##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from  to.
 Commission file number: 0-27207
 VITRIA TECHNOLOGY, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    77-0386311
(I.R.S. Employer
Identification No.)
 945 Stewart Drive
Sunnyvale, California 94085
(408) 212-2700
(Address, including Zip Code, of Registrants Principal Executive Offices
and Registrants Telephone Number, including Area Code)
 
 þ o
  o þ o
 o þ




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##### 



VITRIA TECHNOLOGY, INC.
TABLE OF CONTENTS
 PagePART I: FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4: Controls and Procedures
    
    
    31PART II: OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    33Item 1A: Risk Factors
    
    
    33Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3: Defaults Upon Senior Securities
    
    
    39Item 4: Submission of Matters to a Vote of Security Holders
    
    
    39Item 5: Other Information
    
    
    39Item 6: Exhibits
    
    
    39Signatures
    
    
    41EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
  
    June 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    43,022
    
    
    $
    26,503Short-term investments
    
    
    10,931
    
    
    
    34,979Accounts receivable, net
    
    
    9,632
    
    
    
    7,846Other current assets
    
    
    1,439
    
    
    
    2,181Total current assets
    
    
    65,024
    
    
    
    71,509Property and equipment, net
    
    
    878
    
    
    
    1,136Other assets
    
    
    755
    
    
    
    743Total assets
    
    $
    66,657
    
    
    $
    73,388Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    1,046
    
    
    $
    1,051Accrued compensation
    
    
    2,564
    
    
    
    3,059Other accrued liabilities
    
    
    3,555
    
    
    
    4,184Accrued restructuring expenses
    
    
    2,317
    
    
    
    3,460Deferred revenue
    
    
    12,392
    
    
    
    10,242Total current liabilities
    
    
    21,874
    
    
    
    21,996Long-Term Liabilities:Accrued restructuring expenses
    
    
    4,177
    
    
    
    3,960Other long-term liabilities
    
    
    1,200
    
    
    
    1,330Total long-term liabilities
    
    
    5,377
    
    
    
    5,290Commitments and ContingenciesStockholders Equity:Common Stock: $0.001 par value; 150,000 shares authorized; 34,279 shares outstanding
at June 30, 2006 and 33,709 shares
outstanding at December 31, 2005,
respectively
    
    
    34
    
    
    
    34Additional paid-in capital
    
    
    277,045
    
    
    
    275,857Accumulated other comprehensive income
    
    
    500
    
    
    
    515Accumulated deficit
    
    
    (237,677
    )
    
    
    (229,808
    )Treasury stock, at cost
    
    
    (496
    )
    
    
    (496
    )Total stockholders equity
    
    
    39,406
    
    
    
    46,102Total liabilities and stockholders equity
    
    $
    66,657
    
    
    $
    73,388
  3




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:License
    
    $
    2,701
    
    
    $
    2,146
    
    
    $
    5,222
    
    
    $
    7,568Service and other
    
    
    8,465
    
    
    
    10,200
    
    
    
    16,658
    
    
    
    21,323Total revenue
    
    
    11,166
    
    
    
    12,346
    
    
    
    21,880
    
    
    
    28,891Cost of revenue:License
    
    
    106
    
    
    
    286
    
    
    
    229
    
    
    
    407Service and other
    
    
    3,614
    
    
    
    5,292
    
    
    
    7,564
    
    
    
    10,974Total cost of revenue
    
    
    3,720
    
    
    
    5,578
    
    
    
    7,793
    
    
    
    11,381Gross profit
    
    
    7,446
    
    
    
    6,768
    
    
    
    14,087
    
    
    
    17,510Operating expenses:Sales and marketing
    
    
    4,320
    
    
    
    4,893
    
    
    
    8,438
    
    
    
    9,928Research and development
    
    
    4,383
    
    
    
    4,836
    
    
    
    8,596
    
    
    
    9,378General and administrative
    
    
    2,087
    
    
    
    2,863
    
    
    
    5,185
    
    
    
    6,500Restructuring charges
    
    
    950
    
    
    
    471
    
    
    
    1,095
    
    
    
    607Total operating expenses
    
    
    11,740
    
    
    
    13,063
    
    
    
    23,314
    
    
    
    26,413Loss from operations
    
    
    (4,294
    )
    
    
    (6,295
    )
    
    
    (9,227
    )
    
    
    (8,903
    )Interest income
    
    
    588
    
    
    
    483
    
    
    
    1,160
    
    
    
    872Other income (expenses), net
    
    
    67
    
    
    
    (142
    )
    
    
    237
    
    
    
    (293
    )Net loss before income taxes
    
    
    (3,639
    )
    
    
    (5,954
    )
    
    
    (7,830
    )
    
    
    (8,324
    )Provision for income taxes
    
    
    5
    
    
    
    55
    
    
    
    39
    
    
    
    102Net loss
    
    $
    (3,644
    )
    
    $
    (6,009
    )
    
    $
    (7,869
    )
    
    $
    (8,426
    )Basic and diluted net loss per share
    
    $
    (0.11
    )
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.25
    )Weighted average shares used in computing basic
and diluted net loss per share
    
    
    33,613
    
    
    
    33,480
    
    
    
    33,599
    
    
    
    33,427
  4




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005Operating activities:Net loss
    
    $
    (7,869
    )
    
    $
    (8,426
    )Adjustments to reconcile net loss to net cash
used in operating activities:Loss on disposal of fixed assets
    
    
    
    
    
    
    14Depreciation
    
    
    273
    
    
    
    617Stock-based compensation
    
    
    1,104
    
    
    
    83Provision for doubtful accounts
    
    
    172
    
    
    
    144Changes in assets & liabilities:Accounts receivable
    
    
    (1,958
    )
    
    
    2,457Other current assets
    
    
    742
    
    
    
    (28
    )Other assets
    
    
    (12
    )
    
    
    125Accounts payable
    
    
    (5
    )
    
    
    (104
    )Accrued liabilities
    
    
    (1,056
    )
    
    
    (418
    )Accrued restructuring charges
    
    
    (926
    )
    
    
    (3,041
    )Deferred revenue
    
    
    2,150
    
    
    
    1,499Other long term liabilities
    
    
    (122
    )
    
    
    341Net cash used in operating activities
    
    
    (7,507
    )
    
    
    (6,737
    )Investing activities:Purchases of property and equipment
    
    
    (11
    )
    
    
    (737
    )Purchases of investments
    
    
    (8,558
    )
    
    
    (27,092
    )Maturities of investments
    
    
    32,634
    
    
    
    34,907Net cash provided by investing activities
    
    
    24,065
    
    
    
    7,078Financing activities:Issuance of common stock, net
    
    
    84
    
    
    
    165Reduction of lease payable
    
    
    (75
    )
    
    
    (116
    )Net cash provided by financing activities
    
    
    9
    
    
    
    49Effect of exchange rates
    
    
    (48
    )
    
    
    (42
    )Net increase in cash and cash equivalents
    
    
    16,519
    
    
    
    348Cash and cash equivalents at beginning of period
    
    
    26,503
    
    
    
    32,106Cash and cash equivalents at end of period
    
    $
    43,022
    
    
    $
    32,454Supplemental disclosures of cash flow information:Income taxes paid
    
    $
    33
    
    
    $
    175Interest paid
    
    $
    4
    
    
    $
    10
  5




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##### Table of Contents



NOTE 1. Basis of Presentation
 Basis of Presentation
    NOTE 2. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
 NOTE 3. Summary of Significant Accounting Policies
 Stock-based Compensation
 Share-Based Payment, Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees
  Revenue Recognition
 Software Revenue Recognition
 6




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Accounting for Performance of Construction Type and Certain Production Type Contracts, .
 .
  Accounts Receivable
   7




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##### Table of Contents



.
  Restructuring Charges
  Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activities Accounting for Costs Associated with Exit or Disposal Activities
   Deferred tax valuation allowance
  8




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##### Table of Contents



NOTE 4. Net Loss per Share
   Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator for basic and diluted net loss per share:Net loss
    
    $
    (3,644
    )
    
    $
    (6,009
    )
    
    $
    (7,869
    )
    
    $
    (8,426
    )Denominator for basic and diluted net loss per share
    
    
    33,613
    
    
    
    33,480
    
    
    
    33,599
    
    
    
    33,427Basic and diluted net loss per share
    
    $
    (0.11
    )
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.25
    )
  Six months endedJune 30,2006
    
    
    2005Weighted
average effect of anti-dilutive securities:Employee stock options (using the treasury stock method)
    
    
    4
    
    
    
    143Unvested restricted stock
    
    
    581
    
    
    
    Total
    
    
    585
    
    
    
    143
 NOTE 5. Comprehensive Loss
  9




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Loss
    
    $
    (3,644
    )
    
    $
    (6,009
    )
    
    $
    (7,869
    )
    
    $
    (8,426
    )Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    (35
    )
    
    
    14
    
    
    
    (43
    )
    
    
    (22
    )Unrealized gain on securities
    
    
    15
    
    
    
    36
    
    
    
    28
    
    
    
    50Comprehensive loss
    
    $
    (3,664
    )
    
    $
    (5,959
    )
    
