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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2003
| |  | -------------------------------------------------



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)



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|Delaware                                                      |  | 77-0386311                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification 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 ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act

Rule
12b-2).    Yes  x    No ̈



The number of shares of Vitrias common stock, $0.001 par value,
outstanding as of October 31, 2003 was 32,880,390 shares.



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##### Table of Contents

VITRIA TECHNOLOGY, INC.

Index



|                              |  |                                                                                                                                      |  | Page
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|PART I: FINANCIAL INFORMATION |  |                                                                                                                                     
|                              |  |                                                                                                                                     
|Item 1.                       |  | Condensed Consolidated Financial Statements and Notes                                                                                |  |     
|                              |  |                                                                                                                                     
|                              |  | Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                                                    |  | 3   
|                              |  |                                                                                                                                     
|                              |  | Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2003 and September 30, 2002 |  | 4   
|                              |  |                                                                                                                                     
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and September 30, 2002                  |  | 5   
|                              |  |                                                                                                                                     
|                              |  | Notes to the Condensed Consolidated Financial Statements                                                                             |  | 6   
|                              |  |                                                                                                                                     
|Item 2:                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                |  | 13  
|                              |  |                                                                                                                                     
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                           |  | 27  
|                              |  |                                                                                                                                     
|Item 4:                       |  | Controls and Procedures                                                                                                              |  | 34  
|                              | 
|PART II: OTHER INFORMATION    |  |                                                                                                                                     
|                              |  |                                                                                                                                     
|Item 1:                       |  | Legal Proceedings                                                                                                                    |  | 36  
|                              |  |                                                                                                                                     
|Item 2:                       |  | Changes in Securities and Uses of Proceeds                                                                                           |  | 36  
|                              |  |                                                                                                                                     
|Item 3:                       |  | Defaults Upon Senior Securities                                                                                                      |  | 36  
|                              |  |                                                                                                                                     
|Item 4:                       |  | Submission of Matters to a Vote of Security Holders                                                                                  |  | 37  
|                              |  |                                                                                                                                     
|Item 5:                       |  | Other Information                                                                                                                    |  | 37  
|                              |  |                                                                                                                                     
|Item 6:                       |  | Exhibits and Reports on Form 8-K                                                                                                     |  | 37  
|                              | 
|Signature                     |  | 38                                                                                                                                  
|                              | 
|Certifications                |  |                                                                                                                                     



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PART I. FINANCIAL INFORMATION



ITEM 1. Financial Statements



Vitria Technology, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                           |  | September 30,2003 |          |   | December 31,2002 |  
|------------------------------------------ |  | ----------------- | -------- | - | ---------------- | -
|                                           |  | (unaudited)       |          |   | (Note 1)         |  
|Assets                                     |  |                   |          |   |                  |  
|Current Assets:                            |  |                   |          |   |                  |  
|Cash and cash equivalents                  |  | $                 | 17,278   |   |                  | $
|Short-term investments                     |  |                   | 79,111   |   |                  |  
|Accounts receivable, net                   |  |                   | 12,727   |   |                  |  
|Other current assets                       |  |                   | 2,834    |   |                  |  
|                                           |  |                   |          |   |                  |  
|Total current assets                       |  |                   | 111,950  |   |                  |  
|Property and equipment, net                |  |                   | 3,612    |   |                  |  
|Other assets                               |  |                   | 810      |   |                  |  
|                                           |  |                   |          |   |                  |  
|Total assets                               |  | $                 | 116,372  |   |                  | $
|                                           |  |                   |          |   |                  |  
|Liabilities and Stockholders Equity       |  |                   |          |   |                  |  
|Current Liabilities:                       |  |                   |          |   |                  |  
|Accounts payable                           |  | $                 | 1,996    |   |                  | $
|Accrued payroll and related                |  |                   | 3,902    |   |                  |  
|Other accrued liabilities                  |  |                   | 5,303    |   |                  |  
|Accrued restructuring expenses             |  |                   | 6,541    |   |                  |  
|Deferred revenue                           |  |                   | 13,885   |   |                  |  
|                                           |  |                   |          |   |                  |  
|Total current liabilities                  |  |                   | 31,627   |   |                  |  
|Long-Term Liabilities:                     |  |                   |          |   |                  |  
|Accrued restructuring expenses             |  |                   | 12,533   |   |                  |  
|Other long-term liabilities                |  |                   | 160      |   |                  |  
|                                           |  |                   |          |   |                  |  
|Total long-term liabilities                |  |                   | 12,693   |   |                  |  
|Commitments                                |  |                   |          |   |                  |  
|Stockholders Equity:                      |  |                   |          |   |                  |  
|Common stock                               |  |                   | 33       |   |                  |  
|Additional paid-in capital                 |  |                   | 273,559  |   |                  |  
|Unearned stock-based compensation          |  |                   | (141     | ) |                  |  
|Notes receivable from stockholders         |  |                   | (193     | ) |                  |  
|Accumulated other comprehensive income     |  |                   | 658      |   |                  |  
|Accumulated deficit                        |  |                   | (201,368 | ) |                  |  
|Treasury stock, at cost                    |  |                   | (496     | ) |                  |  
|                                           |  |                   |          |   |                  |  
|Total stockholders equity                 |  |                   | 72,052   |   |                  |  
|                                           |  |                   |          |   |                  |  
|Total liabilities and stockholders equity |  | $                 | 116,372  |   |                  | $
|                                           |  |                   |          |   |                  |  



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



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Vitria Technology, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)



|                                                                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                                               |  | 2003                            |        |   | 2002                           |  
|Revenues:                                                                      |  |                                 |        |   |                                |  
|License                                                                        |  | $                               | 7,084  |   |                                | $
|Service and other                                                              |  |                                 | 11,690 |   |                                |  
|                                                                               |  |                                 |        |   |                                |  
|Total revenues                                                                 |  |                                 | 18,774 |   |                                |  
|                                                                               |  |                                 |        |  
|Cost of revenues:                                                              |  |                                 |        |   |                                |  
|License                                                                        |  |                                 | 175    |   |                                |  
|Service and other                                                              |  |                                 | 5,753  |   |                                |  
|                                                                               |  |                                 |        |   |                                |  
|Total cost of revenues                                                         |  |                                 | 5,928  |   |                                |  
|                                                                               |  |                                 |        |   |                                |  
|Gross profit                                                                   |  |                                 | 12,846 |   |                                |  
|                                                                               |  |                                 |        |  
|Operating expenses:                                                            |  |                                 |        |   |                                |  
|Sales and marketing                                                            |  |                                 | 8,738  |   |                                |  
|Research and development                                                       |  |                                 | 4,207  |   |                                |  
|General and administrative                                                     |  |                                 | 3,120  |   |                                |  
|Stock-based compensation                                                       |  |                                 | 83     |   |                                |  
|Amortization of goodwill and intangible assets                                 |  |                                 |       |   |                                |  
|Impairment of goodwill                                                         |  |                                 |       |   |                                |  
|Restructuring costs                                                            |  |                                 | 503    |   |                                |  
|                                                                               |  |                                 |        |   |                                |  
|Total operating expenses                                                       |  |                                 | 16,651 |   |                                |  
|                                                                               |  |                                 |        |   |                                |  
|Loss from operations                                                           |  |                                 | (3,805 | ) |                                |  
|Interest income                                                                |  |                                 | 251    |   |                                |  
|Other income (expenses), net                                                   |  |                                 | 72     |   |                                |  
|                                                                               |  |                                 |        |   |                                |  
|Net loss before income taxes                                                   |  |                                 | (3,482 | ) |                                |  
|Provision for income taxes                                                     |  |                                 | 251    |   |                                |  
|                                                                               |  |                                 |        |   |                                |  
|Net loss                                                                       |  | $                               | (3,733 | ) |                                | $
|                                                                               |  |                                 |        |   |                                |  
|Basic and diluted net loss per share                                           |  | $                               | (0.11  | ) |                                | $
|                                                                               |  |                                 |        |   |                                |  
|Weighted average shares used in computing basic and diluted net loss per share |  |                                 | 32,644 |   |                                |  
|                                                                               |  |                                 |        |   |                                |  



