<PAGE>

================================================================================
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                ----------------
                                   FORM 10-Q
                                ----------------

                                   (Mark One)

        [X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934.

                 For the quarterly period ended March 31, 2001

                                      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

                            VITRIA TECHNOLOGY, INC.
             (Exact Name of Registrant as Specified in Its Charter)

               Delaware                               77-0386311

        (State or Other Jurisdiction of                (I.R.S. Employer
        Incorporation or Organization)               Identification No.)

                               945 Stewart Drive
                          Sunnyvale, California 94086
                                 (408) 212-2700
   (Address, including Zip Code, of Registrant's Principal Executive Offices
            and Registrant's Telephone Number, including Area Code)

                                ----------------

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]

     The number of shares of Vitria's common stock, $0.001 par value,
outstanding as of April 30, 2001 was 129,492,686 shares.

                                       1
<PAGE>

VITRIA TECHNOLOGY, INC.
<TABLE>
<CAPTION>
Index                                                                              Page
<S>                                                                                <C>
PART I:  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements and Notes

         Condensed Consolidated Balance Sheets at March 31, 2001 and
             December 31, 2000                                                        3

         Condensed Consolidated Statements of Operations for the three months
             ended March 31, 2001 and March 31, 2000                                  4

         Condensed Consolidated Statements of Cash Flows for the three months
             ended March 31, 2001 and March 31, 2000                                  5

         Notes to the Condensed Consolidated Financial Statements                     6

Item 2:  Management's Discussion and Analysis of Financial Condition and Results
             of Operations                                                            9

Item 3:  Quantitative and Qualitative Disclosures About Market Risk                  15

PART II: Other Information

Item 1:  Legal Proceedings                                                           25

Item 2:  Changes in Securities and Uses of Proceeds                                  25

Item 3:  Defaults Upon Senior Securities                                             25

Item 4:  Submission of Matters to a Vote of Security Holders                         25

Item 5:  Other Information                                                           25

Item 6:  Exhibits and Reports on Form 8-K                                            25

Signature                                                                            26
</TABLE>

                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

   ITEM 1.  Financial Statements

<TABLE>
<CAPTION>
                                         Vitria Technology, Inc.
                                  Condensed Consolidated Balance Sheets
                                             (in thousands)


                                                               March 31,                 December 31,
                                                                 2001                        2000
                                                            ---------------            ---------------
                                                              (unaudited)                (See Note 1)
<S>                                                      <C>                         <C>
                                    Assets
   Current Assets:
       Cash and cash equivalents                            $      125,697             $      154,826
       Short-term investments                                       90,564                     69,312
       Accounts receivable, net                                     32,166                     36,889
       Other current assets                                         12,699                      9,138
                                                            ---------------            ---------------
          Total current assets                                     261,126                    270,165

   Restricted investments                                           18,537                     18,757
   Property and equipment, net                                      16,546                     15,164
   Other assets                                                      6,229                      6,106
                                                            ---------------            ---------------
          Total Assets                                      $      302,438             $      310,192
                                                            ===============            ===============

                 Liabilities and Stockholders' Equity
   Current liabilities:
       Accounts payable                                     $        4,177             $        1,396
       Accrued payroll and related                                  15,191                     14,882
       Other accrued liabilities                                    10,093                     10,158
       Deferred revenue                                             43,409                     46,611
                                                            ---------------            ---------------
          Total current liabilities                                 72,870                     73,047

   Commitments
   Stockholders' Equity:
       Common Stock                                                    128                        128
       Additional paid-in capital                                  266,860                    266,591
       Accumulated other comprehensive loss                           (115)                       (68)
       Unearned stock-based compensation                            (2,922)                    (3,603)
       Notes receivable from stockholders                             (291)                      (291)
       Accumulated deficit                                         (34,092)                   (25,612)
                                                            ---------------            ---------------
          Total stockholders' equity                               229,568                    237,145
                                                            ---------------            ---------------
          Total liabilities and stockholders' equity        $      302,438             $      310,192
                                                            ===============            ===============

</TABLE>

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

                                       3
<PAGE>

                            Vitria Technology, Inc.
                Condensed Consolidated Statements of Operations
                   (In thousands, except per share amounts)
                                  (unaudited)
<TABLE>
<CAPTION>

                                                                                       Three Months Ended
                                                                                            March 31,
                                                                                    2001               2000
                                                                              ----------------    ---------------
<S>                                                                        <C>                    <C>
   Revenues:
       License                                                                $        20,861     $       16,318
       Service and other                                                               14,477              4,217
                                                                              ----------------    ---------------
          Total revenues                                                               35,338             20,535
                                                                              ----------------    ---------------
   Cost of revenues:
       License                                                                            325                383
       Service and other                                                                8,224              3,693
                                                                              ----------------    ---------------
          Total cost of revenues                                                        8,549              4,076
                                                                              ----------------    ---------------
          Gross profit                                                                 26,789             16,459
                                                                              ----------------    ---------------
   Operating expenses:
       Sales and marketing                                                             24,208             11,662
       Research and development                                                         9,782              5,282
       General and administrative                                                       3,845              2,189
       Amortization of stock-based compensation                                           563              1,064
                                                                              ----------------    ---------------
          Total operating expenses                                                     38,398             20,197
                                                                              ----------------    ---------------