    $
    (7,884
    )
    
    $
    (8,398
    )
  June 30,
    
    
    December 31,2006
    
    
    2005Foreign currency translation adjustment
    
    $
    518
    
    
    
    561Unrealized loss on securities
    
    
    (18
    )
    
    
    (46
    )Total accumlated other comprehensive gain
    
    $
    500
    
    
    $
    515
 NOTE 6. Stock Benefit Plans and Stock-Based Compensation
 Stock Benefit Plans
  1999 Employee Stock Purchase Plan
  Equity Incentive Plans
   10




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Six months ended June 30, 2006Weighted AverageOptions
    
    
    Exercise PriceOutstanding as of December 31, 2005
    
    
    5,775
    
    
    $
    6.11Granted
    
    
    141
    
    
    
    2.89Exercised
    
    
    (1
    )
    
    
    1.04Canceled
    
    
    (809
    )
    
    
    6.23Outstanding options at end of period
    
    
    5,106
    
    
    $
    6.00Options exercisable
    
    
    3,328
    
    
    $
    7.40
 Six months ended June 30, 2006Weighted AverageRestricted Stock Awards
    
    
    Exercise PriceOutstanding as of December 31, 2005
    
    
    100
    
    
    $
    3.42Awarded
    
    
    541
    
    
    
    2.69Released
    
    
    (52
    )
    
    
    3.14Forfeited
    
    
    
    
    
    
    Outstanding awards at end of period
    
    
    589
    
    
    $
    2.77
  11




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Weighted
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    average
    
    
    
    
    
    
    averageNumber
    
    
    remaining
    
    
    exercise
    
    
    
    
    
    
    exerciseRange of exercise prices
    
    outstanding
    
    
    contractual term
    
    
    price
    
    
    Exercisable
    
    
    price$0.25 - $2.99
    
    
    609,051
    
    
    
    8.50
    
    
    $
    2.82
    
    
    
    161,897
    
    
    $
    2.79$3.00 - $3.09
    
    
    515,212
    
    
    
    8.34
    
    
    
    3.03
    
    
    
    218,428
    
    
    
    3.03$3.12 - $3.41
    
    
    382,118
    
    
    
    8.29
    
    
    
    3.31
    
    
    
    151,792
    
    
    
    3.31$3.42 - $3.42
    
    
    623,500
    
    
    
    8.77
    
    
    
    3.42
    
    
    
    164,333
    
    
    
    3.42$3.43 - $4.59
    
    
    244,733
    
    
    
    7.80
    
    
    
    3.79
    
    
    
    131,471
    
    
    
    3.91$4.60 - $4.60
    
    
    600,000
    
    
    
    4.66
    
    
    
    4.60
    
    
    
    508,332
    
    
    
    4.60$4.65 - $7.92
    
    
    507,006
    
    
    
    6.70
    
    
    
    4.75
    
    
    
    368,009
    
    
    
    4.74$8.00 - $8.00
    
    
    758,250
    
    
    
    3.03
    
    
    
    8.00
    
    
    
    758,250
    
    
    
    8.00$8.12 - $10.00
    
    
    215,323
    
    
    
    4.17
    
    
    
    9.35
    
    
    
    215,143
    
    
    
    9.35$12.04 - $188.00
    
    
    651,030
    
    
    
    5.29
    
    
    
    15.03
    
    
    
    650,053
    
    
    
    15.02$0.25 - $188.00
    
    
    5,106,223
    
    
    
    6.43
    
    
    $
    6.00
    
    
    
    3,327,708
    
    
    $
    7.40
 Stock-based compensation
  Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(SFAS 123(R))
    
    
    (APB 25)
    
    
    (SFAS 123(R))
    
    
    (APB 25)Employee stock-based compensation in:Cost of revenue: service and other
    
    
    63
    
    
    
    
    
    
    
    119
    
    
    
    Research and development
    
    
    137
    
    
    
    
    
    
    
    238
    
    
    
    Sales and marketing
    
    
    212
    
    
    
    21
    
    
    
    385
    
    
    
    28General and administrative
    
    
    190
    
    
    
    
    
    
    
    362
    
    
    
    55Total employee stock-based compensation:
    
    $
    602
    
    
    $
    21
    
    
    $
    1,104
    
    
    $
    83
  12




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Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Loss (2)
    
    $
    (3,644
    )
    
    $
    (6,009
    )
    
    $
    (7,869
    )
    
    $
    (8,426
    )Add: stock-based compensation included in reported net loss
    
    
    602
    
    
    
    21
    
    
    
    1,104
    
    
    
    83Deduct: total stock based compensation expense determined
under fair value based method for all awards (1)
    
