VITRIA TECHNOLOGY INC, 10-Q, 2000-08-14

VITRIA TECHNOLOGY INC
10-Q, 2000-08-14
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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 June 30, 2000

[_] 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, $.001 par value, outstanding
as of July 31, 2000 was 127,568,245 shares.

1
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VITRIA TECHNOLOGY, INC.

Index

<TABLE>
<CAPTION>
Page
<S> <C>
PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements and Notes

Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 3

Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and June 30, 1999 4

Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and June 30, 1999 5

Notes to the Condensed Consolidated Financial Statements 6

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8

Item 3: Quantitative and Qualitative Disclosures About Market Risk 13

PART II: Other Information

Item 1: Legal Proceedings 24

Item 2: Changes in Securities and Uses of Proceeds 24

Item 3: Defaults Upon Senior Securities 24

Item 4: Submission of Matters to a Vote of Security Holders 24

Item 5: Other Information 24

Item 6: Exhibits and Reports on Form 8-K 24

Signature 25
</TABLE>

2
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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Vitria Technology, Inc.
Condensed Consolidated Balance Sheets
(in thousands)

<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 156,482 $ 52,218
Short term investments 69,731 13,231
Accounts receivable, net 41,942 11,443
Other current assets 11,965 4,389
------------ ------------
Total current assets 280,120 81,281

Restricted investments 17,427 -
Property and equipment, net 8,114 4,452
Other assets 914 761
------------ ------------
Total Assets $ 306,575 $ 86,494
============ ============

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,459 $ 401
Accrued payroll and related 12,676 5,266
Accrued professional services 3,436 1,191
Other accrued liabilities 8,953 4,559
Deferred revenue 47,596 15,627
------------ ------------
Total current liabilities 74,120 27,044

Stockholders' Equity:
Common Stock 128 124
Additional paid-in capital 263,873 91,228
Accumulated other comprehensive income (loss) 27 (54)
Unearned stock-based compensation (5,151) (7,223)
Notes receivable from stockholders (291) (291)
Accumulated deficit (26,131) (24,334)
------------ ------------
Total stockholders' equity 232,455 59,450
------------ ------------

Total liabilities and stockholders' equity $ 306,575 $ 86,494
============ ============
</TABLE>

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

3
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Vitria Technology, Inc.
Condensed Consolidated Statement of Operations
(In thousands, except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
License $ 25,273 $ 3,691 $ 41,591 $ 7,178
Service 6,436 2,158 10,569 3,630
Government grant 44 450 128 700
---------- ---------- ---------- -----------
Total revenues 31,753 6,299 52,288 11,508

Cost of sales:
License 305 122 688 184
Service 4,526 1,360 8,135 2,654
Government grant 44 450 128 700
---------- ---------- ---------- -----------
Total cost of sales 4,875 1,932 8,951 3,538
---------- ---------- ---------- -----------
Gross profit 26,878 4,367 43,337 7,970

Operating expenses
Sales and marketing 19,859 3,890 31,521 6,779
Research and development 6,215 1,922 11,497 3,883
General and administrative 3,227 875 5,416 1,601
Amortization of stock-based compensation 976 1,085 2,040 1,952
---------- ---------- ---------- -----------
Total operating expenses 30,277 7,772 50,474 14,215
---------- ---------- ---------- -----------

Loss from operations (3,399) (3,405) (7,137) (6,245)
Other income, net 3,494 105 5,407 234
---------- ---------- ---------- -----------
Net income (loss) before income taxes 95 (3,300) (1,730) (6,011)

Provision for income taxes 67 0 67 0
---------- ---------- ---------- -----------

Net income (loss) 28 (3,300) (1,797) (6,011)

Deemed preferred stock dividend 0 (1,908) 0 (1,908)
---------- ---------- ---------- -----------

Net income (loss) available to common stockholders $ 28 $ (5,208) $ (1,797) $ (7,919)
========== ========== ========= ===========

Basic net income (loss) per share $ 0.00 $ (0.10) $ (0.01) $ (0.15)
========== ========== ========= ===========

Diluted income (loss) per share $ 0.00 $ (0.10) $ (0.01) $ (0.15)
========== ========== ========= ===========

Weighted average shares used in computing basic
net income (loss) per share 122,229 51,320 $ 120,894 52,392
========== ========== ========= ===========

Weighted average shares used in computing diluted
net income (loss) per share 139,657 51,320 120,894 52,392
========== ========== ========= ===========
</TABLE>

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

4
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Vitria Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, June 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,797) $ (6,011)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 1,135 420
Amortization of deferred stock-based compensation 2,040 199
Provision for doubtful accounts 717 1,952
Changes in assets & liabilities:
Accounts receivable (31,216) (1,966)
Other current assets (7,576) (1,639)
Other assets (153) (382)
Accounts payable 1,058 (730)
Accrued liabilities 14,049 2,458
Deferred revenue 31,969 5,806
---------------- ---------------
Net cash provided by operating activities 10,226 107
---------------- ---------------
Cash flows from investing activities
Net cash used in purchasing property and equipment (4,797) (1,769)
Net cash used in purchasing investments (127,467) -
Net cash provided from maturities of investments 53,602 -
---------------- ---------------
Net cash used in investing activities (78,662) (1,769)
---------------- ---------------
Cash flows from financing activities:
Issuance of convertible preferred stock, net - 4,934
Issuance of common stock, net 172,681 461
---------------- ---------------
Net cash provided by financing activities 172,681 5,395
---------------- ---------------

Effect of exchange rates on changes in cash and cash equivalents 19 -

Net increase in cash and cash equivalents 104,264 3,733

Cash and cash equivalents at beginning of period 52,218 12,792
---------------- ---------------
Cash and cash equivalents at end of period $ 156,482 $ 16,525
================ ===============
</TABLE>

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

5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim consolidated financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. In the Company's opinion, these condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, which the Company considers necessary to fairly
state the Company's financial position and the results of its operations and its
cash flows. The balance sheet at December 31, 1999 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 the Company's Annual Report
on Form 10-K for the year ended December 31, 1999. The results of the Company's
operations for any interim period are not necessarily indicative of the results
of the Company's operations for any other interim period or for a full fiscal
year.

2) Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share", and Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Basic earnings per share is calculated by dividing
net income (loss) available to common stockholders by the weighted-average
number of common shares outstanding. Basic earnings per share does not include
shares subject to the Company's right of repurchase, which lapses ratably over
the related vesting term. Diluted earnings per share is calculated by dividing
net income (loss) available to common stockholders by the weighted-average
number of common shares outstanding plus potential common shares. Potential
common shares are composed of common stock subject to the Company's right of
repurchase and common stock issuable upon the exercise of stock options,
warrants, convertible notes and preferred stock. The calculation of diluted net
loss per share excludes potential common shares if the effect is anti-dilutive.

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

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income (loss) per
share:
Net income (loss) $ 28 $ (3,300) $ (1,797) $ (6,011)
Deemed preferred stock dividends - (1,908) - (1,908)
------------- ---------- ------------- ----------
Numerator for basic and diluted net income (loss) per $ 28 $ (5,208) $ (1,797) $ (7,919)
share ============= =========== ============== ===========

Denominator for basic net income (loss) per share:
Weighted average shares available to common stock 127,636 61,107 126,443 59,824
Less shares subject to repurchase (5,407) (9,787) (5,549) (7,432)
------------- ---------- ------------- ----------

Denominator for basic net income (loss) per share 122,229 51,320 120,894 52,392
Dilutive potential common shares, using
treasury stock method 17,428 - - -
------------- ---------- ------------- ----------
Denominator for diluted net income (loss) per share 139,657 51,320 120,894 52,392
============= ========== ============= ==========