   Loss from operations                                                               (11,609)            (3,738)
   Interest income                                                                      3,507              1,913
   Other expenses, net                                                                   (138)                --
                                                                              ----------------    ---------------
   Net loss before income taxes                                                        (8,240)            (1,825)

   Provision for income taxes                                                             240                 --
                                                                              ----------------    ---------------
   Net loss                                                                   $        (8,480)    $       (1,825)
                                                                              ================    ===============
   Basic and diluted net loss per share                                       $         (0.07)    $        (0.02)
                                                                              ================    ===============

   Weighted average shares used in computing basic
       and diluted net loss per share                                                 125,208            119,557
                                                                              ================    ===============


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

</TABLE>



                                                4
<PAGE>

<TABLE>
<CAPTION>
                                   Vitria Technology, Inc.
                       Condensed Consolidated Statements of Cash Flows
                                        (in thousands)
                                         (unaudited)


                                                                                       Three months ended
                                                                                           March 31,
                                                                                    2001               2000
                                                                              ----------------    ---------------
<S>                                                                        <C>                  <C>
   Operating activities:
       Net loss                                                               $        (8,480)    $       (1,825)
       Adjustments to reconcile net loss to net cash
         provided by (used in) operating activities:
          Depreciation                                                                  1,366                545
          Amortization of deferred stock-based compensation                               681              1,064
          Provision for doubtful accounts                                                   -                543
          Changes in assets & liabilities:
            Accounts receivable                                                         4,723            (12,363)
            Other current assets                                                       (3,561)            (4,828)
            Other assets                                                                 (123)               (44)
            Accounts payable                                                            2,781                261
            Accrued liabilities                                                           244              5,368
            Deferred revenue                                                           (3,202)            23,285
                                                                              ----------------    ---------------
              Net cash provided by (used in) operating activities                      (5,571)            12,006
                                                                              ----------------    ---------------

   Investing activities:
       Purchases of property and equipment                                             (2,748)            (1,542)
       Purchases of investments                                                      (101,028)           (73,416)
       Proceeds from maturities of investments                                         80,062             27,577
                                                                              ----------------    ---------------
              Net cash used in investing activities                                   (23,714)           (47,381)
                                                                              ----------------    ---------------
   Financing activities:
       Issuance of common stock, net                                                      269            171,180
                                                                              ----------------    ---------------
              Net cash provided by financing activities                                   269            171,180
                                                                              ----------------    ---------------
   Effect of exchange rates on changes on cash and cash equivalents                      (113)                (7)
                                                                              ----------------    ---------------
   Net increase (decrease) in cash and cash equivalents                               (29,129)           135,798

   Cash and cash equivalents at beginning of period                                   154,826             52,218
                                                                              ----------------    ---------------
   Cash and cash equivalents at end of period                                 $       125,697     $      188,016
                                                                              ================    ===============
</TABLE>

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

                                       5
<PAGE>

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, 2000 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, 2000.   The results of Vitria's operations for any interim period
are not necessarily indicative of the results of our operations for any other
interim period or for a full fiscal year.

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


2)  Net Loss Per Share

     We compute net loss per share in accordance with SFAS No. 128, "Earnings
Per Share".  Basic earnings per share is calculated by dividing net loss by the
weighted-average number of shares of common stock outstanding.  Basic earnings
per share does not include shares subject to Vitria's right of repurchase, which
lapses ratably over the related vesting term.  Diluted earnings 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 the
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):

<TABLE>
<CAPTION>
                                                                                Three months ended
                                                                          March 31,            March 31,
                                                                            2001                 2000
                                                                     ----------------      ----------------
<S>                                                                <C>                   <C>
Numerator:

Net loss                                                             $        (8,480)      $        (1,825)
                                                                     ================      ================

Denominator:
   Weighted average shares of common stock                                   128,400               125,247
   Less weighted shares subject to repurchase                                 (3,192)               (5,690)
                                                                     ----------------      ----------------
Denominator for basic and diluted calculation                                125,208               119,557
                                                                     ================      ================

Basic and diluted net loss per share:                                $         (0.07)      $         (0.02)
                                                                     ================      ================

</TABLE>

                                       6
<PAGE>

     For the three months ended March 31, 2001 and March 31, 2000, shares of
potential common stock totaled 10,115,000 and 19,683,000, respectively and
reflect shares under employee stock options.  Shares of potential common stock
are excluded from the determination of diluted net loss per share as the effect
of such shares on a weighted average basis is anti-dilutive.