    
    (602
    )
    
    
    (529
    )
    
    
    (1,104
    )
    
    
    (1,531
    )Pro forma net loss
    
    $
    (3,644
    )
    
    $
    (6,517
    )
    
    $
    (7,869
    )
    
    $
    (9,874
    )Basic and diluted net loss per share (2)
    
    $
    (0.11
    )
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.25
    )Pro forma basic and diluted net loss per share (3)
    
    $
    (0.11
    )
    
    $
    (0.19
    )
    
    $
    (0.23
    )
    
    $
    (0.30
    )Weighted-average shares used in calculation
    
    
    33,613
    
    
    
    33,480
    
    
    
    33,599
    
    
    
    33,427
 
 (1)
    
    Stock-based compensation expense prior to 2006 is calculated based on the pro forma
application of SFAS 123.(2)
    
    Net loss and net loss per share prior to 2006 did not include stock-based
compensation expense for employee stock-based awards under SFAS 123 because we had not
adopted the recognition provisions of SFAS 123.(3)
    
    Net loss and net loss per share prior to 2006 represents pro forma information based
on SFAS 123. Fair Value Disclosure
  Stock option plan
    
    ESPP
    
    Stock option plan
    
    ESPPThree months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005Expected term (in years)
    
    
    6.25
    
    
    
    3.0
    
    
    
    1.0
    
    
    
    1.0
    
    
    
    6.25
    
    
    
    3.0
    
    
    
    1.0
    
    
    
    1.0Expected Volatility
    
    
    71
    %
    
    
    74
    %
    
    
    43
    %
    
    
    91
    %
    
    
    69
    %
    
    
    66
    %
    
    
    43
    %
    
    
    91
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Risk free interest rate
    
    
    5.11
    %
    
    
    3.67
    %
    
    
    5.21
    %
    
    
    2.73
    %
    
    
    5.04
    %
    
    
    3.92
    %
    
    
    5.21
    %
    
    
    2.73
    %Forfeiture rate
    
    
    8.86
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.86
    %
    
    
    
    
    
    
    
    
    
    
    
 13




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##### Table of Contents



NOTE 7. Restructuring, Impairments and Other Charges
     Facilities Consolidation
    
    
    Serverance
    
    
    TotalBalance at December 31, 2003
    
    $
    18,482
    
    
    $
    330
    
    
    $
    18,812Cash Payments
    
    
    (6,295
    )
    
    
    (330
    )
    
    
    (6,625
    )Facility adjustments
    
    
    1,236
    
    
    
    
    
    
    
    1,236Balance at December 31, 2004
    
    
    13,423
    
    
    
    
    
    
    
    13,423Cash Payments
    
    
    (6,400
    )
    
    
    
    
    
    
    (6,400
    )Facility adjustments
    
    
    397
    
    
    
    
    
    
    
    397Balance at December 31, 2005
    
    
    7,420
    
    
    
    
    
    
    
    7,420Cash Payments
    
    
    (2,020
    )
    
    
    
    
    
    
    (2,020
    )Facility adjustments
    
    
    1,094
    
    
    
    
    
    
    
    1,094Balance at June 30, 2006
    
    $
    6,494
    
    
    $
    
    
    
    $
    6,494
    14




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Total2011 and
    
    
    Estimated2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    Net PaymentsUndiscounted future lease payments and
estimated operating costs for restructured
facilities
    
    $
    1,256
    
    
    $
    2,163
    
    
    $
    903
    
    
    $
    903
    
    
    $
    903
    
    
    $
    2,210
    
    
    $
    8,338Less: contractual future sublease income
    
    
    (322
    )
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (834
    )Gross estimated future payments
    
    $
    934
    
    
    $
    1,651
    
    
    $
    903
    
    
    $
    903
    
    
    $
    903
    
    
    $
    2,210
    
    
    $
    7,504Less: Discount factor due to fair value
treatment of facilities restructured in 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,010
    )Net future payments on restructured facilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,494
 NOTE 8. Deferred Revenue
  NOTE 9. Related Party Transactions
    15




---



##### Table of Contents



Three months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    2006
    
    2005Revenue from QilinSoft LLC
    
    $
    74
    
    
    $
    50
    
    
    $
    148
    
    
    $
    100Research, Development,
and Consulting expense
incurred with QilinSoft
LLC
    
    $
    666
    
    
    $
    580
    
    
    $
    1,522
    
    
    $
    1,000
 As of June 30, 
2006
    
    As of December 31, 
2005Trade Accounts
Receivables and
accruals with
QilinSoft LLC
    
    $
    
    
    
