<PAGE>


Exhibit 10.2

                        SEPARATION AND RELEASE AGREEMENT

         This Separation and Release Agreement (this "AGREEMENT") is made as of
July 2, 1999 ("EFFECTIVE DATE") by and between DAOU Systems, Inc., a Delaware
corporation (the "COMPANY"), and Frederick C. McGee, an individual residing in
California ("MR. MCGEE").

                                    RECITALS

         A Mr. McGee currently is employed by the Company as Chief Financial
Officer ("CFO").

         B. The Company and Mr. McGee desire to settle and dispose of, fully and
completely, all claims, demands, and causes of action which they may have
against each other, known or unknown, including those claims, demands and causes
of action arising out of the employment relationship and its termination.

                                    AGREEMENT

         The parties to this Agreement, intending to be legally bound, agree as
follows:

     1.       DEFINITIONS.  For purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1:

              "AGREEMENT" means this Separation and Release Agreement,
              including any exhibits hereto, as amended in writing from time to
              time.

              "BOARD OF DIRECTORS" means the board of directors of the Company.
              "Company" as defined in the Preamble.

              "CONFIDENTIAL INFORMATION" means: (i) any and all trade secrets
              concerning the business and affairs of the Company, product
              specifications, data, know-how, formulae, compositions, processes,
              designs, sketches, photographs, graphs, drawings, samples,
              inventions and ideas, past, current and planned research and
              development, current and planned manufacturing and distribution
              methods and processes, customer lists, current and anticipated
              customer requirements, price lists, market studies, business
              plans, computer software and programs (including object code and
              source code), computer software and database technologies,
              systems, structures and architectures and related processes,
              formulae, compositions, improvements, devices, know-how,
              inventions, discoveries, concepts, ideas, designs, methods and
              information of the Company and any other information, however
              documented, of the Company that is a trade secret within the
              meaning of the Uniform Trade Secrets Act (California Civil Code
              Sections 3426 through 3426.11). Of particular importance to the
              Company is the protection of the confidentiality of its manner and
              method of integrating and managing healthcare technology networks
              and information technology to increase


                                       1

<PAGE>


              productivity and profit and to reduce cost; the particular
              combination of network products which the Company utilizes is not
              used by any other business or entity and is solely the product of
              research and development by the Company.

              "CORE BUSINESS" means (1) IT software application
              implementation; (2) communication infrastructure services; (3) IT
              management consulting; and (4) IT design, implementation, support
              services for healthcare enterprises, as further detailed in the
              Company Form 10-K, for the period ending December 31, 1999, as
              filed with the Securities and Exchange Commission.

              "DIRECT COMPETITOR" means any company engaged in the Company's
              "Core Business."

              "EFFECTIVE DATE" means the date stated in the first paragraph of
              this Agreement.

              "PERSON" means any individual, corporation (including any
              non-profit corporation), general or limited partnership, limited
              liability company, joint venture, estate, trust, association,
              organization or governmental body.

              "SEPARATION DATE" as defined in Section 2.1.

              "SEVERANCE PAYMENTS" as defined in Section 5.

              "SEVERANCE PERIOD" as defined in Section 5.

     2.       EMPLOYMENT DURING RECRUITING OF CFO.

              2.1   EMPLOYMENT DURING RECRUITING. Mr. McGee and the Company
agree that from the Effective Date, the Company will begin a search to recruit
and employ a new CFO ("RECRUITING PERIOD"), Mr. McGee and the Company agree that
Mr. McGee may continue to perform his current duties as CFO during the
recruiting period for a period at the discretion of the Company, but no later
than August 31, 1999 ("SEPARATION DATE").

             2.2   SALE OF THE COMPANY DURING RECRUITING PERIOD. In the event
the Company engages in a negotiation for the sale of the Company during the
Recruiting Period and prior to the Separation Date defined in Section 2.1 above,
Mr. McGee agrees that the Separation Date may be extended at the Company's
discretion. Mr. McGee agrees that if the Company desires to extend the
Separation Date through the negotiation of the sale, he will agree to perform
his duties as CFO through the date designated by the Company.

