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                                                                   EXHIBIT 10.26

June 10, 2004

Gary Velasquez
[Address]
[Address]

Dear Gary:

This letter sets forth the substance of the separation agreement (the
"Agreement") that Vitria Technology, Inc. (the "Company") is offering to you to
aid in your employment transition.

      1.    SEPARATION. Your last day of employment with the Company was April
21, 2004, (the "Separation Date"), the date you resigned as President and Chief
Executive Officer and as a director.

      2.    ACCRUED SALARY AND PAID TIME OFF. You acknowledge that on the
Separation Date, the Company paid you all accrued salary, and all accrued and
unused vacation earned through the Separation Date, subject to standard payroll
deductions and withholdings. You are entitled to these payments by law.

      3.    SEVERANCE PAYMENTS. Although the Company has no obligation to do so,
if you sign this Agreement and allow it to become effective, then within ten
(10) business days after the Effective Date (as defined in section 15 of this
Agreement), the Company will pay you, as severance, the equivalent of twelve
(12) months of your base salary in effect during April 2004, payable in equal
monthly installments over a twelve (12) month period, subject to standard
payroll deductions and withholdings. The Company's obligation to make the
payments provided for in sections 3 and 4 of this Agreement shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others; provided,
however, that this provision shall not affect or limit any of the Company's
rights in the event of a material breach of this Agreement by the Executive.

      4.    HEALTH INSURANCE. To the extent provided by federal COBRA law and
the Company's current group health insurance policies, you are eligible to
continue your current health insurance benefits at your own expense. Later, you
may be able to convert to an individual policy through the provider of the
Company's health insurance. If you timely elect continued coverage under COBRA,
the Company will pay the COBRA premiums necessary to continue your current
health insurance benefits for twelve (12) months following the Separation Date.

      5.    STOCK OPTIONS. Your stock options will be treated as follows.

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            (i)   187,500 OPTIONS GRANTED ON JULY 17, 2002. You were granted
187,500 stock options on July 17, 2002. Vesting of your stock options from this
grant ceased as of the Separation Date, at which time you had vested in 82,031
options from this grant. Your right to exercise any vested shares, and all other
rights and obligations with respect to these options, will be as set forth in
your stock option agreement(s), grant notice(s) and applicable plan documents.

            (ii)  62,500 OPTIONS GRANTED ON JULY 17, 2002. You were granted
62,500 stock options on July 17, 2002. Vesting of your stock options from this
grant ceased as of the Separation Date, at which time you had not vested in any
options from this grant.

            (iii) 250,000 OPTIONS GRANTED ON JANUARY 31, 2003. You were granted
250,000 stock options on January 31, 2003. If you sign this Agreement and allow
it to become effective, the Company will accelerate the vesting of these options
for one year such that as of the Separation Date, you will have vested in a
total of 135,416 options from this grant. Except as expressly provided herein,
your rights and obligations with respect to these options will be as set forth
in your stock option agreement(s), grant notice(s) and applicable plan
documents.

            (iv)  250,000 OPTIONS GRANTED ON AUGUST 26, 2003. You were granted
250,000 stock options on August 26, 2003. Vesting of your stock options from
this grant ceased as of the Separation Date, at which time you had vested in
36,458 options from this grant. Except as expressly provided herein, your rights
and obligations with respect to these options will be as set forth in your stock
option agreement(s), grant notice(s) and applicable plan documents.

The Company makes no representation or warranty as to the tax treatment of these
options. All other rights and obligations with respect to your stock options
from this grant will be as set forth in your stock option agreement(s), grant
notice(s) and applicable plan documents.

      6.    COMMISSION PAYMENTS. After the Separation Date, the Company may ask
you to perform certain services (the "Services") relating to one or more
specific healthcare deals involving the Company (the "Deal(s)"). The Services
generally will include asking you to communicate with a current or potential
Company customer in order to try to convince the customer to buy the Company's
products or services. Any such request must be made in writing, signed by you
and a duly authorized officer of the Company, and will include a description and
terms of the Services. If you abide by all of your obligations under the terms
of such a request and the Deal(s) for which you provide Services close(s) on or
before September 30, 2004, then after receipt of payments pursuant to the terms
of the Deal(s) the Company will pay you a commission of two percent (2.0%) of
the upfront license fee and two percent (2.0%) of payments received by the
Company for one (1) year of support services, in accordance with the Company's
standard practices for payment of commissions (the "Commission Payment(s)"). The
Company will issue you an IRS Form 1099 with respect to any Commission
Payment(s). You acknowledge that you will be entirely responsible for the
payment of all taxes due and owing as a result of any Commission Payment(s). You
hereby indemnify the Company and hold it harmless from any liability for any
taxes, contributions, penalties, and interest that may be assessed by any taxing
or governmental authority against the Company with respect to any Commission
Payment(s).

      7.    OTHER COMPENSATION OR BENEFITS. You acknowledge that, except as
expressly provided in this Agreement, you will not receive any additional
compensation, severance or benefits after the

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Separation Date, with the sole exception of any benefit the right to which has
vested under the express terms of a Company benefit plan document.

      8.    EXPENSE REIMBURSEMENTS. You agree that, within sixty (60) days of
the Effective Date, you will submit a documented expense reimbursement statement
reflecting all business expenses you incurred through the Separation Date, if
any, for which you seek reimbursement. The Company will reimburse you for these
expenses pursuant to its regular business practice.

      9.    RETURN OF COMPANY PROPERTY. By the Effective Date, you must return
to the Company all Company documents (and all copies thereof) and other Company
property in your possession or control, including, but not limited to: Company
files, notes, memoranda, correspondence, agreements, draft documents, notebooks,
logs, drawings, records, plans, proposals, reports, forecasts, financial
information, sales and marketing information, research and development
information, personnel information, specifications, computer-recorded
information, tangible property and equipment, credit cards, entry cards,
identification badges and keys; and any materials of any kind that contain or
embody any proprietary or confidential information of the Company (and all
reproductions thereof in whole or in part). You agree to make a diligent search
for any Company documents and property (as described above) in your possession
or control prior to the Effective Date.

      10.   PROPRIETARY INFORMATION OBLIGATIONS. You acknowledge your continuing
obligations under your Proprietary Information and Inventions Agreement, a copy
of which is attached hereto as Exhibit A.

      11.   CONFIDENTIALITY. The provisions of this Agreement will be held in
strictest confidence by you and the Company and will not be publicized or
disclosed in any manner whatsoever; provided, however, that: (a) you may
disclose this Agreement to your immediate family; (b) the parties may disclose
this Agreement in confidence to their respective attorneys, accountants,
auditors, tax preparers, and financial advisors; (c) the Company may disclose
this Agreement as necessary to fulfill standard or legally required corporate
reporting or disclosure requirements (such as filing the Agreement with the U.S.
Securities and Exchange Commission pursuant to the Securities and Exchange Act
of 1934, as amended); and (d) the parties may disclose this Agreement insofar as
such disclosure may be necessary to enforce its terms or as otherwise required
by law.

      12.   NONDISPARAGEMENT. Both you and the Company (through its directors
and officers) agree not to disparage the other party, and the other party's
officers, directors, employees, shareholders and agents, in any manner likely to
be harmful to them or their business, business reputation or personal
reputation; provided that both you and the Company may respond accurately and
fully to any question, inquiry or request for information when required by legal
process. You also agree that you will not voluntarily assist any person in
bringing or pursuing legal action against the Company, its agents, successors,
representatives, employees and related and/or affiliated companies based on
events occurring prior to the Separation Date.

      13.   YOUR RELEASE. In exchange for the benefits set forth in sections 3,
4, 5 and 6, and other benefits you are receiving under the terms of this
Agreement to which you would not otherwise be entitled, you hereby generally and
completely release the Company and its directors, officers, employees,
shareholders, partners, agents, attorneys, predecessors, successors, parent or
subsidiary entities, insurers, affiliates and assigns from any and all claims,
liabilities and obligations, both