Basic net income (loss) per share $ 0.00 $ (0.10) $ (0.01) $ (0.15)
============== =========== ============== ===========
Diluted net income (loss) per share $ 0.00 $ (0.10) $ (0.01) $ (0.15)
============== ============ ============== ===========
</TABLE>

6
<PAGE>

3) Comprehensive Loss

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

Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 28 $ (5,208) $ (1,797) $ (7,919)

Other comprehensive income:
Foreign currency translation adjustment (11) - 27 -
Unrealized gain (loss) on securities (49) - 60 -
------------ ------------ ----------- -----------
Comprehensive loss $ (32) $ (5,208) $ (1,710) $ (7,919)
============ ============ =========== ===========
</TABLE>

4) Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133, as
amended, is effective for the Company's 2001 fiscal year. SFAS 133 establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company will adopt SFAS 133 in its quarter ending March 31, 2001 and does
not expect such adoption to have a significant impact on the Company's results
of operations, financial position or cash flows.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), and amended it in March and June 2000. The Company is required to adopt
the provision of SAB 101 in its fourth fiscal quarter of 2000. The Company is
currently reviewing the provisions of SAB 101 and has not fully assessed the
impact of its adoption.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"), which contains rules designed to clarify the
application of APB 25. FIN 44 is effective July 1, 2000 and will be adopted by
the Company at that date. The Company does not expect the adoption of FIN 44 to
have a significant impact on its results of operations, financial position or
cash flows.

5) Restricted investments

Certain of our investments are restricted from use in operations for the
purpose of securing standby letters of credit issued in conjunction with two
leased facilities whose leases extend, with varying expiration dates, through
April 2006 and for which the corresponding letters of credit extend through June
2006. These investments consist of commercial paper and certificates of deposit
with maturities of less than one year, which will be reinvested as they mature
in amounts then needed to support the letters of credit.

7
<PAGE>

6) Subsequent Event

In July 2000, the Company's stockholders approved an amendment to the
Company's restated certificate of incorporation to increase Vitria's
authorized number of shares of common stock from 250,000,000 to 600,000,000.

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. These statements relate to future events
or our future financial performance. In some cases, you can identify forward-
looking statements by terminology including "anticipates," "believes,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should" or "will" or the negative of these terms or
other comparable terminology. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks
outlined under "Business Risks," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.

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 provider of eBusiness infrastructure software. Our
product, BusinessWare, provides the infrastructure that enables incompatible
information technology 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.

Our revenues are derived primarily from license fees and services. 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 and 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. Payments received in
advance of revenue recognition are recorded as deferred revenue.

Service revenues include product maintenance, consulting and training.
Customers who license BusinessWare normally purchase maintenance contracts.
These contracts provide unspecified software upgrades and technical support over
a specified term, typically twelve months. Maintenance contracts are usually
paid in advance, and revenues from these contracts are recognized ratably over
the term of the contract.

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. We opened an office in the United Kingdom in June 1999,
offices in Japan, Germany, Canada and Australia in the first six months of 2000,
and plan to expand further into Europe and the Asia Pacific region throughout
the rest of this calendar year.

A relatively small number of customers account for a significant portion of
our total revenues. In 1999, sales to our ten largest customers accounted for
49% of total revenue. Sales to our ten largest customers accounted for 32% of
total revenues in the six months ended June 30, 2000 and 39% of total revenues
in the three months ended June 30, 2000. However, no one single customer
accounted for more than 10% of total revenue in the six months ended June

8
<PAGE>

30, 2000. As a result, the loss or delay of individual orders can have a
significant impact on our revenues. We expect that revenues from a limited
number of customers will continue to account for a large 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 and cost-
effectiveness of our products.

We have a limited operating history which makes it difficult to accurately
predict future operating results. We believe our success requires expanding our
customer base and continuing to enhance our BusinessWare products. We intend to
continue investing significantly in sales, marketing and research in order to
reach these goals. Our operating expenses are based on anticipated revenue
trends; 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 could result in unforeseen losses. Fees from contracts
that do not meet our revenue recognition policy requirements are recorded as
deferred revenues. While a portion of our revenues each quarter is derived 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
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 availability 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;

. costs related to acquisition of technologies or businesses.

9
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth the results of operations for the three
months ended June 30, 2000 and June 30, 1999 expressed as a percentage of total
revenues.

Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues
License 80% 59% 80% 62%
Service 20% 34% 20% 32%
Government grant 0% 7% 0% 6%
------- ------- ------- --------
Total Revenues 100% 100% 100% 100%

Cost of revenues
License 1% 2% 1% 2%
Service 14% 22% 16% 23%
Government grant 0% 7% 0% 6%
------- ------- ------- --------
Total cost of revenues 15% 31% 17% 31%

Gross profit 85% 69% 83% 69%

Operating expenses
Sales and marketing 63% 62% 60% 59%
Research and development 20% 30% 22% 34%
General and administrative 10% 14% 10% 14%
Amortization of stock-based 3% 17% 4% 17%
compensation
------- ------- ------- --------
Total operating expenses 96% 123% 96% 124%

Loss from operations (11%) (54%) (13%) (55%)
Other income, net 11% 2% 10% 2%
------- ------- ------- --------

Net income (loss) before income taxes 0% (52%) (3%) (53%)
Provision for income taxes 0% 0% 0% 0%
------- ------- ------- --------

Net income (loss) 0% (52%) (3%) (53%)
======= ======= ======= =========
</TABLE>

10
<PAGE>

Results of Operations
For the three and six months ended June 30, 2000 and 1999

REVENUES

LICENSE. License revenues increased 585% to $25.3 million in the three
months ended June 30, 2000 from $3.7 million in the three months ended June 30,
1999. License revenues increased to $41.6 million in the six months ended June
30, 2000 from $7.2 million in the six months ended June 30, 1999, an increase of
479%. This increase was the result of the growth in the number of licenses to
new customers and to a higher average transaction size. Our average transaction
size has increased over the prior year due to larger deployments by customers.

SERVICE. Service revenues increased 198% to $6.4 million in the three
months ended June 30, 2000 from $2.2 in the three months ended June 30, 1999.
Service revenues for the six months ended June 30, 2000 were 10.6 million, as
compared to $3.6 million for the six months ended June 30, 1999, an increase of
191%. This increase is 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.

GOVERNMENT GRANT. Government grant revenues decreased 90% to $44,000 in the
three months ended June 30, 2000 from $450,000 in the three months ended June
30, 1999. Government grant revenues decreased 82% to $128,000 for the six months
ended June 30, 2000 from $700,000 for the six months ended June 30, 1999. Our
government grant contracts ended in April, 2000. We do not expect to recognize
future government grant revenue except to the extent to which we have recorded
in deferred revenue.

COST OF REVENUES

LICENSE. Cost of license revenues consists of royalty payments to third
parties for technology incorporated into our product, which we began selling in
fiscal 1999. Cost of license revenues increased 150% for the three months ended
June 30, 2000 to $305,000 as compared to $122,000 for the same three months in
the prior fiscal year. Cost of license revenues increased 274% for the six
months ended June 30, 2000 to $688,000 as compared to $184,000 for the same six
month period in the prior fiscal year. The increase in cost of license revenues
was attributable to increased licenses of products which incorporate third party
technology. While we expect royalty costs to vary in future quarters as license
volume for products which incorporate third party technology fluctuates, cost of
license revenues has been three percent or less of total license revenue in all
periods in fiscal 1999 and fiscal 2000.

SERVICE. Cost of service revenues consists of salaries, facility costs, and
payments to third party consultants incurred in providing customer support,
training and implementation services. Cost of service revenues were $4.5 million
in the three months ended June 30, 2000, an increase of 233% over cost of
service revenues of $1.4 million for the three months ended June 30, 1999. Cost
of service revenues for the six months ended June 30, 2000 increased 207% to
$8.1 million, compared to $2.7 million for the six months ended June 30, 1999.
Service gross margins declined from 37% in the three months ended June 30, 1999
to 30% in the three months ended June 30, 2000. For the six months ended June
30, 2000, service gross margins declined slightly from 27% to 23% from the same
period in the prior year. The decrease in the gross margins was attributable to
the hiring of additional service personnel in anticipation of supporting a
larger customer base in future periods. In order to provide a high level of
service to our rapidly growing customer base, we plan to continue to make
significant investments in the services and support organizations. As a result,
we expect service gross margins to vary by several percentage points, depending
on our mix of revenues and the rate of investment in the services organization.

GOVERNMENT GRANT. Under the terms of the government grants, we receive
reimbursements only for costs incurred in connection with related research
activities. Consistent with the grant provisions, these charged costs are
exactly equal to the grant revenue recognized.

11
<PAGE>

OPERATING EXPENSES

SALES AND MARKETING EXPENSES. Sales and marketing expenses consist of
salaries, commission, field office expenses, travel and entertainment and
promotional activities. During the three months ended June 30, 2000, sales and
marketing expenses were $19.9 million, an increase of 411% over sales and
marketing expenses of $3.9 million for the three months ended June 30, 1999.
Sales and marketing expenses increased 365% for the six months ended June 30,
2000 to $31.5 million compared to $6.8 million for the six months ended June 30,
1999. The increase was attributable to the expansion of our direct sales force,
fees paid to partners assisting in closing new business and increased
promotional activity. We expect that sales and marketing expenses will continue
to increase as we continue to expand our sales and marketing efforts, 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. To date, all software development
costs have been expensed in the period incurred. During the three months ended
June 30, 2000, research and development expenses were $6.2 million, an increase
of 223% over research and development expenses of $1.9 million for the three
months ended June 30, 1999. Research and development expenses increased 196% to
$11.5 million for the six months ended June 30, 2000 compared to $3.9 million
for the six months ended June 30, 1999. The increase was attributable to an
increase in the number of research and development personnel and the increased
use of independent contractors. We anticipate that we will continue to devote
substantial resources to research and development and that these expenses will
continue to increase.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of salaries for administrative, executive and finance personnel, information
systems costs, professional service fees and allowances for doubtful accounts.
During the three months ended June 30, 2000, general and administrative expenses
were $3.2 million, an increase of 269% over general and administrative expenses
of $875,000 for the three months ended June 30, 1999. General and administrative
expenses increased 238% to $5.4 million for the six months ended June 30, 2000
compared to $1.6 million for the six months ended June 30, 1999. 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 as a result of
our growing operations and the expenses associated with operating as a public
company.

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 for future periods to the extent that options are
terminated prior to full vesting. During the three months ended June 30, 2000,
amortization of stock-based compensation expenses was $976,000, a decrease of
10% over amortization of stock-based compensation expenses of $1.1 million for
the three months ended June 30, 1999. For the six months ended June 30, 2000,
amortization of stock based compensation was essentially flat, increasing only
5% over the same six month period of the prior fiscal year. The decrease or
increase of this expense is due to the timing of the option grants, the use of
the multiple option approach and employee terminations. This expense, which
started to decrease in the three month period ended June 30, 2000, is expected
to continue to decrease in future periods.

OTHER INCOME, NET. Other income, net consists primarily of interest
income. Other income, net increased by 3,228% to $3.5 million in the three
months ended June 30, 2000 from $105,000 in the three months ended June 30, 1999
For the six months ended June 30, 2000, other income, net increased to $5.4
million from $234,000 in the same six month period of the prior year, an
increase of 2,211%. The increase was due to increased interest income on the
proceeds from our initial public offering in September 1999, and the follow-on
offering in February 2000.

12
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Provision for Income Taxes

We recorded an income tax provision of $67,000 in the three month period ended
June 30, 2000. The provision relates to income taxes currently payable on income
generated in non-US tax jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2000, we had $156.5 million in cash and cash equivalents,
$69.7 million in short-term investments, and $206.0 million in working capital
with no outstanding long-term debt.

Net cash generated from operating activities was $10.2 million for the six
months ended June 30, 2000. Net cash generated from operating activities was
$107,000 for the six months ended June 30, 1999. Compared with the same period a
year ago, net cash flows generated in operating activities in 2000 reflects a
decrease in net loss, an increase in accounts receivable, offset by an increase
in deferred revenue and an increase in accrued liabilities partially offset by
an increase in other current assets.

Net cash used in investing activities was $78.7 million in the six months
ended June 30, 2000 and $1.8 million in the three months ended June 30, 1999. Of
this increase in net cash used in investing activities, approximately $127.5
million is from purchasing investments with the cash received from our initial
and follow-on public offerings. Of the amount used for purchasing investments,
$17.4 million is restricted from use in operations to secure standby letters of
credit on two building leases, whose leases extend over the next six years. The
remainder of the increase is due to purchasing fixed assets. We expect that
capital expenditures will continue to increase to the extent we continue to
increase the number of people we employ and expand our operations.

Net cash generated from financing activities was $172.6 million in the six
months ended June 30, 2000, primarily from the issuance of common stock. Net
cash provided by financing activities was $5.4 million in the six months ended
June 30, 1999, primarily from net proceeds from the issuance of convertible
preferred stock.

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 and cash
equivalents will be sufficient to meet our working capital and operating expense
requirements for at least the next twelve months. Thereafter, 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. There can be no assurance
that this additional financing will be available, or if available, will be on
reasonable terms and not dilutive to our stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to interest rate risk on our investments of excess cash. The
primary objective of our investment activities is to preserve principal while at
the same 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 June 30, 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 the our short-term investments,
we have concluded that we do not have a material financial market risk exposure.

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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 at an early
stage of development in a new and rapidly evolving market.

ALTHOUGH WE REPORTED NET INCOME AVAILABLE TO STOCKHOLDERS, WE CANNOT GUARANTEE
WE WILL DO SO IN THE FUTURE.

Although we reported net income available to stockholders for the quarter
ended June 30, 2000, we continue to report losses from operations. We have
incurred substantial losses since inception as we funded the development of our
products and the growth of our organization. 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 recent 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. We
believe that period-to-period comparisons of our historical results of
operations are not a good predictor of our future performance.

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

Our quarterly results will depend primarily upon entering into new
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

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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, 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 stronger
relationships with these system integrators and, as a result, these system
integrators may be more likely to 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 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' 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 AND ARE LIKELY TO CONTINUE TO ACCOUNT
FOR A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES COULD DECLINE DUE TO THE
LOSS OR DELAY OF A SINGLE CUSTOMER ORDER.

Our license agreements do not generally provide for ongoing license
payments. Therefore, we expect that revenues from a limited number of new
customers will continue to account for a large percentage of total revenues in
future quarters. Our ability to attract new customers will depend on a variety
of factors, including the performance, quality, breadth and depth of our current
and future products. The loss or delay of individual orders could have a

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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 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:

EAI VENDORS. We face competition from vendors offering Enterprise
Application Integration, or EAI, software products. These vendors include Active
Software, Inc., CrossWorlds Software, Inc., and New Era of Networks, Inc., also
known as NEON. A number of other companies are offering products that address
different aspects of our solution, including Tibco Software, Inc., BEA Systems,
Inc., webMethods, Inc., Sun Microsystems, Inc., and IBM Corporation. In the
future, some of these companies may expand their products to enhance existing,
or to provide, process automation and real-time analysis functionality.

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 which could compete with some
aspects of our product. These companies have significantly greater resources
than Vitria.

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

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these issues, our sales cycle has ranged from two to nine months and is
difficult to predict for any particular license transaction.

THE COST AND DIFFICULTIES OF 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.

OUR SALES ARE CONCENTRATED IN THE TELECOMMUNICATIONS, SUPPLY CHAIN AND
FINANCIAL SERVICES 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, supply chain and financial services
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.

IF WE ARE NOT SUCCESSFUL IN DEVELOPING PACKAGED VERSIONS OF OUR PRODUCT, OUR
ABILITY TO INCREASE FUTURE REVENUES COULD BE HARMED.

We intend to develop packaged versions of our product which
incorporate business processes of specific industries, including
telecommunications, supply chain and financial services. 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.

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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.

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. In addition, we license technology related to the connectivity of
our product to third-party database and other applications. Loss of the ability
to use this technology, delays in upgrades, or failure of these third parties to
support these technologies 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.

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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. For example, we
discovered problems with respect to the ability of software written in Java to
run sufficiently fast to meet the needs of users in some high performance
applications. These errors have resulted in product release delays, delayed
revenues and customer dissatisfaction. 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. We continue to increase domestically the scope of our
operations, and have added a number of employees. For us to effectively manage
our growth, we must continue to do the following:

. improve our operational, financial and management controls;

. improve our reporting systems and procedures;

. install new management and information control systems; and

. expand, train and motivate our workforce.

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

IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, OUR 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 any of our senior management or other key

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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 early stages 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.

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.

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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.

We expect that third parties may claim that we have infringed their current
or future intellectual property rights. We expect that 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 recently opened offices in the United Kingdom, Japan, Germany,
Canada and Australia and intend to establish additional offices in Europe and
the Asia Pacific region. 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.

FAILURE OF OUR PROSPECTIVE INTERNET CUSTOMERS TO RECEIVE NECESSARY FUNDING COULD
HARM OUR BUSINESS.

Our targeted customers include rapidly growing 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 and thereby reduce our
revenues.

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.

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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 requiring that not all
members of the board may be elected at one time;

. authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding shares
and thwart a takeover attempt;

. prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;

. limitations on the ability of stockholders to call special meetings of
stockholders;

. prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and

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. establishing advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.

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

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PART II
OTHER INFORMATION

1. Legal Proceedings.

None.

2. Changes in Securities and Use of Proceeds

We commenced our initial public offering on September 16, 1999, pursuant to
a Registration Statement on Form S-1 (File No. 333-81297) declared effective on
September 16, 1999. The offering terminated following the sale of all securities
registered. The managing underwriters of the public offering were Credit Suisse
First Boston, Merril Lynch & Co., Robertson Stephens and SoundView Technology
Group (the "Underwriters"). In the offering, we sold an aggregate of 13,800,000
shares of our common stock for an initial price of $4.00 per share. The
aggregate proceeds from the offering were $55.2 million. We paid expenses of
approximately $5.2 million, of which approximately $3.9 million represented
underwriting discounts and commissions and approximately $1.5 million
represented expenses related to the offering. Net proceeds from the offering
were $50.0 million. As of June 30, 2000, we had applied $50.0 million of the
estimated net proceeds from our initial public offering to working capital.

No such payments were made to our directors or officers or their
associates, holders of 10% or more of any class of our equity securities or to
our affiliates, other than payments to officers for salaries in the ordinary
course of business.

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:

3.5 Certificate of Amendment of Restated Certificate of Incorporation of Vitria
Technology, Inc.

10.10 Lease agreement dated May 30, 2000 between Lattice Semiconductor
Corporation and Vitria Technology, Inc.

27.1 Financial Data Schedule

b) Reports on Form 8 K:

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

August 14, 2000 Vitria Technology, Inc.

By /s/ Paul R. Auvil, III
------------------
Paul R. Auvil, III
Vice President, Finance, and Chief Financial
Officer