             2.3   VESTING OF OPTIONS. Mr. McGee's options to purchase shares of
the Company's Common Stock will continue to vest, be exercisable and otherwise
be according to the terms and conditions of the Company's 1996 Stock Option Plan
(the "PLAN") and his Stock Option Agreement(s) ("OPTION AGREEMENT") through the
Separation Date. After the Separation Date, Mr. McGee's options to purchase
shares of Company common stock issued pursuant to the Plan will be controlled in
all respects by the terms and conditions of the Plan and the Option
Agreement(s).


                                       2

<PAGE>


             2.4   AT-WILL-EMPLOYMENT. Nothing in this Agreement may be
construed to contradict or amend Mr. McGee's at-will employment relationship
with the Company. While certain paragraphs of this Agreement describe events
which could occur at a particular time in the future or discuss the effect of a
termination for "cause", nothing in this Agreement may be construed as a
guarantee of employment of any length. Both Mr. McGee and the Company have the
right to terminate the employment relationship at any time and for any reason,
with or without notice.

     3.       PAYMENT OF FINAL WAGES. On the Separation Date, the Company will
provide Mr. McGee with a final paycheck which includes final wages through the
Separation Date, less all applicable federal, state and local income, social
security and other payroll deductions ("FINAL WAGES"). Final Wages include any
accrued but unused vacation and sick leave benefits. The Company will pay Mr.
McGee reasonable and customary business expenses, if any, incurred through the
Separation Date.

     4.       RELEASE OF ALL CLAIMS.  In exchange for the continuation of
employment and benefits described in Section 2 above, Mr. McGee agrees as
follows

              4.1  TERMS OF RELEASE. Mr. McGee, for himself and his heirs,
successors and assigns, each fully releases, and discharges Company, its
officers, directors, employees, shareholders, attorneys, accountants, other
professionals, insurers and agents of the other (collectively "AGENTS"), and all
entities related to each party, including, but not limited to, heirs, executors,
administrators, personal representatives, assigns, parent, subsidiary and sister
corporations, affiliates, partners and co-venturers (collectively "RELATED
ENTITIES"), from all rights, claims, demands, actions, causes of action,
liabilities and obligations of every kind, nature and description whatsoever,
Mr. McGee now has, owns or holds or has at anytime had, owned or held or may
have against the Company, Agents or Related Entities from any source whatsoever,
whether or not arising from or related to the facts recited in this Release and
through the Effective Date. Mr. McGee specifically releases and waives any and
all claims arising under any express or implied contract, rule, regulation or
ordinance, including, without limitation, Title VII of the Civil Rights Act of
1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the
California Fair Employment and Housing Act, and the Age Discrimination in
Employment Act, as amended ("ADEA").

              4.2  SECTION 1542 WAIVER. This Release is intended as a full
and complete release and discharge of any and all claims that Mr. McGee may
have against the Company, Agents or Related Entities through the Effective
Date. In making this release, Mr. McGee intends to release the Company,
Agents and Related Entities from liability of any nature whatsoever for any
claim of damages or injury or for equitable or declaratory relief of any
kind, whether the claim, or any facts on which such claim might be based, is
known or unknown to him. Mr. McGee expressly waives all rights under
Section 1542 of the Civil Code of the State of California, which Mr. McGee
understands provides as follows:

              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


                                      3



<PAGE>

              MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

     Mr. McGee acknowledges that he may discover facts different from or in
addition to those which he now believes to be true with respect to this Release.
Mr. McGee agrees that this Release shall remain effective notwithstanding the
discovery of any different or additional facts.

              4.3  WAIVER OF CERTAIN CLAIMS. Mr. McGee acknowledges that he has
been advised in writing of his right to consult with an attorney prior to
executing the waivers set out in this Release, and that he has been given a
21-day period in which to consider entering into the release of ADEA claims, if
any. In addition, Mr. McGee acknowledges that he has been informed that he may
revoke a signed waiver of the ADEA claims for up to seven (7) days after
executing this Release.

     5.       SEVERANCE PAYMENT UPON TERMINATION OF EMPLOYMENT.

              5.1  AMOUNT OF SEVERANCE. In exchange for Mr. McGee's agreement
to Sections 6, 7, 8 and 9 of this Agreement, Mr. McGee is entitled to severance
in equal payments, each in an amount equal to the most recent, regular monthly
rate of pay received by Mr. McGee during the Employment Period ("SEVERANCE
PAYMENTS"). Severance Payments will be less all applicable federal, state and
local income, social security and other payroll deductions.

              5.2  SEVERANCE PERIOD. Mr. McGee will be entitled to Severance Pay
for a period of twelve (12) months from the Separation Date ("SEVERANCE
PERIOD"). Mr. McGee's Severance Payments will cease if he (a) violates Sections
6, 7, 8 or 9 of this Agreement; (b) resigns his employment prior to the
Separation Date; or (c) is terminated by the Company for "CAUSE" prior to the
Separation Date. For purposes of this Agreement, Cause is defined as (i) Mr.
McGee's material breach of this Agreement or the Confidentiality Agreement which
he signed on June 28, 1996, which is attached as Exhibit A to this Agreement;
(ii) Mr. McGee's failure or refusal to substantially and materially perform
according to or to comply with the reasonable policies and directions
established by the Company or the Board; (iii) the appropriation (or attempted
appropriation) of a material business opportunity of the Company including
attempting to secure or securing any personal profit in connection with any
transaction entered into on behalf of the Company; (iv) the misappropriation (or
attempted misappropriation) of any of the Company's funds or property; (v) the
conviction of, or the entering of a guilty plea or plea of no contest with
respect to a felony, the equivalent thereof, or any other crime with respect to
which imprisonment is a possible punishment; (vi) willful misconduct or
incompetence; (vii) physical or mental disability or other inability to perform,
with or without reasonable accommodation, the essential functions of his
position; or (viii) death.

     6.      RELEASE. Mr. McGee's right to Severance Payments will be contingent
upon his execution of a release and discharge of the Company, its present and
former agents, employees, officers, directors, shareholders, principals,
predecessors, alter egos, partners, parents, subsidiaries, affiliates,
attorneys, insurers, successors and assigns, from any and all claims, demands,
grievances, causes of action or suit of any kind arising out of, or in any way
connected with, the dealings between the parties through the Separation Date,
including claims arising out of the employment relationship and its termination.
This release would include any and all legal


                                       4

<PAGE>

or administrative claims arising under any express or implied contract, law,
rule, regulation, or ordinance, including, but not limited to, Title VII of
the Civil Rights Act of 1964, the Fair Labor Standards Act, the Americans
with Disabilities Act, the California Fair Employment and Housing Act, the
Family Rights' Act, the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") or the Age Discrimination in Employment Act of 1967, as
amended ("ADEA"). The release will be substantially the form attached to this
Agreement as Exhibit "B."

     7.       CONTINUED REPRESENTATION. Unless a conflict of interest arises
which mandates the engagement of separate counsel, Mr. McGee will consent to be
represented by counsel for the Company in the matter of In RE DAOU SYSTEMS
SECURITIES LITIGATION, United States District Court, Southern District, Case No.
98-CV-1537 TW. Mr. McGee will forfeit his right to benefits under Sections 2 and
5 of this Agreement in the event he violates this Section 7.

     8.       NON COMPETITION THROUGH SEVERANCE PERIOD. During the Term of this
Agreement, including the Severance Period, if any, Mr. McGee is prohibited from
engaging in any activity which is competitive with the Company's Core Business.
Mr. McGee will forfeit his right to benefits under Sections 2 and 5 of this
Agreement in the event he violates this Section 8.

     9.       NON-SOLICITATION OF EMPLOYEES. For a period of two years following
his Separation Date, Mr. McGee agrees he will not solicit for employment other
individuals who are the Company's employees or induce the Company's employees to
terminate their employment with the Company for the purpose of competing with
the Company.