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known and unknown, that arise out of or are in any way related to events, acts,
conduct, or omissions prior to or on the date you sign this Agreement. This
general release includes, but is not limited to: (1) all claims arising out of
or in any way related to your employment with the Company or the termination of
that employment; (2) all claims related to your compensation or benefits from
the Company, including salary, bonuses, commissions, vacation pay, expense
reimbursements, severance pay, fringe benefits, stock, stock options or any
other ownership interests in the Company; (3) all claims for breach of contract,
wrongful termination or breach of the implied covenant of good faith and fair
dealing; (4) all tort claims, including claims for fraud, defamation, emotional
distress and discharge in violation of public policy; and (5) all federal,
state, and local statutory claims, including claims for discrimination,
harassment, retaliation, attorneys' fees, or other claims arising under the
federal Civil Rights Act of 1964 (as amended), the federal Americans with
Disabilities Act of 1990, the federal Age Discrimination in Employment Act of
1967 (as amended) ("ADEA"), the California Fair Employment and Housing Act, and
the California Labor Code. Notwithstanding the foregoing, your release shall not
extend to any claims that may arise after this Agreement is executed, including,
without limitation, any claims for breach of this Agreement.

      14.   WAIVER OF UNKNOWN CLAIMS. Except as to claims which have not been
released by the Company as provided herein, the Company and Employee expressly
waive and relinquish all rights and benefits under California Civil Code section
1542, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR."

      15.   ADEA WAIVER. You hereby acknowledge that you are knowingly and
voluntarily waiving and releasing any rights you may have under the ADEA, and
that the consideration given for the foregoing waiver is in addition to anything
of value to which you were already entitled. You have been advised by this
writing, as required by the ADEA that: (a) your waiver and release do not apply
to any claims that may arise after your signing of this Agreement; (b) you
should consult with an attorney prior to executing this release; (c) you have
twenty-one (21) days within which to consider this release (although you may
choose to voluntarily execute this release earlier); (d) you have seven (7) days
following the execution of this release to revoke the Agreement; and (e) this
Agreement will not be effective until the eighth day after this Agreement has
been signed both by you and by the Company ("Effective Date").

      16.   THE COMPANY'S RELEASE. In consideration for your release as set
forth in this Agreement, the Company agrees to and does hereby release and
forever discharge you from any claims; provided, however, that this release
shall not extend to: (1) any claims that may arise after this Agreement is
executed, including without limitation any claims for breach of this Agreement;
(2) any claims arising at any time out of your obligations to protect the
Company's proprietary information, including without limitation any claims
arising from your obligations under your Proprietary Information and Inventions
Agreement, claims arising under the California Uniform Trade Secrets Act, or
common law claims arising from these obligations; (3) any claims arising from
facts which are finally adjudged by a court of competent jurisdiction to be a
breach of fiduciary duty or a crime under any applicable law.

      17.   MISCELLANEOUS. This Agreement, together with Exhibit A, constitutes
the complete, final and exclusive embodiment of the entire agreement between you
and the Company with regard to

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this subject matter. It is entered into without reliance on any promise or
representation, written or oral, other than those expressly contained herein,
and it supersedes any other such promises or representations. This Agreement may
not be modified or amended except in a writing signed by both you and a duly
authorized officer of the Company. This Agreement will bind the heirs, personal
representatives, successors and assigns of both you and the Company, and inure
to the benefit of both you and the Company, their heirs, successors and assigns.
The failure to enforce any breach of this Agreement shall not be deemed to be a
waiver of any other or subsequent breach. For purposes of construing this
Agreement, any ambiguities shall not be construed against either party as the
drafter. If any provision of this Agreement is determined to be invalid or
unenforceable, in whole or in part, this determination will not affect any other
provision of this Agreement and the provision in question will be modified by
the court so as to be rendered enforceable in a manner consistent with the
intent of the parties insofar as possible. This Agreement will be deemed to have
been entered into and will be construed and enforced in accordance with the laws
of the State of California as applied to contracts made and to be performed
entirely within California. This Agreement may be executed in counterparts which
shall be deemed to be part of one original, and facsimile signatures shall be
equivalent to original signatures.

If this Agreement is acceptable to you, please sign below and return the
original to me.

I wish you the best in your future endeavors.

Sincerely,

VITRIA TECHNOLOGY, INC.

By: /s/ Dale Skeen
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        Dale Skeen
        Chief Executive Officer

AGREED:

/s/ Gary Velasquez
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Gary Velasquez

Exhibit A:    Proprietary Information and Inventions Agreement

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                                    EXHIBIT A

                PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT