##### 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 June 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




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##### Table of Contents



Index
 PagePART I: FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements and NotesCondensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 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
    
    
    13Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4: Controls and Procedures
    
    
    35PART II: OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    37Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3: Defaults Upon Senior Securities
    
    
    37Item 4: Submission of Matters to a Vote of Security Holders
    
    
    38Item 5: Other Information
    
    
    38Item 6: Exhibits
    
    
    38Signature
    
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
  
   June 30,
    
    December 31,2005
    
    2004(unaudited)
    
    (Note 1)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    32,454
    
    
    $
    32,106Short-term investments
    
    
    38,692
    
    
    
    46,457Accounts receivable, net
    
    
    7,928
    
    
    
    10,529Other current assets
    
    
    1,908
    
    
    
    1,880Total current assets
    
    
    80,982
    
    
    
    90,972Property and equipment, net
    
    
    1,179
    
    
    
    1,053Other assets
    
    
    747
    
    
    
    872Total assets
    
    $
    82,908
    
    
    $
    92,897Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    1,673
    
    
    $
    1,777Accrued compensation
    
    
    3,814
    
    
    
    4,186Other accrued liabilities
    
    
    3,924
    
    
    
    4,086Accrued restructuring expenses
    
    
    5,254
    
    
    
    6,091Deferred revenue
    
    
    12,581
    
    
    
    11,082Total current liabilities
    
    
    27,246
    
    
    
    27,222Long-Term Liabilities:Accrued restructuring expenses
    
    
    5,128
    
    
    
    7,332Other long-term liabilities
    
    
    1,091
    
    
    
    750Total long-term liabilities
    
    
    6,219
    
    
    
    8,082Commitments and ContingenciesStockholders Equity:Common Stock
    
    
    34
    
    
    
    33Additional paid-in capital
    
    
    275,927
    
    
    
    275,366Unearned stock-based compensation
    
    
    (314
    )
    
    
    Accumulated other comprehensive income
    
    
    410
    
    
    
    382Accumulated deficit
    
    
    (226,118
    )
    
    
    (217,692
    )Treasury stock, at cost
    
    
    (496
    )
    
    
    (496
    )Total stockholders equity
    
    
    49,443
    
    
    
    57,593Total liabilities and stockholders equity
    
    $
    82,908
    
    
    $
    92,897
  3




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenue:License
    
    $
    2,146
    
    
    $
    1,874
    
    
    $
    7,568
    
    
    $
    5,265Service and other
    
    
    10,200
    
    
    
    11,831
    
    
    
    21,323
    
    
    
    22,689Total revenue
    
    
    12,346
    
    
    
    13,705
    
    
    
    28,891
    
    
    
    27,954Cost of revenue:License
    
    
    286
    
    
    
    126
    
    
    
    407
    
    
    
    324Service and other
    
    
    5,292
    
    
    
    5,912
    
    
    
    10,974
    
    
    
    12,000Total cost of revenue
    
    
    5,578
    
    
    
    6,038
    
    
    
    11,381
    
    
    
    12,324Gross profit
    
    
    6,768
    
    
    
    7,667
    
    
    
    17,510
    
    
    
    15,630Operating expenses:Sales and marketing
    
    
    4,872
    
    
    
    5,790
    
    
    
    9,845
    
    
    
    12,357Research and development
    
    
    4,836
    
    
    
    4,205
    
    
    
    9,378
    
    
    
    8,861General and administrative
    
    
    2,863
    
    
    
    3,577
    
    
    
    6,500
    
    
    
    6,859Stock-based compensation
    
    
    21
    
    
    
    302
    
    
    
    83
    
    
    
    343Restructuring charges
    
    
    471
    
    
    
    570
    
    
    
    607
    
    
    
    624Total operating expenses
    
    
    13,063
    
    
    
    14,444
    
    
    
    26,413
    
    
    
    29,044Loss from operations
    
    
    (6,295
    )
    
    
    (6,777
    )
    
    
    (8,903
    )
    
    
    (13,414
    )Interest income
    
    
    483
    
    
    
    252
    
    
    
    872
    
    
    
    503Other income (expenses), net
    
    
    (142
    )
    
    
    36
    
    
    
    (293
    )
    
    
    (104
    )Net loss before income taxes
    
    
    (5,954
    )
    
    
    (6,489
    )
    
    
    (8,324
    )
    
    
    (13,015
    )Provision for income taxes
    
    
    55
    
    
    
    174
    
    
    
    102
    
    
    
    294Net loss
    
    $
    (6,009
    )
    
    $
    (6,663
    )
    
    $
    (8,426
    )
    
    $
    (13,309
    )Basic and diluted net loss per share
    
    $
    (0.18
    )
    
    $
    (0.20
    )
    
    $
    (0.25
    )
    
    $
    (0.40
    )Weighted average shares used in computing basic
and diluted net loss per share
    
    
    33,480
    
    
    
    32,966
    
    
    
    33,427
    
    
    
    32,891
  4




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Six Months EndedJune 30,2005
    
    2004Operating activities:Net loss
    
    $
    (8,426
    )
    
    $
    (13,309
    )Adjustments to reconcile net loss to net cash
used in operating activities:Loss on disposal of fixed assets
    
    
    14
    
    
    
    18Forgiveness of note receivable
    
    
    
    
    
    
    74Depreciation
    
    
    617
    
    
    
    1,120Stock-based compensation
    
    
    83
    
    
    
    343Provision for doubtful accounts
    
    
    144
    
    
    
    41Changes in assets & liabilities:Accounts receivable
    
    
    2,457
    
    
    
    6,269Other current assets
    
    
    (28
    )
    
    
    487Other assets
    
    
    125
    
    
    
    32Accounts payable
    
    
    (104
    )
    
    
    345Accrued liabilities
    
    
    (418
    )
    
    
    (468
    )Accrued restructuring charges
    
    
    (3,041
    )
    
    
    (3,105
    )Deferred revenue
    
    
    1,499
    
    
    
    1,502Other long term liabilities
    
    
    341
    
    
    
    (27
    )Net cash used in operating activities
    
    
    (6,737
    )
    
    
    (6,678
    )Investing activities:Purchases of property and equipment
    
    
    (737
    )
    
    
    (138
    )Purchases of investments
    
    
    (27,092
    )
    
    
    (19,367
    )Maturities of investments
    
    
    34,907
    
    
    
    73,885Net cash provided by investing activities
    
    
    7,078
    
    
    
    54,380Financing activities:Issuance of common stock, net
    
    
    165
    
    
    
    676Reduction of lease payable
    
    
    (116
    )
    
    
    Net cash provided by financing activities
    
    
    49
    
    
    
    676Effect of exchange rates on changes on cash and cash equivalents
    
    
    (42
    )
    
    
    (159
    )Net increase in cash and cash equivalents
    
    
    348
    
    
    
    48,219Cash and cash equivalents at beginning of period
    
    
    32,106
    
    
    
    8,782Cash and cash equivalents at end of period
    
    $
    32,454
    
    
    $
    57,001Supplemental disclosures of cash flow information:Income taxes paid
    
    $
    175
    
    
    $
    340Interest paid
    
    $
    10
    
    
    $
    9
  5




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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-Based Compensation Accounting for Stock Issued
to
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Employees
    Three months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004
    
    2005
    
    2004Stock option plans
    
    ESPP
    
    Stock option plans
    
    ESPPRisk-free interest rate
    
    
    3.67
    %
    
    
    3.29
    %
    
    
    2.73
    %
    
    
    3.14
    %
    
    
    3.92
    %
    
    
    3.23
    %
    
    
    2.73
    %
    
    
    3.14
    %Expected Lives (in years)
    
    
    3
    
    
    
    3
    
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    3
    
    
    
    1
    
    
    
    2Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    74
    %
    
    
    123
    %
    
    
    91
    %
    
    
    138
    %
    
    
    66
    %
    
    
    124
    %
    
    
    91
    %
    
    
    138
    %
   Three months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss, as reported
    
    $
    (6,009
    )
    
    $
    (6,663
    )
    
    $
    (8,426
    )
    
    $
    (13,309
    )Add: stock-based employee compensation expense included
in reported net loss
    
    
    21
    
    
    
    29
    
    
    
    83
    
    
    
    70Deduct:
total stock-based compensation expense (benefit) determined
under the fair value based method for all awards
    
    
    529
    
    
    
    (103
    )
    
    
    1,531
    
    
    
    1,988Pro forma net loss
    
    $
    (6,517
    )
    
    $
    (6,531
    )
    
    $
    (9,874
    )
    
    $
    (15,227
    )Net loss per share as reported
    
    $
    (0.18
    )
    
    $
    (0.20
    )
    
    $
    (0.20
    )
    
    $
    (0.40
    )Pro forma net loss per share
    
    $
    (0.19
    )
    
    $
    (0.20
    )
    
    $
    (0.30
    )
    
    $
    (0.46
    )Total shares used in calculation
    
    
    33,480
    
    
    
    32,966
    
    
    
    33,427
    
    
    
    32,891
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2) Net Loss Per Share
   Three months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Numerator for basic and diluted net loss per share:Net loss
    
    $
    (6,009
    )
    
    $
    (6,663
    )
    
    $
    (8,426
    )
    
    $
    (13,309
    )Denominator for basic and diluted net loss per
share:Weighted average shares of common stock
outstanding
    
    
    33,480
    
    
    
    32,967
    
    
    
    33,427
    
    
    
    32,894Less shares subject to repurchase
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Denominator for basic and diluted net loss per
share
    
    
    33,480
    
    
    
    32,966
    
    
    
    33,427
    
    
    
    32,891Basic and diluted net loss per share
    
    $
    (0.18
    )
    
    $
    (0.20
    )
    
    $
    (0.25
    )
    
    $
    (0.40
    )
 8




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Three months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Weighted average effect of anti-dilutive securities:Employee stock options (using the treasury stock
method)
    
    
    25
    
    
    
    140
    
    
    
    143
    
    
    
    785Common stock subject to repurchase agreements
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    3Total
    
    
    25
    
    
    
    141
    
    
    
    143
    
    
    
    788
 3) Comprehensive Loss
  Three months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss
    
    $
    (6,009
    )
    
    $
    (6,663
    )
    
    $
    (8,426
    )
    
    $
    (13,309
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    14
    
    
    
    (110
    )
    
    
    (22
    )
    
    
    (159
    )Unrealized gain (loss) on securities
    
    
    36
    
    
    
    (54
    )
    
    
    50
    
    
    
    (53
    )Comprehensive loss
    
    $
    (5,959
    )
    
    $
    (6,827
    )
    
    $
    (8,398
    )
    
    $
    (13,521
    )
  June 30,
    
    December 31,2005
    
    2004Foreign currency translation
    
    $
    465
    
    
    $
    487Unrealized gain (loss) on marketable debt
securities
    
    
    (55
    )
    
    
    (105
    )Total accumulated other comprehensive gain
    
    $
    410
    
    
    $
    382
 9




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4) Stock-Based Compensation
   Three months ended
    
    Six months endedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Cost of revenue
    
    $
    
    
    
    $
    73
    
    
    $
    
    
    
    $
    76Sales and marketing
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    69Research and development
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    82General and administrative
    
    
    21
    
    
    
    108
    
    
    
    83
    
    
    
    116Total stock-based compensation
    
    $
    21
    
    
    $
    302
    
    
    $
    83
    
    
    $
    343
 5) Restructuring, Impairments and Other Charges
  Accounting for Costs Associated
with Exit or Disposal Activities
  10




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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
    
    
    (3,304
    )
    
    
    
    
    
    
    (3,304
    )Facility adjustments and accretion
    
    
    605
    
    
    
    
    
    
    
    605Reclassifications of accrued rent
    
    
    (342
    )
    
    
    
    
    
    
    (342
    )Balance at June 30, 2005
    
    $
    10,382
    
    
    $
    
    
    
    $
    10,382
  11




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6) Deferred Revenue
  7) Related Party Transactions
      8) Credit Facilities with Silicon Valley Bank
  12




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9) Segment Information
   
 ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   13




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Product Overview
 BusinessWare
 BusinessWare
  BusinessWare
  14




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CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
 Software Revenue Recognition
  15




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Accounting for Performance of Construction Type and Certain Production Type
Contracts.
 Allowance for Doubtful Accounts
 .
  Restructuring Charges
     16




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17




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RESULTS OF OPERATIONS
 For the three and six months ended June 30, 2005 and June 30, 2004
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004RevenueLicense
    
    
    17
    %
    
    
    14
    %
    
    
    26
    %
    
    
    19
    %Service and other
    
    
    83
    %
    
    
    86
    %
    
    
    74
    %
    
    
    81
    %Total revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenueLicense
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Service and other
    
    
    43
    %
    
    
    43
    %
    
    
    38
    %
    
    
    43
    %Total cost of revenue
    
    
    45
    %
    
    
    44
    %
    
    
    39
    %
    
    
    44
    %Gross profit
    
    
    55
    %
    
    
    56
    %
    
    
    61
    %
    
    
    56
    %Operating expensesSales and marketing
    
    
    39
    %
    
    
    42
    %
    
    
    34
    %
    
    
    44
    %Research and development
    
    
    39
    %
    
    
    31
    %
    
    
    33
    %
    
    
    32
    %General and administrative
    
    
    24
    %
    
    
    26
    %
    
    
    22
    %
    
    
    25
    %Amortization of stock-based compensation
    
    
    0
    %
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %Restructuring charges
    
    
    4
    %
    
    
    4
    %
    
    
    2
    %
    
    
    2
    %Total operating expenses
    
    
    106
    %
    
    
    105
    %
    
    
    91
    %
    
    
    104
    %Loss from operations
    
    
    (51
    %)
    
    
    (49
    %)
    
    
    (30
    %)
    
    
    (48
    %)Interest income
    
    
    4
    %
    
    
    2
    %
    
    
    3
    %
    
    
    2
    %Other income (expenses), net
    
    
    (1
    %)
    
    
    0
    %
    
    
    (1
    %)
    
    
    0
    %Net loss before income taxes
    
    
    (48
    %)
    
    
    (47
    %)
    
    
    (28
    %)
    
    
    (46
    %)Provision for income taxes
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %Net loss
    
    
    (48
    %)
    
    
    (48
    %)
    
    
    (28
    %)
    
    
    (47
    %)
 Revenue
   18




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License.
  Service and other.
 Cost of Revenue
 License.
 Service and other
 19




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Operating Expenses
  Sales and marketing
 Research and development.
 General and administrative
 20




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Stock-based compensation.
 Restructuring charges.
 Accounting for Costs Associated
with Exit or Disposal Activities
     21




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Interest income and other income (expense), net.
 Provision for income taxes
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Liquidity and Capital Resources
 For the six months ended
    
    Percent ChangeJune 30
    
    2005 vs.2005
    
    2004
    
    2004(in thousands)Cash, cash equivalents and short-term investments
    
    $
    71,146
    
    
    $
    85,183
    
    
    
    (16
    %)Short-term liabilities
    
    
    27,246
    
    
    
    30,412
    
    
    
    (10
    %)Long-term liabilities
    
    
    6,219
    
    
    
    10,004
    
    
    
    (38
    %)Net cash used in operating activities
    
    
    (6,737
    )
    
    
    (6,678
    )
    
    
    1
    %Net cash provided by investing activities
    
    
    7,078
    
    
    
    54,380
    
    
    
    (87
    %)Net cash provided by financing activities
    
    
    49
    
    
    
    676
    
    
    
    (93
    %)
  Six Months Ended June 302005
    
    2004Beginning cash and investment balances
    
    $
    78,563
    
    
    $
    91,536Cash receipts from customers
    
    
    33,128
    
    
    
    36,355Miscellaneous cash receipts
    
    
    517
    
    
    
    2,070Investment income
    
    
    872
    
    
    
    504Cash payments to vendors and employees
    
    
    (41,934
    )
    
    
    (45,282
    )Ending cash and investment balances
    
    $
    71,146
    
    
    $
    85,183Net decrease in cash and investment balances
    
    $
    (7,417
    )
    
    $
    (6,353
    )Payments to vendor and employess in excess
of cash receipts from customers
    
    $
    8,806
    
    
    $
    8,927
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
    
    lower net loss of $4.9 million
    
    decrease of $3.8 million in cash receipts in accounts receivable from $6.3
million in the six months ended June 30, 2004 to $2.5 million in the six months
ended June 30, 2005
    
    decrease of $738,000 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
    
    net expenditure of $515,000 of prepaid services in the six months ended June 30,
2005 as compared to total purchases in the same period of 2004
    
    net increase of $123,000 in changes in our current and other assets, accounts
payable, and long term liabilities
    Contractual Cash Obligations and Commitments
  24




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Off-Balance Sheet Arrangements
  Credit Facilities with Silicon Valley Bank
   Operating Capital and Capital Expenditure Requirements
   BusinessWare
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
    
    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.
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Related Party Transactions
      27




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Interest Rate Risk
       2005Average
    
    
    
    
    
    2004Weighted Average
    
    
    
    
    
    Weighted AverageFair Value
    
    Interest Rate
    
    Fair Value
    
    Interest RateCash and cash equivalent
    
    $
    32,454
    
    
    
    0.63
    %
    
    $
    57,001
    
    
    
    0.35
    %Short-term investments
    
    
    38,692
    
    
    
    3.25
    %
    
    
    28,182
    
    
    
    1.31
    %Total cash and
investment securities
    
    $
    71,146
    
    
    
    
    
    
    $
    85,153
 Foreign Exchange Risk
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RISKS ASSOCIATED WITH VITRIAS BUSINESS AND FUTURE OPERATING RESULTS
  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.
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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.
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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.
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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.
   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.
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
    
    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.
 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.
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If we fail to attract and retain qualified personnel, our ability to compete will be harmed.
  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.
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We are at risk of securities class action litigation due to our expected stock price volatility.
  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
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Changes in internal controls.
  36




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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
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##### Table of Contents



Item 4. Submission of Matters to Vote of Security Holders
  (1)
    
    electing two Class III directors to serve until the 2008 annual meeting of
stockholders;(2)
    
    to ratify the selection of BDO Seidman, LLP as our independent registered
public accounting firm for our fiscal year ending December 31, 2005; and(3)
    
    to transact such other business as may properly come before the meting or any
adjournment or postponement thereof.
    Nominee
    
    For
    
    WithheldJoMei Chang, Ph.D.
    
    
    31,787,865
    
    
    
    373,716Dennis P. Wolf
    
    
    31,883,473
    
    
    
    278,108
   For
    
    Against
    
    Abstain32,105,690
    
    
    36,019
    
    
    
    19,872
 
 Item 5. Other Information
  
 Item 6. Exhibits
  Exhibit 10.41 (1)
    
    Offer letter by and between John Parillo and Vitria, dated May 12, 2005.
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Exhibit 10.42 (2)
    
    Non-Employee Director Compensation PolicyExhibit 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 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 10.41 to our Current Report on Form 8-K, dated May 12, 2005
and filed on May 18, 2005 and incorporated herein by reference.(2)
    
    Filed as exhibit 10.42 to our Current Report on Form 8-K, dated June 21, 2005
and filed on June 24, 2005 and incorporated herein by reference.  39




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SIGNATURES
  Vitria Technology, Inc.Date: August 8, 2005
    
    By: /s/ MICHAEL D. PERRYMichael D. PerrySenior Vice President and Chief Financial Officer
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Exhibit Number
    
    DescriptionExhibit 10.41 (1)
    
    Offer letter by and between John Parillo and Vitria, dated May 12, 2005.Exhibit 10.42 (2)
    
    Non-Employee Director Compensation PolicyExhibit 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 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 10.41 to our Current Report on Form 8-K, dated May 12, 2005
and filed on May 18, 2005 and incorporated herein by reference.(2)
    
    Filed as exhibit 10.42 to our Current Report on Form 8-K, dated June 21, 2005
and filed on June 24, 2005 and incorporated herein by reference.