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



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Vitria Technology, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



|                                                                            |  | Nine Months EndedSeptember 30, |        
|--------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                            |  | 2003                           |        
|Operating activities:                                                       |  |                                |        
|Net loss                                                                    |  | $                              | (30,451
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |        
|Amortization of intangible assets                                           |  |                                |       
|Impairment of goodwill                                                      |  |                                |       
|Loss on write-down of equity investments                                    |  |                                | 300    
|Loss on disposal of fixed assets                                            |  |                                | 2,369  
|Depreciation                                                                |  |                                | 3,782  
|Stock-based compensation                                                    |  |                                | 362    
|Changes in assets & liabilities:                                            |  |                                |        
|Accounts receivable                                                         |  |                                | 2,381  
|Other current assets                                                        |  |                                | 277    
|Other assets                                                                |  |                                | 253    
|Accounts payable                                                            |  |                                | (268   
|Other accrued liabilities                                                   |  |                                | (5,667 
|Accrued restructuring charges                                               |  |                                | 5,880  
|Deferred revenue                                                            |  |                                | 455    
|Other long term liabilities                                                 |  |                                | (756   
|                                                                            |  |                                |        
|Net cash used in operating activities                                       |  |                                | (21,083
|                                                                            |  |                                |        
|Investing activities:                                                       |  |                                |        
|Purchases of property and equipment                                         |  |                                | (584   
|Purchases of investments                                                    |  |                                | (90,060
|Maturities of investments                                                   |  |                                | 86,325 
|                                                                            |  |                                |        
|Net cash provided by (used in) investing activities                         |  |                                | (4,319 
|                                                                            |  |                                |        
|Financing activities:                                                       |  |                                |        
|Issuance of common stock, net                                               |  |                                | 155    
|Acquisition of treasury stock                                               |  |                                |       
|                                                                            |  |                                |        
|Net cash provided by financing activities                                   |  |                                | 155    
|                                                                            |  |                                |        
|Effect of exchange rates on changes on cash and cash equivalents            |  |                                | 98     
|                                                                            |  |                                |        
|Net increase (decrease) in cash and cash equivalents                        |  |                                | (25,149
|Cash and cash equivalents at beginning of period                            |  |                                | 42,427 
|                                                                            |  |                                |        
|Cash and cash equivalents at end of period                                  |  | $                              | 17,278 
|                                                                            |  |                                |        



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, 2002 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, 2002. 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.



Stock-based compensation



Vitria accounts for stock-based employee compensation arrangements using the
intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, as amended by FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation, issued by the Financial Accounting Standards Board, and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation and
SFAS No. 148, Accounting for Stock-based Compensation  Transition and Disclosure. Unearned compensation is amortized and expensed in accordance with Financial Accounting Standards Board Interpretation No. 28 using the multiple option
approach.



Under APB 25 and related interpretations, unearned
stock-based compensation is based on the difference, on the date of the grant, between the fair value of Vitrias common stock and the exercise price of a stock award. Under APB 25, no compensation expense is recognized in Vitrias
financial statements when the exercise price of Vitrias employee stock options equals the market price of the underlying stock on the date of grant. Vitria has elected to follow APB 25 because the alternative fair value accounting provided for
under SFAS 123 requires the use of option valuation models that were not developed for use in valuing employee stock options.



Pro forma information regarding net loss and net loss per share is required by SFAS 123. This information is required to be determined as if we had
accounted for our employee stock options (including shares issued under our Employee Stock Purchase Plan, collectively called stock based awards), under the fair value method of that statement.



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The fair value of our stock-based awards to employees in the table below was estimated using the
Black-Scholes option-pricing model and the following weighted-average assumptions:



|                          |  | Stock optionplans               |   |  | ESPP                           |   |  | Stock optionplans |   |  | ESPP |  
|------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ----------------- | - |  | ---- | -
|                          |  | Three months endedSeptember 30, |   |  | Nine months endedSeptember 30, |  
|                          |  | 2003                            |   |  | 2002                           |   |  | 2003              |   |  | 2002 |  
|Risk-free interest rate   |  | 2.99                            | % |  | 3.32                           | % |  | 3.49              | % |  | 3.96 | %
|Expected Lives (in years) |  | 5                               |   |  | 5                              |   |  | 0.5               |   |  | 0.5  |  
|Dividend yield            |  | 0                               | % |  | 0                              | % |  | 0                 | % |  | 0    | %
|Expected volatility       |  | 131                             | % |  | 140                            | % |  | 143               | % |  | 151  | %



The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the
expected volatility of the stock price. Because our stock based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates,
in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of our stock based awards.



The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS 123 to employee
stock-based compensation, including shares issued under our stock option plans and Employee Stock Purchase Plan (collectively options). For purposes of pro forma disclosures, the estimated fair value of the options is assumed to be
amortized to expense over the options vesting periods using the multiple option approach. Pro forma information follows (in thousands, except per share amounts):



|                                                                                                           |  | Three months ended, |        |   | Nine months ended, |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | - | ------------------ | -
|                                                                                                           |  | September 30,2003   |        |   | September 30,2002  |  
|Net loss, as reported                                                                                      |  | $                   | (3,733 | ) |                    | $
|Add: stock-based employee compensation expense included in reported net loss                               |  |                     | 83     |   |                    |  
|Deduct: total stock-based compensation expense determined under the fair value based method for all awards |  |                     | (1,283 | ) |                    |  
|                                                                                                           |  |                     |        |   |                    |  
|Pro forma net loss                                                                                         |  |                     | (4,934 | ) |                    |  
|                                                                                                           |  |                     |        |   |                    |  
|Net loss per share as reported                                                                             |  | $                   | (0.11  | ) |                    | $
|                                                                                                           |  |                     |        |   |                    |  
|Pro forma net loss per share                                                                               |  |                     | (0.15  | ) |                    |  
|                                                                                                           |  |                     |        |   |                    |  
|Shares used in calculation                                                                                 |  |                     | 32,644 |   |                    |  
|                                                                                                           |  |                     |        |   |                    |  



During the nine months
ended September 30, 2002, stock-based compensation expense determined under the fair value based method resulted in a positive number in the above table or a reduction in expense. This is the result of adjustments to reverse previously recognized
stock-based compensation expense on employee options forfeited prior to the employee earning the award. Forfeitures refer to awards that do not vest because service or employment requirements are not met. In accordance with SFAS 123, we based our
initial estimate of stock-based compensation expense on the



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total number of options granted. Adjustments are made in the period of forfeiture to reverse previously recognized stock-based compensation expense
associated with the unearned portion of a forfeited award.



Because the determination of fair value of all options granted prior to the time we became a public entity excludes volatility factors, the above results may not be representative of future periods.



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). All share amounts in the following table have been restated for all periods presented to reflect the reverse stock split which occurred during the second quarter of 2003 (see Note 9).



|                                                      |  | Three months ended |        |   | Nine months ended |  
|----------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                      |  | September 30,2003  |        |   | September 30,2002 |  
|Numerator for basic and diluted net loss per share:   |  |                    |        |   |                   |  
|Net loss                                              |  | $                  | (3,733 | ) |                   | $
|                                                      |  |                    |        |   |                   |  
|Denominator for basic and diluted net loss per share: |  |                    |        |   |                   |  
|Weighted average shares of common stock outstanding   |  |                    | 32,675 |   |                   |  
|Less shares subject to repurchase                     |  |                    | (31    | ) |                   |  
|                                                      |  |                    |        |   |                   |  
|Denominator for basic and diluted net loss per share  |  |                    | 32,644 |   |                   |  
|                                                      |  |                    |        |   |                   |  
|Basic and diluted net loss per share                  |  | $                  | (0.11  | ) |                   | $
|                                                      |  |                    |        |   |                   |  



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). All share amounts in the
following table have been restated for all periods presented to reflect the reverse stock split which occurred during the second quarter of 2003 (see Note 9).



|                                                         |  | Three months ended |  | Nine months ended
|-------------------------------------------------------- |  | ------------------ |  | -----------------
|                                                         |  | September 30,2003  |  | September 30,2002
|Weighted average effect of anti-dilutive securities:     |  |                    |  |                  
|Employee stock options (using the treasury stock method) |  | 548                |  | 81               
|Common stock subject to repurchase agreements            |  | 31                 |  | 149              
|                                                         |  |                    |  |                  
|Total                                                    |  | 579                |  | 230              
|                                                         |  |                    |  |                  



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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 ended |  
|--------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                        |  | September 30,2003  |        |   | September 30,2002 |  
|Net loss                                |  | $                  | (3,733 | ) |                   | $
|Other comprehensive income (loss):      |  |                    |        |   |                   |  
|Foreign currency translation adjustment |  |                    | (28    | ) |                   |  
|Unrealized gain (loss) on securities    |  |                    | 12     |   |                   |  
|                                        |  |                    |        |   |                   |  
|Comprehensive loss                      |  | $                  | (3,749 | ) |                   | $
|                                        |  |                    |        |   |                   |  



4) Revenues



One customer accounted for 18% of total revenues in the three months ended
September 30, 2003 and a different customer accounted for 11% of total revenues in the three months ended September 30, 2002. No customer accounted for more than 10% of total revenues in either of the nine-month periods ended September 30, 2003 or
2002.



5) Stock-Based Compensation



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



|                               |  | Three months ended |    | Nine months ended
|------------------------------ |  | ------------------ | -- | -----------------
|                               |  | September 30,2003  |    | September 30,2002
|Cost of revenues               |  | $                  | 7  |                  
|Sales and marketing            |  |                    | 31 |                  
|Research and development       |  |                    | 30 |                  
|General and administrative     |  |                    | 15 |                  
|                               |  |                    |    |                  
|Total stock-based compensation |  | $                  | 83 |                  
|                               |  |                    |    |                  



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.



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From time to time, we enter into foreign currency forward contracts to protect against a potential
decline in value of assets and liabilities denominated in a currency other than the functional currency of Vitria or one of its subsidiaries. Gains and losses on these forward contracts as well as the offsetting losses and gains on the foreign
denominated assets and liabilities are recognized in current earnings. There were no outstanding forward contracts at September 30, 2003.



7) Restructuring Actions and Asset Impairments



In the year ended December 31, 2002 Vitria initiated actions to reduce our cost structure due to sustained negative economic conditions that have impacted
our operations and resulted in lower than anticipated revenues. In April and August 2002 we reduced our workforce and consolidated our facilities. The restructuring actions in 2002 resulted in a reduction in workforce of approximately 285 employees
or 33% of Vitrias workforce measured as of the beginning of 2002 and affected all departments. Facilities in the United States and United Kingdom were consolidated and related leasehold improvements and equipment were written off. As a result
of the restructuring actions, a charge of $19.5 million in the year ended December 31, 2002 was incurred. The restructuring charge included approximately $4.2 million of severance related charges and $15.4 million of committed excess facilities
payments, which included $463,000 for the write-off of leasehold improvements and equipment in vacated buildings. As of September 30, 2003, $10.5 million of lease termination costs, net of anticipated sublease income, remains accrued from our 2002
restructuring actions and this amount is expected to be fully paid out by fiscal 2013.



In the first quarter of 2003, we initiated actions to further reduce our cost structure. The plan was a combination of a reduction in workforce of approximately 100 employees, or 18% of the existing workforce,
consolidations of facilities in the United States and United Kingdom and the associated disposal of leasehold improvements and equipment. The workforce reduction affected all functional areas and was largely completed in the quarter ended March 31,
2003. As a result of the restructuring plan, we incurred a charge of $14.0 million in the quarter ended March 31, 2003. This charge included approximately $2.0 million of severance related charges, $9.8 million of committed excess facilities
payments, and $2.2 million in write-offs of leasehold improvements and equipment. The severance related charges consist of one-time termination benefits recognized and measured at fair value at the date the plan was communicated to the employees.
All of the terminated employees had left Vitria by May 31, 2003. The excess facilities payments were measured at fair value as of the cease-use date of the facilities using a discount rate of 6% per annum. All excess facilities were vacated prior to
March 31, 2003. The leasehold improvements and equipment write-offs, which were associated with vacating the excess facilities, were based on net book value as of the date of abandonment. In the second quarter of 2003, we incurred a charge of
$337,000 related to the restructuring which occurred in the first quarter of the current year. This charge was made up of $526,000 in severance charges, $62,000 in accretion charges and $22,000 in other facility related adjustments, offset by an
adjustment of $273,000 due to a change in estimated sublease income for one of the restructured buildings which we subleased in the second quarter of 2003. In the third quarter of 2003, we incurred a charge of $503,000 related to the restructuring
action which occurred in 2003. This charge was due to a change in assumptions for our estimated future sublease income for one of the restructured buildings. As of September 30, 2003, $8.6 million of lease termination costs, net of anticipated
sublease income, remains accrued from our 2003 restructuring actions and is expected to be fully paid out by fiscal 2013.



The total accrued liability for lease termination costs of $19.1 million at September 30, 2003 is net of $7.1 million of estimated sublease income. A
portion of this liability is based on the fair value treatment required by SFAS 146, which we adopted as of January 1, 2003 (see Note 8). Aggregate future minimum lease payments for vacated facilities totaled $23.0 million at September 30, 2003,
which is net of $2.5 million in contractual sublease income.



The facilities consolidation charges for all of our restructuring actions were calculated using managements best estimates and were based upon the remaining future lease commitments for vacated facilities from the date of facility
consolidation, net of estimated future sublease income. We have engaged brokers to locate tenants to sublease all of the excess facilities and, to date, have signed one sublease agreement for one of the buildings. The estimated costs of



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vacating these leased facilities were based on market information and trend analyses, including information obtained from third-party real estate sources.
Our ability to generate our estimated sublease income is highly dependent upon the existing economic conditions, particularly lease market conditions in certain geographies, at the time we negotiate the sublease arrangements with third parties.
While the amount we have accrued is our best estimate, these estimates are subject to change and may require routine adjustment as conditions change through the implementation period. If macroeconomic conditions related to the commercial real estate
market continue to worsen, we may be required to increase our estimated cost to exit certain facilities.



As of September 30, 2003, $19.1 million of restructuring costs remained accrued for payment in future periods, as follows (in thousands):



|                                                            |  | Facilitiesconsolidation |        |   | Severance |   |        | Total | 
|----------------------------------------------------------- |  | ----------------------- | ------ | - | --------- | - | ------ | ----- | 
|Fiscal year 2002 actions                                    |  |                         |        |   |           |   |        |       | 
|Total charges                                               |  | $                       | 15,358 |   |           | $ | 4,158  |       | 
|Cash payments                                               |  |                         | (5,190 | ) |           |   | (4,158 | )     | 
|Fixed asset writeoffs                                       |  |                         | (463   | ) |           |   |       |       | 
|Reclassification of deferred rent                           |  |                         | 747    |   |           |   |       |       | 
|                                                            |  |                         |        |   |           |   |        |       | 
|Balance from fiscal year 2002 actions at September 30, 2003 |  |                         | 10,452 |   |           |   |       |       | 
|                                                            |  |                         |       
|Fiscal year 2003 actions                                    |  |                         |        |   |           |   |        |       | 
|Total charges                                               |  |                         | 12,141 |   |           |   | 2,477  |       | 
|Cash payments                                               |  |                         | (1,498 | ) |           |   | (2,477 | )     | 
|Fixed asset writeoffs                                       |  |                         | (2,251 | ) |           |   |       |       | 
|Facilities adjustments                                      |  |                         | 230    |   |           |   |       |       | 
|                                                            |  |                         |        |   |           |   |        |       | 
|Balance from fiscal year 2003 actions at September 30, 2003 |  |                         | 8,622  |   |           |   |       |       | 
|                                                            |  |                         |       
|Total accrual balance at September 30, 2003                 |  | $                       | 19,074 |   |           | $ |       |       | 
|                                                            |  |                         |        |   |           |   |        |       | 



At September 30, 2003,
$6.5 million related to restructuring activities remained in current liabilities and $12.5 million remained in long-term liabilities. We estimate that cash payments totaling approximately $19.1 million, consisting entirely of lease payments, will be
made through 2013.