    $
    300Trade Accounts
Payable and accruals
with QilinSoft LLC
    
    $
    223
    
    
    $
    441
  NOTE 10. Credit Facilities with Silicon Valley Bank
    NOTE 11. Segment Information
   16




---



##### Table of Contents



NOTE 12. Cash, Cash Equivalents and Short-term Investments
  As of June 30, 2006
    
    
    As of December 31, 2005Carrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated
    
    
    Carrying
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedValue
    
    
    Gains
    
    
    Losses
    
    
    Fair Value
    
    
    Value
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCash
    
    $
    8,369
    
    
    $
    
    
    
    $
    
    
    
    $
    8,369
    
    
    $
    7,679
    
    
    $
    
    
    
    $
    
    
    
    $
    7,679Money market funds
    
    
    2,192
    
    
    
    
    
    
    
    
    
    
    
    2,192
    
    
    
    1,285
    
    
    
    
    
    
    
    
    
    
    
    1,285Government securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    800
    
    
    
    
    
    
    
    
    
    
    
    800Commercial paper
    
    
    32,456
    
    
    
    5
    
    
    
    
    
    
    
    32,461
    
    
    
    16,739
    
    
    
    
    
    
    
    
    
    
    
    16,739Total cash equivalents
    
    
    34,648
    
    
    
    5
    
    
    
    
    
    
    
    34,653
    
    
    
    18,824
    
    
    
    
    
    
    
    
    
    
    
    18,824Total cash and cash equivalents
    
    
    43,017
    
    
    
    5
    
    
    
    
    
    
    
    43,022
    
    
    
    26,503
    
    
    
    
    
    
    
    
    
    
    
    26,503Government securities
    
    
    6,008
    
    
    
    
    
    
    
    (17
    )
    
    
    5,991
    
    
    
    13,754
    
    
    
    
    
    
    
    (23
    )
    
    
    13,731Corporate bonds
    
    
    4,946
    
    
    
    
    
    
    
    (6
    )
    
    
    4,940
    
    
    
    13,794
    
    
    
    
    
    
    
    (26
    )
    
    
    13,768Commercial paper
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,477
    
    
    
    3
    
    
    
    
    
    
    
    7,480Total short-term investments
    
    
    10,954
    
    
    
    
    
    
    
    (23
    )
    
    
    10,931
    
    
    
    35,024
    
    
    
    3
    
    
    
    (49
    )
    
    
    34,979Total cash, cash equivalents,
and short-term investments
    
    $
    53,971
    
    
    $
    5
    
    
    $
    (23
    )
    
    $
    53,953
    
    
    $
    61,527
    
    
    $
    3
    
    
    $
    (49
    )
    
    $
    61,482
 
 ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  17




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##### Table of Contents



Product Overview
 BusinessWare
 BusinessWare
  
    
    Process automation
    
    Management of human workflow
    
    Message transport and routing
    
    Data transformation and vocabulary management
    
    Web services integration and orchestration
    
    Enterprise Service Bus (ESB)
    
    Other SOA integration capabilities
    
    Compatibility with specific data transport protocols
    
    Tools for building custom connectors
    
    Various pre-built services for business process integration
    
    Modeling environment for development
    
    Solution life cycle management
  
    
    Connectors for various packaged software applications (e.g., SAP, Siebel, Oracle
Applications, Peoplesoft) and databases (e.g., Oracle, Microsoft SQL Server, Sybase,
DB2)
    
    Connectors for various technology standards and transport protocols (e.g., Java
Messaging Service, WebSphere MQ, IBM CICS)
    
    Specialized data transformation and validation products (e.g., HIPAA, HL7, SWIFT)
    
    Business process monitoring and analysis
    
    EDI and various other business-to-business integration standards
 18




---



##### Table of Contents



BusinessWare BusinessWare
 
    
    Order Accelerator- This process application, initially released in March 2004,
automates business processes across a telecommunications service providers existing
systems and is designed to provide faster, more cost-effective, and more accurate order
management. Order Accelerator includes pre-built business processes and other content
based on the Telemanagement Forums eTOM (Enhanced Telecom Operations Map) standard.
    
    Resolution Accelerator- This process application, initially released in June 2005,
manages the resolution of business process exceptions. Such exceptions occur when
automated business transactions are diverted from their normal process path due to
incomplete or erroneous data, specific business policies, or factors external to the
process. Resolution Accelerator provides capabilities to automatically fix many
problems, guide manual resolution of other problems, and reinsert affected transactions
back into the normal process flow. While a majority of our sales to date of this
product have been to the telecommunications sector, it is applicable to other sectors as
well. We released an enhanced version of Resolution Accelerator in April 2006.
    
    Smart Claims- This process application for health insurance payers was initially
released in late 2003. Smart Claims augments existing claims processing systems by
applying automated business rules to reduce off-line manual processing, by intelligently
routing claims between different systems, and by providing a unified view of the claims
processing lifecycle across multiple systems. Potential benefits to Smart Claims
customers include fewer delays in claims processing and payment, reduced errors, faster
changes to claims processing logic, and faster response to customer and partner
inquiries.
    
    Smart Gateway for Healthcare- This new process application manages the intake,
splitting, validation, transformation, aggregation, and routing of health insurance
claims and other electronic business documents exchanged with multiple external parties.
By consolidating multiple document exchange processes into a single electronic document
gateway, this product can reduce operational complexity and costs, increase visibility
within a complex document exchange process, and make the automated business logic
governing these processes easier to implement, manage and modify. Vitria released the
first part of this solution in December 2005 and released the complete product in June
2006.
     19




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   
    
    Revenue Recognition
    
    Allowances for Doubtful Accounts
    
    Restructuring Costs
  Share-Based Payment
     20




---



##### Table of Contents



RESULTS OF OPERATIONS
 For the three and six months ended June 30, 2006 and June 30, 2005
  21




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,

    
    June 30,2006
    
    2005
    
    2006
    
    2005RevenueLicense
    
    
    24
    %
    
    
    17
    %
    
    
    24
    %
    
    
    26
    %Service and other
    
    
    76
    %
    
    
    83
    %
    
    
    76
    %
    
    
    74
    %Total revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenueLicense
    
    
    1
    %
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %Service and other
    
    
    32
    %
    
    
    43
    %
    
    
    35
    %
    
    
    38
    %Total cost of revenue
    
    
    33
    %
    
    
    45
    %
    
    
    36
    %
    
    
    39
    %Gross profit
    
    
    67
    %
    
    
    55
    %
    
    
    64
    %
    
    
    61
    %Operating expensesSales and marketing
    
    
    38
    %
    
    
    39
    %
    
    
    39
    %
    
    
    34
    %Research and development
    
    
    39
    %
    
    
    39
    %
    
    
    39
    %
    
    
    33
    %General and administrative
    
    
    19
    %
    
    
    24
    %
    
    
    24
    %
    
    
    22
    %Restructuring
    
    
    9
    %
    
    
    4
    %
    
    
    5
    %
    
    
    2
    %Total operating expenses
    
    
    105
    %
    
    
    106
    %
    
    
    107
    %
    
    
    91
    %Loss from operations
    
    
    -38
    %
    
    
    -51
    %
    
    
    -43
    %
    
    
    -30
    %Interest income
    
    
    5
    %
    
    
    4
    %
    
    
    5
    %
    
    
    3
    %Other income (expense), net
    
    
    1
    %
    
    
    -1
    %
    
    
    1
    %
    
    
    -1
    %Net loss before income taxes
    
    
    -32
    %
    
    
    -48
    %
    
    
    -37
    %
    
    
    -28
    %Provision for income taxes
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Net loss
    
    
    -32
    %
    
    
    -48
    %
    
    
    -37
    %
    
    
    -28
    %
 Revenue
  License
  22




---



##### Table of Contents



Service and other
   Cost of Revenue
 License.
  Service and other
 23




---



##### Table of Contents



Operating Expenses
 Sales and marketing
   Research and development.
   General and administrative
 24




---



##### Table of Contents



Restructuring charges.
   Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activities Accounting for Costs Associated with Exit or Disposal Activities
  Interest income and other income (expenses), net.
 Stock-based Compensation .
 25




---



##### Table of Contents



Three months ended June 30,
    
    
    Six months ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(SFAS 123(R))
    
    
    (APB 25)
    
    
    (SFAS 123(R))
    
    
    (APB 25)Employee stock-based compensation in:Cost of revenue: service and other
    
    
    63
    
    
    
    
    
    
    
    119
    
    
    
    Research and development
    
    
    137
    
    
    
    
    
    
    
    238
    
    
    
    Sales and marketing
    
    
    212
    
    
    
    21
    
    
    
    385
    
    
    
    28General and administrative
    
    
    190
    
    
    
    
    
    
    
    362
    
    
    
    55Total employee stock-based
compensation:
    
    $
    602
    
    
    $
    21
    
    
    $
    1,104
    
    
    $
    83
 Provision for Income Taxes
 Accounting for Income Taxes
 LIQUIDITY AND CAPITAL RESOURCES
 June 30, 2006
    
    December 31, 2005
    
    Change
    
    Percent ChangeCash, cash equivalents and short-term investments
    
    $
    53,953
    
    
    $
    61,482
    
    
    $
    (7,529
    )
    