     10.      CONTINUING OBLIGATIONS UNDER CONFIDENTIALITY AGREEMENT. Mr.
McGee understands and agrees that after the Separation Date he has a continuing
obligation to protect the Company's Confidential Information according to the
terms and conditions of the Employee Confidentiality and Inventions Agreement
which Mr. McGee signed on June 28, 1996 and which is attached as Exhibit A to
this Agreement.

     11.      CONFIDENTIALITY OF AGREEMENT. Mr. McGee further agrees to keep
confidential the terms of this Agreement and to refrain from disclosing any
information regarding this Agreement and its terms to any third party, unless
required to do so (a) by a regulatory body (e.g. filings with the Securities
Exchange Commission ("SEC") or the ASE); (b) in financial disclosures to
auditors or in audited financial statements; or (c) under oath, if properly
ordered, in a court of competent jurisdiction. Mr. McGee agrees to notify the
Company in writing upon first notification that he may be required by law to
disclose any information deemed confidential by this Agreement. Notice must be
provided in sufficient time for the party receiving notice to oppose or
otherwise respond to the request.

     12.      NON-DISPARAGEMENT. Mr. McGee and the Company agree they will not
adversely interfere with each others business affairs, including, without
limitation, making disparaging remarks, either orally or in writing, to any
person disparaging, criticizing or speaking ill of the other party's business or
reputation, management or employees in any way and for any reason.


                                       5

<PAGE>

     13.      DISPUTES OR CONTROVERSIES. Mr. McGee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, Mr. McGee, and their respective attorneys and experts, who will agree,
in advance and in writing, to receive and maintain all such information in
secrecy, except as may be limited by them in writing.

     14.      WAIVER OF CERTAIN CLAIMS. Mr. McGee acknowledges that with this
Agreement he has been advised in writing of his right to consult with an
attorney prior to executing the waivers set out in this Agreement, and that he
has been given a 21-day period in which to consider entering into the release of
ADEA claims, if any. In addition, Mr. McGee acknowledges that he has been
informed that he may revoke a signed waiver of the ADEA claims for up to seven
(7) days after executing this Release.

     15.      GENERAL PROVISIONS.

              15.1  WAIVER. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any delay
by either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege, and no
single or partial exercise of any such right, power, or privilege will preclude
any other or further exercise of such right, power, or privilege or the exercise
of any other right, power, or privilege. To the maximum extent permitted by
applicable law, (a) no claim or right arising out of this Agreement can be
discharged by one party, in whole or in part, by a waiver or renunciation of the
claim or right unless in writing signed by the other party; (b) no waiver that
may be given by a party will be applicable except in the specific instance for
which it is given; and (c) no notice to or demand on one party will be deemed to
be a waiver of any obligation of such party or of the right of the party giving
such notice or demand to take further action without notice or demand as
provided in this Agreement.

              15.2  BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This
Agreement shall inure to the benefit of, and shall be binding upon, the parties
hereto and their respective successors, assigns, heirs, and legal
representatives, including any entity with which the Company may merge or
consolidate or to which all or substantially all of its assets may be
transferred. The duties and covenants of Consultant under this Agreement, being
personal, may not be delegated,

              15.3  NOTICES. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of receipt), provided
that a copy is mailed by registered mail, return receipt requested or (c) when
received by the addressee, if sent by a nationally recognized overnight delivery
service (receipt requested), in each case to the appropriate addresses and
facsimile numbers set forth below (or to such other addresses and facsimile
numbers as a party may designate by notice to the other parties):


                                       6

<PAGE>

                        If to the Company:   DAOU Systems, Inc.
                                             5120 Shoreham Place
                                             San Diego, CA  92122
                                             ATTENTION:  President
                                             Facsimile No.:  (619) 452-2789

                        With a copy to:      Baker & McKenzie
                                             101 West Broadway, Twelfth Floor
                                             San Diego, California  92101-3890
                                             ATTENTION:  John J. Hentrich, Esq.
                                             Facsimile No.:  (619) 236-0429

                        If to Mr. McGee:     Frederick McGee
                                             4786 Sun Valley
                                             Del Mar, CA  92014

              15.4  ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the
entire agreement between the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, oral or written, between
the parties hereto with respect to the subject matter hereof. This Agreement may
not be amended orally, but only by an agreement in writing signed by the parties
hereto.

              15.5  GOVERNING LAW.  This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California.

              15.6  BINDING ARBITRATION. Any dispute or claim arising out of
this agreement shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS) and will be governed by the Model Employment Arbitration rules
of AAA. The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. Notwithstanding any rule of
AAA to the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will apply California substantive law in
all respects. The party prevailing in the resolution of any such claim will be
entitled, in addition to such other relief as may be granted, to an award of all
actual attorneys fees and costs incurred in pursuit of the claim, without regard
to any statute, schedule, or rule of court purported to restrict such award.

              15.7  ATTORNEYS' FEES. Unless otherwise specifically provided in
this Agreement, in the event of any controversy, claim or dispute between any of
the parties arising out of or relating to this Agreement, or the breach thereof,
the prevailing party shall be entitled to recover, from the losing party,
reasonable attorneys' fees, expenses and costs actually incurred in


                                       7

<PAGE>

the case of arbitration of any such controversy, claim or dispute, or by the
court in which any such controversy, claim or dispute is resolved.

              15.8  SECTION HEADINGS, CONSTRUCTION. The section headings in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "section" or "sections" refer to the
corresponding section or sections of this Agreement unless otherwise specified.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.

              15.9  SEVERABILITY. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.

              15.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.

     IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.



DAOU SYSTEMS, INC.:                       MR. FREDERICK MCGEE:


By:  /s/   Larry Grandia                  By:  /s/   Frederick C. McGee
     ------------------------------            -------------------------
           Larry Grandia, President                Frederick C. McGee


                                       8


<PAGE>

                                    EXHIBIT A

                                 GENERAL RELEASE

         This GENERAL RELEASE ("Release") is entered into effective as of July
2, 1999 ("Effective Date") by and between DAOU Systems, Inc., a Delaware
corporation (the "COMPANY"), and Frederick C, McGee, an individual resident of
the State of California ("Mr. McGee") with reference to the following facts:

                                    RECITALS

         A.       The parties hereto entered into a Separation and Release
Agreement on July 2, 1999 ("AGREEMENT"). Pursuant to the terms and conditions of
the Agreement, and contingent upon satisfaction of the conditions described in
that Agreement, Mr. McGee would become eligible for severance payments for up to
twelve (12) months (the "SEVERANCE PERIOD") beginning on the Separation Date in
exchange for Employee's release of the Company from all claims which Employee
may have against the Company as of the Separation Date.

         B.       The parties desire to dispose of, fully and completely, all
claims which Mr. McGee may have against the Company in the manner set forth in
this Release.

                                    AGREEMENT

         1.       RELEASE. In exchange for the consideration described in the
Agreement, receipt of which is acknowledged, Mr. McGee, for himself and his
heirs, successors and assigns, each fully releases, and discharges Company, its
officers, directors, employees, shareholders, attorneys, accountants, other
professionals, insurers and agents of the other (collectively "AGENTS"), and all
entities related to each party, including, but not limited to, heirs, executors,
administrators, personal representatives, assigns, parent, subsidiary and sister
corporations, affiliates, partners and co-venturers (collectively "RELATED
ENTITIES"), from all rights, claims, demands, actions, causes of action,
liabilities and obligations of every kind, nature and description whatsoever,
Mr. McGee now has, owns or holds or has at anytime had, owned or held or may
have against the Company, Agents or Related Entities from any source whatsoever,
whether or not arising from or related to the facts recited in this Release. Mr.
McGee specifically releases and waives any and all claims arising under any
express or implied contract, rule, regulation or ordinance, including, without
limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991, the Americans with Disabilities Act, the California Fair Employment and
Housing Act, and the Age Discrimination in Employment Act, as amended ("ADEA").

          2.      SECTION 1542 WAIVER. This Release is intended as a full and
complete release and discharge of any and all claims that Mr. McGee may have
against the Company, Agents or Related Entities through the Separation Date.
In making this release, Mr. McGee intends to release the Company, Agents and
Related Entities from liability of any nature whatsoever for any claim of
damages or injury or for equitable or declaratory relief of any kind, whether
the claim, or any facts on which such claim might be based, is known or
unknown to him- Mr. McGee expressly waives all rights under Section 1542 of
the Civil Code of the State of California, which Mr. McGee understands
provides as follows:

                                       9

<PAGE>

                  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.

Mr. McGee acknowledges that he may discover facts different from or in addition
to those which he now believes to be true with respect to this Release. Mr.
McGee agrees that this Release shall remain effective notwithstanding the
discovery of any different or additional facts.

          3.      WAIVER OF CERTAIN CLAIMS. Mr. McGee acknowledges that with
this Release he has been advised in writing of his right to consult with an
attorney prior to executing the waivers set out in this Release, and that he has
been given a 21-day period in which to consider entering into the release of
ADEA claims, if any. In addition, Mr. McGee acknowledges that he has been
informed that he may revoke a signed waiver of the ADEA claims for up to seven
(7) days after executing this Release.

          4.      NO UNDUE INFLUENCE. This Release is executed voluntarily and
without any duress or undue influence. Mr. McGee acknowledges he has read this
Release and executed it with his full and free consent. No provision of this
Release shall be construed against any party by virtue of the fact that such
party or its counsel drafted such provision or the entirety of this Release.

          5.      CONFIDENTIALITY OF AGREEMENT AND RELEASE. Mr. McGee further
agrees to keep confidential the terms of the Agreement and this Release and to
refrain from disclosing any information regarding this Agreement and its terms
to any third party, unless required to do so (a) by a regulatory body (e.g.
filings with the Securities Exchange Commission ("SEC") or the ASE); (b) in
financial disclosures to auditors or in audited financial statements; or (c)
under oath, if properly ordered, in a court of competent jurisdiction. Mr. McGee
agrees to notify the Company in writing upon first notification that he may be
required by law to disclose any information deemed confidential by this
Agreement. Notice must be provided in sufficient time for the party receiving
notice to oppose or otherwise respond to the request.

        6.        GOVERNING LAW. This Release is made and entered into in the
State of California and accordingly the rights and obligations of the parties
hereunder shall in all respects be construed, interpreted, enforced and governed
in accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California.

        7.        SEVERABILITY. If any provision of this Release is held to be
invalid, void or unenforceable, the balance of the provisions of this Release
shall, nevertheless, remain in full force and effect and shall in no way be
affected, impaired or invalidated.

        8.        COUNTERPARTS. This Release may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute


                                       10

<PAGE>

one and the same instrument. This Release may be executed by facsimile, with
originals to follow by overnight courier.

        9.        DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising
out of this Release shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS) and will be governed by the Model Employment Arbitration rules
of AAA. The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. Notwithstanding any rule of
AAA to the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure Section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will apply California substantive law in
all respects. The party prevailing in the resolution of any such claim will be
entitled, in addition to such other relief as may be granted, to an award of all
actual attorneys fees and costs incurred in pursuit of the claim, without regard
to any statute, schedule, or rule of court purported to restrict such award.

        10.       ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter of this Agreement,
and supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written.

        11.       MODIFICATION; WAIVERS. No modification, termination or
attempted waiver of this Agreement will be valid unless in writing, signed by
the party against whom such modification, termination or waiver is sought to be
enforced.

        12.       AMENDMENT. This Agreement may be amended or supplemented only
by a writing signed by Mr. McGee and the Company.



Dated:            July 2, 1999                  /s/   Frederick C. McGee
      -----------------------------------       -------------------------------
                                                Frederick C. McGee

                                                DAOU SYSTEMS, INC.


Dated:                                         /s/   Larry Grandia
      ----------------------------------       --------------------------------
                                           By: Larry Grandia, President


                                       11