3)  Comprehensive Loss

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

<TABLE>
<CAPTION>
                                                                                Three months ended
                                                                          March 31,            March 31,
                                                                            2001                 2000
                                                                     ----------------      ----------------
<S>                                                                <C>                   <C>
Net loss                                                             $        (8,480)      $        (1,825)

Other comprehensive income (loss):
   Foreign currency translation adjustment                                      (113)                   (7)
   Unrealized loss on securities                                                  66                    --
                                                                     ----------------      ----------------

Comprehensive loss                                                   $        (8,527)      $        (1,832)
                                                                     ================      ================

4)  Unearned Stock-Based Compensation

     The breakdown of the amortization of stock-based compensation is as follows
(in thousands):

                                                                                Three months ended
                                                                                     March 31,
                                                                            2001                2000
                                                                     ----------------      ----------------
Cost of revenues                                                     $            45       $            84
Sales and marketing                                                              215                   407
Research and development                                                         203                   384
General and administrative                                                       100                   189
                                                                     ----------------      ----------------

Total amortization of stock-based compensation                       $           563       $         1,064
                                                                     ================      ================
</TABLE>


5)  Accounts Receivable

     At March 31, 2001 our gross accounts receivable balance was $35.7 million.
Of this balance, 38% or $13.7 million represents revenue that has not yet been
recognized and is included in the deferred revenue balance. At March 31, 2001,
our deferred revenue balance was $43.4 million. Of this balance, 3%, or $1.4
million has been deferred due to customer credit issues. In accordance with the
provisions of SOP 97-2, Vitria records revenue from software licenses when the
following criteria have been met: a license agreement has been signed by both
parties, the fee is fixed or determinable, collection of the fee is probable and
delivery of the product has occurred. In those cases where

                                       7
<PAGE>

all other elements for revenue recognition have been met except customer credit
criteria, we defer recognizing revenue until the customer pays or other evidence
of probability of collection is obtained.

6)  Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities," or "SFAS 133," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133, as amended, was adopted by Vitria
on January 1, 2001 and did not have a material impact on our results of
operations, financial position or cash flows.  We currently hold no derivative
financial instruments and do not currently engage in hedging activities.

7)  Stock Option Exchange Program

     On February 28, 2001, Vitria's Board of Directors approved a voluntary
stock option exchange program for certain of our employees. Under the program,
employees had the opportunity to cancel outstanding stock options granted to
them on or after September 17, 1999 in exchange for a new option grant for an
equal number of shares to be granted between October 5, 2001 and November 5,
2001. The program terminated on April 4, 2001. A total of 4,470,350 options were
cancelled in connection with the option exchange. The exercise price of the new
options will be based on the market price of Vitria's common stock as reported
on the Nasdaq National Market on the day before the new options are granted.
Members of our Board of Directors, executive officers and vice presidents were
not eligible to participate in this program.

8)  Subsequent Event

     On March 25, 2001, Vitria entered into an agreement to acquire XMLSolutions
Corporation, a provider of EDI and XML transformation technology headquartered
in McLean, Virginia. On April 11, 2001, we completed the acquisition and
XMLSolutions became a wholly-owned subsidiary of Vitria. The total purchase
price was approximately $15.7 million, of which approximately $7.0 million was
paid to preferred shareholders and approximately $8.7 million reflected short-
term debt and other liabilities of XMLSolutions, cash advanced to fund
expenses, and estimated transaction costs and expenses. The acquisition will
be accounted for using the purchase method of accounting.

                                       8
<PAGE>

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

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

OVERVIEW

     We are a leading integration server provider. Our product,
BusinessWare(TM), provides the infrastructure that enables incompatible
information technology, or IT, systems to exchange information over corporate
networks and the Internet. BusinessWare enables this exchange to take place
automatically, without human intervention. This eliminates manual entry of
information into multiple IT systems and eliminates the need to manually
exchange information with customers and business partners.

     We derive revenues primarily from two sources:  licenses and services and
other.  Since the introduction of our product in 1997, licenses have become our
primary source of revenues.  Our product is typically licensed directly to
customers for a perpetual term, with pricing based on the number of systems or
applications managed. We record license revenues when a license agreement has
been signed by both parties, the fee is fixed or determinable, collection of the
fee is probable, and delivery of our product has occurred. For electronic
transmissions, we consider our product to have been delivered when the access
code to download the software from the Internet has been provided to the
customer.

     Service and other revenues include product maintenance, consulting and
training. Customers who license BusinessWare normally purchase maintenance
contracts. These contracts provide for unspecified software upgrades and
technical support over a specified term, 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 basis and recognized as
the classes are attended.

     We market our product through our direct sales force and augment our sales
efforts through relationships with system integrators, value-added resellers and
technology vendors.   While our revenues to date have been derived primarily
from accounts in the United States, we opened an office in Singapore in the
first quarter of 2001 and in Japan, Australia, France, Germany, Italy, The
Netherlands in 2000, and plan to expand further in Europe and Asia.

     During the three months ended March 31, 2001, we recognized approximately
28% of our revenues from customers outside the United States.  We believe
international revenues will become a more significant component of our total
revenue as our operations grow.  To date, we have not experienced significant
seasonality of revenues.   We expect future results may be affected by the
fiscal or quarterly budget cycle of our customers.

     Sales to our ten largest customers accounted for 35% of total revenues in
the three months ended March 31, 2001 and 45% of total revenues in the three
months ended March 31, 2000.  However, no one single customer

                                       9
<PAGE>

accounted for more than 10% of total revenues in the three months ended March
31, 2001 or in the three months ended March 31, 2000. While our dependence on
any single customer has been declining over the past three years, we expect that
revenues from a limited number of customers will continue to account for a large
percentage of total revenues in future quarters. As a result, the loss or delay
of individual orders can have a significant impact on our revenues. Our ability
to attract new customers will depend on a variety of factors, including the
reliability, security, scalability and cost-effectiveness of our products.

     During fiscal year 2001, revenues are expected to grow at a much slower
pace than in fiscal year 2000 due to the ongoing slowdown in the
telecommunications industry combined with a general slowdown in IT spending in
other vertical markets.

     We have a limited operating history that makes it difficult to predict
future operating results. We believe our success requires expanding our customer
base and continuing to enhance our BusinessWare products. We intend to continue
to invest significantly in sales, marketing and research and development and
expect to incur operating losses for at least the next four quarters.  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.  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 will depend on many factors, including, but not limited
to, 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;
     .    actions taken by our competitors, including new product introductions
          and pricing changes;
     .    costs of maintaining and expanding our operations;
     .    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;
     .    customer budget cycles and changes in these budget cycles;
     .    availability of customer funds for software purchases given external
          economic factors; and
     .    costs related to acquisition of technologies or businesses;
     .    ability to successfully integrate acquisitions.

     As a result of these factors, period-to-period comparisons of our results
of operations should not be relied upon as indications of future performances.
It is likely that in some

                                       10
<PAGE>

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.

     For a more comprehensive discussion of risks, see "Business Risks"
immediately following Item 3 in Part I hereof.


RESULTS OF OPERATIONS
For the three months ended March 31, 2001 and 2000

     The following table sets forth the results of operations for the three
months ended March 31, 2001 and March 31, 2000 expressed as a percentage of
total revenues.

<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                       March 31,
                                                                                 2001              2000
                                                                               -------            -------
<S>                                                                         <C>                 <C>
Revenues
  License                                                                          59%                80%
  Service and other                                                                41%                20%
                                                                               -------            -------
Total Revenues                                                                    100%               100%

Cost of revenues
  License                                                                           1%                 2%
  Service and other                                                                23%                18%
                                                                               -------            -------
Total cost of revenues                                                             24%                20%
                                                                               -------            -------

Gross profit                                                                       76%                80%

Operating expenses
  Sales and marketing                                                              68%                57%
  Research and development                                                         28%                25%
  General and administrative                                                       11%                11%
  Amortization of stock-based compensation                                          2%                 5%
                                                                               -------            -------
Total operating expenses                                                          109%                98%

Loss from operations                                                              (33)%             (18)%
  Interest income                                                                  10%                 9%
  Other expenses, net                                                               0%                --
                                                                               -------            -------

Net loss before income taxes                                                      (23)%              (9)%
  Provision for income taxes                                                         1%                --
                                                                                -------           -------

Net loss                                                                          (24)%              (9)%
                                                                                =======           =======
</TABLE>

                                       11
<PAGE>

REVENUES

     LICENSE. License revenues increased 28% to $20.9 million in the three
months ended March 31, 2001 from $16.3 million in the three months ended March
31, 2000. This increase was the result of the growth in the number of licenses
and a higher average transaction size. Our average transaction size has
increased due to larger deployments by some of our customers. During fiscal year
2001, revenues are expected to grow at a much slower pace than they grew in
fiscal 2000, primarily due to the ongoing slowdown in the telecommunications
industry combined with a general slowdown in information technology spending in
other vertical markets.

     SERVICE AND OTHER.  Service and other revenues increased 243% to $14.5
million in the three months ended March 31, 2001 from $4.2 million in the three
months ended March 31, 2000. This increase is primarily due to the growth of
maintenance, support and consulting revenues associated with license agreements
signed in earlier periods. We expect these service revenues to continue to
increase as we support new deployments of our products.