    
    -12
    %Working capital
    
    $
    43,150
    
    
    $
    49,513
    
    
    $
    (6,363
    )
    
    
    -13
    %Stockholders equity
    
    $
    39,406
    
    
    $
    46,102
    
    
    $
    (6,696
    )
    
    
    -15
    %
    26




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##### Table of Contents



Contractual Cash Obligations and Commitments
  Off-Balance Sheet Arrangements
  Credit Facilities with Silicon Valley Bank
    Operating Capital and Capital Expenditure Requirements
   27




---



##### Table of Contents




    
    size and timing of customer orders and product and service delivery;
    
    level of demand for our professional services;
    
    changes in the mix of our products and services;
    
    ability to protect our intellectual property;
    
    actions taken by our competitors, including new product introductions and pricing changes;
    
    costs of maintaining and expanding our operations;
    
    timing of the development and release of new products or enhanced products;
    
    costs and timing of hiring qualified personnel;
    
    success in maintaining and enhancing existing relationships and developing new
relationships with system integrators;
    
    technological changes in our markets, including changes in standards for computer and
networking software and hardware;
    
    deferrals of customer orders in anticipation of product enhancements or new products;
    
    delays in our ability to recognize revenue as a result of the decision by our
customers to postpone software delivery, or because of changes in the timing of when
delivery of products or services is completed;
    
    customer budget cycles and changes in these budget cycles;
    
    external economic conditions;
 28




---



##### Table of Contents




    
    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.
  Related Party Transactions
    Three months ended June 30,
    
    Six months ended June 30,2006
    
    2005
    
    2006
    
    2005Revenue from QilinSoft LLC
    
    $
    74
    
    
    $
    50
    
    
    $
    148
    
    
    $
    100Research, Development,
and Consulting expense
incurred with QilinSoft
LLC
    
    $
    666
    
    
    $
    580
    
    
    $
    1,522
    
    
    $
    1,000
 As of June 30, 2006
    
    As of December 31. 2005Trade Accounts
Receivables and accrualswith QilinSoft LLC
    
    $
    
    
    
    $
    300Trade Accounts Payable
and accruals with
QilinSoft LLC
    
    $
    223
    
    
    $
    441
  29




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Interest Rate Risk
       June 30, 2006
    
    
    
    
    
    
    June 30, 2005Weighted Average
    
    
    
    
    
    
    Weighted AverageFair Value
    
    
    Interest Rate
    
    
    Fair Value
    
    
    Interest RateCash and Cash Equivalents
    
    $
    43,022
    
    
    
    0.10
    %
    
    $
    32,454
    
    
    
    0.05
    %Short-term Investments
    
    
    10,931
    
    
    
    3.28
    %
    
    
    38,692
    
    
    
    1.13
    %Total Cash, Cash
Equivalents and
Short-term Investments
    
    $
    53,953
    
    
    
    
    
    
    $
    71,146
 Foreign Exchange Risk
   30




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure controls and procedures
   Vitria didnt have adequate staffing to perform needed reviews.
 Documentation supporting our control assessment was not adequate
 Internal controls over our subsidiary in Japan were not proven to be effective as of December
31, 2005.
  31




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  32




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In re Vitria Technology, Inc. IPO Securities Litigation
    
 ITEM 1A. RISK FACTORS
 Our operating results fluctuate significantly and an unanticipated decline in revenue may
result in a decline in our stock price and may disappoint securities analysts or investors, and may
also harm our relationship with our customers.
    33




---



##### Table of Contents



We have incurred substantial operating losses since inception and we cannot guarantee that we will
become profitable in the future.
  Our operating results are substantially dependent on license revenue from BusinessWare and our
business could be materially harmed by factors that adversely affect the pricing and demand for BusinessWare.
 BusinessWare BusinessWare BusinessWare BusinessWare BusinessWare
 Failure to raise additional capital or generate the significant capital necessary to expand our
operations and invest in new products could reduce our ability to compete and result in lower
revenue.
  
    
    develop or enhance our products and services;
    
    acquire technologies, products or businesses;
    
    expand operations, in the United States or internationally;
    
    hire, train and retain employees; or
    
    respond to competitive pressures or unanticipated capital requirements.
  The reluctance of companies to make significant expenditures on information technology could reduce
demand for our products and cause our revenue to decline.
  34




---



##### Table of Contents



We experience long and variable sales cycles, which could have a negative impact on our results of
operations for any given quarter.
  Because a small number of customers have in the past accounted for a substantial portion of our
revenue, our revenue could decline due to the loss or delay of a single customer order.
  If we are not successful in developing industry specific pre-built process applications based on
our business process integration platform, our ability to increase future revenue could be harmed.
   Our products may not achieve market acceptance, which could cause our revenue to decline.
  Our markets are highly competitive and, if we do not compete effectively, we may suffer price
reductions, reduced gross margins and loss of market share.
  35




---



##### Table of Contents



The cost and difficulty in implementing our product could significantly harm our reputation with
customers, diminishing our ability to license additional products to our customers.
   If our products do not operate with the many hardware and software platforms used by our customers,
our business may fail.
  
    
    our ability to integrate our product with multiple platforms and existing, or legacy,
systems and to modify our products as new versions of packaged applications are
introduced;
    
    the portability of our products, particularly the number of operating systems and
databases that our products can source or target;
    
    our ability to anticipate and support new standards, especially Internet standards;
    
    the integration of additional software modules under development with our existing products; and
    
    our management of software being developed by third parties for our customers or use with our products.
 If we fail to introduce new versions and releases of our products in a timely manner, our revenue
may decline.
 BusinessWare
 36




---



##### Table of Contents



Our products rely on third-party programming tools and applications. If we lose access to these
tools and applications, or are unable to modify our products in response to changes in these tools
and applications, our revenue could decline.
  The use of Open Source Software in our products may expose us to additional risks and harm our
intellectual property our intellectual property position.
  We could suffer losses and negative publicity if new versions and releases of our products contain
errors or defects.
  If we fail to attract and retain qualified personnel, our ability to compete will be harmed.
  If we fail to adequately protect our proprietary rights, we may lose these rights and our business
may be seriously harmed.
  37




---



##### Table of Contents



Our products could infringe the intellectual property rights of others causing costly litigation
and the loss of significant rights.
  Our significant international operations may fail to generate significant product revenue or
contribute to our drive toward profitability, which could result in slower revenue growth and harm
our business.
  We are at risk of securities class action litigation due to our expected stock price volatility.
  We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if
an acquisition would be beneficial to our stockholders.
  
    
    establishment of a classified Board of Directors requiring that not all members of
the Board of Directors may be elected at one time;
    
    authorizing the issuance of blank check preferred stock that could be issued by our
Board of Directors to increase the number of outstanding shares and thwart a takeover
attempt;
    
    prohibiting cumulative voting in the election of directors, which would otherwise
allow less than a majority of stockholders to elect director candidates;
    
    limitations on the ability of stockholders to call special meetings of stockholders;
    
    prohibiting stockholder action by written consent, thereby requiring all stockholder
actions to be taken at a meeting of our stockholders; and
    
    establishing advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings.
 38




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##### Table of Contents



ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to Vote of Security Holders
  (1)
    
    electing one Class I director to serve until the 2009 annual meeting of stockholders;(2)
    
    to ratify the selection of BDO Seidman, LLP as our independent registered public
accounting firm for our fiscal year ending December 31, 2006; and(3)
    
    to transact such other business as may properly come before
the meeting or any
adjournment or postponement thereof.
    Nominee
    
    For
    
    WithheldM. Dale Skeen,
Ph.D.
    
    
    32,139,664
    
    
    
    406,402
   For
    
    Against
    
    Abstain32,516,376
    
    
    19,635
    
    
    
    10,055
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
  Exhibit 31.1
    
    Certification of Chief Executive Officer as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
 39




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##### Table of Contents



Exhibit 31.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.Exhibit 32.1
    
    Certification of Chief Executive Financial Officer as required by Rule 13a-14(b) of
the Securities Exchange Act of 1934, as amended. *Exhibit 32.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended. *
 
 *
    
    The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report on Form
10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be
incorporated by reference into any filing of Vitria Technology, Inc. under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or
after the date of this Form 10-Q, irrespective of any general incorporation language contained
in such filing. 40




---



##### Table of Contents



SIGNATURES
  Vitria Technology, Inc.Date: August 9, 2006
    By:
    /s/  MICHAEL D. PERRYMichael D. PerrySenior Vice President and Chief Financial Officer 41




---



##### Table of Contents



Exhibit 31.1
    
    Certification of Chief Executive Officer as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.Exhibit 31.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.Exhibit 32.1
    
    Certification of Chief Executive Financial Officer as required by Rule 13a-14(b) of
the Securities Exchange Act of 1934, as amended. *Exhibit 32.2
    
    Certification of Chief Financial Officer as required by Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended. *
 
 *
    

The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report on
Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be
incorporated by reference into any filing of Vitria Technology, Inc. under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before
or after the date of this Form 10-Q, irrespective of any general incorporation language
contained in such filing.