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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





(Mark One)


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




For the quarterly period ended September 30, 2002





OR





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




For the transition period from
 to
.





Commission file number: 0-27207





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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)





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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  ̈





The
number of shares of Vitrias common stock, $0.001 par value, outstanding as of October 31, 2002 was 130,870,415 shares.





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##### Table of Contents

VITRIA TECHNOLOGY, INC.





INDEX





PagePART I: FINANCIAL INFORMATIONItem 1.

Condensed Consolidated Financial Statements and NotesCondensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and September 30, 2001

4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and September 30, 2001

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

26Item 4:

Controls and Procedures

36PART II: OTHER INFORMATIONItem 1:

Legal Proceedings

37Item 2:

Changes in Securities and Uses of Proceeds

37Item 3:

Defaults Upon Senior Securities

37Item 4:

Submission of Matters to a Vote of Security Holders

37Item 5:

Other Information

37Item 6:

Exhibits and Reports on Form 8-K

38Signature

39Certifications

40




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##### Table of Contents

PART I.  FINANCIAL INFORMATION





ITEM 1.  Financial Statements





VITRIA TECHNOLOGY, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)





September 30, 2002


December 31, 2001(unaudited)


(Note 1)ASSETSCurrent Assets:Cash and cash equivalents

$
65,919


$
60,479Short-term investments


62,941



96,734Accounts receivable, net


20,616



37,215Other current assets


4,612



7,335Total current assets


154,088



201,763Restricted investments






18,325Property and equipment, net


10,779



14,000Intangible assets, net


1,680



2,752Goodwill






7,247Other assets


1,433



1,424Total assets

$
167,980


$
245,511LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
3,500


$
3,569Accrued payroll and related


9,894



13,232Other accrued liabilities


9,120



10,890Accrued restructuring expenses


4,818



Deferred revenue


17,241



27,309Total current liabilities


44,573



55,000Long Term Liabilities:Accrued restructuring expenses


9,207



Commitments and ContingenciesStockholders Equity:Common Stock


130



130Additional paid-in capital


273,178



271,596Unearned stock-based compensation


(699
)


(1,547
)Notes receivable from stockholders


(193
)


(193
)Accumulated other comprehensive income (loss)


480



(241
)Accumulated deficit


(158,487
)


(79,234
)Treasury stock, at cost


(209
)


Total stockholders equity


114,200



190,511Total liabilities and stockholders equity

$
167,980


$
245,511





The accompanying notes are an integral part of these condensed consolidated
financial statements.




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VITRIA TECHNOLOGY, INC.


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS


(In thousands, except per share amounts)


(unaudited)





Three Months Ended September 30,


Nine Months Ended September
30,2002


2001


2002


2001Revenues:License

$
10,005


$
15,763


$
30,006


$
56,566Service and other


16,038



14,324



47,204



43,260Total revenues


26,043



30,087



77,210



99,826Cost of revenues:License


112



420



2,541



1,042Service and other


8,353



7,050



25,501



22,637Total cost of revenues


8,465



7,470



28,042



23,679Gross profit


17,578



22,617



49,168



76,147Operating expenses:Sales and marketing


15,035



23,615



60,194



73,929Research and development


6,922



10,914



25,147



31,723General and administrative


4,614



4,082



16,128



12,489Stock-based compensation


213



403



1,498



1,469Amortization of goodwill and intangible assets


341



1,252



1,072



2,355Impairment of goodwill










7,047



Restructuring costs


1,665







19,011



Acquired in-process research and development














1,500Total operating expenses


28,790



40,266



130,097



123,465Loss from operations


(11,212
)


(17,649
)


(80,929
)


(47,318
)Interest income


648



1,920



2,377



7,945Other income (expenses), net


(308
)


19



(67
)


219Net loss before income taxes


(10,872
)


(15,710
)


(78,619
)


(39,154
)Provision for income taxes


237



398



634



809Net loss

$
(11,109
)

$
(16,108
)

$
(79,253
)

$
(39,963
)Basic and diluted net loss per share

$
(0.09
)

$
(0.13
)

$
(0.61
)

$
(0.32
)Weighted average shares used in computing basic and diluted net loss per share


129,793



127,368



129,445



126,383





The accompanying notes are an integral part of these condensed consolidated
financial statements.




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##### Table of Contents

VITRIA TECHNOLOGY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Nine months ended September
30,2002


2001Operating activities:Net loss

$
(79,253
)

$
(39,963
)Adjustments to reconcile net loss to net cash used in operating activities:Amortization of goodwill and intangible assets


1,072



2,355Acquired in-process technology






1,500Impairment of goodwill


7,047



Gain on sale of equity investments






(1,960
)Loss on write-down of equity investments


164



1,200Loss on disposal of fixed assets


452



491Depreciation


5,164



4,801Stock-based compensation


1,498



1,469Changes in assets & liabilities:Accounts receivable


16,599



5,083Other current assets


2,723



(2,754
)Other assets


(173
)


(139
)Accounts payable


(69
)


468Accrued liabilities


(4,908
)


(2,459
)Accrued restructuring charges


14,025



Deferred revenue


(10,068
)


(17,167
)Net cash used in operating activities


(45,727
)


(47,075
)Investing activities:Acquisition of subsidiary, net of cash acquired






(8,869
)Purchases of property and equipment


(2,395
)


(5,913
)Purchases of investments


(110,774
)


(318,703
)Maturities of investments


162,804



278,670Proceeds from sales of equity investments






4,000Net cash provided by (used in) investing activities


49,635



(50,815
)Financing activities:Collection of notes receivable from shareholders






98Issuance of common stock, net


931



2,954Acquisition of treasury stock


(209
)


Net cash provided by financing activities


722



3,052Effect of exchange rates on changes on cash and cash equivalents


810



(117
)Net increase (decrease) in cash and cash equivalents


5,440



(94,955
)Cash and cash equivalents at beginning of period


60,479



154,826Cash and cash equivalents at end of period

$
65,919


$
59,871





The accompanying notes are an integral part of these condensed consolidated
financial statements.




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





1)    Basis of Presentation





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim consolidated financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of the management of Vitria Technology, Inc., these unaudited condensed
consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which we consider necessary to fairly state Vitrias financial position and the results of its operations and its cash flows. The
balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial
statements. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in Vitrias Annual Report on Form 10-K for the year ended December 31, 2001. The
results of Vitrias operations for any interim period are not necessarily indicative of the results of the operations for any other interim period or for a full fiscal year.





Certain prior period amounts have been reclassified to conform to the current period presentation. Such reclassifications did not change the previously reported operating
loss or net loss amounts.





2)    Net Loss Per Share





Basic net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding. Basic net loss per share does not include
shares subject to Vitrias right of repurchase, which lapses ratably over the related vesting term. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding plus shares
of potential common stock. Shares of potential common stock are composed of shares of common stock subject to Vitrias right of repurchase and shares of common stock issuable upon the exercise of stock options (using the treasury stock method).
The calculation of diluted net loss per share excludes shares of potential common stock if their effect is anti-dilutive.





The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):





Three months ended


Nine months endedSeptember 30, 2002


September 30, 2001


September 30, 2002


September 30, 2001Numerator for basic and diluted net loss per share:Net loss

$
(11,109
)

$
(16,108
)

$
(79,253
)

$
(39,963
)Denominator for basic and diluted net loss per share:Weighted average shares of common stock outstanding


130,389



129,568



130,359



129,075Less shares subject to repurchase


(596
)


(2,200
)


(914
)


(2,692
)Denominator for basic and diluted net loss per share


129,793



127,368



129,445



126,383Basic and diluted net loss per share

$
(0.09
)

$
(0.13
)

$
(0.61
)

$
(0.32
)




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##### Table of Contents




The following table sets forth the weighted average potential shares of common
stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):





Three months ended

Nine months endedSeptember 30, 2002

September 30, 2001

September 30, 2002

September 30, 2001Weighted average effect of anti-dilutive securities:Employee stock options (using the Treasury Stock Method)

325

3,112

3,920

5,035Common stock subject to repurchase agreements

596

2,200

914

2,692Total

921

5,312

4,834

7,727





3)  Comprehensive Loss





Comprehensive loss is comprised of net loss and other comprehensive income (loss) such as foreign currency translation gains (losses) and unrealized gains (losses) on
available-for-sale marketable securities. Vitrias total comprehensive loss was as follows (in thousands):





Three months ended


Nine months endedSeptember 30, 2002


September 30, 2001


September 30, 2002


September 30, 2001Net loss

$
(11,109
)

$
(16,108
)

$
(79,253
)

$
(39,963
)Other comprehensive income (loss):Foreign currency translation adjustment


24



12



810



(117
)Unrealized gain (loss) on securities


14



114



(88
)


217Comprehensive loss

$
(11,071
)

$
(15,982
)

$
(78,531
)

$
(39,863
)





4)  Stock-Based Compensation





Stock-based compensation is broken down as follows (in thousands):





Three months ended

Nine months endedSeptember 30, 2002

September 30, 2001

September 30, 2002

September 30, 2001Cost of revenues

$
17

$
32

$
64

$
116Sales and marketing


78


151


653


557Research and development


78


145


292


526General and administrative


40


75


489


270Total stock-based compensation

$
213

$
403

$
1,498

$
1,469




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As a result of changes made to our management structure, we modified the stock option vesting terms of option grants made
to two former executives. In accordance with APB 25, Accounting for Stock Issued to Employees, we recorded an additional non-cash stock-based compensation expense of $695,000 as a result of these modifications in the quarter ended March
31, 2002.





5)  Restricted Investments





In June 2002, we entered into a new standby letter of credit, replacing a previous standby letter of credit that restricted certain investments from use in operations. The new standby letter of credit
no longer requires such restriction therefore the investments were subsequently reclassified as cash and cash equivalents or short-term investments.





6)  Derivative Financial Instruments





In accordance with Financial Accounting Standards
No. 133 (SFAS No. 133) Accounting for Derivative Instruments and Hedging Activities, Vitria recognizes all of our derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in
the fair value (i.e., unrealized gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. Derivatives that are not hedges must be
adjusted to fair value through current earnings.





To protect against possible changes in values of certain foreign
currency denominated receivables, primarily resulting from sales outside the United States, from time to time we enter into foreign currency forward contracts which qualify for and are designated as fair value hedges. The gains and losses on these
forward contracts as well as the offsetting losses and gains on the hedged receivables are recognized in current earnings. The effectiveness test for these contracts is determined by using the forward-to-forward rate comparison for currency forward
contracts, which makes same-currency hedges perfectly effective. In the three and nine months ended September 30, 2002, we did not engage in any hedging activities.





7)  Goodwill





During the quarter ended June 30, 2002, we
made an adjustment to reduce the purchase price of XMLSolutions Corporation by $200,000. The reduction in purchase price was due to revised estimates of acquisition related expenses. The adjustment to the purchase price reduced both goodwill and
other accrued liabilities by $200,000. In addition, in accordance with SFAS 142, approximately $1.0 million in assembled workforce, classified as intangible assets, was transferred to goodwill as of January 1, 2002. For comparative purposes we made
this reclassification in the balance sheet as of December 31, 2001.





Also during the quarter ended June 30, 2002,
we performed an assessment of the carrying value of goodwill, which was recorded in connection with our acquisition of XMLSolutions in April 2001. The assessment was performed because our market capitalization had declined significantly, and
sustained negative economic conditions impacted our operations and expected future revenues. We evaluated goodwill under the provisions of Statement of Financial Accounting Standards No. 142 (SFAS No. 142) Goodwill and Other Intangible
Assets (See Note 10). Goodwill was tested for impairment by calculating the fair value of Vitria as a whole based on our market capitalization at June 30, 2002 and comparing the fair value to the book value of Vitria, and then comparing the
implied fair value of the goodwill to its carrying value. As a result of the assessment, we recorded impairment charges of $7.0 million related to goodwill in the quarter ended June 30, 2002.




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The following pro-forma financial information reflects consolidated results adjusted as if SFAS 142 had been adopted for
all periods presented (in thousands, except per share amounts):





Three months ended


Nine months ended


Twelve months ended December 31, 2001September 30, 2002


September 30, 2001


September 30, 2002


September 30, 2001Reported net loss

$
(11,109
)

$
(16,108
)

$
(79,253
)

$
(39,963
)

$
(53,622
)Add back: goodwill amortization (including assembled workforce)






975







1,834



2,083Adjusted net loss

$
(11,109
)

$
(15,133
)

$
(79,253
)

$
(38,129
)

$
(51,539
)Basic and diluted net loss per share:Reported net loss per share

$
(0.09
)

$
(0.13
)

$
(0.61
)

$
(0.32
)

$
(0.42
)Add back: goodwill amortization (including assembled workforce)






0.01







0.02



0.01Adjusted net loss per share

$
(0.09
)

$
(0.12
)

$
(0.61
)

$
(0.30
)

$
(0.41
)Weighted average shares


129,793



127,368



129,445



126,383



126,851





8)  Intangible Assets





At September 30, 2002, intangible assets, resulting from the acquisition of XMLSolutions Corporation, consist of the following (in thousands):





Gross Carrying Amount September 30, 2002

Accumulated Amortization September 30, 2002

Net Carrying Amount September 30, 2002Developed Technology

$
2,500

$
1,227

$
1,273Trademarks


800


393


407Total

$
3,300

$
1,620

$
1,680





In accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, the carrying values of our intangible assets are tested for impairment whenever events or changes in circumstances indicate that we may not be able to recover the
assets carrying amount. An analysis for




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impairment was conducted in June 2002 due to sustained negative economic conditions that have impacted our operations. No impairment was identified for the intangible assets at that time. There
were no significant events in the quarter ended September 30, 2002 to cause us to test again for impairment.





SFAS
142 (see Note 10) requires that intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified as of January 1, 2002. In accordance with SFAS 142, we transferred approximately $1.0 million of net assembled
workforce to goodwill as of January 1, 2002. For comparative purposes we have made this reclassification as of December 31, 2001.





9)  Credit Agreements





In June 2002, we entered into a $15 million revolving line of
credit agreement with Silicon Valley Bank. Interest on outstanding borrowings accrues at the banks prime rate of interest. The facility is secured by all of Vitrias assets. The agreement includes restrictive covenants which require us to
maintain, among other things, a minimum cash, cash equivalents, and short-term investments balance of $90 million. The line of credit serves as collateral for letters of credit and other commitments, even though these items do not constitute draws
on the line of credit. Available advances under the line of credit are reduced by the amount of outstanding letters of credit and other commitments.





As of September 30, 2002, we had not borrowed against this line of credit. In connection with the line of credit agreement, we have outstanding letters of credit of approximately $13.5 million related
to certain office leases.





10)  Recent Accounting Pronouncements





We adopted Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets on January 1, 2002. Under this
pronouncement, goodwill and those intangible assets with indefinite lives are no longer amortized but rather are tested for impairment at least annually and when events and circumstances indicate that their fair value has been reduced below carrying
value (see Notes 7 and 8). SFAS 142 also requires that goodwill be tested for impairment upon adoption. Furthermore, upon adoption, approximately $1.0 million classified as assembled workforce was reclassified to goodwill. SFAS 142 requires that
goodwill be tested for impairment using a two-step impairment analysis. In addition, certain disclosures are required to be presented until all periods are accounted for in accordance with SFAS 142. Pro-forma financial information presented in Note
7 reflects consolidated results adjusted as if SFAS 142 had been adopted for all periods presented.





We adopted
Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets on January 1, 2002. SFAS 144 establishes an accounting model for impairment or disposal of long-lived
assets to be disposed of by sale. Adoption did not have a material impact on our results of operations, financial position or cash flows.





In November 2001, the staff of FASB issued Staff Announcement Topic No. D-103, Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred, or the Announcement.
The Announcement requires companies to characterize reimbursements received for out of pocket expenses incurred as revenue in the income statement. Vitria has adopted the Announcement beginning on January 1, 2002. Adjustments to prior period
financial statements have not been made because the amounts have not been material. The Announcement has had no impact on gross profit or net income but has minimally increased services revenue and cost of services revenue.





In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 eliminates the Emerging Issues Task Force Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring). Under SFAS 146, liabilities for costs associated with an exit or




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disposal activity are recognized when the liabilities are incurred, and fair value is the objective for initial measurement of the liabilities. SFAS 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. We do not believe that the adoption of SFAS 146 will have a material affect on our operating results or financial position.





11)  Restructuring and Asset Impairments





In April 2002,
we initiated actions to reduce our cost structure. The plan was a combination of a reduction in workforce of approximately 150 employees, or 17% of the existing workforce, consolidations of facilities in the United States and United Kingdom and
fixed asset write-offs of leasehold improvements and equipment. The workforce reduction affected all functional areas and was largely completed in the quarter ended June 30, 2002. As a result of the restructuring plan, we incurred a charge of $17.3
million in the quarter ended June 30, 2002. The restructuring charge included approximately $2.4 million of severance related charges, $14.5 million of committed excess facilities payments, and $463,000 in fixed asset write-offs of leasehold
improvements and equipment. The facilities consolidation charge was calculated using our best estimates and was based upon the remaining future lease commitments for vacated facilities from the date of facility consolidation, net of estimated future
sublease income. The estimated costs of vacating these leased facilities were based on market information and trend analyses, including information obtained from independent real estate sources. We have engaged brokers to locate tenants to sublease
these facilities. As of September 30, 2002, $13.6 million of lease termination costs, net of anticipated sublease income, remains accrued and is expected to be fully utilized by fiscal 2013. In calculating the charge for facilities consolidation,
certain assumptions were made with respect to the estimated time periods of vacancy and sublease rates and opportunities. Actual future circumstances could be materially different from our estimates and accordingly, the actual total charges
associated with the vacated facilities could be materially higher or lower than estimated. Adjustments to the facilities consolidation charges will be made in future periods, if necessary, based upon then current actual events and circumstances.





In August 2002, we initiated actions to further reduce our cost structure. The plan consisted entirely of a
reduction in workforce of approximately 135 employees, or 20% of the existing workforce. The workforce reduction affected all functional areas and was largely completed in the quarter ended September 30, 2002. As a result of the restructuring plan,
we incurred a charge of $1.7 million in the quarter ended September 30, 2002.





As of September 30, 2002, $14.0
million of restructuring costs remained accrued for payment in future periods, as follows (in thousands):





2002 Restructuring Reserve

Facilities consolidation


Severance


TotalTotal charges

14,983


2,363


17,346Cash payments

(477
)

(2,201
)

(2,678
)Fixed asset writeoffs

(463
)




(463
)Reclassification of deferred rent

705





705Balance at June 30, 2002

14,748


162


14,910Total charges

(112
)

1,777


1,665Cash payments

(1,013
)

(1,537
)

(2,550
)Balance at September 30, 2002

13,623


402


14,025




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##### Table of Contents

At September 30, 2002, $4.8 million related to the 2002 restructuring activities remained in current liabilities and $9.2
million remained in long term liabilities. During 2002, we have made cash payments for restructuring activities totaling $5.2 million. Cash payments totaling approximately $14.0 million, primarily consisting of lease payments, will be made through
2013. The accrued severance balance of $402,000 is expected to be paid out by December 31, 2003.





In the three
months ended June 30, 2002 we also incurred a charge to cost of license revenues for approximately $2.0 million related to a non-cancelable royalty agreement that will have no future utility to us. The charge resulted from the write-off of
approximately $1.1 million of prepaid assets and the accrual of approximately $875,000 relating to a remaining guaranteed future payment to be made in January 2003.





12)  Treasury Stock





In July 2002, our Board of
Directors announced a stock repurchase program under which we may repurchase up to an aggregate of five million shares of our common stock beginning on July 29, 2002. Under the program the repurchases will be made from time to time on the open
market at prevailing market prices or in negotiated transactions off the market. The repurchases will be funded from available working capital. As of September 30, 2002, 222,900 shares had been repurchased in the open market at a total cost of
approximately $209,000.




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##### Table of Contents




ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the safe
harbor created by those sections. These forward-looking statements are generally identified by words such as expect, anticipate, intend, plan, believe, hope,
assume, estimate and other similar words and expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements,
including, without limitation, the risks outlined under Business Risks in this report on Form 10-Q. These business risks should be considered in evaluating our prospects and future financial performance. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.





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consistency and accuracy of data.