8) Recent Accounting Pronouncements



In June 2002, the Financial Accounting Standard Board, or 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 disposal activity are recognized when the liabilities are incurred,
and fair value is the objective for initial measurement of the liabilities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The provisions of SFAS 146 are required to be applied prospectively after
the adoption date to newly initiated exit activities, and may affect the timing of recognizing future restructuring costs, as well as the amounts recognized. Existing restructuring initiatives will not be affected by the adoption of this Statement.
We adopted SFAS 146 as of January 1, 2003 which has resulted in the fair value treatment of our restructuring actions taken in the quarter ended March 31, 2003.



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In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Others. FIN 45 clarifies the guarantors requirements relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees and requires
the guarantor to recognize at the inception of a guarantee a liability for the fair value of the guarantee obligation. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligation
associated with guarantees issued. The provisions for the initial recognition and measurement of guarantees are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure requirements for our financial statements as of December 31, 2002 and to date, the adoption of FIN 45 has not had a material
effect on our operations or on our financial condition. See Note 11 in our Annual Report on Form 10-K for the year ended December 31, 2002 for additional information on our warranty and indemnification practices. During the nine months ended
September 30, 2003, we did not record any provisions for any guarantees.



In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the
provision of FIN 46 must be applied in the quarter ending December 31, 2003. We do not expect the adoption of FIN 46 will have a material effect on our operations results or financial condition.



9) Reverse stock split



On May 19, 2003, our Board of Directors approved a one-for-four reverse split of our common stock. The reverse split was
approved by Vitria stockholders on May 16, 2003 and implemented on May 27, 2003. Each four shares of our outstanding common stock automatically converted into one share of common stock.



All share and per share amounts have been restated for all periods presented to reflect this reverse stock split. In
addition, the number of authorized shares of common stock was reduced from 600 million to 150 million shares.



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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 quarterly 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.



Overview



Vitria is a leading provider of business process, integration, and management solutions. Our products and services enable
corporations in healthcare, finance, telecommunications and other markets to gain greater real-time operational visibility and control of strategic business processes that are currently fragmented across multiple systems, manual processes and
trading partner interactions. To accomplish this, we develop and deliver the BusinessWare®business process integration software platform together with pre-built and configurable content to solve industry-specific problems, such as healthcare claims transaction management, straight-through processing in capital markets, telecommunications
service provisioning, consolidated order management, and manufacturing and logistics. Vitria was incorporated in California in October 1994 and reincorporated in Delaware in July 1999.



Our flagship BusinessWareintegration platform uses graphically modeled business process logic as the foundation for orchestrating complex, real-time interactions between dissimilar software applications, Web services,
individuals, and trading partners over corporate networks and the Internet. By automating and measuring previously fragmented business processes from start to finish, our solutions are designed to:



| |  |  | Accelerate process cycle times by removing delays caused by manual processes,
| | - |  | -----------------------------------------------------------------------------



| |  |  | Enhance executive and information technology, or IT, visibility into operational business performance by displaying process information in real time,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reduce time-consuming and error-prone manual processes,
| | - |  | -------------------------------------------------------



| |  |  | Enforce industry and company-specific best practices with automated business rules and workflows, and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Ensure greater consistency and accuracy of data.
| | - |  | ------------------------------------------------



Solutions and Products



Vitrias Business Process Integration Solutions



Vitria combines technology leadership with industry domain expertise in healthcare, finance and telecommunications to improve strategic business processes
across systems, people and trading partners. Through pre-built and specifically configured business process integration solutions that preserve and extend a companys existing technology investments, Vitria solutions are designed to provide
real-time visibility and streamlined control over processes and data to reduce costs, increase revenues, improve customer experience, and ensure regulatory compliance.



Vitria has developed years of intellectual property around automating industry-specific business processes in the
healthcare, finance and telecommunications markets that can be either pre-built and pre-packaged in software and bundled with the BusinessWare platform, or used by Vitrias professional services to rapidly design and configure solutions. This
focus on business process solutions allows Vitria to concentrate its product development and marketing efforts on



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demonstrating the measurable business value of process integration to business executives, in addition to demonstrating the technical value of our platform
to information technology professionals. Examples of business process integration problems that Vitria has developed solutions for include:



| |  |  | Claims Transaction Management: designed to provide healthcare insurance payers with greater visibility and acceleration of complete submit-to-remit claims lifecycle in
order to reduce administrative costs and improve customer service.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | SWIFT Management: allows banks and brokerages to automatically generate messages that are compliant with the ever-changing requirements of the SWIFT financial network, convert
between formats and repair failed trades in order to cut operational costs and optimize operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Service Provisioning: allows telecommunications service providers to take and fulfill an order or change order efficiently and effectively, resulting in higher customer
satisfaction, lower inventory costs and optimal use of service labor resources.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



While each Vitria customer has unique aspects of their business processes, there are also many common elements to recurring business integration problems that lend themselves to a more standardized approach. A
pre-built solutions approach is designed to satisfy customers desire for faster time-to-value, lower cost of implementation, and leveraging industry best practices. Pre-built solution components can include:



| |  |  | business process models,
| | - |  | ------------------------



| |  |  | human task automation,
| | - |  | ----------------------



| |  |  | executive and other operational business dashboards,
| | - |  | ----------------------------------------------------



| |  |  | exception handling rules and workflows,
| | - |  | ---------------------------------------



| |  |  | data validation rules and data translations for common electronic documents,
| | - |  | ----------------------------------------------------------------------------



| |  |  | data translations between common applications,
| | - |  | ----------------------------------------------



| |  |  | and application connectors.
| | - |  | ---------------------------



Because these solution components are built on our general-purpose BusinessWare integration platform, each is fully configurable to meet customers
specific business and technology requirements.



Vitrias
Health Insurance Portability and Accountability Act, or HIPAA, Compliance solution is an example of a pre-built solution. It provides transaction and code set compliance with federal HIPAA regulations that provides a pre-built, re-usable foundation
for other business process improvements such as claims transaction management. Vitria intends to develop more pre-built solutions, including co-developing pre-built solutions with select systems integrators.



Vitrias BusinessWare Platform



BusinessWare unifies the five elements that we believe are essential for
business process integration software, all in a single platform:



| | (1) |  | Business Process Management, or BPM: BPM manages the steps of a cross-functional business process to ensure optimal completion of the process (e.g., from submission of a healthcare
claim by a care provider to the remittance of payment). It uses graphical business process models together with automated human workflows to define, automate and orchestrate transactions and the exchange of information between internal business
applications, people and external trading partners.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (2) |  | Business Analysis and Monitoring, or BAM: BAM provides real-time monitoring and analysis of business processes, providing greater visibility and business intelligence needed to
optimize operational efficiency. Our two key BAM components, Cockpit and Analyzer, are designed to continuously gather business process data across applications, human workflows and trading partner interactions; analyze and visualize this data in
real time; and enable business executives and process owners to identify and respond to both business and integration problems or opportunities as they occur.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | Business Vocabulary Management, or BVM: BVM is comprised of content and tools that enable the flexible, scalable management of translations between industry-specific and
application-specific data formats and meanings (vocabularies) as represented in electronic transactions between businesses (e.g. via Electronic Data Interchange, or EDI, or eXtensible Markup Language, or XML), and between a companys internal
applications. BVM uses automated exception handling, business rules-based validation and advanced data transformation designed to ensure that differences in how data is represented does not interfere with successful completion of a business
transaction (e.g. fulfilling a customers order, processing a healthcare claim, or settling a financial transaction). 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.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) |  | Business-to-Business Integration, or B2B: B2B enables the secure and reliable completion of transactions and the exchange of business information between customers and partners over
the Internet to support collaborative business processes. Combined with BPM and BAM, B2B helps companies manage their value chain interactions from end to end as an integrated part of their larger business processes.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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 one another, EAI helps unify and improve enterprise processes while maximizing the value of a companys application investments. Companies may use BusinessWares BPM, BAM and BVM capabilities to control
business processes on top of industry-standard methods of transporting data from application to application (such as Web services and Java Messaging Service) or third-party EAI infrastructures.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



BusinessWare allows customers to solve their business problems using
graphical models rather than developing custom programs. Rather than writing new software programs, business managers can create visual diagrams of business processes, called process models, using a point-and-click user interface.
BusinessWare then translates these process models into software programs that automate the flow of information across a companys underlying IT systems.



Once customers use BusinessWare to define their business process models and integrate the underlying IT systems, people and partners, 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.



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 revenue recognition, allowances for doubtful accounts
and restructuring charges. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the



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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.



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 for the undelivered element, 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, respectively. Revenue is generally deferred
for those agreements which exceed our normal payment terms and are therefore assessed as not being fixed or determinable. Revenue under these agreements is recognized as payments become due unless collectibility concerns exist, in which case revenue
is deferred until payments are received. 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 a sell-through arrangement to an end user has been received.



Service and other revenues include product maintenance,
consulting, and training. 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. These arrangements have not been common and, therefore, the significant majority of the Companys license revenue in the past three years has been
recognized under SOP 97-2.



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 worthiness of each customer, which is based on credit reports from third parties,
analysis of published or publicly available financial



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information and customer specific experience including payment practices and history. 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. When we believe a collectibility issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount
that we believe is collectible.



Restructuring Charges



During the first nine months of 2003, we recorded $14.8
million of restructuring charges related to the realignment of our business operations. In addition, we recorded $19.5 million in restructuring charges related to the realignment of our business operations in 2002. As of September 30, 2003, we have
$19.1 million in accrued restructuring expenses, consisting solely of lease payments, to be made through 2013. Aggregate minimum future lease payments due for abandoned properties totals $23.0 million at September 30, 2003 which is net of $2.5
million in contractual sublease income.



Only costs resulting
from a restructuring 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 represent expenses incurred in connection with
certain cost reduction programs that we have undertaken and consist primarily of the cost of involuntary termination benefits and remaining contractual lease payments and other costs associated with closed facilities, net of anticipated sublease
income.



The charges for facility closure costs require the
extensive use of estimates, including estimates and assumptions related to future maintenance costs, our ability to secure sub-tenants and anticipated 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 or reverse previous charges in the future. Such additional charges or reversals will be recorded to the restructuring charges line in our statement of operations in the period
in which additional information becomes available to indicate our estimates should be adjusted.



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RESULTS OF OPERATIONS

For the three and nine months ended September 30, 2003 and 2002



The following table sets forth the results of operations for the three and nine months ended September 30, 2003 and 2002, expressed as a percentage of total revenues.



|                                               |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |   
|---------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | --
|                                               |  | 2003                            |    |  | 2002                           |   
|Revenues                                       |  |                                 |    |  |                                |   
|License                                        |  | 38                              | %  |  | 38                             | % 
|Service and other                              |  | 62                              | %  |  | 62                             | % 
|                                               |  |                                 |    |  |                                |   
|Total revenues                                 |  | 100                             | %  |  | 100                            | % 
|Cost of revenues                               |  |                                 |    |  |                                |   
|License                                        |  | 1                               | %  |  | 1                              | % 
|Service and other                              |  | 31                              | %  |  | 32                             | % 
|                                               |  |                                 |    |  |                                |   
|Total cost of revenues                         |  | 32                              | %  |  | 33                             | % 
|Gross profit                                   |  | 68                              | %  |  | 67                             | % 
|Operating expenses                             |  |                                 |    |  |                                |   
|Sales and marketing                            |  | 47                              | %  |  | 58                             | % 
|Research and development                       |  | 22                              | %  |  | 27                             | % 
|General and administrative                     |  | 17                              | %  |  | 18                             | % 
|Amortization of stock-based compensation       |  | 0                               | %  |  | 1                              | % 
|Amortization of goodwill and intangible assets |  | 0                               | %  |  | 1                              | % 
|Impairment of goodwill                         |  | 0                               | %  |  | 0                              | % 
|Restructuring charges                          |  | 3                               | %  |  | 6                              | % 
|                                               |  |                                 |    |  |                                |   
|Total operating expenses                       |  | 89                              | %  |  | 111                            | % 
|Loss from operations                           |  | (21                             | %) |  | (44                            | %)
|Interest income                                |  | 1                               | %  |  | 2                              | % 
|Other income (expenses), net                   |  | 0                               | %  |  | (1                             | )%
|                                               |  |                                 |    |  |                                |   
|Net loss before income taxes                   |  | (20                             | %) |  | (43                            | %)
|Provision for income taxes                     |  | 1                               | %  |  | 1                              | % 
|                                               |  |                                 |    |  |                                |   
|Net loss                                       |  | (21                             | %) |  | (44                            | %)
|                                               |  |                                 |    |  |                                |   



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Revenues



We recognized approximately 40% of our revenues from customers outside the United States in the three months ended September 30, 2003 and 36% of our
revenues from customers outside the United States in the nine months ended September 30, 2003, compared to 43% in the three months ended September 30, 2002 and 34% in the nine months ended September 30, 2002. For the next quarter, we believe
international revenues will remain at approximately the same percentage of total revenues as the nine months ended September 30, 2003.



Sales to our ten largest customers accounted for 42% of total revenues in the three months ended September 30, 2003 and 37% of total revenues in the nine
months ended September 30, 2003. 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. One customer accounted for
18% of total revenues in the three months ended September 30, 2003 and a different customer accounted for 11% of total revenues in the three months ended September 30, 2002. No customer accounted for more than 10% of total revenues in either of the
nine-month periods ended September 30, 2003 or 2002. 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.



To date we have not experienced significant seasonality of revenue. Future
results may be affected by the fiscal or quarterly budget cycles of our customers.



License.License revenues decreased 29% to $7.1 million in the three months ended September 30, 2003 from $10.0 million in the three months ended September 30, 2002. License revenues decreased 27% to
$21.8 million in the nine months ended September 30, 2003 from $30.0 million in the nine months ended September 30, 2002. We believe that this decrease is a result of the general slowdown in information technology spending in our target markets,
which has made it more difficult for us to grow our revenues.



Service and other.The level of service revenue is impacted by the number and size of license deals in a given period. First year support is purchased as part of each license deal. Most of our consulting project revenue and customer
training revenue is impacted by the level of license deals. Services and other revenue also includes support renewals, which is impacted by the installed license base. Service and other revenues decreased 27% to $11.7 million in the three months
ended September 30, 2003 from $16.0 million in the three months ended September 30, 2002. Service and other revenues decreased 20% to $37.6 million in the nine months ended September 30, 2003 from $47.2 million in the nine months ended September 30,
2002. The decrease is primarily due to a decrease in consulting revenues due to fewer license deals in the current year which in turn required fewer consulting projects as well as a decrease in first year support, also due to fewer license deals in
the current year. Revenue from support renewals increased over the prior year and slightly mitigated the decreases in other support revenues. This increase in support renewals was due to a decrease in the customer cancellation rate as we saw fewer
customers canceling due to bankruptcy.



Included in deferred
revenue as of September 30, 2003 is approximately $750,000 of unrecognized revenues from Government grants which are subject to outstanding audits with the Government. We expect some of these audits will be resolved in 2003 which may result in
repaying some amount to the Government and/or recognition of certain deferred Government grant revenues.



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 increased 56% from $112,000 in the three months ended September 30, 2002
to $175,000 in the three months ended September 30, 2003. Cost of license revenues decreased 81% from $2.5 million in



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the nine months ended September 30, 2002 to $476,000 in the nine months ended September 30, 2003. 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.



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 decreased 31% from $8.4 million in the three months ended September 30, 2002 to $5.8 million in the three
months ended September 30, 2003. This decrease is primarily due to a decrease of $1.8 million in salary and benefit expenses as well as reduced travel expenses of $524,000 arising from our workforce reductions and cost containment efforts. Cost of
service and other revenues decreased 28% from $25.5 million in the nine months ended September 30, 2002 to $18.4 million in the nine months ended September 30, 2003. This decrease is primarily due to a decrease of $5.8 million in salary and benefit
expenses as well as reduced travel expenses of $975,000 due to workforce reductions and cost containment efforts. For the next quarter, we expect that cost of service and other will remain flat compared to the quarter ended September 30, 2003.



Operating Expenses



Sales and marketing. Sales and marketing expenses consist of
salaries, commissions, field office expenses, travel and entertainment, and promotional expenses. Sales and marketing expenses decreased 42% from $15.0 million in the three months ended September 30, 2002 to $8.7 million in the three months ended
September 30, 2003. This decrease was primarily due to lower salary and benefit expenses of $3.3 million, lower commission expenses of $582,000, reduced travel expenses of $699,000 and reduced facilities costs of $427,000 arising from our workforce
reductions and facility closures, as well as related decreases in most other expense areas as a result of our cost containment efforts. Sales and marketing expenses decreased 47% from $60.2 million in the nine months ended September 30, 2002 to
$31.9 million in the nine months ended September 30, 2003. This decrease was primarily due to lower salary and benefit expenses of $15.9 million, lower commission expense of $2.5 million, reduced travel expenses of $2.8 million and reduced
facilities costs of $1.7 million arising from our workforce reductions and facility closures, as well as related decreases in most other expense areas as a result of our cost containment efforts. For the next quarter, we expect that sales and
marketing expenses will remain flat compared to the quarter ended September 30, 2003.



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. Research and development expenses decreased 39% from $6.9 million in the three months ended September 30, 2002 to
$4.2 million in the three months ended September 30, 2003. This decrease was primarily due to a decrease of $1.9 million in salary expenses and a decrease of $372,000 in facilities costs arising from our workforce reductions as well as related
decreases in most other expense areas as a result of our cost containment efforts. Research and development expenses decreased 45% from $25.1 million in the nine months ended September 30, 2002 to $13.9 million in the nine months ended September 30,
2003. This decrease was primarily due to a decrease of $8.3 million in salary expenses and a decrease of $1.2 million in facilities costs arising from our workforce reductions and a reduction of $698,000 in the use of outside consultants, as well as
related decreases in most other expense areas as a result of our cost containment efforts. For the next quarter, we expect that research and development expenses will remain flat compared to the quarter ended September 30,2003.



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. General and administrative expenses decreased 32% from $4.6
million in the three months ended September 30, 2002 to $3.1 million in the three months ended September 30, 2003. This decrease was primarily attributable to a decrease of $402,000 in salaries and benefit expenses as a result of our workforce
reductions, a reduction of $491,000 in facilities expenses, as well as related decreases in most other expense areas as a result of our cost containment efforts.



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General and administrative expenses decreased 35% from $16.1 million in the nine months ended September 30, 2002 to $10.4 million in the nine months ended
September 30, 2003. This decrease was primarily attributable to a decrease of $3.0 million in salaries and benefit expenses as a result of our workforce reductions and a reduction of $1.1 million in the use of outside consultants, as well as related
decreases in most other expense areas. For the next quarter, we expect that general and administrative expenses will remain flat compared to the quarter ended September 30, 2003.



Stock-based compensation. Total stock-based compensation expenses were $83,000 for the three months ended September
30, 2003 and $213,000 for the three months ended September 30, 2002. Total stock-based compensation expenses were $362,000 for the nine months ended September 30, 2003 and $1.5 million for the nine months ended September 30, 2002. Stocked based
compensation includes the amortization of unearned employee stock-based compensation on options issued to employees prior to Vitria completing its initial public offering in September 1999 and is being amortized over a five-year vesting period. In
the quarter ended March 31, 2002, we recorded $695,000 in additional non-cash stock-based compensation expense as a result of vesting modifications made to option grants for certain key executives who left Vitria during that quarter. We expect to
recognize employee stock-based compensation expenses of approximately $61,000 for the three months ending December 31, 2003 and $80,000 for the year ending December 31, 2004. This unearned compensation expense will be reduced in future periods to
the extent that options are cancelled prior to vesting.



Amortization of purchased intangible assets. Amortization of purchased intangible assets associated with the acquisition of XMLSolutions in April 2001 resulted in charges to earnings of $341,000 and $1.1 million for the three and
nine months ended September 30, 2002, respectively. In the fourth quarter of 2002, we reduced the carrying value of all of our intangible assets associated with this purchase to zero. Therefore there was no amortization of intangible assets in the
three and nine months ended September 30, 2003.



Restructuring charges. In the year ended December 31, 2002 Vitria initiated actions to reduce our cost structure due to sustained negative economic conditions that have impacted our operations and resulted in lower than anticipated
revenues. In April and August 2002 we reduced our workforce and consolidated our facilities. The restructuring actions in 2002 resulted in a reduction in workforce of approximately 285 employees or 33% of Vitrias workforce measured as of the
beginning of 2002 and affected all departments. Facilities in the United States and United Kingdom were consolidated and related leasehold improvement and equipment were written off. As a result of the restructuring actions, a charge of $19.5
million in the year ended December 31, 2002 was incurred. The restructuring charge included approximately $4.2 million of severance related charges and $15.4 million of committed excess facilities payments, which included $463,000 for the write-off
of leasehold improvements and equipment in vacated buildings. As of September 30, 2003, $10.5 million of lease termination costs, net of anticipated sublease income, remains accrued from our 2002 restructuring actions and this amount is expected to
be fully paid out by fiscal 2013.



In the first quarter of
2003, we initiated actions to further reduce our cost structure. The plan was a combination of a reduction in workforce of approximately 100 employees, or 18% of the existing workforce, consolidations of facilities in the United States and United
Kingdom and the associated disposal of leasehold improvements and equipment. The workforce reduction affected all functional areas and was largely completed in the quarter ended March 31, 2003. As a result of the restructuring plan, we incurred a
charge of $14.0 million in the quarter ended March 31, 2003. This charge included approximately $2.0 million of severance related charges, $9.8 million of committed excess facilities payments, and $2.2 million in write-offs of leasehold improvements
and equipment. The severance related charges consist of one-time termination benefits recognized and measured at fair value at the date the plan was communicated to the employees. All of the terminated employees had left Vitria by May 31, 2003. The
excess facilities payments were measured at fair value as of the cease-use date of the facilities using a discount rate of 6%. All excess facilities were vacated prior to March 31, 2003. The leasehold improvements and equipment write-offs, which
were associated with vacating the excess facilities, were based on net book value as of the date of abandonment. In the second quarter of 2003, we incurred a charge of $337,000 related to the restructuring which occurred in the first quarter of the
current year. This charge was made up of $526,000 in severance charges, $62,000 in accretion charges and $22,000 in other facility related adjustments, offset by an adjustment of $273,000 due to a change in estimated sublease income for one of the
restructured buildings



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which we subleased in the second quarter of 2003. In the third quarter of 2003, we incurred a charge of $503,000 related to the restructuring action which
occurred in the first quarter of 2003. This charge was due to a change in assumptions for our estimated future sublease income for one of the restructured buildings. As of September 30, 2003, $8.6 million of lease termination costs, net of
anticipated sublease income, remains accrued from our 2003 restructuring actions and is expected to be fully paid out by fiscal 2013.



The total accrued liability for lease termination costs of $19.1 million at September 30, 2003 is net of $7.1 million of estimated sublease income. A
portion of this liability is based on the fair value treatment required by SFAS 146, which we adopted as of January 1, 2003 (see Note 8). Aggregate future minimum lease payments for vacated facilities totaled $23.0 million at September 30, 2003
which is net of $2.5 million in contractual sublease income.



The facilities consolidation charges for all of our restructuring actions were calculated using managements best estimates and were based upon the remaining future lease commitments for vacated facilities from the date of facility
consolidation, net of estimated future sublease income. We have engaged brokers to locate tenants to sublease all of the excess facilities, and, to date, have signed one sublease agreement for one of the buildings. The estimated costs of vacating
these leased facilities were based on market information and trend analyses, including information obtained from third-party real estate sources. Our ability to generate our estimated sublease income is highly dependent upon the existing economic
conditions, particularly lease market conditions in certain geographies, at the time we negotiate the sublease arrangements with third parties. While the amount we have accrued is our best estimate, these estimates are subject to change and may
require routine adjustment as conditions change through the implementation period. If macroeconomic conditions related to the commercial real estate market continue to worsen, we may be required to increase our estimated cost to exit certain
facilities.



We expect to achieve annualized cost savings of
approximately $38.0 million from our restructuring actions initiated in the year ended December 31, 2002 and an additional $14.0 million from our restructuring actions initiated in the first quarter of 2003.



Interest income and other income, net. Interest and other income, net,
decreased $17,000, or 5%, from $340,000 in the three months ended September 30, 2002 to $323,000 in the three months ended September 30, 2003. This slight decrease was primarily attributable to lower interest income due to lower cash and investment
balances, offset by an increase in foreign currency exchange gain. Interest and other income, net, decreased $1.3 million, or 133%, from $2.3 million in the nine months ended September 30, 2002 to $990,000 in the nine months ended September 30,
2003. This decrease was primarily attributable to lower interest income due to lower cash and investment balances, $290,000 legal settlement fee recognized as other income in 2002, as well as a charge of $300,000 for an other than temporary decline
in value of our equity investment in a private company in 2003.



Provision
for income taxes



We recorded an income tax provision of
$251,000 and $518,000, respectively, for the three-month and nine-month periods ended September 30, 2003. 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. Income tax provisions in all periods presented relate 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.



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Liquidity and capital resources



|                                                    |  | Nine Months EndedSeptember 30, |         |   | PercentChange |  
|--------------------------------------------------- |  | ------------------------------ | ------- | - | ------------- | -
|                                                    |  | 2003                           |         |   | 2002          |  
|                                                    |  | (in thousands)                 |         |   |               |  
|Cash, cash equivalents and short term investments   |  | $                              | 96,389  |   |               | $
|Net cash used in operating activities               |  |                                | (21,084 | ) |               |  
|Net cash provided by (used in) investing activities |  |                                | (4,319  | ) |               |  
|Net cash provided by financing activities           |  |                                | 156     |   |               |  



As of September 30,
2003, we had approximately $96.4 million of cash, cash equivalents and short-term investments, and $12.7 million of long-term liabilities, compared to approximately $128.9 million of cash, cash equivalents and short-term investments and $9.2 million
of long-term liabilities at September 30, 2002.



Net cash used
in operating activities decreased $24.6 million, or 54%, in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. This decrease was primarily due to a decrease in our net loss, a decrease in accounts
receivable, a decrease in deferred revenue, and an increase in accrued restructuring expenses.



Net cash provided by (used in) investing activities decreased $54.0 million, or 109%, in the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. This decrease in the current
period was primarily due the fact that we purchased more short-term investments than we sold, as compared to the prior period when we sold more short-term investments than we purchased.



Net cash provided by financing activities decreased $566,000, or 78%, in the nine months ended September 30, 2003 as
compared to the nine months ended September 30, 2002. Net cash provided by financing activities in both the current and prior periods was primarily from the issuance of common stock offset by the repurchases of terminated employees stock
options which had been exercised prior to vesting.



During the
nine months ended September 30, 2003, our net accounts receivable balance decreased $2.4 million from $15.1 million at December 31, 2002 to $12.7 million at September 30, 2003. The reason for the decrease was due to lower revenues in the nine months
ended September 30, 2003 as well as an improvement in our cash collection efforts which led to an increase in cash receipts. At September 30, 2003, our gross accounts receivable balance is $13.3 million with an allowance for doubtful accounts of
$527,000.



During the nine months ended September 30, 2003, our
deferred revenue balance increased $455,000 from $13.4 million at December 31, 2002 to $13.9 million at September 30, 2003. The primary reason that our deferred revenue balance remained essentially flat over the past nine months is due to an
increase in support renewals due to the fact that a higher percentage of customers are renewing their annual maintenance. This increase was nearly offset by a decrease in prepaid training and consulting as fewer customers elected to prepay for their
services, as well as a smaller increase in deferred license revenue and a decrease in first year maintenance.



Contractual Cash Obligations



At September 30, 2003, we had contractual obligations and commercial commitments of approximately $29.4 million as shown in the table below. The table
below (in thousands) excludes obligations related to accounts payable and accrued liabilities incurred in the ordinary course of business.



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|                 |  | Year ending December 31, |       | Totalminimumpayment
|---------------- |  | ------------------------ | ----- | -------------------
|                 |  | 2003                     |       | 2004               
|Operating Leases |  | $                        | 2,080 |                    
|Capital Leases   |  |                          | 23    |                    
|                 |  |                          |       |                    
|Total            |  | $                        | 2,103 |                    
|                 |  |                          |       |                    



Operating lease
commitments shown above, which are net of contractual sublease agreements, include $23.0 million of operating lease commitments under leases for vacated facilities which were recorded as accrued restructuring expenses in the accompanying balance
sheet as of September 30, 2003. This $23.0 million lease commitment is net of $2.5 million in contractual sublease income. We do not have any material commercial commitments under lines of credit, standby lines of credit, standby repurchase
obligations or other such arrangements, except as discussed below in the section entitled Credit Facilities with Silicon Valley Bank.



Off-Balance Sheet Arrangements



At September 30, 2003, 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.



Credit Facilities with Silicon Valley Bank



We have a $15.0 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 $80.0 million. As part of this $80.0 million balance, the agreement also requires us to maintain a minimum of $25.0 million in investments which are invested through Silicon
Valley Bank. 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, 2003, 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 $10.2 million related to certain office leases at September 30, 2003.



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 1.3 million shares of our common stock through July 2003. Under the program the repurchases were 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, 2003, 124,000 shares had been repurchased in the open market at a total cost of approximately $496,000. No shares were repurchased during the nine
months ended September 30, 2003.



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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 balances, cash generated from operations, if any, and interest on available cash and investment
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. We intend to continue to invest selectively in sales, marketing and research and
development. However, during the remainder of this fiscal year, we expect that operating expenses will be slightly lower than the first half of the year due to our continued cost containment efforts. We anticipate that operating expenses and planned
capital expenditures will continue to constitute a material use of our cash resources. We expect total capital expenditures for the reminder of fiscal year 2003 will be less than $1.0 million. In addition, we may utilize cash resources to fund
acquisitions or investments in other businesses, technologies or products lines. We believe that our available cash, cash equivalents and short-term investments 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 believe our success requires expanding our customer base and continuing to
enhance our BusinessWare products. 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;
| | - |  | -----------------------------



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



| |  |  | 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, 2003 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 September 30, 2003.



The following table set forth our weighted average interest rate for cash, cash equivalents and short-term investments for
the nine-month period ending September 30, 2003 (in thousands):



|                                     |  | September 30, 2003 |       
|------------------------------------ |  | ------------------ | ------
|                                     |  | Fair Value         |       
|Cash and cash equivalents            |  | $                  | 17,278
|Short-term investments               |  |                    | 79,111
|                                     |  |                    |       
|Total cash and investment securities |  | $                  | 96,389
|                                     |  |                    |       



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 currencies, customer receivables, and inter-company receivables or payables with our foreign subsidiaries. Additionally, we provide funding to our foreign subsidiaries 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



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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.



We had no outstanding forward contracts as of September
30, 2003.



RISKS ASSOCIATED WITH VITRIAS BUSINESS AND FUTURE OPERATING
RESULTS



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.



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 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. 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.



Our quarterly results 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 was 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 have incurred substantial operating losses since inception and we cannot guarantee that we will become profitable 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 $201.4 million as of September 30, 2003. Since the beginning of 2002, we have reduced our workforce by a total of 385 employees and consolidated certain facilities as part of our restructuring plan. As
a result of these actions, we incurred restructuring charges of $19.5 million in 2002 and $14.8 million in the nine months ended September 30, 2003. Despite these recent measures in order to remain competitive we intend to continue investing heavily
in sales, marketing and research and development. As a result, we are likely to continue report future operating losses and cannot guarantee whether we will report net income in the future.



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



Since 1998, a majority of our total revenues has been derived from licensing our BusinessWare product and applications built using that product. We expect
that will continue to be the case. Accordingly, our future operating results will depend on the demand for BusinessWare by existing and 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.



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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.



During the nine months ended September 30, 2003, we had a net loss of $30.5 million and our operating activities used $21.1 million of cash. As of September 30, 2003, we had approximately $96.4 million in cash and
cash equivalents and short-term investments, and $12.7 million in long-term liabilities. 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.
| | - |  | -----------------------------------------------------------------------



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



The challenging economic environment in the United States and abroad, and especially the
continued reluctance of companies to make significant expenditures on information technology, could reduce demand for our products and cause our revenues to continue to decline.



The downturn in the U.S. and the world 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. Over approximately the past two and half
years, we have experienced a general slow-down in the level of capital spending by some of our customers due to the general economic downturn, which has resulted in lower revenues. This slow-down in capital spending, if sustained in future periods,
could result in reduced sales or the postponement of sales to our customers. There can be no assurance that the level of spending on information technology in general, or on business integration software by our customers and potential customers,
will increase or remain at current levels in future periods. Lower spending on information technology could result in reduced license sales to our customers, reduced overall revenues, diminished margin levels, and could impair our operating results
in future periods.



In addition, international events threaten
to deepen and prolong the challenging economic environment. Terrorism and the threat thereof, as well as actual or threatened war or hostilities in various regions, could cause companies further to delay or moderate their capital expenditures,
thereby potentially harming our financial performance.



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



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products, and approval at a number of management levels within the customers organization. Because of these issues, our sales cycle has ranged from six
to nine months, and in some cases even longer, and it is very difficult to predict whether and when any particular license transaction might be completed. 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.



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 42% and 37% of total revenues in the three and nine months ended September 30, 2003, respectively. 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.



If we are not successful in developing industry specific solutions based on BusinessWare, 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, financial services 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. Specific industries may experience economic downturns or
regulatory changes that may result in delayed spending decisions by customers or require changes to our products. 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.



To date we have
concentrated our sales and marketing efforts toward companies in the telecommunications, financial services, and healthcare industries. 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.



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



Deployment of our products 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 products fail 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 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 products 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 BEA Systems, 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



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vocabulary management functionality. 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. In addition, 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. Finally, 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. 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.



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 harmed if these efforts do not generate license and service
revenues necessary to offset this investment.



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 products 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.



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If our products do 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 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 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 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 products for mission-critical business operations, any of these occurrences could seriously harm
our business and generate negative publicity.



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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 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 assure that we will be able to
recruit and retain sufficient numbers of these highly skilled employees.



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.



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.



Our significant international operations may fail to generate significant product revenues or contribute to our drive toward profitability, which could result in slower revenue growth and harm our business.



We have opened international offices in countries including the United
Kingdom, Japan, Germany, France, Italy, Brazil, Taiwan, Korea, Mexico, Singapore, Canada, Australia, Spain and China, and we may establish additional international offices. During the first nine months of 2003, 36% of our revenue was derived from
international markets. We anticipate devoting significant resources and management attention to expanding international opportunities. 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 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



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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 and in February 2003, Vitria and certain of our officers and directors were named as defendants in a class action shareholder complaints. 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 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 of directors or for proposing matters that can be acted upon by stockholders at
stockholder meetings
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Section 203 of the Delaware
General Corporations Law and the terms of our stock option plans may also discourage, delay or prevent a change in control of Vitria. In addition, as of September 30, 2003, our executive officers, directors and their affiliates beneficially own
approximately 36% of our outstanding common stock. This could have the effect of delaying or preventing a change of control of Vitria and may make some transactions difficult or impossible without the support of these stockholders.



Item 4. CONTROLS AND PROCEDURES



Based on their evaluation as of September 30, 2003, our chief executive officer and chief financial officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and Form 10-Q. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to
materially affect our internal controls over financial reporting.



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



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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 our 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 (IPO), violated 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 since the mid-1990s. All of these IPO-related lawsuits
were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Defendants filed a global motion to dismiss the IPO-related lawsuits on July 15, 2002. On February 19, 2003, Judge Scheindlin
issued a ruling denying in part and granting in part the Defendants motions to dismiss. On June 18, 2003, Vitrias Board of Directors approved a resolution accepting a settlement offer from the plaintiffs according to the terms and
conditions of a comprehensive Memorandum of Understanding negotiated between the plaintiffs and the issuer defendants. Under the terms of the settlement, the plaintiff class will dismiss with prejudice all claims against Vitria and our current and
former directors and officers, and Vitria will assign to the plaintiff class or its designee certain claims that Vitria may have against the underwriters of our IPO. In addition, the tentative settlement guarantees that, in the event that the
plaintiffs recover less than $1.0 billion in settlement or judgment against the underwriter defendants in the IPO-related lawsuits, the plaintiffs will be entitled to recover the difference between the actual recovery and $1.0 billion from the
insurers for the Issuers. Although Vitria has approved this settlement proposal in principle, it remains subject to a number of procedural conditions, as well as formal approval by the court. If approved, there will be no cash or other payment from
Vitria to the plaintiff class or any other parties.



In
February 2003, Vitria and certain of our 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 Florida, captioned Liu v. Credit Suisse First
Boston Corporation (CSFB), et al., Case No. 03-20459. In the complaint, the plaintiffs allege that CSFB knowingly conspired with dozens of issuers, including Vitria, to conduct initial public offerings based on misinformation about
our future prospects and the proper pricing of their shares, in violation of the anti-fraud provisions of section 10(b) of the Securities Exchange Act of 1934. The complaint sought unspecified monetary damages and other relief. In June 2003, the
plaintiffs filed an amended complaint which voluntarily dismissed Vitria and our officers and directors from the action without prejudice. This dismissal was reaffirmed in two orders issued by the court in July 2003. Accordingly, neither Vitria nor
any of our officers and directors remains a party to this action.



With the exception of the above lawsuits, we are not currently party to any other material pending legal proceedings, except routine legal proceedings arising in the ordinary course of and incidental to our business. We do not believe that
these other proceedings, individually or collectively, will harm our business.



Item 2. Changes in Securities and Use of Proceeds



None.



Item 3. Defaults Upon Senior Securities



None.



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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 2003 our Audit Committee did not approve any non-audit services to be performed by Ernst & Young LLP.



Item 6. Exhibits and Reports on Form 8-K



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



|             | 
|------------ | 
|Exhibit 31.1 | 
|             | 
|Exhibit 31.2 | 
|             | 
|Exhibit 32.1 | 
|             | 
|Exhibit 32.2 | 

---

|* |  | The certifications attached as Exhibit 32.1 and Exhibit 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.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Vitria filed a Current Report on Form 8-K, dated July 30, 2003, on August 1, 2003, reporting under Item 12. Disclosure of Results of Operations and
Financial Condition, its results for the six months ended June 30, 2003.



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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 13, 2003 |  |  |  | By: |  | /s/ JEFFREY J. BAIRSTOW
|                        |  |  |  |     |  |                        



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