##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended September 30, 2005
 OR
 o
    
    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: 0-27207
 VITRIA TECHNOLOGY, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    77-0386311(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 945 Stewart Drive
Sunnyvale, California 94085
(408) 212-2700
(Address, including Zip Code, of Registrants Principal Executive Offices
and Registrants Telephone Number, including Area Code)
 
 þ o
 þ o
 o þ




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Index
    
    PagePART I: FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements and NotesCondensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4: Controls and Procedures
    
    
    36PART II: OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    38Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3: Defaults Upon Senior Securities
    
    
    38Item 4: Submission of Matters to a Vote of Security Holders
    
    
    38Item 5: Other Information
    
    
    39Item 6: Exhibits
    
    
    39Signature
    
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
  
   September 30,
    
    
    December 31,2005
    
    
    2004(unaudited)
    
    
    (Note 1)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    27,139
    
    
    $
    32,106Short-term investments
    
    
    38,113
    
    
    
    46,457Accounts receivable, net
    
    
    10,141
    
    
    
    10,529Other current assets
    
    
    2,488
    
    
    
    1,880Total current assets
    
    
    77,881
    
    
    
    90,972Property and equipment, net
    
    
    1,227
    
    
    
    1,053Other assets
    
    
    748
    
    
    
    872Total assets
    
    $
    79,856
    
    
    $
    92,897Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    1,456
    
    
    $
    1,777Accrued compensation
    
    
    3,874
    
    
    
    4,186Other accrued liabilities
    
    
    5,179
    
    
    
    4,086Accrued restructuring expenses
    
    
    4,400
    
    
    
    6,091Deferred revenue
    
    
    11,218
    
    
    
    11,082Total current liabilities
    
    
    26,127
    
    
    
    27,222Long-Term Liabilities:Accrued restructuring expenses
    
    
    4,486
    
    
    
    7,332Other long-term liabilities
    
    
    1,486
    
    
    
    750Total long-term liabilities
    
    
    5,972
    
    
    
    8,082Commitments and ContingenciesStockholders Equity:Common Stock
    
    
    34
    
    
    
    33Additional paid-in capital
    
    
    276,029
    
    
    
    275,366Unearned stock-based compensation
    
    
    (292
    )
    
    
    Accumulated other comprehensive income
    
    
    485
    
    
    
    382Accumulated deficit
    
    
    (228,003
    )
    
    
    (217,692
    )Treasury stock, at cost
    
    
    (496
    )
    
    
    (496
    )Total stockholders equity
    
    
    47,757
    
    
    
    57,593Total liabilities and stockholders equity
    
    $
    79,856
    
    
    $
    92,897
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:License
    
    $
    3,929
    
    
    $
    3,066
    
    
    $
    11,497
    
    
    $
    8,331Service and other
    
    
    9,559
    
    
    
    13,234
    
    
    
    30,882
    
    
    
    35,923Total revenue
    
    
    13,488
    
    
    
    16,300
    
    
    
    42,379
    
    
    
    44,254Cost of revenue:License
    
    
    797
    
    
    
    227
    
    
    
    1,204
    
    
    
    551Service and other
    
    
    4,711
    
    
    
    5,900
    
    
    
    15,685
    
    
    
    17,900Total cost of revenue
    
    
    5,508
    
    
    
    6,127
    
    
    
    16,889
    
    
    
    18,451Gross profit
    
    
    7,980
    
    
    
    10,173
    
    
    
    25,490
    
    
    
    25,803Operating expenses:Sales and marketing
    
    
    4,784
    
    
    
    4,672
    
    
    
    14,629
    
    
    
    17,029Research and development
    
    
    3,878
    
    
    
    4,388
    
    
    
    13,256
    
    
    
    13,249General and administrative
    
    
    1,644
    
    
    
    3,121
    
    
    
    8,144
    
    
    
    9,980Stock-based compensation
    
    
    22
    
    
    
    6
    
    
    
    105
    
    
    
    349Restructuring
    
    
    38
    
    
    
    173
    
    
    
    645
    
    
    
    797Total operating expenses
    
    
    10,366
    
    
    
    12,360
    
    
    
    36,779
    
    
    
    41,404Loss from operations
    
    
    (2,386
    )
    
    
    (2,187
    )
    
    
    (11,289
    )
    
    
    (15,601
    )Interest income
    
    
    526
    
    
    
    277
    
    
    
    1,398
    
    
    
    780Other income (expense), net
    
    
    30
    
    
    
    79
    
    
    
    (263
    )
    
    
    (25
    )Net loss before income taxes
    
    
    (1,830
    )
    
    
    (1,831
    )
    
    
    (10,154
    )
    
    
    (14,846
    )Provision for income taxes
    
    
    55
    
    
    
    221
    
    
    
    157
    
    
    
    515Net loss
    
    $
    (1,885
    )
    
    $
    (2,052
    )
    
    $
    (10,311
    )
    
    $
    (15,361
    )Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.31
    )
    
    $
    (0.47
    )Weighted average shares used in computing basic
and diluted net loss per share
    
    
    33,524
    
    
    
    33,196
    
    
    
    33,459
    
    
    
    32,993
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Nine Months EndedSeptember 30,2005
    
    
    2004Operating activities:Net loss
    
    $
    (10,311
    )
    
    $
    (15,361
    )Adjustments to reconcile net loss to net cash
used in operating activities:Loss on disposal of fixed assets
    
    
    26
    
    
    
    37Forgiveness of note receivable from employees
    
    
    
    
    
    
    193Depreciation
    
    
    895
    
    
    
    1,550Stock-based compensation
    
    
    105
    
    
    
    349Provision for doubtful accounts
    
    
    (146
    )
    
    
    (155
    )Changes in assets & liabilities:Accounts receivable
    
    
    534
    
    
    
    7,124Other current assets
    
    
    (608
    )
    
    
    790Other assets
    
    
    124
    
    
    
    94Accounts payable
    
    
    (321
    )
    
    
    801Accrued liabilities
    
    
    947
    
    
    
    (83
    )Accrued restructuring charges
    
    
    (4,537
    )
    
    
    (4,506
    )Deferred revenue
    
    
    136
    
    
    
    (1,361
    )Other long term liabilities
    
    
    736
    
    
    
    (45
    )Net cash used in operating activities
    
    
    (12,420
    )
    
    
    (10,573
    )Investing activities:Purchases of property and equipment
    
    
    (1,149
    )
    
    
    (152
    )Purchases of investments
    
    
    (52,995
    )
    
    
    (48,587
    )Maturities of investments
    
    
    61,389
    
    
    
    85,540Net cash provided by investing activities
    
    
    7,245
    
    
    
    36,801Financing activities:Issuance of common stock, net
    
    
    267
    
    
    
    1,075Reduction of lease payable
    
    
    (166
    )
    
    
    Net cash provided by financing activities
    
    
    101
    
    
    
    1,075Effect of exchange rates on changes on cash and cash equivalents
    
    
    107
    
    
    
    (78
    )Net increase (decrease) in cash and cash equivalents
    
    
    (4,967
    )
    
    
    27,225Cash and cash equivalents at beginning of period
    
    
    32,106
    
    
    
    8,782Cash and cash equivalents at end of period
    
    $
    27,139
    
    
    $
    36,007Supplemental disclosures of cash flow information:Income taxes paid
    
    $
    233
    
    
    $
    584Interest paid
    
    $
    14
    
    
    $
    12
  5




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##### Table of Contents



1) Basis of Presentation
    Recent Pronouncements
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes in
Interim Financial Statements.
 Stock-based compensation
 Accounting for Stock Issued to Employees Accounting for Certain
Transactions Involving Stock Compensation Accounting for Stock-Based Compensation Accounting for Stock-based Compensation 
Transition and Disclosure , Accounting for
Stock Appreciation Rights and Other Stock Option or Award Plan, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services
 Share-Based Payment Accounting for Stock Issued to Employees
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Three Months Ended,
    
    
    
    
    
    
    
    
    
    Nine Months Ended,September 30
    
    
    
    
    
    
    
    
    
    September 30,2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Stock option plans
    
    ESPP
    
    Stock option plans
    
    ESPPRisk-free interest rate
    
    
    4.18
    %
    
    
    3.92
    %
    
    
    2.70
    %
    
    
    3.08
    %
    
    
    3.95
    %
    
    
    3.32
    %
    
    
    2.73
    %
    
    
    3.14
    %Expected Lives (in years)
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    1
    