In addition to providing the integration platform, we offer pre-packaged
integration solutions, known as collaborative applications. These are pre-built, configurable solutions for solving common integration problems by managing collaborative processes within and across enterprises. The Vitria Collaborative Applications
(VCA) family of products is built on and leverages the BusinessWare integration platform and provides significant out-of-the-box capabilities for addressing specific integration problems. For example, our VCA for HIPAA (Health Insurance Portability
and Accountability Act) provides a quick-start solution for managing transaction, validation and security requirements between healthcare payers, providers, clearinghouses and government agencies in order to meet new regulatory standards in the
healthcare sector.





The BusinessWare integration platform and our family of collaborative applications are
currently licensed by more than 500 companies worldwide in such diverse industries as healthcare, manufacturing, financial services, insurance, telecommunications and energy.





BusinessWare combines in a single solution the five elements that we believe are essential for ebusiness infrastructure software:





| | (1) |  | Business Process Management, or BPM: BPM manages the steps of a cross-functional business process to ensure completion of the process (e.g., the sales through
collection cycle). It uses graphical business process models to define, automate and orchestrate transactions and the exchange of information between internal business applications, people and external trading partners.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (2) |  | Business-to-Business Integration, or B2Bi: B2Bi enables the secure and reliable completion of transactions and the exchange of business information between
customers and partners over
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the Internet to support collaborative business processes. B2Bi helps companies manage their value chain interactions from end to end.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------




| | (3) |  | Business Analysis and Monitoring, or BAM: BAM provides real-time monitoring and analysis of business processes thereby enabling optimization of operational
efficiency. Our two key BAM componentsCockpit and Analyzercontinuously gather business process data, analyze and visualize it in real time, and enable process owners to identify and respond to both business and integration problems or
opportunities as they occur.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (4) |  | Business Vocabulary Management, or BVM: BVM is comprised of content and tools that enable more flexible, scalable management of translations between
application-specific and industry-specific data formats and meanings (vocabularies). BVM is designed to make integration easier, reduce cost, minimize the risk of change and enable efficient exception handling. BVM includes a comprehensive set of
extended markup language, industry-specific vocabularies (words and meanings) and documents required to conduct business over the Internet. To address the specific needs of each industry, BVM provides packaged vocabularies for various industries
based on the specific business terms used within those industries.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (5) |  | Enterprise Application Integration, or EAI: EAI enables the secure and reliable movement of information in and out of internal business applications. By
enabling internal applications to communicate with each other, EAI helps unify and improve extended enterprise processes.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Companies may use BusinessWares capabilities to orchestrate interactions between both emerging industry-standard and legacy third-party application integration infrastructures.





Once customers use BusinessWare to define their business process models and integrate the underlying information technology
(IT) systems, BusinessWare automatically controls the flow of information across the IT systems as specified by the process models. BusinessWare continuously analyzes the customers business processes and can automatically change the processes
in response to this analysis. This capability allows companies to transform the information flowing through their IT systems into actionable intelligence that enables business managers to optimize their business operations.





Our products are typically licensed directly to customers for a perpetual term, with pricing based on the number of copies
licensed or systems or applications managed. We market our products through our direct sales force and augment our marketing efforts through relationships with system integrators and technology vendors. To date, we have not experienced significant
seasonality of revenue. We expect that future results may be affected by the fiscal or quarterly budgeting cycles of our customers.





CRITICAL ACCOUNTING POLICIES





Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. We evaluate our estimates on an on-going basis, including those related to allowances for bad debts, investments,
intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.




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We believe the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial statements.





Revenue Recognition





We derive revenues from software licenses to end users for BusinessWare and other products and related
services, which include maintenance and support, consulting and training services. In accordance with the provisions of Statement of Position 97-2, Software Revenue Recognition, as amended, we record revenue from software licenses when a
license agreement is signed by both parties, the fee is fixed or determinable, collection of the fee is probable and delivery of the product has occurred. For electronic delivery, the product is considered to have been delivered when the access code
to download the software from the Internet has been provided to the customer. If an element of the agreement has not been delivered, revenue for the element is deferred based on vendor-specific objective evidence of fair value. If vendor-specific
objective evidence of fair value does not exist, all revenue is deferred until sufficient objective evidence exists or all elements have been delivered. We treat all arrangements with payment terms longer than normal not to be fixed or determinable.
Our normal payment terms currently range from net 30 days to net 90 days for domestic and international customers. Revenue is deferred for those agreements which exceed normal payment terms. If the fee due from the customer
is not fixed or determinable, revenue is recognized as payments become due from the customer. Our assessment of collectibility is particularly critical in determining whether revenue should be recognized in the current market environment. If
collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue on arrangements with customers who are not the ultimate users, primarily third-party systems integrators, is not recognized until evidence of
sell-through arrangement to an end user has been received.





Marketing assistance fees are commissions which are
paid to partners who have contributed to the successful completion of a license transaction in accordance with a written agreement and specific project executed with Vitria. Such fees are offset against the end customer license revenue.





Service and other revenues include product maintenance and support, consulting, training and government grants.
Revenues from maintenance and support are deferred and recognized ratably over the term of the contract. Revenues from consulting and training are recognized when the services are performed and collectibility is deemed probable. Customers who
license BusinessWare normally purchase maintenance contracts. These contracts provide unspecified software upgrades and technical support over a specified term, which is typically twelve months. Maintenance contracts are usually paid in advance, and
revenues from these contracts are recognized ratably over the term of the contract. A majority of our customers use third-party system integrators to implement our products. Customers typically purchase additional consulting services from us to
support their implementation activities. These consulting services are generally sold on a time and materials basis and recognized as the services are performed. We also offer training services which are sold on a per student or per class basis and
recognized as the classes are attended.





Payments received in advance of revenue recognition are recorded as
deferred revenue. When the software license arrangement requires us to provide consulting services for significant production, customization or modification of the software, or when the customer considers these services essential to the
functionality of the software product, both the product license revenue and consulting services revenue are recognized in accordance with the provision of Statement of Position 81-1, Accounting for Performance of Construction Type and Certain
Production Type Contracts. We recognize revenue from these arrangements using the percentage of completion method based on cost inputs and, therefore, both product license and consulting services revenue are recognized as work progresses.





Allowance for Doubtful Accounts





We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to deliver required payments to us. These allowances are
established through analysis of the credit




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worthiness of each customer, which is based on credit reports from third parties, analysis of published or publicly available financial information and customer specific experience including
payment practices and history. The use of different estimates or assumptions could produce materially different allowance balances. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.





Valuation of Equity Investments





We record an investment impairment charge when we believe an investment in corporate debt securities or in equity securities of private
companies has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of the underlying companies could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investments current carrying value, thereby possibly requiring an impairment charge in the future.





Accounting for Income Taxes





We record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination
was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.





Special Charges





During the first nine months of 2002, we recorded significant special charges related to non-recurring events and the realignment and restructuring of our business operations. These charges represent
expenses incurred in connection with certain cost reduction programs that we have undertaken, and consist of the cost of involuntary termination benefits, facilities charges and other costs of exiting activities. We will record a liability in the
period management approves a restructuring plan if:





| | - |  | Management having the appropriate level of authority approves and commits Vitria to the specific plan involving involuntary terminations and/or the exit from
certain activities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | - |  | The period of time to complete the plan indicates that significant changes to the plan of termination are not likely;
| | - |  | ---------------------------------------------------------------------------------------------------------------------




| | - |  | The plan involving terminations identifies the number of employees and positions to be terminated, and the termination benefit arrangement is communicated to
employees at the commitment date.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Only costs resulting from an exit plan that are not
associated with, or that do not benefit activities that will be continued, are eligible for recognition as liabilities at the commitment date.





These charges, for both severance and exit costs, require the extensive use of estimates primarily about the number of employees to be paid severance, the amount of severance and related benefits to be
paid, and the cost of exiting facilities, including estimates and assumptions related to future maintenance costs, our ability to secure sub-tenants (if applicable) and any sublease income to be received in the future. If we fail to make accurate
estimates or to complete planned activities in a timely manner, we might record additional charges in the future, and might not be permitted to accrue such charges at the time a restructuring plan is approved, but may have to recognize such costs as
incurred.





Contingencies and Litigation





We are subject to various proceedings, lawsuits and claims relating to product, technology, labor, shareholder and other matters. We are required to assess the likelihood
of any adverse outcomes and the potential range of probable losses in these matters. The amount of loss accrual, if any, is determined after careful analysis of each matter, and is subject to adjustment if warranted by new developments or revised
strategies.




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##### Table of Contents

RESULTS OF OPERATIONS


For the three and nine months ended
September 30, 2002





The following table sets forth the results of operations for the three and nine months
ended September 30, 2002, expressed as a percentage of total revenues.





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001Revenues:License

38
%

52
%

39
%

57
%Service and other

62
%

48
%

61
%

43
%Total revenues

100
%

100
%

100
%

100
%Cost of revenues:License

1
%

1
%

3
%

1
%Service and other

32
%

24
%

33
%

23
%Total cost of revenues

33
%

25
%

36
%

24
%Gross profit

67
%

75
%

64
%

76
%Operating expenses:Sales and marketing

58
%

78
%

78
%

74
%Research and development

27
%

36
%

33
%

32
%General and administrative

18
%

14
%

21
%

13
%Stock-based compensation

1
%

1
%

2
%

1
%Amortization of goodwill and intangible assets

1
%

4
%

1
%

2
%Impairment of goodwill

0
%

0
%

9
%

0
%Restructuring costs

6
%

0
%

25
%

0
%Acquired in-process research and development

0
%

0
%

0
%

2
%Total operating expenses

111
%

133
%

169
%

124
%Loss from operations

(44
)%

(58
)%

(105
)%

(48
)%Interest income

2
%

6
%

3
%

8
%Other income, net

(1
)%

0
%

0
%

0
%Net loss before income taxes

(43
)%

(52
)%

(102
)%

(40
)%Provision for income taxes

1
%

1
%

1
%

1
%Net loss

(44
)%

(53
)%

(103
)%

(41
)%




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##### Table of Contents




REVENUES





We recognized approximately 43% of our revenues from customers outside the United States in the three months ended September 30, 2002 and 34% of our revenues from customers outside the United States in
the nine months ended September 30, 2002, compared to 31% in the three months ended September 30, 2001 and 25% in the nine months ended September 30, 2001. For the next quarter, we believe international revenues will remain at approximately the same
percentage of total revenues as the three months ended September 30, 2002.





