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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

Commission file number 0-27207

VITRIA TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

945 Stewart Drive

Sunnyvale, CA 94085-3913

(Address, including zip code, of principal executive offices)

Registrant’s telephone number, includes area code:

(408) 212-2700

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

      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 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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004 was approximately: $61,701,000. Shares of common stock held by each executive officer and director and their affiliates as of June 30, 2004 have been excluded from this computation. The number of shares of common stock outstanding as of February 28, 2005 was 33,465,403.

DOCUMENTS INCORPORATED BY REFERENCE

      The Registrant has incorporated by reference into Part III hereof portions of its Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed by April 29, 2005.

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VITRIA TECHNOLOGY, INC.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

      This report on Form 10-K 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 business risks discussed on pages 27 through 35 of this report on Form 10-K. These business risks should be considered in evaluating our prospects and future financial performance.

PART I

Overview

      Vitria is a leading provider of business process integration software and services for corporations in healthcare and insurance, telecommunications, manufacturing, finance and other industries. Our software products orchestrate interactions between isolated software systems, automate manual process steps, facilitate both manual and automated resolution of process exceptions and manage data exchanges between companies. Our software products also provide operational staff and managers with real-time and historical views of individual transactions as well as of large-scale processes spanning multiple systems and organizations.

      Our customers use our software products to pursue new revenue opportunities, cut operating costs, reduce process cycle times, decrease process errors, improve customer service, increase supply chain efficiencies and more easily adapt their business processes to changing requirements and conditions.

      Our strategy is to help our customers manage complex business processes, particularly those that require enterprise-class reliability from their underlying software infrastructure. These targeted business processes typically use multiple software applications, involve a series of steps occurring over a period of time, include both system-to-system interactions and manual workflow and require end-to-end visibility. Our experience is that such process requirements are most common in Global 2000 companies in healthcare and insurance, telecommunications, manufacturing and finance, although we have customers in other industries as well.

      We execute our strategy in two ways. First, we offer a software platform for business process integration. Customers use our platform to create and deploy process and integration content (such as process models and data transformations) to meet their unique needs. Second, we offer pre-built process applications with our platform to support selected business processes in specific industries. By providing Vitria-built content based on industry standards and best practices, our applications are designed to reduce customer implementation time while providing an adaptable business process integration framework for meeting future needs.

Product Overview

      Vitria:BusinessWare is our business process integration platform and flagship product. It uses graphically modeled business process and integration logic as the foundation for orchestrating complex interactions among dissimilar software applications, databases, web services, people, and companies over corporate networks and the Internet. Our platform is typically used by information technology professionals to support complex business processes like order management and fulfillment, securities trades and insurance claims processing, supply chain management, and customer service.

      Vitria:BusinessWare includes a business process integration server and various options that extend the server’s capabilities. Some of these optional products enable connectivity to specific software applications, databases, and protocols. Other options provide additional capabilities for data transformation, process analysis and visualization, and trading partner management.

      As software and hardware technology advance, the market for our business process integration platform remains dynamic. New and improved packaged applications come to market, new technologies and industry standards gain acceptance, new competitors emerge, and existing competitors improve their products. In

addition, new government regulations affect software purchasing. Our market is also sensitive to macroeconomic conditions, which strongly influence corporate investments in new software and services.

      In 2004, we responded to these changing market conditions by enhancing our platform product. In March, we enabled Vitria:BusinessWare to run on the Linux operating system, which is increasingly used in Global 2000 companies. More notably, we released Vitria:BusinessWare version 4.3 in December. A key enhancement in this new version is its improved capabilities for enabling and managing Service-Oriented Architectures (SOA). SOA is an increasingly popular design philosophy for making software assets available as reusable services that can more easily be combined and orchestrated to support higher level business processes. We believe that our platform’s strengths in both integration and business process management position us to benefit from the SOA market trend in 2005, particularly when customers prefer extending use of their existing high-value software assets rather than replacing them.

      We believe that companies with complex business process integration needs prefer products that are easy to implement and administer, leverage their existing software infrastructure, and support common technology standards. For these reasons, Vitria:BusinessWare version 4.3 also includes improved capabilities for modeling workflow, data transformation, security administration and system monitoring. We plan additional platform enhancements to Vitria:BusinessWare in 2005.

      Selling our business process integration platform is only part of our market strategy. We also offer pre-built process applications that customers can run on our Vitria:BusinessWare platform. These applications provide Vitria-developed content for specific business processes in selected industries and are designed to be customized to meet a company’s unique needs. We have sold these applications to existing platform customers and to new customers that bought our applications along with our Vitria:BusinessWare platform.

      In 2004, we enhanced Vitria:OrderAccelerator, a pre-built process application for order lifecycle management in the telecommunications industry. This product builds on industry best practices endorsed by the TeleManagement Forum, a non-profit global organization that provides leadership, strategic guidance and practical solutions to improve the management and operation of information and communications services. One of our first customers for Vitria:OrderAccelerator has made a repeat purchase of the application for use in additional service regions.

      In addition, we enhanced Vitria:SmartClaims, our pre-built process application for life cycle management of health insurance claims. This product helps insurance companies and other healthcare payers automate claims-related processing steps that were previously performed manually. Vitria:SmartClaims also centralizes claim status information across multiple software systems involved in claims processing. In 2004, one of our first customers for Vitria:SmartClaims successfully completed its implementation of this application.

      Furthermore, we enhanced our HIPAA-compliant health insurance claims gateway product. Health insurance companies and claims processing clearinghouses use this pre-built process application product to receive, validate, disaggregate and route batches of insurance claims that are submitted electronically by hospitals and other healthcare providers. In 2004, a new customer for this product agreed to work with us to jointly develop additional capabilities relevant to insurance claims processing.

      As competition in the integration platform market increases in the years ahead, we expect our pre-built process applications to be an increasingly important source of license and services revenue. In 2005, we plan to develop at least one new pre-built process application for process exception management. In addition, we plan to develop a new application to help customers manage processes for receiving, validating, and distributing business documents sent by other companies. We also plan to continue enhancing our existing pre-built process applications.

Competition

      The markets for our platform products and pre-built process applications are characterized by evolving industry standards, rapid software and hardware technology developments and frequent new product introductions. Our success depends on how well we support our existing customers, enhance our current products, introduce differentiated new products, meet changing customer needs, respond to emerging

standards and technologies, market our products and services and effectively compete against other vendors in our market.

      We face intense competition from several types of competitors:

      Integration Product Suites offered by SeeBeyond, TIBCO Software, webMethods, IBM and other vendors that most closely resemble our own platform. Some such competitors complement their integration products with related offerings, such as applications servers and portals. We believe we can compete favorably against these vendors for opportunities where business process integration requirements are particularly complex, especially in telecommunications and other industries where we already have a large customer base and industry-specific expertise.

      Business Process Management (BPM) and workflow products offered by FileNet, Savvion, TIBCO Software, Intalio, Fuego and other vendors. Some of these competing products offer strong capabilities for process modeling, document management and managing human workflow. We believe we can compete favorably against these vendors when buyers need not only BPM and workflow but also high reliability and robust integration capabilities like transaction management and complex data transformation.

      Application Development Suites offered by BEA, IBM, Microsoft and other companies. Such products are most attractive to buyers that prefer using one vendor’s offerings for both application development and application integration. We believe we can compete favorably against these vendors when a buyer needs to focus more on integrating and orchestrating existing applications than on developing new ones and when buyers prefer a process-oriented approach to integration.

      Enterprise Service Buses offered by Sonic Software, Fiarano, PolarLake, and other companies. These products offer flexible and relatively low-cost solutions for transporting, routing, transforming and integrating data across a variety of software applications and data sources. We believe we can compete favorably against these vendors when a customer needs to focus more on orchestrating complex business processes than on data integration.

      Enterprise Application Suites offered by SAP, Oracle/ Peoplesoft, and other companies sometimes include integration capabilities that compete against our products. These products are most attractive when buyers need to integrate multiple software systems from the same application vendor. We believe we can compete favorably against these vendors when customers need to integrate and orchestrate existing applications from multiple vendors and prefer an application-neutral approach.

      Pre-integrated suites of industry-specific applications. Examples of such competitors include Telcordia in software for the telecommunications industry, Trizetto in software for the health insurance sector, Sungard in software for the financial services sector and other vendors. These competing products are particularly attractive to buyers who prefer replacing existing applications or buying new applications for a specific functional need. We believe we can compete favorably against these vendors when customers prefer to extend the use of their existing applications rather than replace them and are trying to solve a complex business process problem that is cross-functional in nature.

      Custom software development by a potential customer’s internal resources, off-shore contractors and system integrators. This approach may be attractive when few systems are involved, integration and process requirements are relatively simple and future modifications are not expected to be frequent or extensive. We believe we can compete favorably against this approach when integration needs are more complex, time to market is important and when significant future modifications, flexibility and re-use are expected.

Sales and Marketing

      We license our products and sell services through our direct sales organization and, in some regions, through several types of resellers. As of December 31, 2004, our sales force consisted of sales professionals and sales support consultants located in 16 offices throughout the world. Sales support consultants who provide pre-sales support to potential customers on product information and deployment capabilities complement our direct sales professionals.

      Our sales process requires that we work closely with targeted customers to identify short-term and long-term technical needs and business goals. Our sales team, which includes both sales and technical professionals,

then works with the customer to develop a proposal to address these needs. The level of customer analysis and financial commitment required for our products typically results in a sales cycle of six to nine months. We expect that future results may be affected by the fiscal or quarterly budgeting cycles of our customers.