    
    
    2Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    66
    %
    
    
    121
    %
    
    
    77
    %
    
    
    137
    %
    
    
    66
    %
    
    
    123
    %
    
    
    91
    %
    
    
    138
    %
   Three Months Ended,
    
    
    Nine Months Ended,September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (1,885
    )
    
    $
    (2,052
    )
    
    $
    (10,311
    )
    
    $
    (15,361
    )Add: stock-based employee compensation expense included in
reported net loss, net of applicable tax effects
    
    
    22
    
    
    
    6
    
    
    
    105
    
    
    
    349Deduct: total stock-based compensation expense determined
under the fair value based method for all awards, net of
applicable tax effects
    
    
    (218
    )
    
    
    (1,221
    )
    
    
    (1,758
    )
    
    
    (3,196
    )Pro forma net loss
    
    $
    (2,081
    )
    
    $
    (3,267
    )
    
    $
    (11,964
    )
    
    $
    (18,208
    )Net loss per share as reported
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.31
    )
    
    $
    (0.47)      (0.47
    )Pro forma net loss per share
    
    $
    (0.06
    )
    
    $
    (0.10
    )
    
    $
    (0.36
    )
    
    $
    (0.55
    )Total shares used in calculation
    
    
    33,524
    
    
    
    33,196
    
    
    
    33,459
    
    
    
    32,993
  8




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Net Loss Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator for basic and diluted net loss per share:Net loss
    
    $
    (1,885
    )
    
    $
    (2,052
    )
    
    $
    (10,311
    )
    
    $
    (15,361
    )Denominator for basic and diluted net loss per
share:Weighted average shares of common stock
outstanding
    
    
    33,524
    
    
    
    33,196
    
    
    
    33,459
    
    
    
    32,995Less shares subject to repurchase
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (2
    )Denominator for basic and diluted net loss per
share
    
    
    33,524
    
    
    
    33,196
    
    
    
    33,459
    
    
    
    32,993Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.06
    )
    
    $
    (0.31
    )
    
    $
    (0.47
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average effect of anti-dilutive securities:Employee stock options (using the treasury stock
method)
    
    
    145
    
    
    
    12
    
    
    
    148
    
    
    
    365Common stock subject to repurchase agreements
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2Total
    
    
    145
    
    
    
    12
    
    
    
    148
    
    
    
    367
 9




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##### Table of Contents



3) Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss
    
    $
    (1,885
    )
    
    
    (2,052
    )
    
    $
    (10,311
    )
    
    $
    (15,361
    )Other comprehensive income (loss):Foreign currency translation
adjustment
    
    
    74
    
    
    
    81
    
    
    
    52
    
    
    
    (78
    )Unrealized gain (loss) on
securities
    
    
    0
    
    
    
    5
    
    
    
    50
    
    
    
    (50
    )Comprehensive loss
    
    $
    (1,811
    )
    
    $
    (1,966
    )
    
    $
    (10,209
    )
    
    $
    (15,489
    )
  September 30,
    
    
    December 31,2005
    
    
    2004Foreign currency translation
    
    $
    539
    
    
    $
    487Unrealized gain (loss) on marketable debt securities
    
    
    (55
    )
    
    
    (105
    )Total accumulated other comprehensive gain
    
    $
    484
    
    
    $
    382
 4) Stock-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Cost of revenue
    
    $
    
    
    
    $
    1
    
    
    $
    
    
    
    $
    77Sales and marketing
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    71Research and development
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    84General and administrative
    
    
    22
    
    
    
    1
    
    
    
    105
    
    
    
    117Total stock-based compensation
    
    $
    22
    
    
    $
    6
    
    
    $
    105
    
    
    $
    349
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5) Restructuring, Impairments and Other Charges
  Accounting for Costs Associated
with Exit or Disposal Activities
    11




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Facilitiesconsolidation
    
    
    Severance
    
    
    TotalFiscal 2002 restructuring
    
    $
    15,358
    
    
    $
    4,158
    
    
    $
    19,516Cash payments
    
    
    (2,592
    )
    
    
    (4,014
    )
    
    
    (6,606
    )Fixed assets write-offs
    
    
    (463
    )
    
    
    
    
    
    
    (463
    )Reclassifications of deferred rent
    
    
    747
    
    
    
    
    
    
    
    747Balance at December 31, 2002
    
    
    13,050
    
    
    
    144
    
    
    
    13,194Fiscal 2003 restructuring
    
    
    12,077
    
    
    
    2,477
    
    
    
    14,554Cash payments
    
    
    (5,627
    )
    
    
    (2,621
    )
    
    
    (8,248
    )Fixed assets write-offs
    
    
    (2,247
    )
    
    
    
    
    
    
    (2,247
    )Facilities adjustment and accretion
    
    
    1,229
    
    
    
    
    
    
    
    1,229Severance
    
    
    
    
    
    
    330
    
    
    
    330Balance at December 31, 2003
    
    
    18,482
    
    
    
    330
    
    
    
    18,812Cash payments
    
    
    (6,295
    )
    
    
    (330
    )
    
    
    (6,625
    )Facility adjustments and accretion
    
    
    1,236
    
    
    
    
    
    
    
    1,236Balance at December 31, 2004
    
    
    13,423
    
    
    
    
    
    
    
    13,423Cash payments
    
    
    (4,840
    )
    
    
    
    
    
    
    (4,840
    )Facility adjustments and accretion
    
    
    645
    
    
    
    
    
    
    
    645Reclassifications of accrued rent
    
    
    (342
    )
    
    
    
    
    
    
    (342
    )Balance at September 30, 2005
    
    $
    8,886
    
    
    $
    
    
    
    $
    8,886
  6) Deferred Revenue
  12




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##### Table of Contents



7) Related Party Transactions
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenue from QilinSoft
    
    $
    50
    
    
    $
    25
    
    
    $
    150
    
    
    $
    75Research and
development expense
incurred with
QilinSoft
    
    $
    1,000
    
    
    $
    176
    
    
    $
    2,000
    
    
    $
    351
 September 30, 2005
    
    December 31, 2004Trade
    
    
    
    
    
    TradeTrade
    
    Accounts
    
    Trade
    
    AccountsAccounts
    
    Payable and
    
    Accounts
    
    Payable andReceivable
    
    Accruals
    
    Receivable
    
    AccrualsQilinSoft LLC
    
    $
    
    
    
    $
    707
    
    
    $
    
    
    
    $
    102
  8) Credit Facilities with Silicon Valley Bank
  13




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9) Segment Information
    
 ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   14




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Product Overview
 BusinessWare
 BusinessWare
  BusinessWare
  15




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CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
 Software Revenue Recognition
  16




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Accounting for Performance of Construction Type and Certain Production Type
Contracts.
 Allowance for Doubtful Accounts
 .
  Restructuring Charges
     17




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18




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RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2005 and September 30, 2004
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004RevenueLicense
    
    
    29
    %
    
    
    19
    %
    
    
    27
    %
    
    
    19
    %Service and other
    
    
    71
    %
    
    
    81
    %
    
    
    73
    %
    
    
    81
    %Total revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenueLicense
    
    
    6
    %
    
    
    1
    %
    
    
    3
    %
    
    
    1
    %Service and other
    
    
    35
    %
    
    
    36
    %
    
    
    37
    %
    
    
    40
    %Total cost of revenue
    
    
    41
    %
    
    
    37
    %
    
    
    40
    %
    
    
    41
    %Gross profit
    
    
    59
    %
    
    
    63
    %
    
    
    60
    %
    
    
    59
    %Operating expensesSales and marketing
    
    
    36
    %
    
    
    29
    %
    
    
    35
    %
    
    
    38
    %Research and development
    
    
    29
    %
    
    
    27
    %
    
    
    31
    %
    
    
    30
    %General and administrative
    
    
    12
    %
    
    
    19
    %
    
    
    19
    %
    
    
    23
    %Amortization of stock-based compensation
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %Restructuring charges
    
    
    0
    %
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %Total operating expenses
    
    
    77
    %
    
    
    76
    %
    
    
    87
    %
    
    
    94
    %Loss from operations
    
    
    (18
    %)
    
    
    (13
    %)
    
    
    (27
    %)
    
    
    (35
    %)Interest income
    
    
    4
    %
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %Other income (expenses), net
    
    
    0
    %
    
    
    0
    %
    
    
    (1
    %)
    
    
    0
    %Net loss before income taxes
    
    
    (14
    %)
    
    
    (11
    %)
    
    
    (25
    %)
    
    
    (33
    %)Provision for income taxes
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %Net loss
    
    
    (14
    %)
    
    
    (12
    %)
    
    
    (25
    %)
    
    
    (34
    %)
 Revenue
   19




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##### Table of Contents



License.
 Service and other.
 Cost of Revenue
 License.
 Service and other
 20




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##### Table of Contents



Operating Expenses
  Sales and marketing
 Research and development.
 General and administrative
 21




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##### Table of Contents



Stock-based compensation.
 Restructuring charges.
 Accounting for Costs Associated
with Exit or Disposal Activities
     22




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Interest income and other income (expense), net.
 Provision for income taxes
    23




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##### Table of Contents



Liquidity and Capital Resources
 For the nine months ended
    
    Percent ChangeSeptember 30,
    
    2005 vs.2005
    
    2004
    
    2004(in thousands)Cash, cash equivalents and short- term investments
    
    $
    65,252
    
    
    $
    81,758
    
    
    
    (20
    %)Short-term liabilities
    
    
    26,127
    
    
    
    28,676
    
    
    
    (9
    %)Long-term liabilities
    
    
    5,972
    
    
    
    8,299
    
    
    
    (28
    %)Net cash provided by (used in) operating activities
    
    
    (12,420
    )
    
    
    (10,573
    )
    
    
    17
    %Net cash provided by investing activities
    
    
    7,245
    
    
    
    36,801
    
    
    
    (80
    %)Net cash provided by financing activities
    
    
    101
    
    
    
    1,075
    
    
    
    (91
    %)
  Nine Months Ended September 30,2005
    
    
    2004Beginning cash and investment balances
    
    $
    78,563
    
    
    $
    91,536Cash receipts from customers
    
    
    43,388
    
    
    
    50,645Miscellaneous cash receipts
    
    
    863
    
    
    
    2,509Investment income
    
    
    1,398
    
    
    
    782Cash payments to vendors and employees
    
    
    (58,960
    )
    
    
    (63,714
    )Ending cash and investment balances
    
    $
    65,252
    
    
    $
    81,758Net decrease in cash and investment balances
    
    $
    (13,311
    )
    
    $
    (9,778
    )Payments to
vendor and empolyees in excess
of cash receipts from customers
    
    $
    15,572
    
    
    $
    13,069
   24




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##### Table of Contents




    
    lower net loss of $5.0 million;
    
    $6.6 million decrease in change in accounts receivable balances from $7.1 million
in the nine months ended September 30, 2004 to $534,000 in the nine months ended
September 30, 2005 mainly due to lower cash collections from
customers in the current year as compared to the prior year;
    
    $1.1 million decrease in non-cash add back depreciation and amortization,
provision of income taxes, and stock based compensation due to expiring hardware and
lower stock-based compensation expense recorded in 2005;
    
    $1.4 million decrease in net expenditure of prepaid services in the nine months
ended September 30, 2005 as compared to total net expenditure in the same period of
2004; and
    
    $688,000 net increase in changes in our current and other assets, accounts
payable, and long term liabilities.
    Contractual Cash Obligations and Commitments
  25




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Off-Balance Sheet Arrangements
  Credit Facilities with Silicon Valley Bank
   Operating Capital and Capital Expenditure Requirements
   BusinessWare
 26




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##### Table of Contents




    
    size and timing of customer orders and product and service delivery;
    
    level of demand for our professional services;
    
    changes in the mix of our products and services;
    
    ability to protect our intellectual property;
    
    actions taken by our competitors, including new product introductions and pricing changes;
    
    costs of maintaining and expanding our operations;
    
    timing of the development and release of new products or enhanced products;
    
    costs and timing of hiring qualified personnel;
    
    success in maintaining and enhancing existing relationships and developing new
relationships with system integrators;
    
    technological changes in our markets, including changes in standards for computer and
networking software and hardware;
    
    deferrals of customer orders in anticipation of product enhancements or new products;
    
    delays in our ability to recognize revenue as a result of the decision by our
customers to postpone software delivery, or because of changes in the timing of when
delivery of products or services is completed;
    
    customer budget cycles and changes in these budget cycles;
    
    external economic conditions;
    
    availability of customer funds for software purchases given external economic factors;
    
    costs related to acquisition of technologies or businesses;
    
    ability to successfully integrate acquisitions;
    
    changes in strategy and capability of our competitors; and
    
    liquidity and timeliness of payments from international customers.
 27




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##### Table of Contents



Related Party Transactions
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenue from QilinSoft
    
    $
    50
    
    
    $
    25
    
    
    $
    150
    
    
    $
    75Research and
development expense
incurred with
QilinSoft
    
    $
    1,000
    
    
    $
    176
    
    
    $
    2,000
    
    
    $
    351
 September 30, 2005
    
    December 31, 2004Trade
    
    
    
    
    
    TradeTrade
    
    Accounts
    
    Trade
    
    AccountsAccounts
    
    Payable and
    
    Accounts
    
    Payable andReceivable
    
    Accruals
    
    Receivable
    
    AccrualsQilinSoft LLC
    
    $
    
    
    
    $
    707
    
    
    $
    
    
    
    $
    102
  28




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Interest Rate Risk
       2005
    
    
    
    
    
    
    2004Weighted Average
    
    
    
    
    
    
    Weighted AverageFair Value
    
    
    Interest Rate
    
    
    Fair Value
    
    
    Interest RateCash and cash equivalents
    
    $
    27,139
    
    
    
    0.63
    %
    
    $
    36,007
    
    
    
    0.34
    %Short-term investments
    
    
    38,113
    
    
    
    3.81
    %
    
    
    45,751
    
    
    
    1.44
    %Total cash and investment securities
    
    $
    65,252
    
    
    
    
    
    
    $
    81,758
 Foreign Exchange Risk
  29




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RISKS ASSOCIATED WITH VITRIAS BUSINESS AND FUTURE OPERATING
  Our operating results fluctuate significantly and an unanticipated decline in revenue may result in
a decline in our stock price and may disappoint securities analysts or investors, and may also harm
our relationship with our customers.
    We have incurred substantial operating losses since inception and we cannot guarantee that we will
become profitable in the future.
  30




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##### Table of Contents



Our operating results are substantially dependent on license and support revenue from BusinessWare and our business could be materially harmed by factors that adversely affect the pricing and demand
for BusinessWare.
 BusinessWare BusinessWare BusinessWare BusinessWare BusinessWare
 Failure to raise additional capital or generate the significant capital necessary to expand our
operations and invest in new products could reduce our ability to compete and result in lower
revenue.
  
    
    develop or enhance our products and services;
    
    acquire technologies, products or businesses;
    
    expand operations, in the United States or internationally;
    
    hire, train and retain employees; or
    
    respond to competitive pressures or unanticipated capital requirements.
  The continued reluctance of companies to make significant expenditures on information technology
could reduce demand for our products and cause our revenue to decline.
  We experience long and variable sales cycles, which could have a negative impact on our results of
operations for any given quarter.
  31




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##### Table of Contents



Because a small number of customers have in the past accounted for a substantial portion of our
revenue, our revenue could decline due to the loss or delay of a single customer order.
  If we are not successful in developing industry specific pre-built process applications based on BusinessWare , our ability to increase future revenue could be harmed.
 BusinessWare
  Our products may not achieve market acceptance, which could cause our revenue to decline.
  Our markets are highly competitive and, if we do not compete effectively, we may suffer price
reductions, reduced gross margins and loss of market share.
  32




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##### Table of Contents



The cost and difficulty in implementing our product could significantly harm our reputation with
customers, diminishing our ability to license additional products to our customers.
  If our products do not operate with the many hardware and software platforms used by our customers,
our business may fail.
  
    
    our ability to integrate our product with multiple platforms and existing, or legacy,
systems and to modify our products as new versions of packaged applications are
introduced;
    
    the portability of our products, particularly the number of operating systems and
databases that our products can source or target;
    
    our ability to anticipate and support new standards, especially Internet standards;
    
    the integration of additional software modules under development with our existing products; and
    
    our management of software being developed by third parties for our customers or use
with our products.
 33




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##### Table of Contents



If we fail to introduce new versions and releases of our products in a timely manner, our revenue
may decline.
 BusinessWare
 Our products rely on third-party programming tools and applications. If we lose access to these
tools and applications, or are unable to modify our products in response to changes in these tools
and applications, our revenue could decline.
   We could suffer losses and negative publicity if new versions and releases of our products contain
errors or defects.
  If we fail to attract and retain qualified personnel, our ability to compete will be harmed.
  34




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##### Table of Contents



If we fail to adequately protect our proprietary rights, we may lose these rights and our
business may be seriously harmed.
  Our products could infringe the intellectual property rights of others causing costly litigation
and the loss of significant rights.
  Our significant international operations may fail to generate significant product revenue or
contribute to our drive toward profitability, which could result in slower revenue growth and harm
our business.
  We are at risk of securities class action litigation due to our expected stock price volatility.
  35




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##### Table of Contents



We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if
an acquisition would be beneficial to our stockholders.
  
    
    establishment of a classified Board of Directors requiring that not all members of
the Board of Directors may be elected at one time;
    
    authorizing the issuance of blank check preferred stock that could be issued by our
Board of Directors to increase the number of outstanding shares and thwart a takeover
attempt;
    
    prohibiting cumulative voting in the election of directors, which would otherwise
allow less than a majority of stockholders to elect director candidates;
    
    limitations on the ability of stockholders to call special meetings of stockholders;
    
    prohibiting stockholder action by written consent, thereby requiring all stockholder
actions to be taken at a meeting of our stockholders; and
    
    establishing advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings.
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
  36




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##### Table of Contents



Changes in internal controls.
  37




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
 In re Vitria Technology, Inc. IPO Securities Litigation
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to Vote of Security Holders
  38




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
  Exhibit 10.43 (1)
    
    Separation Agreement, by and between James A. Davis and Vitria, dated August
5, 2005Exhibit 10.44 (2)
    
    Separation Agreement, by and between Gregory Anderson and Vitria, effective
September 12, 2005.Exhibit 31.1
    
    Certification of Chief Executive Officer as required by Rule 13a-14(a) of
the Securities Exchange Act
of 1934, as amended.Exhibit 31.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(a) of the
Securities Exchange Act
of 1934, as amended.Exhibit 32.1
    
    Certification of Chief Executive Financial Officer as required by Rule 13a-14(b) of
the Securities
Exchange Act of 1934, as amended. *Exhibit 32.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(b) of the
Securities Exchange Act
of 1934, as amended. *
 
 (1)
    
    Filed as Exhibit 10.43 to our Current Report on Form 8-K, dated August 5, 2005 and
filed on August 11, 2005 and incorporated herein by reference.(2)
    
    Filed as Exhibit 10.44 to our Current Report on Form 8-K, dated September 9, 2005 and filed
on September 15, 2005 and incorporated herein by reference.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report
on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are
not to be incorporated by reference into any filing of Vitria Technology, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Form 10-Q, irrespective of any general
incorporation language contained in such filing. 39




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##### Table of Contents



SIGNATURES
  Vitria Technology, Inc.Date: November 4, 2005
    
    By: /s/ MICHAEL D. PERRYMichael D. PerrySenior Vice President and Chief Financial Officer
 40




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##### Table of Contents



Exhibit 10.43 (1)
    
    Separation Agreement, by and between James A. Davis and Vitria, dated August
5, 2005Exhibit 10.44 (2)
    
    Separation Agreement, by and between Gregory Anderson and Vitria, effective
September 12, 2005.Exhibit 31.1
    
    Certification of Chief Executive Officer as required by Rule 13a-14(a) of
the Securities Exchange Act
of 1934, as amended.Exhibit 31.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(a) of the
Securities Exchange Actof 1934, as amended.Exhibit 32.1
    
    Certification of Chief Executive Financial Officer as required by Rule 13a-14(b) of
the Securities Exchange Act of 1934, as amended. *Exhibit 32.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended. *
 
 (1)
    
    Filed as Exhibit 10.43 to our Current Report on Form 8-K, dated August 5, 2005 and
filed on August 11, 2005 and incorporated herein by reference.(2)
    
    Filed as Exhibit 10.44 to our Current Report on Form 8-K, dated September 9, 2005 and
filed on September 15, 2005 and incorporated herein by reference.*
    
    The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report
on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are
not to be incorporated by reference into any filing of Vitria Technology, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Form 10-Q, irrespective of any general
incorporation language contained in such filing. 41