Sales to our ten largest customers
accounted for 41% of total revenues in the three months ended September 30, 2002 and 30% of total revenues in the nine months ended September 30, 2002. Sales to our ten largest customers accounted for 42% of total revenues in the three months ended
September 30, 2001 and 30% of total revenues in the nine months ended September 30, 2001. One customer accounted for 11% of our revenues in the three months ended September 30, 2002 and a different customer accounted for 15% of our revenues in the
three months ended September 30, 2001. No one single customer accounted for more that 10% of total revenues in either of the nine months ended September 30, 2002 or 2001. We expect that revenues from a limited number of customers will continue to
account for a large percentage of total revenues in future quarters. Therefore, the loss or delay of individual orders could have a significant impact on revenues. Our ability to attract new customers will depend on a variety of factors, including
the reliability, security, scalability and the overall cost-effectiveness of our products.





LICENSE.License revenues decreased 37% to $10.0 million in the three months ended September 30, 2002 from $15.8 million in the three months ended September 30, 2001. License revenues decreased 47% to $30.0 million in the nine months ended September 30,
2002 from $56.6 million in the nine months ended September 30, 2001. These decreases were the result of a decrease in the number of licenses sold, which we believe has been caused primarily by a general slowdown in information technology spending in
our target markets.





SERVICE AND OTHER. Service and other revenues increased 12% to $16.0 million in the three
months ended September 30, 2002 from $14.3 million in the three months ended September 30, 2001. Service and other revenues increased 8% to $47.2 million in the nine months ended September 30, 2002 from $43.3 million in the nine months ended
September 30, 2001. The increases for both periods are due to an increase in consulting revenues as projects initiated in prior quarters were completed. This increase is offset in part by a decrease in support revenues due to declining renewal rates
among early customers who have gone out of business or are experiencing financial difficulties as well as a decrease in training revenues due to the current economic environment which is curtailing many of our customers training budgets.





COST OF REVENUES





LICENSE. Cost of license revenues consists of royalty payments to third parties for technology incorporated into our products. Cost of license revenues varies as it is dependent upon the
third-party technology incorporated into our products and the buying patterns of our customers. As a percentage of license revenues, cost of license revenues decreased to 1% in the three months ended September 30, 2002 from 3% for the three months
ended September 30, 2001. This fluctuation is due to the buying patterns of our customers, as cost of license revenues is dependent upon which products our customers purchase, and which of those purchased products have third-party technology
incorporated into them. As a percentage of license revenues, cost of license revenues increased to 8% in the nine months ended September 30, 2002 from 2% in the nine months ended September 30, 2001. This increase is due to the write off of a $2.0
million non-cancelable prepaid royalty which was written off in the second quarter of 2002. We wrote off the prepaid royalty because we do not expect the royalty agreement to have any future utility to us.





SERVICE AND OTHER. Cost of service and other revenues consists of salaries, facility costs, travel expenses and third party consultant
fees incurred in providing customer support, training and implementation related services. Cost of service and other revenues was $8.4 million in the three months ended September 30, 2002, an increase of 18%




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over cost of service and other revenues of $7.1 million in the three months ended September 30, 2001. This increase is primarily due to increased travel expenses incurred by our professional
services group related to increased consulting revenues in the current quarter. Cost of service and other revenues was $25.5 million in the nine months ended September 30, 2002, an increase of 13% over cost of service and other revenues of $22.6
million in the nine months ended September 30, 2001. This increase is primarily due to increased travel expenses incurred by our professional services group related to increased consulting revenues in the current quarter and to higher salary costs
over the same period a year ago. As a percentage of service and other revenues, these costs increased 3% to 52% in the three months ended September 30, 2002 from 49% in the three months ended September 30, 2001. As a percentage of service and other
revenues, these costs increased 2% to 54% in the nine months ended September 30, 2002 from 52% in the nine months ended September 30, 2001. These percentage changes remained essentially flat due to increasing expenses at the same time that service
and other revenues have increased. For the next quarter, we expect that cost of service and other revenues will remain consistent with previous periods in absolute dollars.





OPERATING EXPENSES





SALES AND MARKETING. Sales and
marketing expenses consist of salaries, commissions, field office expenses, travel and entertainment, and promotional expenses. During the three months ended September 30, 2002, sales and marketing expenses were $15.0 million, a decrease of 36% over
sales and marketing expenses of $23.6 million for the three months ended September 30, 2001. This decrease was primarily due to lower salary and related expenses, lower travel expenses and lower facilities costs all as a result of our headcount
reductions and sales office closures. During the nine months ended September 30, 2002, sales and marketing expenses were $60.2 million, a decrease of 19% over sales and marketing expenses of $73.9 million for the nine months ended September 30,
2001. This decrease is primarily attributable to a decrease in commission expense due to reduced revenues, lower salary and related expenses and lower facilities costs as a result of our headcount reduction and sales office closures. As a percentage
of revenues, sales and marketing expenses decreased 20% to 58% in the three months ended September 30, 2002 from 78% in the three months ended September 30, 2001. This decrease is primarily due to reduction in headcount and related sales office
closures in the last two quarters. As a percentage of revenues, sales and marketing expenses increased 4% to 78% in the nine months ended September 30, 2002 from 74% in the nine months ended September 30, 2001. This slight increase is due to our
reduced revenues in the current period which has been offset by our reduction in headcount and related sales office closures in the last two quarters. For the next quarter, we expect that sales and marketing expenses will decrease in absolute
dollars as a result of the August 2002 reduction in workforce and further efforts to control costs.





RESEARCH AND
DEVELOPMENT. Research and development expenses include costs associated with the development of new products, enhancements to existing products, and quality assurance activities. These costs consist primarily of employee salaries, benefits, and the
cost of consulting resources that supplement the internal development team. Costs of developing software for external use that may have been eligible for capitalization have not been material and we have expensed all of these costs as incurred.
During the three months ended September 30, 2002, research and development expenses were $6.9 million, a decrease of 37% from research and development expenses of $10.9 million for the three months ended September 30, 2001. This decrease is mainly
attributable to a decrease in salary and related expenses as a result of our headcount reduction in August 2002, lower overhead costs as headcount was decreased, and a decrease in third party consulting expenses. During the nine months ended
September 30, 2002, research and development expenses were $25.1 million, a decrease of 21% over research and development expense of $31.7 million for the nine months ended September 30, 2001. This decrease is mainly attributable to a decrease in
salary and related expenses as a result of headcount reductions in 2002 and decreases in recruiting expenses, travel expenses and facilities costs due to our cost containment efforts. As a percentage of total revenues, research and development
expenses decreased 9% to 27% in the three months ended September 30, 2002 from 36% in the three months ended September 30, 2001. This decrease over the same period of the prior year is attributed to a significant decrease in expenses as a result of
our cost containment efforts. As a percentage of total revenues, research and development expense increased 1% to 33% in the nine months ended September 30, 2002 from 32% in the nine months ended September 30, 2001. Research and development expenses
as a percentage of revenues remained essentially flat compared to




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the same period of the prior year due to our ability to reduce research and development expenses proportionately with the decrease in revenues
experienced during the same period. For the next quarter, we expect that research and development expenses will decrease in absolute dollars as a result of the August 2002 reduction in workforce and further efforts to control costs.





GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of salaries for administrative, executive
and finance personnel, information systems costs, outside professional service fees and our provision for doubtful accounts. During the three months ended September 30, 2002, general and administrative expenses were $4.6 million, an increase of 13%
over general and administrative expenses of $4.1 million for the three months ended September 30, 2001. This increase is mainly due to a decrease in sublease rental income and an increase in bad debt expenses, offset by a decrease in salary and
related expenses as a result of our headcount reduction in August 2002. During the nine months ended September 30, 2002, general and administrative expenses were $16.1 million, an increase of 29% over general and administrative expenses of $12.5
million for the nine months ended September 30, 2001. This increase is primarily attributable to an increase in outside consulting expenses associated with the implementation of internal systems and a decrease in sublease rental income. As a
percentage of revenues, general and administrative expenses increased 4% to 18% in the three months ended September 30, 2002 from 14% in the three months ended September 30, 2001. As a percentage of revenues, general and administrative expenses
increased 8% to 21% in the nine months ended September 30, 2002 from 13% in the nine months ended September 30, 2001. These increases as a percentage of revenues are due to both the increases in general and administrative expenses in absolute
dollars as explained above, as well as the decreases in revenues in the three and nine months ended September 30, 2002 from the same periods in the prior year. For the next quarter, we expect that general and administrative expenses will decrease in
absolute dollars as a result of the August 2002 reduction in workforce and further efforts to control costs.





STOCK-BASED COMPENSATION. Stock-based compensation represents the difference between the exercise price and the deemed fair value of our common stock on the date certain stock options were granted or modified. During the three months
ended September 30, 2002, stock-based compensation was $213,000, a decrease of 47% over stock-based compensation of $403,000 for the three months ended September 30, 2001. During the nine months ended September 30, 2002, stock-based compensation was
$1.5 million, an increase of 2% over stock-based compensation of $1.47 million for the nine months ended September 30, 2001. As a result of changes in our top management structure, we modified the stock option vesting terms of option grants
made to two former executives who left the company in the quarter ended March 31, 2002. In accordance with APB 25, Accounting for Stock Issued to Employees, we recorded $695,000 in additional non-cash stock-based compensation expense in
the three months ended March 31, 2002 as a result of these grant modifications. Stock-based compensation also includes the amortization of unearned employee stock-based compensation on options issued to employees which were exercised prior to Vitria
filing its initial public offering in September 1999. This unearned employee stock-based compensation is being amortized over a five-year vesting period. We expect to recognize employee stock-based compensation expenses of approximately $181,000 for
the three months ending December 31, 2002, $434,000 for the year ending December 31, 2003 and $85,000 for the year ending December 31, 2004. This unearned compensation expense will be reduced in future periods to the extent that options are
terminated prior to vesting. The amount of compensation expense recorded for options that are cancelled prior to vesting will be credited to the income statement at the time of termination.





AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS. We purchased XMLSolutions in April 2001 under the purchase method of accounting which resulted in goodwill
and intangible assets being recorded at the time of purchase. Goodwill associated with this purchase was amortized over its estimated life in 2001. However, in accordance with SAFS 142, as referenced in Note 10 in the Notes to Condensed
Consolidated Financial Statements, beginning January 1, 2002, we discontinued the amortization of goodwill. Amortization of other purchased intangible assets associated with the acquisition of XMLSolutions resulted in charges to earnings of $341,000
for the three months ended September 30, 2002 and $1.1 million for the nine months ended September 30, 2002. Amortization of goodwill and intangible assets was




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$1.3 million in the three months ended September 30, 2001 and $2.4 million in the nine months ended September 30, 2001. The purchased intangible assets will continue to be amortized over their
estimated useful lives subject to periodic review for impairment.





IMPAIRMENT OF GOODWILL. During the quarter
ended June 30, 2002, we performed an assessment of the carrying value of our goodwill, which was recorded in connection with our acquisition of XMLSolutions in April 2001. The assessment was performed because our market capitalization had declined
significantly and because sustained negative economic conditions have impacted our operations and expected future revenues. Current economic indicators suggest that these conditions will continue for the foreseeable future. We evaluated goodwill
under the provisions of SFAS 142 (See Note 10). Goodwill was tested for impairment by calculating the fair value of Vitria as a whole, based on our market capitalization at June 30, 2002, and comparing the fair value to the book value of Vitria, and
then comparing the implied fair value of the goodwill with its carrying value. As a result of this assessment, we recorded impairment charges of $7.0 million related to goodwill.





INTANGIBLE ASSETS. Our purchase of XMLSolutions Corporation resulted in intangible assets. Intangible assets, which have a net carrying amount of approximately $1.7 million
at September 30, 2002, include developed technology and trademarks. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, the carrying values of our
intangible assets are tested for impairment whenever events or changes in circumstances indicate that we may not be able to recover the assets carrying amount. An analysis for impairment was conducted in June 2002 due to sustained negative economic
conditions that impacted our operations. No impairment was identified for the intangible assets at that time. There were no significant events in the quarter ended September 30, 2002 to cause us to test again for impairment. As required by SFAS 142,
intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. In accordance with SFAS 142, we transferred approximately $1.0 million of net assembled workforce to goodwill as of January 1, 2002.





RESTRUCTURING COSTS. In April 2002, we initiated actions to reduce our cost structure. The plan was a combination
of a reduction in workforce of approximately 150 employees, or 17%, of the existing workforce, consolidations of facilities in the United States and United Kingdom and fixed asset write-offs of leasehold improvement and equipment. The workforce
reduction affected all functional areas and was largely completed in the quarter ended June 30, 2002. As a result of the restructuring plan, we incurred a charge of $17.3 million in the quarter ended June 30, 2002. The restructuring charge included
approximately $2.4 million of severance related charges, $14.5 million of committed excess facilities payments, and $463,000 in fixed asset write-offs of leasehold improvements and equipment. The facilities consolidation charge was calculated using
our best estimates and was based upon the remaining future lease commitments for vacated facilities from the date of facility consolidation, net of estimated future sublease income. The estimated costs of vacating these leased facilities were based
on market information and trend analyses, including information obtained from independent real estate sources. We have engaged brokers to locate tenants to sublease these facilities. As of September 30, 2002, $13.6 million of lease termination
costs, net of anticipated sublease income, remains accrued and is expected to be fully utilized by fiscal 2013. In calculating the charge for facilities consolidation, certain assumptions were made with respect to the estimated time periods of
vacancy and sublease rates and opportunities. Actual future circumstances could be materially different from our estimates and accordingly, the actual total charges associated with the vacated facilities could be materially higher or lower than
estimated. Adjustments to the facilities consolidation charges will be made in future periods, if necessary, based upon then current actual events and circumstances.





In August 2002, we initiated actions to further reduce our cost structure. The plan consisted of a reduction in workforce of approximately 135 employees, or 20% of the
existing workforce. The workforce reduction affected all functional areas and was largely completed in the quarter ended September 30, 2002. As a result of the restructuring plan, we incurred a charge of $1.7 million in the quarter ended September
30, 2002. We expect to achieve $38 million in annual cost savings as a result of our April, 2002 and August, 2002 restructuring actions.




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INTEREST AND OTHER INCOME, NET.  Interest and other income, net,
decreased by 82% to $340,000 in the three months ended September 30, 2002 from $1.9 million in the three months ended September 30, 2001. Interest and other income, net, decreased by 72% to $2.3 million in the nine months ended September 30, 2002
from $8.2 million in the nine months ended September 30, 2001. The decrease in both periods is primarily attributable to lower interest income due to lower interest rates and lower cash and investment balances, as well as losses due to fluctuations
in foreign currencies on foreign denominated assets and liabilities.





PROVISION FOR INCOME TAXES





We recorded an income tax provision of $237,000 and $634,000, respectively, for the three-month and nine- month periods ended September
30, 2002. The provision relates to income taxes currently payable on income generated in non-U.S. tax jurisdictions, state income taxes, and foreign withholding taxes incurred on software license revenue. We recorded an income tax provision of
$398,000 and $809,000, respectively, for the three-month and nine-month periods ended September 30, 2001. The 2001 provision relates to income taxes payable on income generated in non-U.S. jurisdictions, state income taxes, and foreign withholding
taxes incurred on software license revenue.





LIQUIDITY AND CAPITAL RESOURCES





Nine months ended September 30,


Percent Change2002

2001(in thousands)Working Capital

$
109,485

$
152,295


(28
%)Cash, cash equivalents and short term investments

$
128,860

$
169,746


(24
%)Net cash used in operating activities

$
45,727

$
47,075


(3
%)Net cash provided by (used in) investing activities

$
49,635

$
(50,815
)

198
%Net cash provided by financing activities

$
722

$
3,052


(76
%)





As of September 30, 2002, we had approximately $128.9 million in
cash, cash equivalents and short-term investments, and $109.5 million in working capital with no outstanding long-term debt, compared to approximately $169.7 million in cash, cash equivalents and short-term investments and $152.3 million in working
capital with no outstanding long-term debt at September 30, 2001.





Net cash used in operating activities decreased
$1.3 million or 3% during for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. This decrease was primarily due to an increase in our net loss, which was offset almost entirely by the addition of accrued
restructuring expenses, a decrease in accounts receivable, a decrease in deferred revenue, and an impairment of goodwill, a non-cash item.





Net cash provided by investing activities increased $100.4 million or 198% or in the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. This increase in the current year was primarily
due the fact that we sold more investments than we purchased to fund our operations, as compared to the prior year when we purchased more investments than we sold.




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Net cash provided by financing activities decreased $2.3 million or 76% in the
nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. Net cash provided by financing activities in both the current and prior periods has been primarily from the issuance of common stock.





During the nine months ended September 30, 2002, our net accounts receivable decreased $16.6 million from $37.2 million at
December 31, 2001 to $20.6 million at September 30, 2002. The reason for the decline was due to strong collections in the first two quarters of the current year and to lower revenues in the nine months ended September 30, 2002. The lower revenue
trend is likely to have a negative impact our future cash flows through at least the next quarter. At September 30, 2002, our gross accounts receivable balance is $22.7 million with an allowance for doubtful accounts of $2.1 million.





During the nine months ended September 30, 2002, our deferred revenue balance decreased $10.1 million from $27.3 million at
December 31, 2001 to $17.2 million at September 30, 2002. The primary reason for this decline is a decrease in our deferred support balances due to lower than anticipated license revenues in both the current and prior quarters and declining renewal
rates among some of our customers who have ceased operations or are experiencing financial difficulties. In addition, our deferred consulting balances have decreased due to the completion of projects which were initiated in prior quarters.





Contractual Cash Obligations





At September 30, 2002, we had operating lease commitments of approximately $35.6 million, payable through 2013 as noted in the table below.





Year ending December 31,

2007 and Thereafter

Total Minimum Lease Payment2002

2003

2004

2005

2006Operating Leases

$
2,383

$
8,664

$
6,903

$
6,578

$
4,708

$
6,411

$
35,647





Off-Balance Sheet Arrangements





At September 30, 2002, Vitria did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.





Stock Repurchase Program





In July 2002, our Board of Directors announced a stock repurchase program under which we may repurchase up to an aggregate of five million shares of our common stock beginning on July 29, 2002. Under
the program the repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The repurchases will be funded from available working capital. As of September 30, 2002, 222,900
shares had been repurchased in the open market at a total cost of approximately $209,000.





Operating Capital and Capital Expenditure
Requirements





Estimated future uses of cash over the next twelve months are primarily to fund operations and
to a lesser extent to fund capital expenditures. For the next twelve months, we expect to fund these uses from available cash




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balances, cash generated from operations, if any, and interest on available cash balances. Our ability to generate cash from operations is
dependent upon our ability to sell our products and services and generate revenue, as well as our ability to manage our operating costs. In turn, our ability to sell our products is dependent upon both the economic climate and the competitive
factors of the marketplace in which we operate.





In the past, we have invested significantly in our operations.
For the next quarter, we expect that operating expenses will decrease in absolute dollars as a result of reductions in workforce and continued efforts to control costs. However, we anticipate that operating expenses and planned capital expenditures
will continue to constitute a material use of our cash resources. We believe that our available cash and cash equivalents will be sufficient to meet our working capital and operating expense requirements for at least the next twelve months. At some
point in the future we may require additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise these additional funds through public or private debt or equity financings. If we need
to seek additional financing, there is no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders.





We have a limited operating history that makes it difficult to predict future operating results. We believe our success requires expanding our customer base and continuing
to enhance our products. Subject to a number of factors, some of which are difficult to project, such as the timing of the improvement of both the U.S. economy and of information technology spending in our target markets, we expect to reach
profitability sometime during fiscal 2003. Our revenues, operating results and cash flows depend upon the volume and timing of customer orders and payments and the date of product delivery. Historically, a substantial portion of revenues in a given
quarter have been recorded in the third month of that quarter, with a concentration of these revenues in the last two weeks of the third month. We expect this trend to continue and, therefore, any failure or delay in the closing of orders would have
a material adverse effect on our quarterly operating results and cash flows. Since our operating expenses are based on anticipated revenues and because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenue
from one or more license transactions could cause significant variations in operating results from quarter to quarter and cause unexpected results. Revenues from contracts that do not meet our revenue recognition policy requirements for which we
have been paid or have a valid receivable are recorded as deferred revenues. While a portion of our revenues each quarter is recognized from deferred revenue, our quarterly performance will depend primarily upon entering into new contracts to
generate revenues for that quarter. New contracts may not result in revenue during the quarter in which the contract was signed, and we may not be able to predict accurately when revenues from these contracts will be recognized. Our future operating
results and cash flows will depend on many factors, including the following:





| |  | 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;
|- |  | --------------------------------------------------

| |  | introduction of new products;
|- |  | -----------------------------

| |  | timing of our development and release of new and 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;
|- |  | ----------------------------------------------------------



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| |  | 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.
|- |  | ------------------------------------------------------------------




As a result of these factors, 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. It is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors. In this event, the price of our common stock would likely decline.




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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





The
following discussion about our risk management activities includes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements for the
reasons described under the caption Risks Associated with Vitrias Business and Future Operating Results.





Interest
Rate Risk





Our exposure to market risk for changes in interest rates relates to our investment portfolio,
which consists of short-term money market instruments and debt securities with maturities between 90 days and one year. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality
issuers and, by policy, we limit the amount of credit exposure to any one issuer.





We mitigate default risk by
investing in high credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. These securities are
generally classified as available for sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported, as a separate component of stockholders equity, net of tax. Unrealized gains and losses at
September 30, 2002 were not material.





We have no cash flow exposure due to rate changes for cash equivalents and
cash investments as all of these investments are at fixed interest rates.





There has been no material change in
our interest rate exposure since December 31, 2001.





Foreign Exchange Risk





As a global concern, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on our financial position and results of operations. Historically, our primary exposures have related to non-U.S. dollar-denominated sales and expenses in Europe, Asia Pacific and Latin America.





In order to reduce the effect of foreign currency fluctuations, from time to time, we utilize foreign currency forward exchange
contracts (forward contracts) to hedge certain foreign currency transaction exposures outstanding during the period. The gains and losses on the forward contracts help to mitigate the gains and losses on our outstanding foreign currency
transactions. We do not enter into forward contracts for trading purposes. All foreign currency transactions and all outstanding forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in other
income, net. There were no outstanding forward contracts as of September 30, 2002.





RISKS ASSOCIATED WITH VITRIAS BUSINESS AND
FUTURE OPERATING RESULTS





Since our short operating history makes it difficult to evaluate our prospects, our future financial
performance may disappoint securities analysts or investors and result in a decline in our stock price.





We
were incorporated in October 1994. Until November 1997, we were engaged primarily in research and development of our initial product. We licensed our first product in November 1997. Because of our limited operating history, we have limited insight
into trends that may emerge in our market and affect our business. The revenue and income potential of our market is unproven. As a result of our limited operating history, we have limited financial data




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that available to evaluate our business. Our prospects should be considered in light of the risks, expenses and challenges we might encounter because we are in the early stages of development in
a new and rapidly evolving market.





Although we have in the past reported net income, we cannot guarantee we will do so in the future.





We have incurred substantial losses since inception as we funded the development of our products and the
growth of our organization. We have an accumulated deficit of $158.5 million as of September 30, 2002. We intend to continue investing selectively in sales, marketing and research and development. As a result, we are likely to report future
operating losses and cannot guarantee we will report net income in the future.





Our operating results fluctuate significantly and an
unanticipated decline in revenue may disappoint securities analysts or investors and result in a decline in our stock price.





Although we have had significant revenue growth in the past, we may not be able to grow our revenues or match prior growth rates, consequently prospective investors should not use past results to predict future operating margins or
results. Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future. If our operating results are below the expectations of securities analysts or investors, our stock price is likely to
decline. Period-to-period comparisons of our historical results of operations are not necessarily a good predictor of our future performance.





Our revenues and operating results depend upon the volume and timing of customer orders and payments and the date of product delivery. Historically, a substantial portion of revenues in a given quarter
has been recorded in the third month of that quarter, with a concentration of these revenues in the last two weeks of the third month. We expect this trend to continue and, therefore, any failure or delay in the closing of orders would have a
material adverse effect on our quarterly operating results. Since our operating expenses are based on anticipated revenues and because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenue from one or more
license transactions could cause significant variations in operating results from quarter to quarter and unexpected results.





Our quarterly results will depend primarily upon entering into new or follow-on contracts to generate revenues for that quarter. New contracts may not result in revenue in the quarter in which the contract is signed, and we may not
be able to predict accurately when revenues from these contracts will be recognized. Our operating results are also dependent upon our ability to manage our cost structure.





We received a letter from Nasdaq stating that if we are unable to comply with the minimum bid price of $1.00, our common stock will be delisted from the Nasdaq National Market.





On October 21, 2002 we received a letter from Nasdaq advising us that our common stock had not met Nasdaqs minimum bid
price requirement of $1.00 for 30 consecutive trading days and that, if we were unable to demonstrate compliance with this requirement for at least 10 consecutive trading days during the 90 calendar days ending January 21, 2003, our common stock may
be subject to delisting from the Nasdaq National Market. If we are unable to meet the Nasdaq National Market requirements, at the discretion of Nasdaq our common stock may be transferred to the Nasdaq SmallCap Market. Transferring to the Nasdaq
SmallCap Market would provide us with an additional grace period to satisfy the minimum bid price requirement; however, we would nevertheless be subject to certain adverse consequences described below. In addition, in such event we would still be
required to satisfy various listing maintenance standards for our common stock to be quoted on the Nasdaq SmallCap Market, including the minimum bid price requirement after expiration of any grace periods. If we fail to meet such standards, our
common stock would likely be delisted from the Nasdaq SmallCap Market and trade on the over-the-counter bulletin board, commonly referred to as the pink sheets. Such alternatives are generally considered as less efficient markets and
would seriously




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impair the liquidity of our common stock and limit our potential to raise future capital through the sale of our common stock, which could
materially harm our business.





If we are delisted from the Nasdaq National Market, we will face a variety of legal
and other consequences that will likely negatively affect us including, without limitation, the following:





-        we may lose our exemption from the provisions of Section 2115 of the California Corporations Code which imposes aspects of California corporate law on certain non-California
corporations operating within California. As a result, (i) our Board of Directors would no longer be classified and our stockholders would elect all of our directors at each annual meeting, (ii) our stockholders would be entitled to cumulative
voting, and (iii) we would be subject to more stringent stockholder approval requirements and more stockholder-favorable dissenters rights in connection with certain strategic transactions;





-        the state securities law exemptions available to us would be more limited and, as a result, future issuances of our
securities may require time-consuming and costly registration statements;





-        due to the application of different securities law exemptions and provisions, we may be required to amend our stock option and stock purchase plans and comply with time-consuming and
costly administrative procedures;





-        the coverage of Vitria by
securities analysts may decrease or cease entirely; and





-        we may
lose current or potential investors and customers.





Our product may not achieve market acceptance, which could cause our revenues to
decline.





Deployment of our product requires interoperability with a variety of software applications and
systems and, in some cases, the ability to process a high number of transactions per second. If our product fails to satisfy these demanding technological objectives, our customers will be dissatisfied and we may be unable to generate future sales.
Failure to establish a significant base of customer references will significantly reduce our ability to license our product to additional customers.





Our revenues will likely decline if we do not develop and maintain successful relationships with system integrators.





System integrators install and deploy our products and those of our competitors, and perform custom integration of systems and applications. Some system integrators engage in joint marketing and sales
efforts with us. If these relationships fail, we will have to devote substantially more resources to the sales and marketing, and implementation and support of our product than we would otherwise have to, and our efforts may not be as effective as
those of the system integrators. In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these customers. We rely upon these firms for recommendations of our product during
the evaluation stage of the purchasing process, as well as for implementation and customer support services. A number of our competitors have strong relationships with these system integrators and, as a result, these system integrators may recommend
competitors products and services. In addition, a number of our competitors have relationships with a greater number of these system integrators and, therefore, have access to a broader base of enterprise customers. Our failure to establish or
maintain these relationships would significantly harm our ability to license and successfully implement our software product. In addition, we rely on the industry expertise and reach of these firms. Therefore, this failure would also harm our
ability to develop industry-specific products. We are currently investing, and plan to continue to invest, significant resources to develop and maintain these relationships. Our operating results could be adversely affected if these efforts do not
generate license and service revenues necessary to offset this investment.




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We may suffer product deployment delays, a lower quality of customer service and increased expenses
if sufficient system integrator implementation teams are not available.





System integrators help our customers
install and deploy our product. These system integrators are not contractually required to implement our product, and competition for these resources may preclude us from obtaining sufficient resources to provide the necessary implementation
services to support our needs. If the number of installations of our product exceeds our access to the resources provided by these system integrators, we will be required to provide these services internally, which would significantly limit our
ability to meet our customers implementation needs and increase our expenses. In addition, we cannot control the level and quality of service provided by our current and future implementation partners.





Because a small number of customers have in the past accounted for a substantial portion of our revenues, our revenues could decline due to the loss or delay
of a single customer order.





Sales to our ten largest customers accounted for 41% of total revenues in the
three months ended September 30, 2002 and 30% of total revenues in the nine months ended September 30, 2002. Sales to our ten largest customers accounted for 42% of total revenues in the three months ended September 31, 2001 and 30% of total
revenues in the nine months ended September 30, 2001. One customer accounted for 11% of our revenues in the three months ended September 30, 2002 and a different customer accounted for 15% of our revenues in the three months ended September 30,
2001. No one single customer accounted for more that 10% of total revenues in either of the nine months ended September 30, 2002 or 2001. Our license agreements do not generally provide for ongoing license payments. Therefore, we expect that
revenues from a limited number of customers will continue to account for a significant percentage of total revenues in future quarters. Our ability to attract new customers will depend on a variety of factors, including the reliability, security,
scalability, breadth and depth of our products, and cost-effectiveness of our products. The loss or delay of individual orders could have a significant impact on revenues and operating results. Our failure to add new customers that make significant
purchases of our product and services would reduce our future revenues.





Our sales are concentrated in the telecommunications,
manufacturing, financial services, energy, insurance and healthcare industries, and if our customers in these markets decrease their information technology spending, or we fail to penetrate other industries, our revenues may decline.