      Our marketing efforts are focused on educating potential customers, generating new sales opportunities, and creating awareness of our various products. We conduct a variety of marketing programs to attract and educate prospects in our target market, including seminars, trade shows, direct contact campaigns, press relations and industry analyst programs.

Strategic Relationships

      To assist us in solving some aspects of our customers’ business problems, we have established relationships with system integrators and technology vendors.

      System Integrators. We work with leading consulting firms, including: Accenture, BearingPoint, Capgemini, and Deloitte Consulting. These consulting firms have deep relationships across a broad range of enterprise customers and extensive domain expertise. Through these relationships, we deliver comprehensive approaches for healthcare and insurance, telecommunications, manufacturing, finance and other industries.

      Technology Vendors. We collaborate with leading application software, database and hardware vendors to ensure compatibility of Vitria:BusinessWare with their software and hardware platforms. We have established strategic relationships with leading companies such as BEA, Crystal Decisions, Hewlett-Packard, IBM, ILOG, Microsoft, Sybase, Octetstring, Oracle/ PeopleSoft, Portal Software, Siebel Systems and Sun Microsystems. We conduct marketing and/or development activities with these vendors to deliver better products to our joint customers.

Service and Support

      Services are a significant part of our business. Our service offerings are all related to the use of Vitria products by our customers and partners and include consulting, training and support. We offer consulting services in the areas of project planning, architecture design, implementation, operational management and performance management. To assist customers and partners in using our software more effectively, we offer training classes at our facilities as well as at customer locations. Customers usually purchase support when they buy our software products. Support includes technical assistance via telephone and email, access to our technical support website, and software upgrades. Customers may renew their support for additional periods after the initial support term expires.

Research and Development

      We are concentrating our research and development efforts in two primary areas: 1) continued enhancement of our business process integration platform and 2) creating industry-specific pre-built process applications focused on solving customers’ process centric problems. Our strategy is to develop applications comprised of cross-industry frameworks that can be extended with industry-specific content customized as needed by our professional services team, system integrators or the customers themselves.

      Our research and development expenses were $17.5 million in 2004, $18.2 million in 2003, and $31.0 million in 2002. These investments represented 28%, 23%, and 32%, respectively, of total revenue for those years. We have also used offshore development partners in India and China to increase the productivity of our development efforts while decreasing our costs. In 2005 we will continue to focus on research and development investments in both our platform products and pre-built process applications.

Intellectual Property and Other Property Rights

      Our success depends on our ability to develop and protect our proprietary technology and intellectual property rights. We rely primarily on a combination of licensing provisions, confidentiality procedures, and the protections afforded by the law relating to patents, copyrights, trademarks and trade secrets to accomplish these goals.

      We typically license our software products pursuant to non-exclusive license agreements that govern and impose restrictions on our customers’ ability to utilize the software. In addition, we seek to avoid disclosing our trade secrets by taking steps that are customary in the industry, including but not limited to, requiring employees, customers and others with access to our proprietary information to execute confidentiality agreements with us and restricting access to our source code. We also seek to protect our software, documentation and other written materials under trade secret, patent and copyright laws.

      We pursue an active patent program. To date, we have been awarded five patents expiring between March 2017 and October 2021, relating to our technology, and we have numerous patent applications pending. It is possible that the patents we have received could be successfully challenged or invalidated, and that the patents we have applied for or our potential future patents will not be granted or may be successfully challenged. It is also possible that we may not develop additional proprietary products or technologies that are patentable, that any patent issued to us may not provide us with any competitive advantages, and that the patents of others will seriously harm our ability to do business.

      Despite our efforts to protect our proprietary rights, existing laws afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, there can be no assurance that we will be able to protect our proprietary rights against unauthorized third-party copying or use. Unauthorized use of our proprietary rights could materially harm our business. 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.

      It is also possible that third parties will claim that we have infringed their current or future intellectual property. We expect that software developers will increasingly be subject to infringement claims as the number of products in different industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, prevent product shipment, cause delays, or require us to enter into royalty or licensing agreements, any of which could harm our business. Patent litigation in particular involves complex technical issues and inherent uncertainties. In the event an infringement claim against us is successful and we could not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, our business could be harmed.

Employees

      As of December 31, 2004, we had a total of 285 employees. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

Financial Information by Business Segment and Geographic Data

      We operate in one business segment, business process integration solutions. We recognized approximately 47% of our revenue from customers located outside the United States in 2004 compared to approximately 38% in 2003 and approximately 35% in 2002. Revenue from the U.S. was approximately 53% of total revenue in 2004. Revenue from Canada and Japan each accounted for approximately 10% of total revenue in 2004. No other country accounted for more than 10% of revenue in 2004. No one country other than the U.S. accounted for more than 10% of revenue in 2003 or 2002. The information included in Note 1 (under the heading “Segment information”) and Note 13 of Notes to the Consolidated Financial Statements, is incorporated herein by reference from Item 8 of Part II hereof.

Executive Officers of the Registrant

      The executive officers of Vitria and their ages as of March 15, 2005 are as follows:

      M. Dale Skeen has been our Chief Executive Officer since April 2004. Dr. Skeen was named interim CEO by the Board in April 2004 and the Board made him permanent CEO in February 2005. Dr. Skeen, co-founded Vitria in 1994, has been a Director since Vitria’s inception and our Chief Technology Officer since 1994. From 1986 to 1994, Dr. Skeen served as Chief Scientist at TIBCO Software. From 1984 to 1986, Dr. Skeen was a research scientist at IBM’s Almaden Research Center. From 1981 to 1984, Dr. Skeen was on the faculty at Cornell University. Dr. Skeen holds a B.S. in Computer Science from North Carolina State University and a Ph.D. in Computer Science on Distributed Database Systems from the University of California, Berkeley.

      Gregory E. Anderson has been our Senior Vice President of Professional Services and Business Consulting since November 2003. From April 2000 to March 2003, Mr. Anderson served as a Partner in the Health Care Group at Deloitte Consulting, a management consultancy (now part of Deloitte & Touche LLP). From September 1996 to March 2000, Mr. Anderson served as a Partner in the Health Services Group at Andersen Consulting (now Accenture Ltd), a management consultancy. From 1980 to 1996, Mr. Anderson served in various management consulting positions at Deloitte & Touche Consulting Group, The Warner Group, and at Ernst & Whinney (now part of Capgemini). Mr. Anderson holds a B.A. in Business Administration from the University of Southern California and an M.B.A. from the University of California, Los Angeles.

      James A. Davis became our Executive Vice President of Operations in March 2005. From April 2004 to March 2005 Mr. Davis served as a partner with Atlanta International, an advisory company for international mergers and acquisitions in the software and IT industry. From January 2003 to April 2004, Mr. Davis served as Executive Vice President of Development at Sungard Brass, a division of Sungard Data Systems, a provider of software and processing solutions. From October 2001 to December 2002, he served as President and Chief Executive Officer at Sungard Global Marketing, a division of Sungard Data Systems. From July 1994 to October 2001 Mr. Davis worked for Hewlett-Packard, as General Manager of the Software Engineering Systems Division. Previously, Mr. Davis worked for Apple, Sun Microsystems, Digital Equipment and Burroughs Corp. Mr. Davis holds a B.A. in Business and Economics from Hendrix College, Conway, Arkansas.

      John N. Ounjian has been our Executive Vice President of Healthcare and Insurance since July 2004. From 1996 to June 2004, Mr. Ounjian served as Senior Vice President and Chief Information Officer of Blue Cross and Blue Shield of Minnesota, a health insurance provider. In 1996, Mr. Ounjian served as a Senior Principal in the healthcare consulting group of Technology Solutions Company. From 1994 to 1996, Mr. Ounjian was President of Technology Advisory Group. From 1989 to 1994, Mr. Ounjian served as the Senior Vice President, Technology Support Services of H.F. Ahmanson & Co./ Home Savings of America. From 1975 to 1989, Mr. Ounjian served as the Senior Vice President, Technical Services of Union Bank of California. From 1967 to 1975, Mr. Ounjian served as Vice President, Strategic Planning of First Interstate Bank. Mr. Ounjian holds a B.A. in Business Administration from California State University at Northridge.

      Michael D. Perry has been our Senior Vice President and Chief Financial Officer since June 2004. From April 2003 to February 2004, Mr. Perry served as Chief Financial Officer at Ride Data Managers, LLC, an operator of internet data centers and from February 2002 to April 2003, Mr. Perry served as Chief Financial Officer at LCF Enterprises, a holding company. From 2001 to 2002, Mr. Perry served as Senior Vice President of Finance at Exodus Communications, Inc., an operator of internet data centers. From 2000 to 2001, Mr. Perry served as Chief Financial Officer at Bidcom, Inc., an application service provider to the construction industry. From 1998 to 2000, Mr. Perry served as Chief Financial Officer at Women.com, a network of content, community and ecommerce sites. From 1987 to 1998, Mr. Perry served as Chief Financial Officer at Belo Corporation, a newspaper and television broadcasting company. Mr. Perry holds a B.A. and an M.B.A. in Accounting and Finance from Michigan State University.

      Paul D. Taylor has been our Senior Vice President of Worldwide Sales since May 2004. Mr. Taylor joined Vitria in February 2002 as Vice President and General Manager of our European Operations and in March 2003 his role was expanded to include our Asia Pacific Operations. From December 1999 to February 2002, Mr. Taylor served as Senior Vice President of EMEA (Europe, Middle East, and Africa) Operation at CommerceOne, a software and services provider for business process automation services. Previous to 1999, Mr. Taylor held senior roles at IBM, Lotus, Tandem and Stratus.