COST OF REVENUES

     LICENSE. Cost of license revenues consists of royalty payments to third
parties for technology incorporated into our products. These costs vary from
quarter to quarter, dependent upon the sales of products which incorporate
third-party technology. Cost of license revenues decreased 15% for the three
months ended March 31, 2000 to $325,000 as compared to $383,000 for the same
three months in the prior fiscal year. This decrease is due to a lower level of
sales of products which incorporate third-party technology in the three months
ended March 31, 2001 than in the three months ended March 31, 2000. We expect
the cost of license revenue to continue to increase. However, as a percentage of
license revenue, we do not expect any significant variation in the cost of
license revenues from the past two years.

     SERVICE AND OTHER. Cost of service revenues consists of salaries, facility
costs, travel expenses and payments to third party consultants incurred in
providing customer support, training and implementation services. Cost of
service and other revenues were $8.2 million in the three months ended March 31,
2001, an increase of 123% over cost of service and other revenues of $3.7
million in the three months ended March 31, 2000. The increase resulted from
hiring additional support, training and implementation personnel, higher travel
expenses associated with an increased number of customer implementations, and
increased facility costs associated with hiring additional personnel. We expect
that cost of service and other revenues will continue to increase in dollar
amount as we continue to expand our customer support organization to meet
anticipated customer demand. The gross margin on service and other revenues as a
percentage of revenue increased to 43% in the three months ended March 31, 2001
from 12% in the three months ended March 31, 2000. This is mainly due to an
increase in service and other revenues in the quarter ended March 31, 2001. All
components of service and other revenues increased in the current quarter.
However, the largest increase was in support revenue, which is due to a larger
installed base of licenses with support agreements and, to a lesser extent, an
increase in support renewals.


OPERATING EXPENSES

     SALES AND MARKETING. Sales and marketing expenses consist of salaries,
commissions, field office expenses, travel and promotional expenses. During the
three months ended March 31, 2001, sales and marketing expenses were $24.2
million, an increase of 108% over sales and marketing expenses of $11.7 million
for the three months ended March 31, 2000. This increase resulted from hiring
additional sales and marketing personnel, increased commission expense driven by
the growth in revenues, increased facilities costs as we expanded our domestic
and international field offices, and higher travel expenses associated with our
expanded sales force. As a percentage of revenue, sales and marketing expenses
increased to 68% in the three months ended March 31, 2001 from 57% in the three
months ended March 31, 2000. This increase as a percentage of revenue is due to
the fact that our sales and

                                       12
<PAGE>

marketing structure has been established to support a higher revenue base than
we actually experienced in the quarter ended March 31, 2001. We believe that our
sales and marketing expenses will continue to increase as we build out key
strategic elements of our sales and marketing infrastructure, establish
additional U.S. and international sales offices and increase promotional
activities.

     RESEARCH AND DEVELOPMENT.  Research and development expenses include costs
associated with the development of new products, enhancements to existing
products, and quality assurance activities. These costs consist primarily of
employee salaries, benefits, and the cost of consulting resources that
supplement the internal development team. Costs of developing software for
external use that may have been eligible for capitalization have not been
material and we have expensed all of these costs as incurred. During the three
months ended March 31, 2001, research and development expenses were $9.8
million, an increase of 85% over research and development expenses of $5.3
million for the three months ended March 31, 2000. This increase was primarily
the result of higher salary expenses related to hiring additional research and
development personnel and higher facilities and overhead costs associated with
the increase in personnel. We anticipate that we will continue to devote
substantial resources to research and development and that these expenses will
continue to increase in dollar amounts.

     GENERAL AND ADMINISTRATIVE.  General and administrative expenses consist of
salaries for administrative, executive and finance personnel, information
systems costs, outside professional service fees and allowances for doubtful
accounts. During the three months ended March 31, 2001, general and
administrative expenses were $3.8 million, an increase of 76% over general and
administrative expenses of $2.2 million for the three months ended March 31,
2000. The increase was attributable to an increase in personnel expense and an
increase in outside professional services hired to support our expanding
operations. We believe that our general and administrative expenses will
continue to increase in dollar amount as a result of our growing operations.

     AMORTIZATION OF STOCK-BASED COMPENSATION.  Deferred stock-based
compensation primarily represents the difference between the exercise price and
the deemed fair value of our common stock on the date certain stock options were
granted. This difference is amortized using the multiple option approach over a
five year period starting on the date the options were granted. Unearned
compensation expense will be reduced in future periods to the extent that
options are terminated prior to full vesting. During the three months ended
March 31, 2001, amortization of stock-based compensation was $563,000, a
decrease of 47% over amortization of stock-based compensation of $1.1 million
for the three months ended March 31, 2000. The decrease of this expense is due
to the timing of the option grants, the use of the multiple option approach and
employee terminations. This expense is expected to continue to decrease in
future periods.

     INTEREST AND OTHER INCOME.  Interest and other income increased by 76% to
$3.4 million in the three months ended March 31, 2001 from $1.9 million in the
three months ended March 31, 2000.  The increase was due to increased interest
income on the proceeds from our follow-on offering received in February 2000,
which, due to timing of the receipt of the funds, was not invested for the full
quarter in fiscal 2000.

PROVISION FOR INCOME TAXES


     We recorded an income tax provision of $240,000 in the three-month period
ended March 31, 2001.  The provision relates to income taxes currently payable
on income generated in non-US tax jurisdictions, state income taxes, and foreign
withholding taxes incurred on software license revenue.  We did not record an
income tax provision in the three-month period ended March 31, 2000 as we had
cumulative net operating losses in all tax jurisdictions.


LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2001, we had $125.7 million in cash and cash equivalents,
$90.6 million in short-term investments, and $188.3 million in

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<PAGE>

working capital with no outstanding long-term debt, compared to $154.8 million
in cash and cash equivalents, $69.3 million in short-term investments and $197.1
million in working capital with no outstanding long term debt at March 31, 2000.

     Net cash used in operating activities was $5.6 million for the three months
ended March 31, 2001 and was primarily due to our net loss, partially offset by
a decrease in accounts receivable. Net cash provided by operating activities was
$12.0 million for the three months ended March 31, 2000, primarily due to an
increase in deferred revenue, partially offset by an increase in accounts
receivable.

     Net cash used in investing activities was $23.7 million in the three months
ended March 31, 2001 and was primarily due to purchases of investments,
partially offset by maturities of investments. Net cash used in investing
activities was $47.4 million in the three months ended March 31, 2000, primarily
due to purchasing investments with the cash received from our September 1999
initial public offering and February 2000 follow-on offering.

     Net cash provided by financing activities was $269,000 in the three months
ended March 31, 2001 and was primarily from the issuance of common stock.  Net
cash provided by financing activities was $171.2 million in the three months
ended March 31, 2000 and was primarily from the net proceeds of our February
2000 follow-on public offering.

     At March 31, 2001, we had operating lease commitments of approximately $44
million.

     On April 11, 2001, Vitria completed its acquisition of XMLSolutions, a
Virginia corporation. The total purchase price was approximately $15.7 million,
of which approximately $7.0 million was paid to preferred shareholders and
approximately $8.7 million reflected short-term debt and other liabilities of
XMLSolutions, cash advanced to fund expenses, and estimated transaction costs
and expenses. The acquisition of XMLSolutions is not expected to have a material
effect on our liquidity and capital resources.

     We expect to experience a significant growth in our operating expenses for
the forseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses and planned capital expenditures will
constitute a material use of our cash resources. In addition, we may utilize
cash resources to fund acquisitions or investments in other businesses,
technologies or product lines. We believe that available cash, cash equivalents
and 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 ever
needed 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.

                                       14
<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     In the normal course of business, the financial position of Vitria is
routinely subjected to a variety of risks, including market risk associated with
interest rate movements and collectibility of accounts receivable.  We regularly
assess these risks and have established policies and business practices to
protect against the adverse effects of these and other potential exposures.  As
a result, we do not anticipate material losses in these areas.  As we expand our
operations internationally, we will also become subject to risks associated with
currency rate movements on non-U.S. dollar denominated assets and liabilities.

     We are exposed to interest rate risk on our investments of cash, cash
equivalents and marketable debt securities.  The primary objective of our
investment activities is to preserve principal while at the same time maximizing
yields without significantly increasing risk.  To achieve this objective, we
invest in highly liquid and high quality debt securities.  To minimize the
exposure due to adverse shifts in interest rates, we invest in short-term
securities with maturities of less than one year.  If a one percentage point
change in interest rates were to have occurred on March 31, 2001 or March 31,
2000, such a change would not have had a material effect on the fair value of
our investment portfolio as of that date.  Due to the nature of our short-term
investments, we have concluded that we do not have a material financial market
risk exposure.

Business Risks

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

     We were incorporated in October 1994. Until November 1997, we were engaged
primarily in research and development of our initial product. We licensed our
first product in November 1997. Because of our limited operating history, we
have limited insight into trends that may emerge in our market and affect our
business. The revenue and income potential of our market are unproven. As a
result of our limited operating history, we have limited financial data that you
can use to evaluate our business. You must consider our prospects in light of
the risks, expenses and challenges we might encounter because we are in the
early stages of development in a new and rapidly evolving market.

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

     We have incurred substantial losses since inception as we funded the
development of our products and the growth of our organization. We have an
accumulated deficit of $34.1 million as of March 31, 2001.  We intend to
continue investing heavily in sales, marketing and research and development. As
a result, we are likely to report future operating losses and cannot guarantee
we will report net income in the future.

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

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

     Our revenues for the first quarter ended March 31, 2001 reflected a
sequential decline from our revenues in the fourth quarter ended December 31,
2000. During fiscal year 2001, revenues are expected to grow at a much slower

                                       15
<PAGE>

pace than the growth rate in fiscal 2000.  This is due primarily to the ongoing
slowdown in the telecommunications industry combined with a general slowdown in
IT spending in other vertical markets.

     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 will depend primarily upon entering into new or
follow-on contracts to generate revenues for that quarter. New contracts may not
result in revenue in the quarter in which the contract was signed, and we may
not be able to predict accurately when revenues from these contracts will be
recognized.

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

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

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

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

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

     System integrators help our customers install and deploy our product. These
system integrators are not contractually required to implement our product, and
competition for these resources may preclude us from obtaining sufficient
resources to provide the necessary implementation services to support our needs.
If the number of installations of our product exceeds our access to the
resources provided by these system integrators, we will be required to provide
these services internally, which would significantly limit our ability to meet
our customers'

                                       16
<PAGE>

implementation needs and increase our expenses. In addition, we cannot control
the level and quality of service provided by our current and future
implementation partners.

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

     Sales to our ten largest customers accounted for 35% of total revenues in
the three months ended March 31, 2001.  Sales to our ten largest customers
accounted for 25% of total revenues in the fiscal year ended December 31, 2000.
Our license agreements do not generally provide for ongoing license payments.
Therefore, we expect that revenues from a limited number of customers will
continue to account for a significant percentage of total revenues in future
quarters. Our ability to attract new customers will depend on a variety of
factors, including the reliability, security, scalability, breadth and depth of
our products, and cost-effectiveness of our products. The loss or delay of
individual orders could have a significant impact on revenues and operating
results. Our failure to add new customers that make significant purchases of our
product and services would reduce our future revenues.

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

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

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

Failure of our current or potential Internet customers to receive necessary
funding could harm our business.

          Some of our customers include Internet companies.  Most privately and
publicly held Internet companies require outside cash sources to continue
operations.  To the extent additional funding is less available for Internet
companies as a result of a stock market decline or other factors, demand for our
products may decline significantly, thereby reducing our sales.   On sales we do
generate from Internet companies, we may need to defer recognizing revenue until
payment is received.

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

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

                                       17
<PAGE>

Our markets are highly competitive and, if we do not compete effectively, we may
suffer price reductions, reduced gross margins and loss of market share.

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

     B2Bi and EAI Vendors. We face direct and indirect competition from vendors
offering Business-to-Business Integration ("B2Bi") and Enterprise Application
Integration ("EAI"), as well as other aspects of our products. Some of these
vendors include BEA Systems, Inc., CrossWorlds Software, Inc., IBM Corporation,
Sybase, Inc., SeeBeyond Technology Corporation, Tibco Software, Inc., and
webMethods, Inc. In the future, some of these companies may expand their
products to enhance existing, or to provide, process automation and real-time
analysis functionality.  Additionally, in this fast-growing market, 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.

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

     Other Software Vendors. We may in the future also encounter competition
from major enterprise software developers including Oracle Corporation,
PeopleSoft, Inc., and SAP AG. In addition, Microsoft Corporation has announced
its intention to introduce products that could compete with some aspects of our
product. Other companies that target the enterprise software market may also try
to expand into the integration market.

     Many of our competitors have more resources and broader customer
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.

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 product, 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 product generally involves a significant commitment of capital
and other resources by a customer. This commitment often requires significant
technical review, assessment of competitive products, and approval at a number
of management levels within the customer's organization. Because of these
issues, our sales cycle has ranged from two to nine months and is difficult to
predict for any particular license transaction.

                                       18
<PAGE>

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 product is 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 product, or the failure by us or third-
party consultants to ensure customer satisfaction, could damage our reputation
with existing and future customers and reduce future revenues. In many cases,
our customers must interact with, modify, or replace significant elements of
their existing computer systems. The costs of our product and services represent
only a portion of the related hardware, software, development, training and
consulting costs. The significant involvement of third parties, including system
integrators, reduces the control we have over the implementation of our product
and the quality of customer service provided to organizations which license our
software.

If we are not successful in continuing to develop packaged versions of our
product, our ability to increase future revenues could be harmed.

     We have developed and intend to continue to develop packaged versions of
our product which incorporate business processes of specific industries,
including telecommunications, manufacturing, financial services and energy. This
presents technical challenges and will require collaboration with system
integrators and the commitment of significant resources. If we are not
successful in developing these targeted products or these products do not
achieve market acceptance, our ability to increase future revenues could be
harmed.

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

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

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

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

     .  our ability to integrate our product with multiple platforms and
        existing, or legacy, systems and to modify our product as new versions
        of packaged applications are introduced;

     .  the portability of our product, particularly the number of operating
        systems and databases that our product 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 product; and

     .  our management of software being developed by third parties for our
        customers or use with our product.

                                       19
<PAGE>

If we fail to introduce new versions and releases of our product 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 product. 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 product in anticipation of future releases. If customers defer material
orders in anticipation of new releases or new product introductions, our
revenues may decline.

Our product relies on third-party programming tools and applications. If we lose
access to these tools and applications, or are unable to modify our product 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 product contain errors or defects.

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

Our growth continues to place a significant strain on our management systems and
resources and if we fail to manage our growth our ability to market and sell our
product and develop new products may be harmed.

     We must plan and manage our growth effectively in order to offer our
product and services and achieve revenue growth and profitability in a rapidly
evolving market. Our growth has and will continue to place a significant strain
on our management systems and resources, and we may not be able to effectively
manage our growth in the future. For us to effectively manage our growth, we
must continue to do the following:

     .  install new management and information control systems; and

     .  expand, train and motivate our workforce.

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

                                       20
<PAGE>

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

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

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

     We depend on the continued service of our key technical, sales and senior
management personnel. None of these persons are bound by an employment
agreement. The loss of senior management or other key research, development,
sales and marketing personnel could have a material adverse effect on our future
operating results. In particular Dr. JoMei Chang, our President and Chief
Executive Officer, and Dr. M. Dale Skeen, our Chief Technology Officer, would be
difficult to replace.

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

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

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

Business-to-business electronic commerce networks, including Vitria's Business
Network, are at an early stage of development and market acceptance.

     We are in the second year of offering subscriptions to the Vitria Business
Network. The revenues associated may be a combination of license and/or annual
subscription fees. Our future prospects could be adversely impacted if the
Vitria Business Network is not commercially successful.

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

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

                                       21
<PAGE>

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 product 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, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no issued
patents. 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 product 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 product is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.

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

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

     .  we fail to provide the product or maintenance and support;

     .  we cease to do business without a successor; or

     .  there is a bankruptcy proceeding by or against Vitria.

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

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

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

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

     We have opened international offices in countries including the United
Kingdom, Japan, Germany, France, Italy, Canada, Australia, The Netherlands, and
Singapore and intend to establish additional international offices. 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 may not be able to efficiently integrate the operations of our acquisitions
which may harm our business.

     We recently acquired XMLSolutions Corporation, a provider of EDI and XML
technology.  We may make additional acquisitions of, or significant investments
in, businesses that offer complementary products, services,

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<PAGE>

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

Failure to raise additional capital or generate the significant capital
necessary to expand our operations and invest in new products could reduce our
ability to compete and result in lower revenues.

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

     .  develop or enhance our products and services;

     .  acquire technologies, products or businesses;

     .  expand operations, in the United States or internationally;

     .  hire, train and retain employees; or

     .  respond to competitive pressures or unanticipated capital requirements.

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

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

     In the past, securities class action litigation has often been brought
against a company following a decline in the market price of its securities.
This risk is especially acute for us because technology companies have
experienced greater than average stock price volatility in recent years and, as
a result, have been subject to, on average, a greater number of securities class
action claims than companies in other industries. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources, and could seriously harm
our business.

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 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.

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<PAGE>

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

                                       24
<PAGE>

                                    PART II
                               OTHER INFORMATION

Item 1.   Legal Proceedings.

     Vitria is currently a party to various legal actions arising out of the
normal course of business, none of which are expected to have a material adverse
effect on Vitria's financial position, results of operations, or cash flows.

     In April 2001, XMLSolutions Corporation received a letter from DISA, the
Data Interchange Standards Association, asserting a copyright claim with respect
to certain XMLSolutions' technology that we have now acquired as a result of our
acquisition of XMLSolutions. DISA indicated that if the matter is not resolved
to its satisfaction it will pursue all available remedies, including but not
limited to injunctive relief and damages. We believe that the asserted claim is
without merit. We cannot, however, assure that DISA will not commence formal
legal proceedings or that we will prevail in any such proceedings. If formal
legal proceedings are commenced, we intend to vigorously defend ourselves.

Item 2.  Changes in Securities and Use of Proceeds.

     None.

Item 3.  Defaults Upon Senior Securities.

     None.

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

     None.

Item 5.  Other Information.

     None.

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

a)  Exhibits

       10.12  Employment Agreement between Jay W. Shiveley III and Vitria dated
       April 9, 2001.

b)  Reports on Form 8-K

       On March 9, 2001, Vitria filed a Current Report on Form 8-K, dated
       February 28, 2001.

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<PAGE>

                                   SIGNATURE

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:  May 15, 2001                By:   /s/ Paul R. Auvil, III

                                         Paul R. Auvil, III
                                         Vice President, Finance,
                                         and Chief Financial Officer
                                         (Principal Financial Officer)

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