We expect to continue to direct our sales and marketing efforts toward companies in the telecommunications,
manufacturing, financial services, energy, insurance and healthcare industries. Given the high degree of competition and the rapidly changing environment in these industries, there is no assurance that we will be able to continue sales in these
industries at current levels. In addition, we intend to market our product in new vertical markets. Customers in these new vertical markets are likely to have different requirements and may require us to change our product design or features, sales
methods, support capabilities or pricing policies. If we fail to successfully address these new vertical markets we may experience decreased sales in future periods.





During the fourth quarter of 2000, companies in the telecommunications industry began sharply decreasing their capital expenditures as the U.S. economy contracted. This
decrease in spending and the overall contraction in the U.S. economy negatively impacted our revenues in 2001 and in the nine months ended September 30, 2002, and may continue to negatively impact our revenues for the foreseeable future.





Failure of our current or potential small to mid-sized customers to receive necessary funding could harm our business.





Some of our customers include small to mid-size companies. Most privately and publicly held small to mid-size
companies require outside cash sources to continue operations. To the extent additional funding is less available for small to mid-sized companies as a result of a stock market decline, a downturn in the U.S. economy or other




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factors, demand for our products may decline significantly, thereby reducing our sales. On sales we do generate from small to mid-size
companies, we may need to defer recognizing revenue until payment is received.





The downturn in the U.S. economy may continue to cause
a decline in capital allocations, thus reducing our revenue and affecting our accounts receivable.





The
downturn in the U.S. economy may cause a further decline in capital allocations for software purchases. The delay in capital expenditures may cause a decrease in sales, may cause an increase in our accounts receivable and may make collection of
license and support payments from our customers more difficult. In addition, if our customers seek protection from creditors through formal bankruptcy filings, we may experience an increase in delinquent accounts receivable.





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 market for our product is intensely competitive, evolving and subject to rapid technological change. The
intensity of competition is expected to increase in the future. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could significantly reduce our future revenues. Our
current competitors include:





B2Bi, Application and EAI Vendors. We face direct and indirect competition
from vendors offering Business-to-Business Integration, (B2Bi), and Enterprise Application Integration (EAI), which deliver some of the functionality of our products. Some of these vendors include BEA, IBM Corporation, IONA, Microsoft Corporation,
Mercator Software, Sybase, SeeBeyond Technology, Tibco Software, and webMethods. In the future, some of these companies may expand their products to provide or enhance existing business process management, business analysis and monitoring, and
business vocabulary management functionality. Additionally, these or other competitors may merge to attempt the creation of a more competitive entity, or one that offers a broader solution than we provide.





Process Automation and Workflow Vendors. We face direct and indirect competition from vendors offering process automation and/or
workflow, which deliver some of the functionality of our products. Some of these vendors include Savvion, Fuego, and Intalio. In the future, some of these companies may expand their products to add new or enhance existing EAI and B2Bi functionality.
Additionally, these or other competitors may merge to attempt the creation of a more competitive entity, or one that offers a broader solution that we provide.





Internal IT Departments. In-house information technology departments of potential customers have developed or may develop systems that provide for some or all of the functionality of
our products. We expect that internally developed application integration and process automation efforts will continue to be a principal source of competition for the foreseeable future. In particular, it can be difficult to sell our product to a
potential customer whose internal development group has already made large investments in and progress towards completion of systems that our product is intended to replace.





Other Software Vendors. We also face or may soon face direct and indirect competition from major enterprise software developers that offer integration products as a
complement to their other enterprise software products. These companies may also modify their applications to be more easily integrated with other applications through web services or other means. Some of these vendors include JD Edwards, Oracle,
PeopleSoft, Siebel Systems and SAP AG.





Many of our competitors have more resources and broader customer and
partner relationships than we do. In addition, many of these competitors have extensive knowledge of our industry. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties
to offer a single solution and increase the ability of their products to address customer needs.




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Although we believe that our solutions generally compete favorably with respect
to these factors, our market is relatively new and is evolving rapidly. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater resources.





We experience long and variable sales cycles, which could have a negative impact on our results of operations for any given quarter.





Our product is often used by our customers to deploy mission-critical solutions used throughout their
organization. Customers generally consider a wide range of issues before committing to purchase our products, including product benefits, ability to operate with existing and future computer systems, ability to accommodate increased transaction
volume and product reliability. Many customers will be addressing these issues for the first time. As a result, we or other parties, including system integrators, must educate potential customers on the use and benefits of our product and services.
In addition, the purchase of our products generally involves a significant commitment of capital and other resources by a customer. This commitment often requires significant technical review, assessment of competitive products, and approval at a
number of management levels within the customers organization. Because of these issues, our sales cycle has ranged from two to nine months and is difficult to predict for any particular license transaction. In addition, the downturn in the
U.S. economy has caused some customers to increase budgetary controls or require additional management approvals within the customers organization prior to committing to significant capital purchases, either of which could result in an
increased sales cycle.





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.





Our products are often purchased as
part of large projects undertaken by our customers. These projects are complex, time consuming and expensive. Failure by customers to successfully deploy our products, or the failure by us or third-party consultants to ensure customer satisfaction,
could damage our reputation with existing and future customers and reduce future revenues. In many cases, our customers must interact with, modify, or replace significant elements of their existing computer systems. The costs of our product and
services represent only a portion of the related hardware, software, development, training and consulting costs. The significant involvement of third parties, including system integrators, reduces the control we have over the implementation of our
products and the quality of customer service provided to organizations which license our software.





If we are not successful in
continuing to develop industry specific solutions based on our products, our ability to increase future revenues could be harmed.





We have developed and intend to continue to develop solutions based on BusinessWare which incorporate business processes, connectivity and document transformations specific to the needs of particular industries, including
telecommunications, manufacturing, financial services, energy, insurance and healthcare industries. This presents technical and sales challenges and requires collaboration with third parties, including system integrators and standard organizations,
and the commitment of significant resources. If we are not successful in developing these targeted solutions or these solutions do not achieve market acceptance, our ability to increase future revenues could be harmed.





If our new VCA products are not commercially successful, our revenues may decline.





The market for our family of VCA products may not develop as quickly or broadly as we anticipate. Our future prospects could be harmed and our revenues could decline if our
family of VCA products do not achieve market acceptance and commercial success.





If we are not successful in selling products in
specific industries, our ability to increase future revenues may be harmed.




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We have developed and intend to continue to develop products for specific
industries, including telecommunications, healthcare, insurance, manufacturing, financial services and energy. Specific industries may experience economic downturns or regulatory changes that may result in delayed spending decisions by customers or
require changes to our products. We may be unable to meet the needs of specific industries or adapt our products to the changing needs of specific industries. If our products are not accepted in specific industries, our ability to increase future
revenues could be harmed.





Our operating results are substantially dependent on license revenues from one product and our business
could be materially harmed by factors that adversely affect the pricing and demand for our product.





Since
1998, a substantial portion of our total revenues has been derived from the license of our BusinessWare product and for applications for that product. Accordingly, our future operating results will depend on the demand for BusinessWare by future
customers, including new and enhanced releases that are subsequently introduced. If our competitors release new products that are superior to BusinessWare in performance or price, or we fail to enhance BusinessWare and introduce new products in a
timely manner, demand for our product may decline. A decline in demand for BusinessWare as a result of competition, technological change or other factors would significantly reduce our revenues.





If our product does not operate with the many hardware and software platforms used by our customers, our business may fail.





We currently serve a customer base with a wide variety of constantly changing hardware, packaged software applications and networking platforms. If our products fail to
gain broad market acceptance, due to their inability to support a variety of these platforms, our operating results may suffer. Our business depends, among others, on the following factors:





| |  |  | our ability to integrate our product with multiple platforms and existing, or legacy, systems and to modify our product 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 revenues may decline.





We may fail to introduce or deliver new products on a timely basis, if at all. In the past, we have experienced delays in the commencement
of commercial shipments of our BusinessWare products. To date, these delays have not had a material impact on our revenues. If new releases or products are delayed or do not achieve market acceptance, we could experience a delay or loss of revenues
and cause customer dissatisfaction. In addition, customers may delay purchases of our products in anticipation of future releases. If customers defer material orders in anticipation of new releases or new product introductions, our revenues may
decline.





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 revenues could decline.





Our programs utilize Java programming technology provided by Sun Microsystems. We also depend upon access to the interfaces, known as APIs, used for communication between external software products and packaged
application software. Our access to APIs of third-party applications are controlled by the providers of these




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applications. If the application provider denies or delays our access to APIs, our business may be harmed. Some application providers may become
competitors or establish alliances with our competitors, increasing the likelihood that we would not be granted access to their APIs. We also license technology related to the connectivity of our product to third-party database and other
applications and we incorporate some third-party technology into our product offerings. Loss of the ability to use this technology, delays in upgrades, failure of these third parties to support these technologies, or other difficulties with our
third-party technology partners could lead to delays in product shipment and could cause our revenues to decline.





We could suffer
losses and negative publicity if new versions and releases of our products contain errors or defects.





Our
products and their interactions with customers software applications and IT systems are complex and, accordingly, there may be undetected errors or failures when products are introduced or as new versions are released. We have in the past
discovered software errors in our new releases and new products after their introduction which has resulted in additional research and development expenses. To date, these additional expenses have not been material. We may in the future discover
errors in new releases or new products after the commencement of commercial shipments. Since many customers are using our product for mission- critical business operations, any of these occurrences could seriously harm our business and generate
negative publicity.





If we fail to develop the management system and infrastructure to support our growth, our ability to market and
sell our products and develop new products may be harmed.





We must plan and manage our growth effectively in
order to offer our products and services and achieve revenue growth and profitability in a rapidly evolving market. For us to effectively manage our growth, we must continue to do the following:





| |  |  | install new management and information control systems; and
| | - |  | -----------------------------------------------------------

| |  |  | expand, train and motivate our workforce.
| | - |  | -----------------------------------------




In particular, we continue to add new software systems to complement and enhance our existing accounting, human resource and sales and marketing software systems. If we fail to install these software
systems in an efficient and timely manner, or if the new systems fail to adequately support our level of operations, then we could incur substantial additional expenses to remedy these failures.





If we do not keep pace with technological change, our products may be rendered obsolete and our operating results may suffer.





Our industry is characterized by very rapid technological change, frequent new product introductions and enhancements, changes in customer demands and evolving
industry standards. Our existing products will be rendered obsolete if we fail to introduce new products or product enhancements that meet new customer demands, support new standards or integrate with new or upgraded versions of packaged
applications. We have also found that the technological life cycle of our product is difficult to estimate. We believe that we must continue to enhance our current product while we concurrently develop and introduce new products that anticipate
emerging technology standards and keep pace with competitive and technological developments. Failure to do so will harm our ability to compete. As a result, we are required to continue to make substantial product development investments.





If we fail to attract and retain qualified personnel, our ability to compete will be harmed.





We depend on the continued service of our key technical, sales and senior management personnel. None of these persons are bound by an
employment agreement. The loss of senior management or other key research, development, sales and marketing personnel could have a material adverse effect on our future operating results. In




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particular, Dr. JoMei Chang, our President and Chief Executive Officer, and Dr. M. Dale Skeen, our Chief
Technology Officer, would be difficult to replace.





In addition, we must attract, retain and motivate highly
skilled employees. We face significant competition for individuals with the skills required to develop, market and support our products and services. We cannot be sure that we will be able to recruit and retain sufficient numbers of these highly
skilled employees.





We depend on the increasing use of the Internet and on the growth of electronic commerce. If the use of the
Internet and electronic commerce does not grow as anticipated, our revenues could decline and our business will be seriously harmed.





We depend on the increased acceptance and use of the Internet as a medium for electronic commerce and the adoption by businesses of ebusiness solutions. Rapid growth in the use of the Internet is a recent occurrence. As a
result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of business customers may not adopt or continue to use the Internet as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products.





Our future results may depend significantly on the use of our electronic commerce platform in electronic marketplaces.





We have entered into agreements with licensees who are forming networks that will be powered by our business-to-business electronic commerce platform. These networks have been recently formed and are
at an early stage of development. There is no guarantee regarding the level of activity of different companies in these networks, the effectiveness of the interaction among companies using our business-to-business electronic commerce platform and of
the attractiveness of offerings of our competitors. If these networks are not successful, our business, operating results and financial position could be affected.





If we fail to adequately protect our proprietary rights, we may lose these rights and our business may be seriously harmed.





We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our products from our competitors
products. The use by others of our proprietary rights could materially harm our business. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish
and protect our proprietary rights. Despite our efforts to protect our proprietary rights, existing laws afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that
we regard as proprietary. Accordingly, there can be no assurance that we will be able to protect our proprietary rights against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our products is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual property rights.





If our source code is released to
our customers, our ability to protect our proprietary rights could be jeopardized and our revenues could decline.





Some of our license agreements require us to place the source code for our products in escrow. These agreements generally provide these customers with a limited, non-exclusive license to use this code if:





| |  |  | we fail to provide the product or maintenance and support;
| | - |  | ----------------------------------------------------------

| |  |  | we cease to do business without a successor; or
| | - |  | -----------------------------------------------

| |  |  | there is a bankruptcy proceeding by or against Vitria.
| | - |  | ------------------------------------------------------



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Our revenues could decline and our business could be seriously harmed if
customers were granted this access.





Our products could infringe the intellectual property rights of others causing costly litigation
and the loss of significant rights.





Software developers in our market will increasingly be subject to
infringement claims as the number of products in different software industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, prevent product shipment or cause delays, or require us to enter
into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular has complex technical issues and inherent uncertainties. In the event an infringement claim against us is successful and we cannot obtain a
license on acceptable terms or license a substitute technology or redesign our product to avoid infringement, our business would be harmed. Furthermore, former employers of our current and future employees may assert that our employees have
improperly disclosed to us or are using confidential or proprietary information.





We may not successfully enter international markets
or generate significant product revenues abroad, which could result in slower revenue growth and harm our business.





We have opened international offices in countries including Australia, Brazil, Canada, France, Germany, Japan, Korea, Italy, Singapore, Spain, Taiwan, and the United Kingdom, and may establish additional international offices. There
are a number of challenges to establishing operations outside of the United States and we may be unable to successfully generate significant international revenues. If we fail to successfully establish our products in international markets, we could
experience slower revenue growth and our business could be harmed. It may be difficult to protect our intellectual property in certain international jurisdictions.





We may not be able to efficiently integrate the operations of our acquisitions which may harm our business.





We may make additional acquisitions of, or significant investments in, businesses that offer complementary products, services, technologies or market access. If we are to
realize the anticipated benefits of these acquisitions, the operations of these companies must be integrated and combined efficiently. Customer relationships and strategic partnerships may be disrupted during the integration process which could
result in lost sales and lost customers, and could harm our business. We may also incur significant expenses during the integration process. In addition, the dedication of management resources to integration may detract attention from our day-to-day
business. The successful integration of any acquisition will also depend in part on the retention of key personnel. There can be no assurance that the integration process will be successful or that the anticipated benefits of any business
integration will be fully realized. Achieving the benefits of any acquisition will depend in part on our ability to continue to successfully develop and sell our products and integrate new technologies to develop new products and product features,
in a timely and efficient manner. If we are not successful in these efforts, our business may be harmed.





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 revenues.





We may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to, among other things:





| |  |  | 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.
| | - |  | -----------------------------------------------------------------------



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Our failure to do any of these things could result in lower revenues and could
seriously harm our business.





We are at risk of securities class action litigation due to our expected stock price volatility.





In the past, securities class action litigation has often been brought against a company following a decline
in the market price of its securities. This risk is especially acute for us because technology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater
number of securities class action claims than companies in other industries. In November 2001, Vitria and certain of our officers and directors were named as defendants in a class action stockholder complaint. This litigation could result in
substantial costs and divert managements attention and resources, and could harm our business. See Part II, Item 1 Legal Proceedings for more information regarding this litigation.





We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.





Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of
Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:





| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




In addition, Section 203 of the Delaware General Corporations Law and
the terms of our stock option plans may discourage, delay or prevent a change in control of Vitria.





Item 4.    Controls and Procedures.





Under the supervision and with
the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities
Exchange Act Rule 13a-14 within 90 days of the filing date of this quarterly report. Based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There
were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of evaluation.





Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within Vitria have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.




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PART II


OTHER INFORMATION





Item 1.    Legal Proceedings.





In November 2001, Vitria and certain
of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, and captioned Kideys, et al., v. Vitria Technology, Inc., et al., Case
No. 01-CV-10092. The plaintiffs allege that Vitria, certain of our officers and directors and the underwriters of our initial public offering, or IPO, violated the federal securities laws because Vitrias IPO registration statement and
prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other
relief. Similar complaints were filed in the same court beginning in January 2001 against numerous public companies that first sold their common stock publicly since the mid-1990s. We believe that this lawsuit is without merit and intend to defend
against it vigorously.





On August 8, 2001, all of these IPO-related lawsuits were consolidated for pretrial
purposes before United States Judge Shira Scheindlin of the Southern District of New York. Judge Scheindlin held an initial case management conference on September 7, 2001, at which time she ordered, among other things, that the time for all
defendants to respond to any complaint be postponed until further order of the Court. Thus, neither Vitria nor any of our officers or directors has been required to answer the complaint, and no discovery has been served on Vitria.





In accordance with Judge Scheindlins orders at further status conferences in March and April 2002, appointed lead
plaintiffs counsel filed amended, consolidated complaints in these IPO-related lawsuits on April 19, 2002. Defendants then filed a global motion to dismiss the IPO-related lawsuits on July 15, 2002. Subsequent settlement discussions between
the parties have resulted in an agreement by the plaintiffs to dismiss the named individual officers and directors of Vitria who were named as defendants in the IPO-related lawsuit. Judge Scheindlin entered a court order detailing this dismissal on
October 9, 2002. Oral arguments on issuers motion to dismiss the complaints were held on November 1, 2002. As of the date of this filing, the court has not yet ruled on this motion.





Vitria is currently a party to various legal actions arising out of the normal course of business, none of which is expected to harm Vitrias financial position, cash
flows or results of operations.





Item 2.    Changes in Securities and Use of Proceeds.





None.





Item 3.    Defaults Upon Senior Securities.





None.





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





None.





Item 5.    Other Information.





Consistent with Section 10A(i)(2) of
the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, Vitria is responsible for disclosing the nature of the non-audit services approved by our Audit Committee during a quarter to be performed by Ernst &
Young LLP, our independent auditor. Non-audit services are services other than those provided by Ernst & Young LLP in connection with an audit or a review of Vitrias financial statements. During the third quarter of 2002 our Audit
Committee did not approve any non-audit services to be performed by Ernst & Young LLP.




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





|a) |  | Exhibits
|-- |  | --------




10.15 Loan and Security Agreement, by and between Silicon Valley Bank and Vitria, dated June 28, 2002.





10.16 Loan Modification Agreement, by and between Silicon Valley Bank, dated November 6, 2002.





10.17 Separation Agreement, by and between John Wheeler and Vitria, dated July 31, 2002.





99.1 Certification of Chief Executive Officer.





99.2 Certification of Chief Financial Officer.





|b) |  | Reports on Form 8-K
|-- |  | -------------------




No reports on Form 8-K were filed during the quarter ended September 30, 2002.




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SIGNATURES





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.





VITRIA TECHNOLOGY, INC.Date:

November 14, 2002



By:

/s/    GRAHAM SMITHGraham Smith, Senior Vice
President, Chief Financial Officer and Secretary




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CERTIFICATION





I, JoMei Chang, President and Chief Executive Officer, certify that:





| | (1) |  | I have reviewed this quarterly report on Form 10-Q of Vitria Technology, Inc.;
| | --- |  | ------------------------------------------------------------------------------




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




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




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




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





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





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





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




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





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





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




Date: November 14, 2002



By:

/s/    JOMEI CHANG,
PH.D.JoMei Chang President and
Chief Executive Officer




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CERTIFICATION





I, Graham Smith, Senior Vice President, Chief Financial Officer and Secretary, certify that:





| | (1) |  | I have reviewed this quarterly report on Form 10-Q of Vitria Technology, Inc.;
| | --- |  | ------------------------------------------------------------------------------




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




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




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




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





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





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





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




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





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





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




Date: November 14, 2002



By:

/s/    GRAHAM SMITHGraham Smith Senior Vice
President, Chief Financial Officer and Secretary




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