      Aaron C. Timm has been our Vice President, General Counsel and Secretary since September 2003. Mr. Timm joined Vitria as Corporate Counsel in 2000. From 1998 to 2000, Mr. Timm was an Associate with Orrick, Herrington & Sutcliffe LLP, a law firm. Mr. Timm holds a B.S.F.S from Georgetown University and a J.D. from Harvard Law School.

Available Information

      We make available free of charge through our Internet website, http://www.vitria.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

      At December 31, 2004, our principal sales, marketing, research and development and administrative offices consist of approximately 64,000 square feet of leased space located in Sunnyvale, California under a lease that expires in August 2009. We also have leases for sales offices in various locations in the U.S. and ten foreign countries expiring on various dates through June 2013. In addition, we have approximately 156,000 square feet of leased space in locations in the U.S. and in the United Kingdom that were exited as part of restructuring actions taken in 2002 and 2003. We believe that our existing leased properties are in good condition and suitable for the conduct of our business.

      In November 2001, Vitria and certain of our officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York, now captioned In re Vitria Technology, Inc. IPO Securities Litigation, Case No. 01-CV-10092. In the amended complaint, the plaintiffs allege that Vitria, certain of our officers and directors, and the underwriters of our initial public offering (“IPO”) violated federal securities laws because Vitria’s IPO registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs seek unspecified monetary damages and other relief. Similar complaints were filed in the same court against hundreds of public companies (“Issuers”) that first sold their common stock since the mid-1990s (the “IPO Lawsuits”).

      The IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. Defendants filed a global motion to dismiss the IPO-related lawsuits on July 15, 2002. In October 2002, Vitria’s officers and directors were dismissed without prejudice pursuant to a stipulated dismissal and tolling agreement with the plaintiffs. On February 19, 2003, Judge Scheindlin issued a ruling denying in part and granting in part the Defendants’ motions to dismiss.

      In June 2003, Vitria’s Board of Directors approved a resolution tentatively accepting a settlement offer from the plaintiffs according to the terms and conditions of a comprehensive Memorandum of Understanding negotiated between the plaintiffs and the Issuers. Under the terms of the settlement, the plaintiff class will dismiss with prejudice all claims against the Issuers, including Vitria and our current and former directors and officers, and the Issuers will assign to the plaintiff class or its designee certain claims that they may have against the IPO underwriters. In addition, the tentative settlement guarantees that, in the event that the plaintiffs recover less than $1.0 billion in settlement or judgment against the underwriter defendants in the IPO Lawsuits, the plaintiffs will be entitled to recover the difference between the actual recovery and $1.0 billion from the insurers for the Issuers. In June 2004, Vitria executed a final settlement agreement with the plaintiffs consistent with the terms of the Memorandum of Understanding. The settlement is still subject to a number of conditions, including action by the Court certifying a class action for settlement purposes and formally approving the settlement. The underwriters have opposed both the certification of the class and the judicial approval of the settlement. On February 15, 2005, the Court issued a decision certifying a class action for settlement purposes and granting preliminary approval of the settlement subject to modification of certain bar orders contemplated by the settlement. In addition, the settlement is still subject to statutory notice requirement as well as final judicial approval.

      None.

PART II

Common Stock

      Our common stock is traded on the Nasdaq National Market under the symbol “VITR.” Public trading of our common stock commenced on September 17, 1999. The following table shows, for the periods indicated, the high and low per share prices of our common stock, as reported by the Nasdaq National Market as adjusted for a one-for-four reverse stock split effected in May 2003.

      As of December 31, 2004, there were approximately 298 stockholders of record of our common stock.

Dividend Policy

      We have never paid any cash dividends on our common stock and do not expect to pay cash dividends for the foreseeable future. In addition, our credit facility with Silicon Valley Bank prohibits the payment of cash dividends.

Equity Compensation Plan Information

      Information regarding our equity compensation plans will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 26, 2005, under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” and is incorporated by reference in this report.

Issuer Purchases of Equity Securities

      We did not repurchase any of our equity securities during the year ended December 31, 2004.

      The consolidated statement of operations data for the years ended December 31, 2004, 2003, and 2002, and the consolidated balance sheet data as of December 31, 2004 and 2003, have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2001 and 2000, and the consolidated balance sheet data as of December 31, 2002, 2001, and 2000 have been derived from our audited financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for any future period. The data presented below has been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States and should be read in conjunction with our financial statements, including the notes, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

      The following discussion and analysis should be read with “Selected Financial Data” and our consolidated financial statements and notes included elsewhere in this Annual Report on Form 10-K.

      The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form  10-K. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in “Business Risks” below as well as those discussed elsewhere.

Overview

      Vitria is a leading provider of business process integration software and services for corporations in healthcare and insurance, telecommunications, manufacturing, finance and other industries. Our software connects and orchestrates complex business processes across multiple software applications, data sources, organizations, employees and trading partners. Our software products also provide operational staff and managers with real-time and historical views of individual transactions as well as of large-scale processes spanning multiple systems and organizations.

      Our customers use our software products to enable new revenue opportunities, cut operational costs, reduce process cycle times, decrease process errors, improve customer service, increase supply chain efficiencies, and more easily adapt their business processes to new requirements and opportunities. Examples of business processes supported by our products include order lifecycle management, insurance claims lifecycle management, supply chain management, and securities trade processing.

      We have operations in the Americas, Europe, Asia, and Australia. We sell our products through our direct sales force and, in some regions, through system integrators and other resellers. Our software runs on Sun Solaris, Microsoft Windows, IBM AIX, Hewlett-Packard HP-UX, and Linux operating systems.

      Vitria was founded in 1994, is incorporated in Delaware, and became a public corporation in 1999. We maintain executive offices and principal facilities at 945 Stewart Drive, Sunnyvale, California, 94085. Our telephone number is 408-212-2700. We maintain a website at www.vitria.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC web site at www.sec.gov.

      Our flagship Vitria:BusinessWare integration platform uses graphically modeled business process and integration logic as the foundation for orchestrating complex interactions between dissimilar software applications, web services, individuals, and trading partners over corporate networks and the Internet. By automating and monitoring previously fragmented business processes from start to finish, our products and services are designed to:

      During the fiscal year 2004, we extended the capabilities of our core platform product by releasing Vitria:BusinessWare version 4.3, adding support for the Linux operating system and delivering new tools to help existing customers migrate to the current version of our platform. Vitria:BusinessWare version 4.3 included significant enhancements in business process management and manageability as well as support for service-oriented architectures. In 2004, we also released enhanced versions of two pre-built process applica-

tions for the health insurance industry and developed a new pre-built process application for order lifecycle management in the telecommunications industry.

      Our business process integration platform products have faced increasing competition over the past few years. Increasing competition was a primary factor in the decline in total license revenue from 2003 to 2004. We expect the intensity of our competition in platform sales to further increase as market adoption of lower-level integration technologies like messaging, transformation, and web services continues to shift towards evolving industry standards supported by a broad range of software vendors.

      Consequently, we expect our pre-built process applications product line to be our primary source of revenue growth in the years ahead. By combining the power and flexibility of the Vitria:BusinessWare platform with pre-built content, we believe that our pre-built process applications can provide more customer value, command higher prices, and offer us a more diverse revenue composition than our platform sales alone. While our 2004 license revenue from applications fell short of our goals, we made significant progress by signing six customer contracts for these products in 2004 and by initiating development of several new applications.

      In 2005, we plan to increase investments in our pre-built process applications product line and bring several new applications to market. One or more of these planned new products will focus on managing process exceptions. Another application will help customers manage processes for receiving, validating, and distributing business documents sent by other companies. We also expect to initiate development of other new pre-built process applications, as well as enhance several of our existing ones.

      The challenges on which our executives are most focused in 2005 include increasing sales of our existing pre-built process applications, bringing new pre-built process applications to market successfully, enhancing our platform products to better support our future applications as well as providing greater value to our platform customers, improving execution in sales and marketing, expanding our strategic alliances to increase our revenue opportunities, and renewing enterprise license agreements with some of our most important customers. In addition, we plan to selectively invest in Research and Development and Sales and Marketing to strengthen our future growth, and at the same time, contain overall costs in order to reduce our net cash outflow.

Critical Accounting Policies and Estimates

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

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

      We derive our revenue from sales of software licenses and related services. In accordance with the provisions of Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended, we record revenue from software licenses when a license agreement is signed by both parties, the fee is fixed or determinable, collection of the fee is probable and delivery of the product has occurred. For electronic delivery, we consider our software products to have been delivered when the access code to download the software from the Internet has been provided to the customer. If an element of the agreement has not been delivered, revenue for the element is deferred based on vendor-specific objective evidence of fair value. If vendor-specific objective evidence of fair value does not exist for the undelivered element, all revenue is

deferred until sufficient objective evidence exists or all elements have been delivered. We treat all arrangements with payment terms longer than normal as having fees that are not fixed or determinable. Our normal payment terms currently range from “net 30 days” to “net 90 days” for domestic and international customers, respectively. We defer revenue for those agreements which exceed our normal payment terms and are therefore assessed as not being fixed or determinable. Revenue under these agreements is recognized as payments become due unless collectibility concerns exist, in which case revenue is deferred until payments are received. Our assessment of collectibility is particularly critical in determining whether revenue should be recognized in the current market environment. Fees derived from arrangements with resellers are not recognized until evidence of a sell-through arrangement to an end user has been received.

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

      Payments received in advance of revenue recognition are recorded as deferred revenue. In the event that a software license arrangement requires us to provide consulting services for significant production, customization or modification of the software, or when the customer considers these services essential to the functionality of our software product, both the product license revenue and consulting services revenue would be recognized in accordance with the provision of SOP 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts. In such event, we would recognize revenue from such arrangements using the percentage of completion method and, therefore, both the product license and consulting services revenue would be recognized as work progresses, using hours worked as input measures. These arrangements have not been common and, therefore, the significant majority of our license revenue in the past three years has been recognized under SOP 97-2, as amended.

      We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to deliver required payments to us. When we believe a collectibility issue exists with respect to a specific receivable, we record an allowance to reduce that receivable to the amount that we believe is collectible. Accounts 180 days past due are typically fully reserved. In addition, we record an allowance on the remainder of our receivables that are still in good standing. When determining this allowance, we consider the probability of recoverability based on our past experience, taking into account current collection trends that are expected to continue, as well as general economic factors. From this, we develop an allowance provision based on the percentage likelihood that our aged receivables will not be collected. Historically our actual losses have been consistent with our provisions. Customer accounts receivable balances are written off against the allowance for doubtful accounts when they are deemed uncollectible.

      Unexpected future events or significant future changes in trends could have a material impact on our future allowance provisions. If the financial condition of our individual customers were to deteriorate in the future, or general economic conditions were to deteriorate and affect our customers’ ability to pay, our allowance expense could increase and have a material impact on our future statements of operations and cash flows.

      We recorded $16.1 million in restructuring charges related to the realignment of our business operations in 2003 and $19.5 million in restructuring charges in 2002. As of December 31, 2004, we have $13.4 million in accrued restructuring expenses consisting of lease payments for facilities we restructured in 2003 and 2002.

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

represent expenses incurred in connection with certain cost reduction programs that we have undertaken and consist primarily of the cost of involuntary termination benefits and remaining contractual lease payments and other costs associated with closed facilities net of anticipated sublease income. Information regarding sublease income estimates for the amount of sublease income we are likely to receive and the timing of finding a tenant has been obtained from third party experts and is based on prevailing market rates.

      The charges for facility closure costs require the extensive use of estimates, including estimates and assumptions related to future maintenance costs, our ability to secure sub-tenants and anticipated sublease income to be received in the future. If we fail to make accurate estimates or to complete planned activities in a timely manner, we might record additional charges or reverse previous charges in the future. Such additional charges or reversals will be recorded to the restructuring charges line in our statement of operations in the period in which additional information becomes available to indicate our estimates should be adjusted. Since April 2002, we have revised our sublease income estimates at least semi-annually due to significant downward trends in the real estate markets in the United States and in the United Kingdom.

Quarterly Results of Operations

      The following tables set forth statement of operations data for each of the eight quarters in the period ended December 31, 2004, as well as the percentage of our total revenue represented by each item. This information has been derived from our unaudited financial statements. The unaudited financial statements have been prepared on the same basis as the audited financial statements contained in this annual report and include all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of this information. You should read this information in conjunction with our annual audited financial statements and related notes appearing elsewhere in this annual report. Our quarterly operating results are expected to vary significantly from quarter to quarter and you should not draw any conclusions about our future results from the results of operations for any quarter.

      The information below has been derived from our unaudited financial statements.

Revenue

      Total revenue, which is comprised of license revenue and service revenue, declined 23% from 2003 to 2004, and 17% from 2002 to 2003. The reason for these declines is discussed below.

      License. The license revenue that we recognize in any given period is directly related to the number and size of our license orders. A few large license orders usually comprise a large percentage of our sales and as such our average license order size fluctuates significantly from period to period. Due to the rapidly changing business environment, we expect that we will continue to see fluctuations in the size of our average license order.

      License revenue decreased 50% from $30.1 million in 2003 to $14.9 million in 2004. While sales for our platform products declined in 2004 due to increased competition, our new application products fell short of our planned revenue targets because the sales cycle for these new products took longer than we expected. From 2003 to 2004 we experienced a 37% decline in license order volume and our average license order size declined 26% as compared to 2003. The decrease in our license order volume in 2004 compared to 2003 year was due to the maturation of the market in which we compete for our platform products, which has resulted in fewer total orders as competition has increased for these products. The decrease in the size of our average license order in 2004 as compared to 2003 was primarily due to the commoditization of the market for business integration platform products in which Vitria:BusinessWare competes, which has resulted in downward pricing pressure for these products.

      License revenue decreased 16% from $36.0 million in 2002 to $30.1 million in 2003. From 2002 to 2003 we experienced a 20% decline in license order volume. During 2003 our average license order size increased 10% as compared to 2002. The decrease in our license order volume in 2003 compared to 2002 year was due to the maturation of the market in which we compete for our platform products. The increase in the size of our

average license order in 2003 as compared to 2002 was primarily due to fact that a few large license orders comprised a large percentage of our sales in this period which increased our average license order size.

      Service and other. The level of service revenue is affected by the number and size of license sales in a given period. Customers typically purchase maintenance for the first year as part of each license sale. Most of our consulting revenue and customer training revenue is also affected by the size and number of license deals. Service and other revenue includes revenue from support renewals, which are dependent upon our installed license base. Service revenue decreased 7% from $50.6 million in 2003 to $46.9 million in 2004. Consulting revenue decreased by $2.8 million and first year support revenue decreased by $1.2 million. These declines were offset by an increase in maintenance renewal revenue of $1.8 million from customers who had licensed our products in previous years. Also affecting the comparison to the prior year was $1.1 million in non-recurring government grant revenue recognized in 2003.

      Service revenue decreased 17% from $61.3 million in 2002 to $50.6 million in 2003. Consulting revenue decreased by $7.2 million, first year support revenue decreased by $8.7 million and training revenue decreased by $1.5 million, all related to our decrease in license revenue from the prior year. These declines were offset by an increase in support renewal revenue of $6.7 million from customers who had purchased our license products in previous years.

      Included in service and other revenue for 2003 was approximately $1.1 million of revenue related to government grants received in prior years. This revenue previously had been included in deferred revenue on the balance sheet since 1999 pending the outcome of several government audits, which were finalized in the fourth quarter of 2003, because we had concluded that revenue under these arrangements were not fixed or determinable until the expiration of the audits. We have no further government grant-related deferred revenue on our consolidated balance sheets as of December 31, 2004.

      During 2004, we experienced an increase in international revenue as a percentage of total revenue. Revenue from customers outside the United States increased to 47% in 2004, from 38% in 2003 and 35% in 2002 respectively. The reason for the increase in 2004 in international revenue as a percentage of total revenue is due to a decline in total domestic revenue dollars compared to the prior year. Total international revenue dollars has remained approximately the same in 2004 as in 2003.

      Revenue from our ten largest customers accounted for 36% of total revenue in 2004, 33% of total revenue in 2003 and 30% of total revenue in 2002. In all three years, no single customer accounted for more than 10% of total revenue. UPC Operations BV accounted for 10% of our accounts receivable balance as of December 31, 2004 and California Independent System Operator accounted for 12% of our accounts receivable balance as of December 31, 2003. We expect that revenue from a limited number of customers will continue to account for a large percentage of total revenue in future quarters. Therefore, the loss or delay of individual orders could have a significant impact on revenue. Our ability to attract new customers will depend on a variety of factors, including the reliability, security, scalability and the overall cost-effectiveness of our products. To date, we have not experienced significant seasonality of revenue. However, we expect that future results may be affected by the fiscal or quarterly budget cycles of our customers.

Cost of Revenue

      License. Cost of license revenue consists of royalty payments to third parties for technology incorporated into our product. Fluctuations in cost of license revenue is generally due to the buying patterns of our customers, as cost of license revenue is dependent upon which products our customers purchase and which of those purchased products have third-party technology incorporated into them. Cost of license revenue increased 8% from $614,000 in 2003 to $667,000 in 2004. This increase in cost of license revenue was primarily due to the incorporation of new third party technology into products released and first sold in 2004.

      Cost of license revenue decreased 78% from $2.8 million in 2002 to $614,000 in 2003. The decrease from 2002 to 2003 was primarily due to the write-off during 2002 of a non-cancelable royalty agreement that we determined would have no future utility to us.

      Future fluctuations in cost of license revenue is dependent upon increases or decreases in sales of those particular products which incorporate third-party technology.

      Service and other. Cost of service revenue 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 revenue remained relatively consistent, decreasing slightly from $23.9 million in 2003 to $23.6 million in 2004. The decrease in cost of service and other revenue was primarily due to a reduction in salary expense of $1.5 million due to reduced headcount offset by an increase in contractor costs of $1.1 million.

      Cost of service revenue decreased 27% from $32.7 million in 2002 to $23.9 million in 2003. This decrease is primarily due to decreased salary expenses of $6.6 million related to our restructuring actions at the end of the first quarter of 2003 as well as reduced travel expenses of $1.2 million due to fewer consulting projects in 2003 than in the prior year.

      We expect that cost of service and other will increase slightly in 2005 as compared to 2004 due to expected increases in headcount and travel expenses.

Operating Expenses

      Sales and Marketing. Sales and marketing expenses consist of salaries, commissions, field office expenses, travel, entertainment and promotional expenses. Sales and marketing expenses decreased 45% from $39.8 million in 2003 to $22.0 million in 2004. This decrease was primarily due to lower headcount which reduced salary and related expenses by $9.7 million, depreciation and occupancy expenses by $2.1 million and travel and entertainment expenses by $1.5 million. In addition, commission expense declined $1.9 million due to lower headcount and lower license sales.

      Sales and marketing expenses decreased 45% from $72.7 million in 2002 to $39.8 million in 2003. This decrease was primarily the result of decreases in salary and benefit expenses of $18.8 million and reduced travel expenses of $3.4 million due to our workforce reduction in the first quarter of 2003, lower commission expenses of $1.5 million due to lower license revenue in 2003. Also contributing to our decrease in 2003 were reduced expenses for outside consultants of $1.6 million, lower marketing expenses of $1.9 million and reduced lease and facilities costs of $2.1 million, all due to our efforts to contain costs.

      We expect that sales and marketing expenses will increase slightly in 2005 as compared to 2004 due to increased headcount and increased commission expenses.

      Research and Development. Research and development expenses include costs associated with the development of new products, enhancements to existing products, and quality assurance activities. These costs consist primarily of employee salaries, benefits and the cost of consulting resources that supplement the internal development team. Research and development expenses decreased 4% from $18.2 million in 2003 to $17.5 million in 2004. This decrease was primarily due to reduced depreciation and occupancy charges of $1.3 million, partially offset by an increase in offshore third party development expenses of $351,000 as we shifted some development work to India and China. Research and development costs have remained relatively flat compared to the prior year as we maintained productivity in order to develop new products and enhance existing products in 2004.

      Research and development expenses decreased 41% from $31.0 million in 2002 to $18.2 million in 2003. This decrease was primarily the result of decreases in salary and benefits expenses of $9.1 million due to workforce reduction in 2003, lower external consulting expenses of $883,000 due to cost containment efforts and reduced facility costs of $1.5 million due to our facilities restructuring in 2003.

      We expect that sales and marketing expenses will increase slightly in 2005 as compared to 2004 due to increased headcount and increased commission expenses.

      General and Administrative. General and administrative expenses consist of salaries for administrative, executive and finance personnel, outside professional service fees, information systems costs and our provision for doubtful accounts. General and administrative expenses remained essentially unchanged from $13.2 million in 2003 to $13.1 million in 2004. The slight decrease was primarily due to lower depreciation and occupancy expenses of $926,000 and lower travel related expenses of $310,000, offset by higher salary and related expense of $538,000 mainly related to severance charges for the departure of several key executives in

the second quarter of 2004 and increased contractor costs of $611,000 primarily due to compliance with the Sarbanes-Oxley Act.

      General and administrative expenses decreased 36% from $20.7 million in 2002 to $13.2 million in 2003. This decrease was primarily attributable to a decrease of $3.2 million in salary and benefits expenses and an $856,000 reduction in travel and related expenses as a result of our workforce reductions in 2003, reduced tax and insurance expenses of $853,000 and a reduction of $1.3 million in external consulting expenses as a result of our cost containment efforts.

      We expect that general and administrative expenses will decrease slightly in 2005 as compared to 2004 due to the one-time severance charges in 2004.

      Stock-based compensation. Total stock-based compensation expenses were $354,000 in 2004, $423,000 in 2003 and $1.6 million in 2002.

      Stock-based compensation includes the amortization of unearned employee stock-based compensation on options issued to employees prior to our initial public offering in September 1999. Amortization of unearned employee stock-based compensation for options issued to employees prior to Vitria’s initial public offering in September 1999 was amortized over a five year period and has been fully amortized as of December 31, 2004. For the years ended December 31, 2004, 2003, and 2002, we did not incur any stock-based compensation in connection with stock issued to non-employees for services rendered.

      In 2004, we issued a stock grant to all Vitria employees. Each person who was a non-executive employee on the date of the grant received 250 shares of Vitria common stock. The fair market value of our common stock at the date of the grant was $2.88 per share. This stock grant resulted in stock based compensation expense of $207,000 in 2004. In accordance with Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees, we recorded $67,000 stock-based compensation expense for stock option grant modifications made for a certain executive in 2004. In 2002, we recorded $695,000 in stock-based compensation expense as a result of stock option grant modification made for certain executives.

      Amortization and impairment of intangible assets. Amortization and impairment of purchased intangible assets associated with the acquisition of XML Solutions in April 2001 resulted in charges to earnings of $2.7 million for the year ended December 31, 2002. During 2002, we performed an assessment of the carrying value of our intangible assets under the provision of Statement of Financial Accounting Standard (“SFAS”) 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in light of sustained negative economic conditions which impacted our operations and expected future revenue. As a result of this assessment, we recorded an additional impairment charge of $1.4 million in the fourth quarter of 2002, effectively reducing the carrying value of all intangible assets to zero.

      Impairment of goodwill. We accounted for the acquisition of XMLSolutions in April 2001 under the purchase method of accounting which resulted in $8.3 million of goodwill being recorded at the time of purchase. During 2002, we performed an assessment of the carrying value of our goodwill. The assessment was performed because our market capitalization had declined significantly, on what was considered to be an-other-than temporary basis, and because sustained negative economic conditions had affected our operations and expected future revenue. As a result of this assessment, we recorded an impairment charge of $7.0 million related to goodwill during 2002, reducing the carrying value of goodwill to zero.

      Restructuring and other charges. In 2002 we initiated actions to reduce our cost structure due to sustained negative economic conditions that affected our operations and resulted in lower than anticipated revenue. The plan was a combination of a reduction in workforce of approximately 285 employees, consolidations of facilities in the United States and United Kingdom and the related disposal of leasehold improvements and equipment. As a result of these restructuring actions, we incurred a charge of $19.5 million in the year ended December 31, 2002. The restructuring charge included approximately $4.2 million of severance-related charges and $15.3 million of committed excess facilities payments, which included $463,000 for the write-off of leasehold improvements and equipment in vacated facilities.

      In 2003 we initiated actions to further reduce our cost structure. The plan was a combination of a reduction in workforce of approximately 100 employees, consolidations of facilities in the United States and United Kingdom and the related disposal of leasehold improvements and equipment. As a result of these

restructuring actions, we incurred a charge of $16.1 million in the year ended December 31, 2003. The restructuring charge included approximately $2.9 million of severance related charges and $13.0 million of committed excess facilities payments, which included $2.2 million for the write-off of leasehold improvements and equipment in vacated facilities. The charge also included $180,000 in accretion charges related to the fair value treatment for the facilities we restructured in 2003, in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities.

      In the year ended December 31, 2004, we incurred $1.1 million in restructuring costs. These costs consisted of accretion expense due to the fair value treatments for those leases restructured in 2003 under SFAS 146 and adjustments we made to our estimates for future sublease income and other assumption of future costs, which we revise periodically based on current market conditions.

      As of December 31, 2004, $13.4 million related to facility closures remains accrued from all of our restructuring actions, which is net of $6.3 million of estimated future sublease income. A portion of this liability is based on the fair value treatment required by SFAS 146, which we adopted as of January 1, 2003.

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

      In our estimated lease payout schedule in the table below (in thousands), future lease payments for facilities are shown at actual contractual amounts and future sublease income is estimated based on third party estimates based on prevailing market rates. On our Consolidated Balance Sheets, liabilities for leases restructured in 2003 are carried at their fair value, which incorporates discounting the payments to their net present value.

      Interest Income and Other Income, net. Interest and other income, net remained constant at $1.2 million in both 2004 and 2003. Interest and other income, net, decreased 61%, from $3.1 million in 2002 to $1.2 million in 2003. These decreases were mainly due to lower interest rates on our short-term investments and lower interest generating cash and investment balances. Also contributing to the decline in 2003, we incurred a loss on disposition of our China subsidiary of $339,000 (see “Related Party Transactions” below) and a charge of $300,000 for an other-than-temporary decline in value of our equity investment in a private company. In 2002, we incurred a charge of $164,000 associated with an other-than-temporary decline in value of our equity in the same company.

Provision for Income Taxes

      We recorded provision for income taxes of $493,000, $594,000, and $1.2 million for the years ended December 31, 2004, 2003, and 2002, respectively. Income tax provisions in all periods presented relate to income taxes currently payable on income generated in non-U.S. tax jurisdictions, state income taxes, and foreign withholding taxes incurred on software license revenue.

      Based on the cumulative pre-tax losses that we have sustained, a valuation allowance was recorded in an amount equal to the net deferred tax assets as of December 31, 2004, 2003, and 2002. As of December 31, 2004, we had deferred tax assets of approximately $86.3 million, an increase of $2.6 million from December 31, 2003. The increase in our valuation allowance was $2.6 million for 2004, net of true-ups to prior years’ estimates.

      As of December 31, 2004, 2003 we had federal and state net operating loss (NOL) carryforwards of approximately $177.1 million and $107.9 million respectively. Approximately $425,000 included in the current year NOL is related to deductions associated with stock option exercises, which when utilized are credited to the equity section of the balance sheet rather than the statement of operations. We also had federal and state tax credit carryforwards of approximately $6.0 million and $4.8 million, respectively at December 31, 2004. The federal net operating loss and tax credit carryforwards will expire beginning in 2014, if not utilized. The state net operating losses will expire beginning in 2011. The state tax credits carry forward indefinitely. Our ability to utilize the benefits of the NOLs and tax credit carryforwards is dependent on our generation of sufficient taxable income in future years. In addition, a change in ownership or the application of the alternative minimum tax rules could adversely affect our ability to utilize the state and federal NOLs.

Liquidity and Capital Resources

      The current source of our cash and investment balances is primarily cash receipts from customers, as we do not have any outstanding debt and our interest income is insignificant. The downward trend in our revenue over the past three years has affected our cash flows, contributing to a negative cash flow from operations in 2004, 2003, and 2002. Our cash payments to employees and suppliers have exceeded our cash receipts from customers in each of these three years. To compensate for our declining revenue, we restructured in 2002 and 2003, closing facilities and reducing headcount. In 2004, our combined cash and investment balances declined by an average of $3.2 million per quarter. We need to continue to selectively invest in research and development to produce new products and in sales and marketing to sell those products in order to increase our revenue and improve our cash position. Unless we are able to increase our revenue in the next few years, we may need to further reduce spending or seek additional funds through public or private debt financings.

      The decline in our cash and investment balances is summarized in the table below.

      Net cash used in operating activities decreased $12.4 million or 48% in 2004 compared to 2003. The primary reason for this decline was the decrease in our net loss from $30.9 million in 2003 to $15.9 million in 2004. Cash, cash equivalents and short term investments decreased 14% from $91.5 million at December 31, 2003 to $78.6 million at December 31, 2004. The main reason for the decline in our cash and investment balances between 2003 and 2004 was that our total cash payments to vendors and employees was greater than our total cash receipts from customers. Cash payments of $5.3 million made in 2004 for leases restructured in previous years is not included as an expense in our 2004 net income as it has already been expensed and accrued in previous years.

      Net cash used in operating activities decreased $30.0 million, or 53%, in 2003 compared to 2002. The primary reason for this decline is the decrease in our net loss from $91.7 million in 2002 to $30.9 million in 2003. Cash, cash equivalents and short term investments decreased 22% from $117.9 million at December 31, 2002 to $91.5 million at December 31, 2003. The main reason for the decline in our cash and investment balances between 2002 and 2003 is that our total cash payments to vendors and employees were greater than our total cash receipts from customers. Included in our 2003 cash payments to vendors was $5.6 million in cash payments made in 2003 for leases that were restructured in 2003 and 2002.

      Net cash provided by (used in) investing activities increased $43.9 million, or 550% in 2004 compared to 2003. This increase in the current year was mainly due to the fact that we sold at maturity $36.2 million more in short term investments than we purchased in 2004. We sold at maturity more short-term investments than we purchased partially to fund operating losses of $15.9 million and cash payments for restructured leases of approximately $6.3 million. The remaining $14.0 million from investments we sold at maturity is due to timing differences in buying and selling investments in order to take advantage of the effect of interest rate changes in the marketplace.

      Net cash provided by (used in) investing activities decreased $44.5 million, or 122%, in 2003 compared to 2002. This decrease was primarily due to the fact that we purchased $7.4 million more short-term investments than we sold at maturity in 2003 as compared to the prior year when we sold at maturity more short term investments than we purchased. This decrease was mainly the effect of timing differences in buying and selling investments in order to take advantage of the effect of interest rate changes in the marketplace.

      Net cash provided by financing activities increased $793,000 or 176% in 2004 compared to 2003. This increase was due to an increase in stock option exercises over the prior year. Net cash provided by financing activities decreased $192,000 or 30% in 2003 compared to 2002. This decrease was due to a lower number of stock option exercises in 2003, partially due to a decreased in stock price from the prior year.

      During the year ended December 31, 2004, our net accounts receivable balance decreased $5.0 million from $15.5 million at December 31, 2003 to $10.5 million at December 31, 2004. The decrease in our accounts receivable balance was due a decline in revenue in the fourth quarter of 2004 of $3.7 million as compared to the fourth quarter revenue in 2003, from $21.3 million to $17.6 million. In addition, most of the revenue we recognized in the fourth quarter of 2004 was invoiced toward the end of the fourth quarter, which determined that the cash expected for the related revenue is not due to be collected until the first quarter of 2005. At December 31, 2004, our gross accounts receivable balance was $11.0 million with an allowance for doubtful accounts of $532,000.

      For the year 2004, our deferred revenue balance decreased $2.8 million from $13.9 million at December 31, 2003 to $11.1 million at December 31, 2004. This decrease in our deferred revenue balance is due to a decrease in support renewals of $1.3 million, combined with additional decreases in deferred (prepaid) consulting and training which together totaled approximately $1.1 million.

      At December 31, 2004, we had contractual obligations and commercial commitments of approximately $18.8 million as shown in the table below. The table below excludes obligations related to accounts payable and accrued liabilities incurred in the ordinary course of business.

      Operating lease commitments shown above include all of our facility leases, both for buildings that we have restructured and buildings not restructured, and are net of all contractual sub-lease agreements. Of the above $18.4 million in operating lease obligations, $14.5 million is related to total operating lease obligations for restructured buildings. This $14.5 million is the net of $19.7 million in gross lease payments, less $2.3 million in contractual future sublease income and $2.9 million in estimated future sublease income.

      At December 31, 2004 and December 31, 2003, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

      We entered into a Loan and Security Agreement with Silicon Valley Bank, dated June 28, 2002, for the purpose of establishing a revolving line of credit. We modified this agreement on June 11, 2004 and reduced the line of credit from $15.0 million to $12.0 million. The modification requires us to maintain minimum cash, cash equivalents, and short-term investments balance of $30.0 million. The agreement also requires us to maintain our primary depository and operating accounts with Silicon Valley Bank and invest all of our investments through Silicon Valley Bank. The line of credit serves as collateral for letters of credit and other commitments, even though these items do not constitute draws on the line of credit. Available advances under the line of credit are reduced by the amount of outstanding letters of credit and other commitments. Interest on outstanding borrowings on the line of credit accrues at the bank’s prime rate of interest. The agreement is secured by all of our assets.

      As of December 31, 2004, we had not borrowed against this line of credit. In connection with the line of credit agreement, we have outstanding letters of credit of approximately $6.4 million related to certain office leases at December 31, 2004. Fees related to the outstanding letters of credit totaled $64,000 in 2004.

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

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

      In the past, we have invested significantly in our operations. We plan to selectively invest in Research and Development and Sales and Marketing in 2005 to strengthen our future growth, and at the same time, contain overall costs in order to reduce our net cash outflow. For the next year, we anticipate that operating expenses and planned capital expenditures will continue to constitute a material use of our cash resources. We expect our capital expenditures in the next year to be approximately $1 million. We believe that our available cash, cash equivalents and short-term investments will be sufficient to meet our working capital and operating expense requirements for at least the next twelve months. At some point in the future we may require additional funds to support our working capital and operating expense requirements or for other purposes such as funding acquisitions or investments in other businesses. If such funds are needed, we may seek to raise these additional funds through public or private debt or equity financings. If we need to seek additional financing, there is no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders.

      We believe our success requires expanding our customer base and continuing to enhance our Vitria:BusinessWare products. Our revenue, operating results and cash flows depend upon the volume and timing of customer orders and payments and the date of product delivery. Historically, a substantial portion of revenue in a given quarter has been recorded in the third month of that quarter, with a concentration of this revenue in the last two weeks of the third month. We expect this trend to continue and, therefore, any failure or delay in the closing of orders would have a material adverse effect on our quarterly operating results and cash flows. Since our operating expenses are based on anticipated revenue 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. Revenue 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 revenue. While a portion of our revenue in each quarter is recognized from deferred revenue, our quarterly performance will depend primarily upon entering into new contracts to generate revenue 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 revenue from these contracts will be recognized. Our future operating results and cash flows will depend on many factors, including the following:

      As a result of these factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. It is likely that in some future quarter our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock would likely decline.

Related Party Transactions

      In December 2003, we sold our interest in our China operations to QilinSoft LLC. QilinSoft is owned and controlled by Dr. JoMei Chang, a director and a significant stockholder, and Dr. Dale Skeen, a director and our Chief Executive Officer and Chief Technology Officer, the spouse of Dr. Chang and a significant stockholder.

      Vitria and QilinSoft also entered into a license agreement in December 2003 whereby QilinSoft received a royalty-bearing license to distribute Vitria products in China. In addition, Vitria and QilinSoft executed a development agreement in December 2003 pursuant to which QilinSoft will perform development work and other fee-bearing services for us.

      During the twelve months ended December 31, 2004, we recorded royalty license income of $100,000 from QilinSoft which is included in service revenue in our Statements of Operations. During the year ended December 31, 2004, we incurred charges of $596,000 for development work performed by QilinSoft, which was recorded in Research and Development Expense. At December 31 2004, we owed QilinSoft $102,000 for development work QilinSoft performed for us in the fourth quarter of 2004 which was paid by January 31, 2005.

      Recently Issued Accounting Pronouncements

      In December 2004, the Financial Accounting Standard Board (FASB) issued SFAS 123(R), Share-Based Payment, which replaces SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires compensation costs relating to share-based payment transactions be recognized in financial statements. The pro forma disclosure previously permitted under SFAS 123 will no longer be an acceptable alternative to recognition of expenses in the financial statements. SFAS 123(R) is effective as of the beginning of the first reporting period that begins after June 15, 2005, with early adoption encouraged. We currently measure compensation costs related to share-based payments under APB 25, as allowed by SFAS 123, and provide disclosure in notes to financial statements as required by SFAS 123. We are required to adopt SFAS 123(R) starting in the third fiscal quarter of 2005. We expect the adoption of SFAS 123(R) will have a material adverse impact on our net income and net income per share. We are currently in the process of evaluating the extent of such impact.

      In December 2004, FASB issued SFAS 153, Exchanges of Nonmonetary Assets — an amendment to APB Opinion 29. This statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Adoption of this statement is not expected to have a material impact on our results of operations or financial condition.

      In December 2004, FASB Staff Position FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP FAS 109-2”) was issued, providing guidance under SFAS 109, “Accounting for Income Taxes” for recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004, enacted on October 22, 2004. FSP FAS 109-2 allows time beyond the financial reporting period of enactment to evaluate the effects of the Jobs Act before applying the requirements of FSP FAS 109-2. Accordingly, we are evaluating the potential effects of the Jobs Act and have not adjusted our tax expense or deferred tax liability to reflect the requirements of FSP FAS 109-2.

      In March 2004, the FASB issued EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provided new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

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

Interest Rate Risk

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

      We mitigate default risk by investing in high credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. These securities are generally classified as available for sale, and consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported, as a separate component of stockholders’ equity, net of tax. Unrealized losses at December 31, 2004 were $105,000.

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

      There has been no material change in our interest rate exposure since December 31, 2004.

      The table below presents the principal amount of related weighted average interest rates for our investment portfolio. Short-term investments are all in fixed rate instruments and have maturities of one year or less. Cash equivalent consist of money market funds and short-term investments which have an original maturity date of 90 days or less from the time of purchase.

      Table of investment securities (in thousands) as of December 31:

Foreign Exchange Risk

      As a global concern, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial position and results of operations. Historically, our primary exposures have related to non-U.S. dollar-denominated currencies, receivables, and inter-company receivables or payables with our foreign subsidiaries. Additionally, we provide funding to our foreign subsidiaries in Europe, Asia Pacific and Latin America. Currently, short-term intercompany balances with our foreign subsidiaries are in a net liability position with the U.S. corporate headquarters. The net liability position primarily comes from our subsidiary in Japan, and the remaining foreign subsidiaries are in a net intercompany receivable position with the U.S. corporate headquarters. A 10% strengthening of foreign exchange rates against the U.S. dollar with all other variables held constant would result in an increase in the net intercompany payable, which is denominated in foreign currencies and due to corporate headquarters, of approximately $200,000. A 10% weakening of foreign exchange rates against the U.S. dollar with all other variables held constant would result in a decrease in the net intercompany payable, which is denominated in foreign currencies and due to corporate headquarters, of approximately $200,000. At December 31, 2004, our foreign subsidiaries had a net asset position of close to zero and thus a 10% change in foreign exchange rates would not have materially affected our financial position.

      In order to reduce the effect of foreign currency fluctuations, from time to time, we utilize foreign currency forward exchange contracts (forward contracts) to hedge certain foreign currency transaction exposures outstanding during the period. The gains and losses on the forward contracts help to mitigate the gains and losses on our outstanding foreign currency transactions. We do not enter into forward contracts for trading purposes. All foreign currency transactions and all outstanding forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in other income, net.

      We had no outstanding forward contacts as of December 31, 2004 and did not enter into any forward contracts during 2004.

RISKS ASSOCIATED WITH VITRIA’S BUSINESS AND FUTURE OPERATING RESULTS

Our operating results fluctuate significantly and an unanticipated decline in revenue may result in a decline in our stock price and may disappoint securities analysts or investors, and may also harm our relationship with our customers.

      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 revenue 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 revenue in a given quarter has been recorded in the third month of that quarter, with a concentration of this revenue 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 revenue and because a high percentage of these expenses are relatively fixed, a delay in the recognition of revenue from one or more license transactions could cause significant variations in operating results from quarter to quarter and cause unexpected results.

      Our quarterly results depend primarily upon entering into new or follow-on contracts to generate revenue 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 revenue from these contracts will be recognized. Our operating results are also dependent upon our ability to manage our cost structure.

We have incurred substantial operating losses since inception and we cannot guarantee that we will become profitable in the future.

      We have incurred substantial losses since inception as we funded the development of our products and the growth of our organization. We have an accumulated deficit of $217.7 million as of December 31, 2004. Since the beginning of 2002, we have reduced our workforce and consolidated certain facilities as part of our restructuring plan. As a result of these actions, we incurred a charge of $1.1 million in 2004, $16.1 million in 2003, and $19.5 million in 2002. Despite these measures in order to remain competitive we intend to continue investing in sales, marketing and research and development. As a result, we may report future operating losses and cannot guarantee whether we will report net income in the future.

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

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

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

      During 2004, we had a net loss of $15.9 million and our operating activities used $13.7 million of cash. As of December 31, 2004, we had approximately $78.6 million in cash and cash equivalents and short-term investments, $63.8 million in working capital, $27.2 million in short-term liabilities, and $8.1 million in long-term liabilities. We may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, or at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

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

The continued reluctance of companies to make significant expenditures on information technology could reduce demand for our products and cause our revenue to decline.

      There can be no assurance that the level of spending on information technology in general, or on business integration software by our customers and potential customers, will increase or remain at current levels in future periods. Lower spending on information technology could result in reduced license sales to our customers, reduced overall revenue, diminished margin levels, and could impair our operating results in future periods. Any general 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. A general slow-down in capital spending, if sustained in future periods, could result in reduced sales or the postponement of sales to our customers.

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

      Our products are often used by our customers to deploy mission-critical solutions used throughout their organization. Customers generally consider a wide range of issues before committing to purchase our products, including product benefits, ability to operate with existing and future computer systems, ability to accommodate increased transaction volume and product reliability. Many customers will be addressing these issues for the first time. As a result, we or other parties, including system integrators, must educate potential customers on the use and benefits of our product and services. In addition, the purchase of our products generally involves a significant commitment of capital and other resources by a customer. This commitment often requires significant technical review, assessment of competitive products, and approval at a number of management levels within the customer’s organization. Because of these issues, our sales cycle has ranged from six to nine months, and in some cases even longer, and it is very difficult to predict whether and when any particular license transaction might be completed.

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

      Sales to our ten largest customers accounted for 36% of total revenue in the fiscal year ended December 31, 2004. Our license agreements do not generally provide for ongoing license payments. Therefore, we expect that revenue from a limited number of customers will continue to account for a significant percentage of total revenue 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 the cost-effectiveness of our products. The loss or delay of individual orders could have a significant impact on revenue and operating results. Our failure to add new customers that make significant purchases of our product and services would reduce our future revenue.

If we are not successful in developing industry specific pre-built process applications based on Vitria:BusinessWare, our ability to increase future revenue could be harmed.

      We have developed and intend to continue to develop pre-built process applications based on Vitria:BusinessWare which incorporate business processes, connectivity and document transformations specific to the needs of particular industries, including healthcare and insurance, telecommunications, manufacturing, finance and other industries. This presents technical and sales challenges and requires collaboration with third parties, including system integrators and standard organizations, and the commitment of significant resources. Specific industries may experience economic downturns or regulatory changes that may result in delayed spending decisions by customers or require changes to our products. If we are not successful in developing these targeted pre-built process applications or these pre-built process applications do not achieve market acceptance, our ability to increase future revenue could be harmed.

      To date we have concentrated our sales and marketing efforts toward companies in the healthcare and insurance, financial services, telecommunication and other vertical markets. Customers in these 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 the needs of these vertical markets we may experience decreased sales in future periods.

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

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

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

      The market for our products and solutions 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 revenue. Our current and potential competitors include, BEA, Fiarano, FileNet, Fuego, IBM Corporation, Intalio, Microsoft Corporation, Oracle/ Peoplesoft, PolarLake, SAP, Savvion, SeeBeyond Technology, Sonic Software, Sungard, TIBCO Software, Telcordia, TriZetto, webMethods and others. In the future, some of these companies may expand their products to provide or enhance existing business process management, business analysis and monitoring, and business vocabulary management functionality, as well as integration solutions for specific business problems. These or other competitors may merge to attempt the creation of a more competitive entity or one that offers a broader solution than we provide. In addition, “in-house” information technology departments of potential customers have developed or may develop systems that provide for some or all of the functionality of our products. We expect that internally developed application integration and process automation efforts will continue to be a principal source of competition for the foreseeable future. In particular, it can be difficult to sell our product to a potential customer whose internal development group has already made large investments in and progress towards completion of systems that our product is intended to replace. Finally, we face direct and indirect competition from major enterprise software developers that offer integration products as a complement to their other enterprise software products. These companies may also modify their applications to be more easily integrated with other applications through web services or other means. Some of these companies include Oracle/ PeopleSoft and SAP AG.

      Many of our competitors have more resources and broader customer and partner relationships than we do. In addition, many of these competitors have extensive knowledge of our industry. Current and potential competitors have established or may establish cooperative relationships among themselves or with third-parties to offer a single solution and increase the ability of their products to address customer needs. Although we believe that our solutions generally compete favorably with respect to these factors, our market is relatively new and is evolving rapidly. We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater resources.

The cost and difficulty in implementing our product could significantly harm our reputation with customers, diminishing our ability to license additional products to our customers.

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

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

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

If we fail to introduce new versions and releases of our products in a timely manner, our revenue 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 Vitria:BusinessWare products. To date, these delays have not had a material impact on our revenue. If new releases or products are delayed or do not achieve market acceptance, we could experience a delay or loss of revenue and cause customer dissatisfaction. In addition, customers may delay purchases of our products in anticipation of future releases. If customers defer material orders in anticipation of new releases or new product introductions, our revenue may decline.

Our products rely on third-party programming tools and applications. If we lose access to these tools and applications, or are unable to modify our products in response to changes in these tools and applications, our revenue 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 revenue to decline.

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

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

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 employees are bound by an employment agreement. The loss of senior management or other key research, development, sales and marketing personnel could have a material adverse effect on our future operating results. In addition, we must attract, retain and motivate highly skilled employees. We face significant competition for individuals with the skills required to develop, market and support our products and services. We cannot assure that we will be able to recruit and retain sufficient numbers of these highly skilled employees.

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

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

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

      Software developers in our market are increasingly being 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 involves complex technical issues and inherent uncertainties. In the event an infringement claim against us is successful and we cannot obtain a license on acceptable terms or license a substitute technology or redesign our product to avoid infringement, our business would be harmed. Furthermore, former employers of our current and future employees may assert that our employees have improperly disclosed to us or are using confidential or proprietary information.

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

      We have international presence in Australia, Canada, France, Germany, Italy, Japan, Korea, Singapore, Spain and the United Kingdom. During 2004, 47% of our revenue was derived from international markets. There are a number of challenges to establishing and maintaining operations outside of the United States and we may be unable to continue to generate significant international revenue. If we fail to successfully establish or maintain products in international markets, we could experience slower revenue growth and our business could be harmed. In addition, it also may be difficult to protect our intellectual property in certain international jurisdictions.

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

      In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially acute for us because technology companies have experienced greater than average stock price volatility in recent years and, as a result, have been subject to, on average, a greater number of securities class action claims than companies in other industries. In November 2001, Vitria and certain of our officers and directors were named as defendants in a class action shareholder complaint. This litigation could result in substantial costs and divert management’s attention and resources, and could seriously harm our business. See Item 3 of Part I “Legal Proceedings” for more information regarding this litigation.

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

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

      Section 203 of the Delaware General Corporations Law and the terms of our stock option plans may also discourage, delay or prevent a change in control of Vitria. In addition, as of December 31, 2004, our executive officers, directors and their affiliates beneficially own approximately 37% of our outstanding common stock. This could have the effect of delaying or preventing a change of control of Vitria and may make some transactions difficult or impossible without the support of these stockholders.

      The financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 15 of Part IV. The chart entitled “Financial Information by Quarter (Unaudited)” contained in Item 7 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this report.

      None

      We maintain “disclosure controls and procedures” as this term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, (the Exchange Act). Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our control system are met to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, (CEO) and Chief Financial Officer, (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing disclosure controls and procedures, our management has necessarily applied its judgment in evaluating the costs versus the benefits of the possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, but there can be no assurance that any design will succeed in achieving its stated goal under all potential future conditions.

      Under supervision of Vitria management, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2004. In performing this evaluation, Vitria management has determined that the material weakness further described in our “Report of Management on Internal Control over Financial Reporting” existed at of December 31, 2004. As a result, our CEO and CFO have concluded that our disclosure controls and procedures were not effective in providing reasonable assurance that the objectives of our control system were met as of December 31, 2004.

      Our “Report of Management on Internal Control over Financial Reporting” and the related report of our independent registered public accounting firm are included in this Form 10-K on pages 40 and 41, respectively.

     Changes in Internal Control over Financial Reporting

      In October of 2004, we had identified a deficiency in an internal control related to our Information Technology (IT) systems. Our IT systems lost power on October 29, 2004, which resulted from the failure to replace a battery in an uninterruptible power supply system that had been previously reported as malfunctioning during a preventive maintenance inspection. This power failure in turn caused our data back-up server to fail. We were therefore unable to back up much of our data for several days. During the period of power and backup failure none of our data was lost, and this system failure did not result in a misstatement of our financial statements. However, because the accuracy and completeness of our financial information depends on the capability of our IT systems to record and preserve our data, management concluded this failure constituted a material weakness in our internal control structure at that time. The failed battery and backup server was replaced with new equipment, a full backup was completed on November 9, 2004 and our process of making regularly scheduled backups was resumed. Subsequent testing showed that these actions, coupled with a change in the IT organization, had fully remediated this material weakness by December 31, 2004. Except as disclosed above, then was no change in our internal control over financial reporting that occurred during the fourth quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

      None

PART III

      Information concerning our directors will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 26, 2005, in the section entitled “Proposal 1-Election of Directors” and is incorporated by reference into this report. Information concerning our Audit Committee and Financial Expert is incorporated by reference to the Section entitled “Audit Committee” contained in our definitive Proxy Statement. Information concerning procedures for recommending directors in incorporated by referenced to the Section entitled “Nominating and Corporate Governance Committee” to be contained in our definitive Proxy Statement. Information concerning our Executive Officers is set forth under “Executive Officers” in Part I of this Annual Report on Form 10-K and is incorporated herein by reference. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in our definitive Proxy Statement. Information concerning our code of conduct is incorporated by reference to the section entitled “Code of Conduct” to be contained in our definitive Proxy Statement.

      The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 26, 2005, under the caption “Executive Compensation,” and is incorporated by reference into this report.

      The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 26, 2005, under the caption “Security Ownership of Certain Beneficial Owners and Management,” and “Securities Authorized for Issuance Under Equity Compensation Plans” and is incorporated by reference into this report.

      The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 26, 2005, under the caption “Certain Relationships and Related Transactions”, and is incorporated by reference into this report.

      The information required by this Item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders to be held on May 26, 2005 under the section entitled “Proposal 2 — Ratification of Selection of Independent Registered Public Accounting Firm.”

PART IV

      The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as a part of this annual report.

VITRIA TECHNOLOGY, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Our internal control system has been designed to provide reasonable, not absolute, assurance to our management and Board of Directors that the objectives of our control system with respect to the integrity, reliability and fair presentation of published financial statements are met. Even an effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even those internal control systems determined to be effective can provide only reasonable assurance that financial statements are free of material errors.

      Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, which was conducted according to the COSO criteria, we have concluded that our internal control over our financial reporting was not effective in achieving its objectives as of December 31, 2004 due to one material weakness that existed in our internal controls as of that date.

      A material weakness is a control deficiency or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based on management’s assessment of our internal control over financial reporting as of December 31, 2004, the following material weakness existed as of that date:

      As of December 31, 2004, our review and supervision procedures over the recording of activity at our Japanese subsidiary were inadequate in that (a), there was no documented evidence of certain levels of local review of revenue recognition calculations nor documentation of points to be considered; (b), there was a lack of segregation of duties at this subsidiary due to small headcount; and (c) certain procedures carried out by external consultants were not adequately tested and reviewed. Taken together, these deficiencies constitute a material weakness in our system of internal controls over financial reporting. These deficiencies resulted in potential misstatements at December 31, 2004, which were corrected before the December 31, 2004 financial statements were finalized. We have taken action to remediate this material weakness, and we expect that future tests of internal controls over the Japanese location will determine that the control is operating effectively.

      Our independent registered public accounting firm has issued an attestation report on management’s assessment of our internal control over financial reporting which is included elsewhere herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM — INTERNAL CONTROLS

To The Board of Directors and Stockholders of Vitria Technology, Inc. and Subsidiaries:

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Vitria Technology, Inc. and Subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment. As of December 31, 2004, the Company’s review and supervision procedures over the recording of activity at its Japanese subsidiary were inadequate in that (a), there was no documented evidence of certain levels of local review of revenue recognition calculations nor documentation of points to be considered; (b), there was a lack of segregation of duties at the subsidiary due to small headcount; and (c), certain procedures carried out by external consultants were not adequately tested and reviewed. Taken together, these deficiencies constitute a material weakness in the Company’s system of internal controls over financial reporting. These deficiencies resulted in potential misstatements at December 31, 2004, which were caught and corrected before the December 31, 2004 financial statements were finalized. However, these control deficiencies result in more than a remote likelihood that a material misstatement to the Company’s annual or interim financial statements will not be prevented or detected. Accordingly, management has determined that these control deficiencies constitute a material weakness. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 31, 2004, and this report does not affect our report dated February 11, 2005 on those consolidated financial statements.

      In our opinion, management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued by COSO. Also in our opinion, because of the effects of the material weakness described above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control — Integrated Framework issued by COSO.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheet of Vitria Technology, Inc as of December 31, 2004 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the year ended December 31, 2004, and our report dated February 11, 2005 expressed an unqualified opinion thereon.

We do not express an opinion or any other form of assurance on management’s statements regarding corrective actions taken by the Company after December 31, 2004.

/s/ BDO Seidman, LLP

San Francisco, California

February 11, 2005

REPORT OF BDO SEIDMAN, LLP, INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM — FINANCIAL STATEMENT

To the Board of Directors and Stockholders of Vitria Technology, Inc.:

      We have audited the accompanying consolidated balance sheet of Vitria Technology, Inc. as of December 31, 2004 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended. We have also audited the 2004 schedule listed in the accompanying index. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and the schedule. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vitria Technology, Inc. at December 31, 2004, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

      Also, in our opinion, the 2004 schedule presents fairly, in all material respects, the information set forth therein.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Vitria Technology, Inc.’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 11, 2005 expressed an unqualified opinion on Management’s Assessment of the Effectiveness of Internal Control Over Financial Reporting and an adverse opinion on the Effectiveness of Internal Control Over Financial Reporting because of a material weakness.

San Francisco, California

February 11, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Vitria Technology, Inc.:

      We have audited the accompanying consolidated balance sheet of Vitria Technology, Inc. as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2003. Our audit also included the financial statement schedule listed in the Index at Item 15 of this Annual Report on Form 10-K, with respect to each of the two years in the period ended December 31, 2003. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vitria Technology, Inc. at December 31, 2003, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule with respect to each of the two years in the period ended December 31, 2003, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

Palo Alto, California

January 22, 2004

VITRIA TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

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

VITRIA TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS