Support
   Domestic                               $    20.4    $   15.7         30%      $    39.6    $    31.5         26%
   International                                5.3         4.0         33%           11.0          8.1         36%
                                         -----------  ----------                -----------  -----------
   Total customer support revenue         $    25.7    $   19.7         30%      $    50.6    $    39.6         28%
                                         -----------  ----------                -----------  -----------
     Percentage of total revenue                 27%         23%                        27%          24%

 Professional Services and Education
   Domestic                               $    10.6    $    9.0         18%      $    20.9    $    16.8         24%
   International                                3.1         3.5        (11%)           6.2          7.0        (11%)
                                         -----------  ----------                -----------  -----------
   Total professional services and
     education revenue                    $    13.7    $   12.5         10%      $    27.1    $    23.8         14%
                                         -----------  ----------                -----------  -----------
     Percentage of total revenue                 14%         14%                        15%          14%

 Hardware revenue
   Domestic                               $     3.6    $    2.3         57%      $     8.0    $     7.1         13%
   International                                1.2         1.2          0%            2.0          2.4        (17%)
                                        ------------  ----------                -----------  -----------
   Total hardware revenue                 $     4.8    $    3.5         37%      $    10.0    $     9.5          5%
                                        ------------  ----------                -----------  -----------
     Percentage of total revenue                  5%          4%                         5%           6%

 Other revenue
   Domestic                               $     1.1    $    1.3        (15%)     $     2.2    $     3.1        (29%)
   International                                0.2         0.4        (50%)           0.3          0.8        (63%)
                                        ------------  ----------                -----------  -----------
   Total other revenue                    $     1.3    $    1.7        (24%)     $     2.5         $3.9        (36%)
                                        ------------  ----------                -----------  -----------
     Percentage of total revenue                 1%          2%                         1%           2%
                                        ------------  ----------                -----------  -----------
 Total revenue
   Domestic                               $    71.3    $   61.2         17%      $   138.2    $   118.2         17%
   International                               23.8        24.9         (4%)          49.7         49.3          1%
                                        ------------ -----------                -----------  -----------
   Total revenue                          $    95.1    $   86.1         10%      $   187.9    $   167.5         12%
                                        ============ ===========                ===========  ===========
 </TABLE>

Software revenue from the licensing of our software products increased 2% and 8%
for the three and six month periods, respectively,  ended June 30, 2000 over the
comparable periods of 1999.  Software revenue growth was adversely affected by a
decline in international sales.

                                       10
<PAGE>

Customer support revenue consists of revenue from maintenance contracts and "fee
for service"  revenues.  Customer support revenue  increased 30% and 28% for the
three and six month  periods,  ended June 30, 2000 over the same periods of 1999
due to increased maintenance revenue from the growth of our installed base.

Professional   services  and  education  revenue  is  generated  primarily  from
consulting  and  implementation  services  provided to end users of our software
products,  technical consulting services provided to our resellers, and training
services.  Such services are primarily  performed on a time and material  basis.
Professional  services and education revenue increased 10% and 14% for the three
and six month periods ended June 30, 2000 over the comparable period of 1999 and
is a result  of an  increase  in  consulting  services  and  custom  development
projects along with an increase in sales of pre-packaged service offerings which
include both consulting and training.

Hardware revenue is generated primarily from the sale of 12-inch optical storage
and retrieval libraries (OSAR). Hardware revenue increased by 37% and 5% for the
three and six month  periods ended June 30, 2000 over the  comparable  period of
1999 due to an increase in 30 gigabyte drive orders. Hardware revenue,  however,
is expected to continue to decline as a percentage of total revenue.

Other  revenue is  generated  from the sale of spare  parts,  supplies and third
party products.  Other revenue decreased 24% and 36% for the three and six month
periods, respectively,  ended June 30, 2000 compared to the same periods in 1999
due to  diminished  demand for spares and  expected  decreased  orders for third
party product.

International  revenue  represented  25% and 29% of total  revenues in the three
month  periods  ended June 30,  2000 and 1999,  respectively.  For the six month
periods ended June 30 2000 and 1999  international  revenue  constituted 26% and
29%, respectively.  Although weaker performance in our international  operations
has resulted in a lower  proportion of revenue being generated  internationally,
management expects that international  operations will continue to account for a
significant  portion of total  revenues.  However,  international  revenues  are
subject to certain  risks  including  but not limited to political  and economic
instability and currency fluctuation.

Cost of Revenue
 <TABLE>
 <CAPTION>
                                              Three Months Ended June 30,            Six Months Ended June 30,
                                        --------------------------------------  -----------------------------------
                                                                        %                                     %
                                           2000         1999         Change       2000         1999        Change
 (Dollars in millions)                  --------------------------------------  -----------------------------------
 <S>                                         <C>          <C>          <C>         <C>          <C>           <C>
 Cost of software revenue                   $  4.3       $  4.7        (9%)       $  8.6       $  8.6          0%
  Percentage of software revenue                 9%          10%                       9%           9%

 Cost of customer support revenue           $ 10.2       $  9.2        11%        $ 20.8       $ 17.9         16%
  Percentage of customer support
    revenue                                     40%          47%                      41%          45%

 Cost of professional services  and
    education revenue                       $ 11.9       $  9.9        20%        $ 23.4       $ 19.7         19%
  Percentage of professional services
     and education revenue                      87%          79%                      86%          83%

 Cost of hardware revenue                   $  3.5       $  1.8        94%        $  6.4       $  5.0         28%
  Percentage of hardware revenue                73%          51%                      64%          53%

 Cost of other revenue                      $  1.0       $  1.4       (29%)       $  2.0       $  3.2        (38%)
 Percentage of other revenue                    77%          82%                      80%          82%

 Total cost of revenue                      $ 30.9      $  27.0        14%        $ 61.2       $ 54.4         13%
  Percentage of total revenue                   32%          31%                      33%          32%

 </TABLE>

The cost of software  revenue  includes  royalties paid to third parties and the
cost of software  distribution.  The cost of software revenue as a percentage of
software  revenue for the three month period ended June 30, 2000 decreased to 9%
from  10% in the  same  period  of  1999.  The  cost of  software  revenue  as a
percentage  of  software  revenue for the six month  period  ended June 30, 2000
remained constant at 9% for the same period in 1999.

The cost of  customer  support  revenue  includes  customer  support  personnel,
supplies, and the cost of third party hardware maintenance. The cost of customer

                                       11
<PAGE>

support revenue as a percentage of customer  support revenue for the three month
period ended June 30, 2000 decreased to 40% from 47% in the same period of 1999.
The cost of customer  support  revenue for the six month  period  ended June 30,
2000 decreased to 41% from 45% for the  comparable  period of 1999. The decrease
is attributable to increased revenue without a proportional increase in cost.

The cost of professional  services and education  revenue consists  primarily of
professional services personnel, training personnel and third party contractors.
The cost of  professional  services and  education  revenue as a  percentage  of
professional  services  and  education  revenue for the three month period ended
June 30, 2000  increased to 87% from 79% in the same period of 1999. The cost of
professional  services and education revenue for the six month period ended June
30, 2000 increased 86% from 83% for the comparable  period of 1999. The increase
was due  primarily to an increase in the number of  personnel, the cost of which
has not been fully absorbed by proportional revenue growth.

The cost of hardware revenue  includes the cost of manufacturing  OSARs, and the
cost of  hardware  integration  personnel.  The cost of  hardware  revenue  as a
percentage  of hardware  revenue for the three month  period ended June 30, 2000
increased  to 73%  from  51% for the  comparable  period  of  1999.  The cost of
hardware  revenue as a percentage  of hardware  revenue for the six month period
ended June 30, 2000 increased to 64% from 53% for the comparable period of 1999.
The increase is due to higher costs  associated  with  upgrading  and  providing
warranty coverage for certain products.

The cost of other revenue  includes the cost of supplies,  spare parts and third
party  product.  The cost of other  revenue as a percentage of other revenue for
the three  months  ended  June 30,  2000  decreased  to 77% from 82% in the same
period of 1999.  The cost of other  revenue as a percentage of other revenue for
the six  month  period  ended  June  30,  2000  decreased  80%  from 82% for the
comparable  period of 1999.  The decrease in cost of other revenue is the result
of a reduction in fixed costs.

Operating Expenses

 <TABLE>
 <CAPTION>
                                         Three Months Ended June 30,             Six Months Ended June 30,
                                   -------------------------------------    ------------------------------------
 (Dollars in millions)                   2000        1999     % Change           2000        1999     % Change
                                   -----------------------   -----------    ----------------------   -----------
 <S>                                   <C>         <C>           <C>            <C>        <C>             <C>
 Research and development             $  13.9     $  13.2        5%            $  28.0    $  26.3         6%
  Percentage of total revenue             15%         15%                          15%        16%

 Selling, general and
    administrative                    $  39.3     $  40.8       (4%)           $  80.3    $  80.2         0%
  Percentage of total revenue             41%         47%                          43%        48%
 </TABLE>

Research  and  development  expenses  increased  5% and 6% for the three and six
month  periods  ended June 30, 2000,  respectively,  compared to the  comparable
periods  of 1999.  The  increases  in  absolute  dollars  were due to a  general
increase in salaries. As a percentage of total revenue, research and development
expenses  were at 15% for the  three-month  period ended June 30, 2000 and 1999,
respectively  and 15%  compared to 16% for the six month  period  ended June 30,
2000 and 1999, respectively.

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

Selling,  general and administrative  expenses decreased 4% and 0% for the three
and six month  periods ended June 30, 2000 compared to the same periods of 1999.
The decrease was  primarily  due overall  reduced  spending.  As a percentage of
total revenue, selling, general and administrative expenses decreased to 41% for
the three month  period ended June 30, 2000 from 47% in the same period of 1999.
For the six month period  ended June 30, 2000  selling , general  administration
expenses  decreased  to 43%  compared  to 48% for the same period in 1999 due to
expense levels growing at a lower rate than revenue.

Amortization of intangibles and in-process research and development.  On May 18,
2000, we acquired certain assets from Application  Partners  Incorporated  (API)
for $20.0 million. The acquisition was accounted for as a purchase. Amortization
expense for the  purchased  intangible  assets was $254,000 for the period ended
June 30,  2000,  compared  with none in the same  period of 1999.  Based upon an
independent  third  party  appraisal,  $3.0  million of the  purchase  price was
allocated to in-process research and development which was immediately expensed.
The in-process research and development expenses related to new product projects
that were under  development at the date of the acquisition and were expected to

                                       12
<PAGE>

eventually lead to new products but had not yet established  feasibility and for
which no future alternative use was identified.  The valuation of the in-process
research and development  projects was based upon the discounted expected future
net cash  flows  of the  products  over  their  expected  life,  reflecting  the
estimated  percent of completion of the projects and an estimate of the costs to
complete the projects.  New product development  projects underway at API at the
time of the  acquisition  included  Sequis,  an  eService  application  which we
estimated was 88% complete at the date of the acquisition. The estimated cost to
complete the project will aggregate  approximately $300,000 and will be incurred
over a  three-month  period.  Since the date of  acquisition,  we have  incurred
approximately $80,000 related to the project.

Uncertainties that could impede the progress of converting a development project
to a developed  technology  include the  availability of financial  resources to
complete the project, failure of the technology to function properly,  continued
economic  feasibility of developed  technologies,  failure to convert technology
into  a  repetitively  manufacturable  product,  customer  acceptance,  customer
demand,  and  customer  qualification  of  such  new  technology,   and  general
competitive  conditions  in the  industry.  There can be no  assurance  that the
in-process research and development projects will be successfully  completed and
commercially introduced.

Provision  for Income  Taxes.  The combined  federal,  state and foreign  annual
effective  tax rate for the three months ended June 30, 2000 was 22% compared to
30% for the comparable period in 1999. The combined  federal,  state and foreign
annual tax rate for the six months  ended June 30, 2000 was 23%  compared to 30%
for the comparable  period in 1999. The decrease in the rate is  attributable to
the utilization of domestic net operating loss  carryforwards as a result of the
increase in domestic revenue.

Foreign Currency Fluctuations and Inflation.  Our performance can be affected by
changes in foreign  currency  values  relative to the U.S. dollar in relation to
the  Company's  revenue and  operating  expenses.  The impact to net income from
foreign  exchange  transactions  and hedging  activities is  immaterial  for all
periods  reported.  As of June  30,  2000,  we had  forward  exchange  contracts
outstanding  totaling  approximately $2.9 million in 9 currencies.  All of these
contracts mature in three months.

Other  comprehensive  loss  reflects an  increase of $0.2  million for the three
months  ended June 30, 2000 and an  increase of $1.9  million for the six months
ended June 30, 2000 in the unrealized loss due to foreign currency  translation.
This increase was primarily  attributable to unrealized  losses  associated with
the weakening of the Euro currency against the U.S. dollar during the period.

Management  believes  that  inflation  has not had a  significant  impact on the
prices of its products, the cost of its materials,  or its operating results for
the three months ended June 30, 2000 and 1999.

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


Liquidity and Capital Resources

At June 30, 2000, combined cash, cash equivalents and investments totaled $124.3
million,  an increase of $15.6  million from the end of 1999.  Cash  provided by
operating  activities  during the six months ended June 30, 2000  totaled  $25.9
million  and  resulted  primarily  from net  income;  an  increase  in  unearned
maintenance revenue related to prepaid maintenance  contracts;  and additions to
net income for  depreciation  and  amortization  expense  offset by decreases in
accounts payable and accrued  compensation and benefits.  Cash used by investing
activities  totaled  $30.8 million and was a result of capital  expenditures  of
$12.6 million and the acquisition of certain assets and in-process  research and
development  of $20.0  million.  Cash provided by financing  activities  totaled
$17.7  million  and was a result  of  proceeds  received  from the  exercise  of
employee stock options and the employee stock purchase plan.

                                       13
<PAGE>

Accounts  receivable  decreased  to $70.0  million  at June 30,  2000 from $72.7
million at December 31, 1999. Days sales outstanding  decreased to 67 days as of
June  30,  2000  from 70 days  as of  December  31,  1999.  Current  liabilities
increased to $87.5  million at June 30, 2000 from $86.5  million at December 31,
1999. The increase in current  liabilities is primarily a result of increases in
unearned  maintenance  revenue and income taxes payable,  offset by decreases in
accounts payable, and accrued compensation and benefits.

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

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

Recent Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants issued SOP
No. 98-1,  "Accounting for Costs of Computer Software  Developed or Obtained for
Internal  Use".  We  adopted  SOP No.  98-1  effective  January  1, 1999 with no
significant effect on our results of operations and financial condition.

In December 1999,  Staff  Accounting  Bulletin No. 101 ("SAB 101") was issued to
provide staff's views in applying  generally accepted  accounting  principles to
revenue recognition in financial statements. SAB 101, is effective no later than
the fourth fiscal quarter of fiscal years  beginning after December 15, 1999. We
are  currently  evaluating  the impact this  bulletin may have on our  financial
statements.

In June 1998, the Financial Accounting Standards Board ("FASB") issued, SFAS No.
133, "Accounting for Derivative  Instruments and Hedging  Activities".  SFAS No.
133 as amended,  is effective for fiscal years beginning after June 15, 2000 and
will require us to record all  derivatives  on the balance  sheet at fair value.
For derivatives  that are hedges,  changes in the fair value of derivatives will
be offset by the change in fair value of the hedged assets, liabilities, or firm
commitments.  We  believe  the  impact of  adopting  this  standard  will not be
material to our results of operations or equity.

Other Matters

Year 2000. In 1997, we implemented a year 2000 Integrity  Program to ensure that
our computer  software  products and internal  business  systems would  function
properly  in year  2000  and  thereafter.  Since  January  1,  2000 we have  not
experienced any problems with our software products or internal business systems
to  properly  manage and  manipulate  data  related  to the year  2000.  All new
generations of our software products are released as year 2000 compliant.

The EURO Conversion.  On January 1, 1999, eleven of the fifteen member countries
of the European Union  established fixed conversion rates between their existing
sovereign currencies and the EURO. These countries have agreed to adopt the EURO
as their  common  legal  currency  from that date.  The EURO  trades on currency
exchanges and is available for non-cash transactions. These countries will issue
sovereign debt exclusively in EURO and will re-denominate  outstanding sovereign
debt.  Effective  on this date,  these  countries  no longer  control  their own
monetary  policies  by  directing  independent  interest  rates  for the  legacy
currencies.  Instead,  the authority to direct monetary policy,  including money
supply  and  official  interest  rates for the  EURO,  is  exercised  by the new
European Central Bank.

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

We have made the necessary  changes to our internal  business systems to support
transactions  denominated in the EURO,  including  establishing EURO price lists
for effected countries.  We have evaluated the impact the conversion to the EURO
will have on our financial  condition and results of  operations.  Based on this
evaluation  to date,  we  currently do not believe that there will be a material
impact on our  financial  condition or results of  operations as a result of the

                                       14
<PAGE>

EURO conversion, except that we cannot currently assess the impact that a common
EURO-based  price list will have on how we market our products in Europe nor the
impact, if any, on revenues generated in Europe.

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.

Factors That May Affect Future Results

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

Rapid Technological Change; Product Development. 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 continued success 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.  There can be no
assurance  that we will be successful  in developing  and marketing new software
products and services  offerings or enhancements  to our existing  software on a
timely basis or that any new or enhanced  software and services  offerings  will
adequately  address the changing needs of the  marketplace.  If we are unable to
develop and introduce new software and enhancements or new service offerings, in
a  timely  manner  in  response  to  changing  market   conditions  or  customer
requirements,  our business and operating  results could be adversely  affected.
From time to time,  we or our  competitors  may announce new software  products,
capabilities or  technologies  that have the potential to replace or shorten the
life cycles of our existing  software  products.  There can be no assurance that
announcements of currently planned or other new software products will not cause
customers to delay their  purchasing  decisions in anticipation of such software
products,  which  could  have a  material  adverse  effect on our  business  and
operating results.

Uncertainty of Future  Operating  Results;  Fluctuations in Quarterly  Operating
Results.  Prior growth  rates in our revenue and  operating  results  should not
necessarily  be considered  indicative  of future  growth or operating  results.
Future operating results will depend upon many factors, including the demand for
our products; the level of software product and price competition; the length of
our sales cycle; variations in the productivity of our sales force;  seasonality
of  individual  customer  buying  patterns;  the size and  timing of  individual
transactions;  the delay or  deferral of  customer  implementations;  the budget
cycles of our customers;  the timing of new software  introductions and software
enhancements by us and our competitors;  the mix of sales by products, software,
services and distribution channels;  levels of international sales; acquisitions
by competitors;  changes in foreign currency exchange rates,  impact of the EURO
currency;  our ability to develop and market new  software  products and control
costs; and general domestic and international economic and political conditions.

As a result of these factors, revenues and operating results for any quarter are
subject to variation  and are not  predictable  with any  significant  degree of
accuracy. Therefore, we believe that period-to-period comparisons of our results
of operations  are not  necessarily  meaningful and 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 be materially adversely affected.

Competition.  The  Web  content  management,   integrated  document  management,
imaging,  workflow,  computer  output  to  laser  disk and  electronic  document
management  software  markets  are  highly  competitive,  and there are  certain
competitors of ours with substantially greater sales, marketing, development and
financial  resources.  We believe that the  competitive  factors  affecting  the
market for our  software  products  and  services  include  vendor  and  product
reputation; product quality, performance and price; the availability of software
products on multiple platforms;  product  scalability;  product integration with
other enterprise  applications;  software  functionality and features;  software
ease of use; and the quality of professional services, customer support services
and training.  The relative importance of each of these factors depends upon the
specific  customer  involved.  While we believe we compete  favorably in each of
these areas, there can be no assurance that we will continue to do so. Moreover,
our  present  or future  competitors  may be able to develop  software  products
comparable  or superior to those  offered by us,  offer lower price  products or
adapt  more  quickly  than  we do  to  new  technologies  or  evolving  customer
requirements. Competition is expected to intensify. In order to be successful in
the future, we must respond to technological  change,  customer requirements and
competitors'  current  software  products  and  innovations.  There  can  be  no
assurance that we will be able to continue to compete  effectively in our market
or that  future  competition  will not have a  material  adverse  effect  on our

                                       15
<PAGE>

business, financial condition or results of operations. In addition, current and
potential   competitors   have   established   or  may   establish   cooperative
relationships  among themselves or with third parties to increase the ability of
their products to address the needs of the markets served by us. Accordingly, it
is possible that new competitors or alliances  among  competitors may emerge and
rapidly acquire  significant market share.  Increased  competition may result in
price  reductions,  reduced gross margins and loss of market share, any of which
could have a material  adverse  effect on our business,  financial  condition or
results of operations.

Intellectual  Property and other  Proprietary  Rights.  Our success depends,  in
part, on our ability to protect our proprietary  rights to the technologies used
in our principal products.  We rely on a combination of copyrights,  trademarks,
trade secrets,  confidentiality procedures and contractual provisions to protect
our proprietary rights in our software products.  There can be no assurance that
our  existing  or  future  copyrights,   trademarks,   trade  secrets  or  other
intellectual  property rights will be of sufficient scope or strength to provide
meaningful  protection  or a  commercial  advantage  to us. We have no  software
patents.  In  addition,  the laws of some  foreign  countries do not protect our
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance  that such factors would not have a material  adverse effect
on our business,  financial condition or results of operations.  In addition, we
also rely on certain  software  that we license  from third  parties,  including
software  that is  integrated  with  internally  developed  software used in our
products to perform key  functions.  There can be no  assurance  that such third
parties  will  remain in  business,  that they will  continue  to support  their
software products, or that their software products will otherwise continue to be
available  to us on  commercially  reasonable  terms.  The loss or  inability to
maintain any of these software  licenses could result in delays or reductions in
software  shipments  until  equivalent  software can be  developed,  identified,
licensed and integrated,  which could adversely  affect our business,  financial
condition or results of operations.

We may, from time to time, be notified that we are infringing  certain patent or
intellectual  property  rights of others.  Combinations  of technology  acquired
through past or future  acquisitions and our technology will create new software
products and technology that may give rise to claims of  infringement.  While no
actions  other than those  discussed  in Item I, Note 7, herein,  are  currently
pending  against us for  infringement of patent or other  proprietary  rights of
third  parties,  there can be no assurance  that third parties will not initiate
infringement  actions against us in the future.  Infringement actions can result
in  substantial  cost to,  and  diversion  of,  resources.  If we were  found to
infringe  upon the rights of  others,  no  assurance  can be given that we could
redesign the infringing products or could obtain licenses on acceptable terms or
at all, that significant  damages for past infringement would not be assessed or
that further litigation  relative to any such licenses or usage would not occur.
The failure to successfully defend any claims or redesign our products or obtain
necessary  licenses or other rights,  the ultimate  disposition of any claims or
the advent of litigation arising out of any claims of infringement, could have a
material  adverse  effect on our  business,  financial  condition  or results of
operations.

Dependence  on  Certain  Relationships.  We have  entered  into a number  of key
relationships  with other  companies such as Microsoft  Corporation,  IBM Global
Services,   Siebel  Systems  Inc,  SAP  AG,  Hewlett-Packard  Company,  and  Sun
Microsystems,  Inc.  There can be no  assurance  that these  companies  will not
reduce or  discontinue  their  relationships  with,  or  support  of, us and our
products.

Dependence on Key Management and Technical  Personnel.  Our success depends to a
significant  degree  upon the  continued  contributions  of our key  management,
marketing,  technical and operational  personnel.  In general, we do not utilize
employment agreements for our key employees.  The loss of the services of one or
more key  employees  could  have a  material  adverse  effect  on our  operating
results.  We also believe our future  success will depend in large part upon our
ability to attract and retain additional highly skilled  management,  technical,
marketing,   product   development,   operational   personnel  and  consultants.
Competition for such personnel,  particularly software developers,  professional
service consultants and other technical personnel, is intense, and pay scales in
the software industry have  significantly  increased.  There can be no assurance
that we will be successful in attracting and retaining such personnel.

International Sales. Historically,  we have derived approximately thirty percent
of our total  revenues  from  international  sales.  International  business  is
subject to certain risks  including  varying  technical  standards;  tariffs and
trade  barriers;  political and economic  instability;  reduced  protection  for
intellectual property rights in certain countries;  difficulties in staffing and
maintaining foreign operations;  difficulties in managing foreign  distributors;
varying   requirements   for  localized   products;   potentially   adverse  tax
consequences;  currency  exchange  fluctuations  including  those related to the
EURO;  the burden of  complying  with a wide  variety of complex  foreign  laws,
regulations  and treaties;  and the  possibility of  difficulties  in collecting
accounts  receivable.  There can be no assurance  that any of these factors will
not have a material  adverse  effect on our  business,  financial  condition  or
results of operations.

Product  Liability.  Software  and  products  as complex as those sold by us are
susceptible to errors or failures,  especially when first introduced or when new
versions  are  released.  Our software  products  are often  intended for use in

                                       16
<PAGE>

applications  that are  critical  to a  customer's  business.  As a result,  our
customers  may rely on the  effective  performance  of the software to a greater
extent than the market for software  products  generally.  We conduct  extensive
software  testing to ensure that our software is free of significant  errors and
defects.  In addition,  we have designed and tested the most current versions of
our software products to be year 2000 compliant.  However, some of our customers
are running earlier software products that are not year 2000 compliant. Although
we have been encouraging such customers to migrate to current software versions,
no assurance can be given that all of them will do so. Moreover, we also rely on
certain software that we license from third parties,  including software that is
integrated  with  internally  developed  software and is used in our products to
perform key functions.  There can be no assurance that such third party software
will be free of errors and defects or be year 2000  compliant.  Although we have
not experienced any material  product  liability claims to date, there can be no
assurance that errors or defects, whether associated with year 2000 functions or
otherwise, will not result in product liability claims against us in the future.
A successful  product  liability  claim brought against us could have a material
adverse effect upon our business, operating results and financial condition. Our
license agreements with customers typically contain provisions designed to limit
our exposure to potential product liability claims. However, it is possible that
such  limitation of liability  provisions may not be effective under the laws of
certain jurisdictions.

Stock Price  Volatility.  We believe  that a variety of factors  could cause the
trading price of our common stock to fluctuate, perhaps substantially, including
quarter-to-quarter   variations   in   operating   results;   announcements   of
developments related to our business;  fluctuations in our order levels; general
conditions in the technology sector or the worldwide  economy;  announcements of
technological  innovations,  new software products or product enhancements by us
or our  competitors;  key  management  changes;  changes in joint  marketing and
development  programs;  developments  relating to patents or other  intellectual
property  rights or disputes;  and  developments in our  relationships  with our
customers,  resellers  and  suppliers.  In  addition,  in recent years the stock
market in  general,  and the  market  for  shares of  high-technology  stocks in
particular,  have experienced  extreme price  fluctuations  that have often been
unrelated to the operating performance of affected companies.  Such fluctuations
could adversely affect the trading price of our common stock.


                                       17
<PAGE>


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

See Notes to Consolidated Financial Statements.


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

(a)  The 2000  Annual  Meeting of  Stockholders  of the Company was held at 9:00
     a.m. on May 18, 2000, in Costa Mesa, California.

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

      ------------------------ -------------------------- ----------------------
      Nominee                  Affirmative Votes          Votes Withheld
      ------------------------ -------------------------- ----------------------
      L. George Klaus          29,873,031                 547,847
      ------------------------ -------------------------- ----------------------
      William P. Lyons         29,874,561                 546,317
      ------------------------ -------------------------- ----------------------
      Lee D. Roberts           29,731,760                 689,118
      ------------------------ -------------------------- ----------------------
      John C. Savage           29,917,244                 503,634
      ------------------------ -------------------------- ----------------------
      Roger S. Siboni          29,872,230                 548,648
      ------------------------ -------------------------- ----------------------
      Theodore J. Smith        29,907,627                 513,251
      ------------------------ -------------------------- ----------------------

(c)  The  Company's  stockholders  were  asked to approve  an  amendment  to the
     Company's  1995 Stock  Option Plan (the "1995 Plan") to increase the number
     of shares of Common  Stock  issuable  under the 1995 Plan by an  additional
     1,350,000  shares.  This  proposal  was  approved  in  accordance  with the
     following vote of stockholders:

     ------------------- ------------------ ------------------- ----------------
                                                                Broker
     Votes For           Votes Against      Abstentions         Non-Votes
     ------------------- ------------------ ------------------- ----------------
     18,135,623          12,212,526         72,729              0
     ------------------- ------------------ ------------------- ---------------

(d)  The Company's  stockholders  were asked to approve an amendment to the 1998
     Employee  Stock  Purchase Plan (the "1998  Purchase  Plan") to increase the
     number of shares of Common Stock  issuable  under the 1998 Purchase Plan by
     an additional 340,000 shares. This proposal was approved in accordance with
     the following vote of stockholders:

     -------------------- ------------------ ------------------- ---------------
                                                                 Broker
     Votes For            Votes Against      Abstentions         Non-Votes
     -------------------- ------------------ ------------------- ---------------
     28,643,861           1,707,002          70,015              0
     -------------------- ------------------ ------------------- ---------------

Item 5.  Other Material Events

On May 18, 2000 the Company acquired  certain assets from Application  Partners,
Inc. (API) for $20.0 million.  The Purchase Agreement is hereby  incorporated by
reference in Exhibit 10.24

Item 6.  Exhibits and Reports on Form 8-K

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

(b)  No reports on Form 8-K were filed during the second quarter of 2000.


                                       18
<PAGE>


                                    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 14, 2000                    By:______________/s/_________________________
----------------
Date                                   Lee D. Roberts, President and
                                       Chief Executive Officer
                                      (Principal Executive Officer)




                                       19

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

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

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

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

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

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

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

10.2*           Business  Alliance  Program  Agreement  between  the  Registrant
                and  Oracle  Corporation  dated  July  1,  1996,  as amended  by
                Amendment  One thereto (filed as Exhibit  10.4 to Form 10-QA for
                the quarter ended June 30, 1996).

10.3*           Runtime   Sublicense   Addendum   between  the   Registrant  and
                Oracle Corporation  dated July 1, 1996,  as amended by Amendment
                One thereto (filed as Exhibit 10.4 to Form 10-QA for the quarter
                ended June 30, 1996).

10.3.1*         Runtime    Sublicense   Addendum   between  the  Registrant  and
                Oracle Corporation  dated July 1, 1996; as amended by Amendments
                Two  through Six thereto  (filed as Exhibit  10.3.1 to Form 10-Q
                for the quarter ended September 30, 1998).

10.4*           Full   Use   and    Deployment   Sublicense   Addendum   between
                the  Registrant  and  Oracle Corporation  dated July 1, 1996. as
                amended by Amendment One thereto  (filed as Exhibit 10.4 to Form
                10-QA for the quarter ended June 30, 1996).

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

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

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

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

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

----------------------------------------------
* Incorporated herein by reference
                                       20

<PAGE>



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

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

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

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

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

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

10.21*          Amended and Restated  FileNET  Corporation  1998  Employee Stock
                Purchase  Plan  (filed  as  Exhibit  99.15 to Form S-8, filed on
                October 29, 1999; Registration No. 333-89983).

10.22*          FileNET Corporation  International  Employee Stock Purchase Plan
                (filed as Exhibit 99.16 to Form S-8,  filed on October 29, 1999;
                Registration No. 333-89983).

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

10.24           Asset Purchase Agreement between the Registrant  and Application
                Partners, Inc. dated May 18, 2000.

27.1            Financial Data Schedule.

27.2            Financial Data Schedule amneded for Quarter ended March 31, 2000
                to reflect corrected date.

-----------------------------------------------
* Incorporated herein by reference
                                       21