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                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

         This Employment Agreement is made as of June 15, 1999 by DAOU
Systems, Inc., a Delaware corporation ("EMPLOYER" or the "COMPANY"), and
Larry D. Grandia, an individual resident of the State of Utah ("EMPLOYEE").

                                    RECITALS

         WHEREAS, Employer desires to obtain the services of Employee, and
Employee desires to secure employment from Employer; and

         WHEREAS, Employer and Employee desire to set forth in this Agreement
the terms and conditions under which Employee is to be employed by Employer.

         NOW THEREFORE, Employer and Employee, in consideration of the mutual
promises set forth herein, hereby agree as follows:

                                    AGREEMENT

1.       DEFINITIONS

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

         "AAA" as defined in SECTION 10.10.

         "AGREEMENT" means this Employment Agreement, including any
attachments hereto, as amended in writing from time to time.

         "BENEFITS" as defined in SECTION 3.2.

         "BOARD OF DIRECTORS" means the board of directors of Employer.

         "CAUSE" means: (a) Employee's material breach of this Agreement; (b)
Employee's material failure to adhere to any written policy of Employer
generally applicable to officers of the Company if Employee has been given a
reasonable opportunity to comply with such policy or cure his failure to
comply (which reasonable opportunity must be granted during the ten-day
period preceding termination of this Agreement); (c) the appropriation (or
attempted appropriation) of a material business opportunity of Employer,
including attempting to secure or securing any personal profit in connection
with any transaction entered into on behalf of Employer; (d) the
misappropriation (or attempted misappropriation) of any of Employer's funds
or property; (e) 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; (f)
willful misconduct; (g) physical or mental disability or other inability to
perform the essential functions of his position, with or without reasonable
accommodation; or (h) death.

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         "CHANGE IN CONTROL" means a transaction whereby (a) substantially
all of the outstanding shares of Employer's Common Stock are exchanged for
cash or the securities (or combination thereof) of another Person, or (b) any
Person becomes the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or indirectly, of more
than fifty percent (50%) of the outstanding shares of Employer's Common Stock
at such time.

         "CONSULTING AGREEMENT" means the Consulting Agreement, dated as of
March 1, 1999, by and between Employer and Employee.

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

         "EMPLOYEE" as defined in the preamble of this Agreement.

         "EMPLOYER" as defined in the preamble of this Agreement.

         "EMPLOYER'S COMMON STOCK" means Employer's common stock, $0.001 par
value per share.

         "EMPLOYMENT" as defined in SECTION 2.1.

         "EMPLOYMENT PERIOD" means the term of the Employment under this
Agreement.

         "FAIR MARKET VALUE" of one Stock Option means the amount equal to
(i) the closing selling price per share of Employer's Common Stock on the
date in question, as reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system, LESS (ii) the
exercise price of such Stock Option.

         "FISCAL YEAR" means Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.

         "INCENTIVE COMPENSATION PLAN" means Employer's Incentive
Compensation Plan, attached hereto as ATTACHMENT A, as modified from time to
time.

         "OPTION PLAN" as defined in SECTION 3.4(a).

         "PERFORMANCE BONUS" as defined in SECTION 3.3.

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

         "POST-EMPLOYMENT PERIOD" as defined in SECTION 7.2.

         "RULES" as defined in SECTION 10.10.

         "SALARY" as defined in SECTION 3.1.

         "STOCK OPTIONS" as defined in SECTION 3.4(a).

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2.       EMPLOYMENT TERMS AND DUTIES

         2.1 EMPLOYMENT. Employer hereby employs Employee, and Employee
hereby accepts employment by Employer (the "EMPLOYMENT"), upon the terms and
conditions set forth in this Agreement.

         2.2 AT-WILL EMPLOYMENT. Employee's Employment relationship with
Employer is at-will, terminable at any time and for any reason, with or
without Cause, by either Employer or Employee. While certain paragraphs of
this Agreement describe events which could occur at a particular time in the
future, nothing in this Agreement may be construed as a guarantee of
Employment of any length.

         2.3 DUTIES. Employee will serve as the Chief Executive Officer of
Employer and have such other duties as are assigned or delegated to Employee
by the Board of Directors. Employee will (i) devote his entire business time,
attention, skill and energy exclusively to the business of Employer (except
for Employee's reasonable, outside board or professional activities), (ii)
use his best efforts to promote the success of Employer's business and (iii)
cooperate fully with the Board of Directors in the advancement of the best
interests of Employer. If Employee continues to serve or is elected as a
director of Employer or as a director or officer of any of its affiliates,
then Employee will fulfill his duties as such director or officer without
additional compensation, except as set forth in SECTION 3.4(a).

         2.4 COMPLIANCE WITH EMPLOYER'S POLICIES. Employee acknowledges and
agrees that compliance with Employer's policies, practices and procedures is
a term and condition of the Employment under this Agreement.

3.       COMPENSATION

         3.1 SALARY. Employee will be paid an annual salary (the "SALARY") of
Two Hundred Thirty Thousand Dollars ($230,000), which will be payable in
equal periodic installments according to Employer's customary payroll
practices. The Board of Directors (or a committee thereof) will review the
Salary no less frequently than annually.

         3.2 BENEFITS. Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, hospitalization, major medical and other employee benefit plans of
Employer that may be in effect from time to time, to the extent Employee is
eligible under the terms of those plans (collectively, the "BENEFITS"). In
addition, during the Employment Period, Employer will provide Employee with a
life insurance policy, providing for payment of One Million Dollars
($1,000,000) to the named beneficiaries to be specified by Employee. Employee
hereby represents and warrants that he is in good physical health and has not
been denied medical or life insurance in the past.

         3.3 ADDITIONAL COMPENSATION. As additional compensation for the
services to be rendered by Employee pursuant to this Agreement, Employer will
pay to Employee an annual performance bonus (the "PERFORMANCE BONUS") in an
amount up to One Hundred Fifty-Thousand Dollars ($150,000) in accordance with
the Incentive Compensation Plan. Upon commencement of employment, Employer will
pay to Employee a signing bonus in the amount of Fifty Thousand Dollars
($50,000), which signing bonus shall constitute a non-refundable advance

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against the Performance Bonus for Fiscal Year 1999. Subject to SECTION 8, in
order to be eligible to receive the Performance Bonus, Employee must be
employed by Employer on the date that the Performance Bonus is distributed by
the Employer.

         3.4 STOCK OPTIONS.

             (a) GRANT OF OPTIONS. Effective on the Effective Date, Employer
will grant to Employee options representing the right to purchase up to Four
Hundred Thousand (400,000) shares of Employer's Common Stock (collectively, the
"STOCK OPTIONS"). Two Hundred Fifty Thousand (250,000) of the Stock Options
shall be outside of the Company's 1996 Stock Option Plan (the "OPTION PLAN").
One Hundred and Fifty Thousand (150,000) of the Stock Options shall be pursuant
to the Option Plan. The Stock Options granted pursuant to the Option Plan will
consist of incentive stock options as defined in Internal Revenue Code Section
422(b) to the extent permitted by applicable law (generally limited to options
with no more than One Hundred Thousand Dollars ($100,000) in exercise price in a
given year) and the balance will be non-qualified options (non-statutory
options). All of the Stock Options granted outside of the Option Plan will be
non-qualified/non-statutory stock options. The exercise price for the Stock
Options will be the closing price per share of Employer's Common Stock on the
Effective Date. Employee will be entitled to retain and continue to vest his
existing director stock options as long as he remains a director (the "DIRECTOR
OPTIONS"). The Company agrees that, if permitted by law, the exercise price of
the Director Options will be adjusted in the event that the exercise price of
employee stock options granted under the Option Plan is adjusted.

             (b) VESTING SCHEDULE. The Stock Options will vest in accordance
with the following schedule: (i) 50,000 of the Stock Options on the Effective
Date, (ii)100,000 of the Stock Options on December 15, 1999, (iii) 100,000 of
the Stock Options on December 15, 2000, and (iv) 150,000 of the Stock Options on
December 15, 2001. However, in the event of a Change in Control of the Company,
70% of the then unvested Stock Options will vest immediately upon the
consummation of such Change in Control, except if such Change in Control is
initiated within six (6) months of the Effective Date and intended to be
consummated as a merger through an exchange of equity securities. Furthermore,
in the event that Employee is terminated without Cause: (i) prior to December
15, 1999, 100,000 of the Stock Options will vest immediately upon such
termination; (ii) on or after December 15, 1999 but prior to December 15, 2000,
an additional 100,000 of the Stock Options will vest immediately upon such
termination; or (iii) on or after December 15, 2000 but prior to December 15,
2001, all of the remaining unvested Stock Options will vest immediately upon
such termination.

             (c) OTHER TERMS. The Stock Options granted outside of the Option
Plan shall contain and be subject to such other terms and conditions as are
generally included in the Option Plan and the related stock option agreement
except as set forth herein. In addition, Employer shall register the shares of
Employer's Common Stock underlying the Stock Options by filing a Registration
Statement on Form S-8 (or other available registration statement) with the
Securities and Exchange Commission.

         3.5 LOAN. Upon Employee's written request to Employer, Employer will,
within thirty (30) days after receipt of such written request, loan to Employee,
at the minimum interest rate permitted under applicable tax regulations, Two
Hundred Thousand Dollars ($200,000) (the

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"LOAN"). The Loan shall be due and payable by Employee to Employer in the
event and on the date of a Change in Control which occurs on or before the
second anniversary of the effective date of the Loan, unless such Change in
Control occurs within the first six (6) months after the Effective Date. In
the event that a Change in Control occurs (i) within the first six (6) months
after the Effective Date or (ii) does not occur before the second anniversary
of the effective date of the Loan, the Loan will be forgiven by the Company.
In the event that Employee is entitled to receive any payment pursuant to
SECTION 8.2 or SECTION 8.5, Employer shall have the right to deduct from any
such payment any outstanding balance with respect to the Loan made pursuant
to this SECTION 3.5. Employee hereby acknowledges that the Loan and any
forgiveness thereof will result in imputed income to Employee and Employee
shall be responsible for payment of all applicable federal and state taxes.

         3.6 MERGER AND ACQUISITION SUCCESS FEE. In the event that there is a
Change in Control transaction, Employee will be afforded the opportunity to
assist in the negotiations related thereto if he is still employed by the
Company; and Employee will be entitled to a success fee of (i) $750,000 if
such Change in Control occurs within the first six (6) months after the
Effective Date or (ii) $500,000 if such Change in Control occurs after the
date that is six (6) months after the Effective Date.

4.       FACILITIES AND EXPENSES

         Employer will furnish to Employee office space, equipment, supplies
and such other facilities and personnel as Employer deems necessary or
appropriate for the performance of Employee's duties under this Agreement,
including the payment of reasonable expenses to equip Employee's home office
(e.g., personal computer and telephonic access) at Employee's Utah residence.
Employer will pay on behalf of Employee (or reimburse Employee for)
reasonable expenses incurred by Employee at the request of, or on behalf of,
Employer in the performance of Employee's duties pursuant to this Agreement,
and in accordance with Employer's employment policies, including reasonable
expenses incurred by Employee in attending conventions, seminars, and other
business meetings, in appropriate business entertainment activities, and for
promotional expenses. Employee must file expense reports with respect to such
expenses in accordance with Employer's policies.

         In addition, Employer will: (a) reimburse Employee for the
reasonable travel expenses of Employee's spouse or Employee's children for up
to two (2) trips per month (in the aggregate) from Salt Lake City, Utah to
San Diego, California; (b) provide Employee with membership access to a golf
club within reasonable proximity to Del Mar, California; and (c) to the
extent not previously covered under the Consulting Agreement, reimburse
Employee for the amount that Employee pays to acquire in his name the equity
membership in the golf club to which Employee's previous employer provided
him with access, which reimbursement shall not exceed Twenty Thousand Dollars
($20,000). Employee must file expense reports with respect to such expenses
and reimbursements in accordance with Employer's policies.

5.       VACATIONS AND HOLIDAYS

         Employee will be entitled to four (4) weeks of paid vacation per year
and holidays in accordance with Employer's policies. Employee will accrue
vacation to a maximum of six (6)

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weeks. After Employee reaches this maximum accrual amount, he will cease to
accrue additional vacation until his accrued vacation falls below this
maximum accrual amount.

6.       CONFIDENTIALITY; EMPLOYEE INVENTIONS

         Employee hereby agrees to comply with the terms and conditions of
Employer's Employee Confidentiality and Inventions Agreement, attached hereto as
ATTACHMENT B.

7.       NON-COMPETITION AND NON-INTERFERENCE

         7.1 ACKNOWLEDGMENTS BY EMPLOYEE. Employee acknowledges that: (a) the
services to be performed by him under this Agreement are of a special, unique,
unusual, extraordinary and intellectual character; (b) Employer's business is
national in scope and its products and services are marketed throughout the
United States; (c) Employer competes with other businesses that are or could be
located in any part of the United States; and (d) the provisions of this SECTION
7 are reasonable and necessary to protect Employer's business.

         7.2 COVENANTS OF EMPLOYEE. In consideration of the acknowledgments by
Employee and the Compensation and the Benefits to be paid or provided to
Employee by Employer, and in recognition of the confidential information that
Employee will obtain related to Employer's business (including its customers and
employees), Employee covenants that he will not, directly or indirectly:

             (a) during the Employment Period, except in the course of the
Employment hereunder, engage or invest in, own, manage, operate, finance,
control, or participate in the ownership, management, operation, financing, or
control of, be employed by, associated with, or in any manner connected with,
lend Employee's name or any similar name to, lend Employee's credit to or render
services or advice to, any business whose products or activities compete in
whole or in part with the products or activities of Employer; PROVIDED, HOWEVER,
that Employee may purchase or otherwise acquire up to (but not more than) one
percent (1%) of any class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such securities are
listed on any national or regional securities exchange or have been registered
under Section 12(g) of the Securities Exchange Act of 1934, as amended;

             (b) whether for Employee's own account or for the account of any
other Person, at any time during the Employment Period and the Post-Employment
Period, solicit business of the same or similar type being carried on by
Employer, from any Person known by Employee to be a customer of Employer and
with whom Employee had personal contact during and by reason of the Employment
with Employer;

             (c) whether for Employee's own account or the account of any other
Person (i) at any time during the Employment Period and the Post-Employment
Period, solicit, employ, or otherwise engage as an employee, independent
contractor, or otherwise, any Person who is or was an employee of Employer at
any time during the Employment Period or in any manner induce or attempt to
induce any employee of Employer to terminate his employment with Employer; or
(ii) at any time during the Employment Period and the Post-Employment Period,
interfere with Employer's relationship with any Person, including any Person who
at any

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time during the Employment Period was an employee, contractor, supplier, or
customer of Employer; or

             (d) at any time during or after the Employment Period, disparage
Employer or any of its shareholders, directors, officers, employees or agents.

         For purposes of this SECTION 7.2, the term "POST-EMPLOYMENT PERIOD"
means the one (1) year period beginning on the date of termination of the
Employment with Employer.

         If any covenant in this SECTION 7.2 is held to be unreasonable,
arbitrary or against public policy, such covenant will be considered to be
divisible with respect to scope, time and geographic area, and such lesser
scope, time or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary and not against
public policy, will be effective, binding and enforceable against Employee.

         The period of time applicable to any covenant in this SECTION 7.2
will be extended by the duration of any violation by Employee of such covenant.

         Employee will, while the covenant under this SECTION 7.2 is in effect,
give notice to Employer, within ten (10) days after accepting any other
employment, of the identity of Employee's employer. Employer may notify such
employer that Employee is bound by this Agreement and, at Employer's election,
furnish such employer with a copy of this Agreement or relevant portions
thereof.

8.       TERMINATION PAY

         Effective upon the termination of this Agreement, Employer will be
obligated to pay to Employee (or, in the event of his death, his designated
beneficiary as defined below) only such compensation as is provided in this
SECTION 8.

         8.1 TERMINATION WITH CAUSE. In the event that Employer terminates
Employee with Cause, Employee only will be entitled to receive the portion of
the Salary and the Performance Bonus accrued and owing to Employee only through
the date that such termination is effective, but will not be entitled to any
compensation during any subsequent Fiscal Year.

         8.2 TERMINATION WITHOUT CAUSE. In the event that Employer terminates
Employee without Cause, Employee will be entitled to receive a severance payment
of One Million Five Hundred Thousand Dollars ($1,500,000). Payment of this
severance amount will be conditional upon Employee signing a standard form
general release of claims against the Company and its directors, officers,
affiliates and agents. Upon payment of such amount, Employee will not be
entitled to receive any other payment under this SECTION 8.

         8.3 [RESERVED.]

         8.4 RESIGNATION. In the event that Employee resigns from Employer,
Employee shall not be entitled to any termination pay, other than the portion of
the Salary and the Performance Bonus accrued and owing to Employee only through
the date that such resignation is effective.

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         8.5 NON-RENEWAL PAYMENT. In the event that, on or before August 15,
2001, the Company does not offer an employment agreement to Employee which is
acceptable to Employee (after reasonable negotiations between Employer and
Employee lasting for at least thirty (30) days), then Employee will be entitled
to payment of One Million Five Hundred Thousand Dollars ($1,500,000); PROVIDED,
HOWEVER, that payment of such amount will be conditional upon Employee signing a
standard form general release of claims against the Company and its directors,
officers, affiliates and agents. Upon payment of such amount, Employee will not
be entitled to receive any other payment under this SECTION 8.

         8.6 BENEFITS. Employee's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date of Employee's
termination, and Employee will be entitled to accrued Benefits pursuant to such
plans only as provided in such plans.

         8.7 DESIGNATED BENEFICIARY. For purposes of this SECTION 8, Employee's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as Employee may designate by notice to Employer from time to time
or, if Employee fails to give notice to Employer of such a beneficiary,
Employee's estate. Notwithstanding the preceding sentence, Employer will have no
duty, in any circumstances, to attempt to open an estate on behalf of Employee,
to determine whether any beneficiary designated by Employee is alive or to
ascertain the address of any such beneficiary, to determine the existence of any
trust, to determine whether any person or entity purporting to act as Employee's
personal representative (or the trustee of a trust established by Employee) is
duly authorized to act in that capacity, or to locate or attempt to locate any
beneficiary, personal representative or trustee.

         8.8 CHANGE IN CONTROL. In the event that (i) there is a Change in
Control of the Company and (ii) the acquiring party in such Change in Control
does not offer to Employee a position acceptable to Employee, such acquiring
party will pay to Employee an amount equal to one and one-half (1 1/2) times the
aggregate of the Salary and the Performance Bonus. The acquiring party will pay
to Employee such amount upon the consummation of such Change in Control.

9.       RELOCATION AND OTHER BENEFITS

         9.1 AUTOMOBILE. During the Employment Period, Employer will provide to
Employee a leased automobile commensurate with Employee's role as the Chief
Executive Officer of Employer.

         9.2 LODGING. During the Employment Period, Employer shall provide to
Employee appropriate lodging in a condominium (available to Employee on a
full-time basis) reasonably satisfactory to Employee, until June 30, 2000, or
longer if Employee is requested by Employer to spend a substantial portion of
his time in San Diego, California.

         9.3 HOUSING RELOCATION BENEFITS. Employee will be entitled to the
housing relocation benefits, including reasonable moving expenses and realtor
fees and the current house sales price guarantee described in ATTACHMENT C to
this Agreement.

         9.4 COBRA COVERAGE. Employee will be reimbursed by the Company for (i)
insurance premiums paid by Employee for a period of 18 months resulting from
Employee's

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election of COBRA coverage relating to Employee's previous employment and
(ii) any taxes paid by Employee relating to the Company's reimbursement of
such premiums.

         9.5      CERTAIN ADDITIONAL PAYMENTS.

             (a) Anything in this Agreement to the contrary notwithstanding
and except as set forth below, in the event it shall be determined that any
payment or distribution by Employer or for the benefit of Employee (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional
payments required under this Section 9.5) (a "PAYMENT") would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "CODE"), or any interest or penalties are incurred by
Employee with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"EXCISE TAX"), then Employee shall be entitled to receive an additional
payment (a "GROSS-UP PAYMENT") in an amount such that, after payment by
Employee of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.

             (b) Subject to the provisions of Section 9.5(c), all
determinations required to be made under this Section 9.5, including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such determination,
shall be made by Ernst & Young LLP (the "ACCOUNTING FIRM"), which shall
provide detailed supporting calculations to Employer and Employee within
fifteen (15) business days of the receipt of notice from Employee that there
has been a Payment, or such earlier time as is requested by Employer. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting Change in Control, Employee shall
appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Employer. Any Gross-Up Payment, as
determined pursuant to this Section 9.5, shall be paid by Employer to
Employee within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Employee, it shall furnish Employee with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal income
tax return should not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon
Employer and Employee. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not have been made by Employer should have been made ("UNDERPAYMENT"),
consistent with the calculations required to be made hereunder. In the event
that Employer exhausts its remedies pursuant to Section 9.5(c) and Employee
thereafter is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by Employer to or for the benefit of
Employee.

             (c) Employee shall notify Employer in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment of the
Gross-Up Payment. Such

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notification shall be given as soon as practicable but no later than ten (10)
business days after Employee is informed in writing of such claim and shall
apprise Employer of the nature of such claim and the date on which such claim
is requested to be paid. Employee shall not pay such claim prior to the
expiration of the 30-day period following the date on which it gives such
notice to Employer (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If Employer notifies
Employee in writing prior to the expiration of such period that it desires to
contest such claim, Employee shall:

                  (i) give Employer any information reasonably requested by
Employer relating to such claim;

                 (ii) take such action in connection with contesting such
claim as Employer shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by Employer;

                (iii) cooperate with Employer in good faith in order
effectively to contest such claim; and

                 (iv) permit Employer to participate in any proceedings
relating to such claim; PROVIDED, HOWEVER, that Employer shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
Employee harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result
of such representation and payment of costs and expenses. Without limitation
on the foregoing provisions of this Section 9.5(c), Employer shall control
all proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct Employee to pay the tax claimed
and sue for a refund or contest the claim in any permissible manner, and
Employee agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as Employer shall determine; PROVIDED, HOWEVER, that
if Employer directs Employee to pay such claim and sue for a refund, Employer
shall advance the amount of such payment to Employee, on an interest-free
basis and shall indemnify and hold Employee harmless, on an after-tax basis,
from any Excise Tax or income tax (including interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and FURTHER, PROVIDED, that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of Employee with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.

             Furthermore, Employer's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Employee shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.

             (d) If, after the receipt by Employee of an amount advanced by
Employer pursuant to Section 9.5(c), Employee becomes entitled to receive any
refund with respect to such

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claim, Employee shall promptly pay to Employer the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Employee of an amount advanced by Employer
pursuant to Section 9.5(c), a determination is made that Employee shall not
be entitled to any refund with respect to such claim and Employer does not
notify Employee in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then
such advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.

10.      GENERAL PROVISIONS

         10.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. Employee acknowledges
that the injury that would be suffered by Employer as a result of a breach of
the provisions of this Agreement (including any provision of SECTIONS 6 and 7)
would be irreparable and that an award of monetary damages to Employer for such
a breach would be an inadequate remedy. Consequently, Employer will have the
right, in addition to any other rights it may have, to obtain injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce
any provision of this Agreement, and Employer will not be obligated to post bond
or other security in seeking such relief. Without limiting Employer's rights
under this SECTION 10 or any other remedies of Employer, if Employee breaches
any of the provisions of SECTION 6 or 7, Employer will have the right to cease
making any payments otherwise due to Employee under this Agreement.

         10.2 COVENANTS OF SECTIONS 6 AND 7 ARE ESSENTIAL AND INDEPENDENT
COVENANTS; ADVICE OF COUNSEL. The covenants by Employee in SECTIONS 6 and 7 are
essential elements of this Agreement, and without Employee's agreement to comply
with such covenants, Employer would not have entered into this Agreement or
employed or continued the Employment of Employee. Employer and Employee have
independently consulted their respective counsel and have been advised in all
respects concerning the terms of this Agreement, including the reasonableness
and propriety of the above referenced covenants, with specific regard to the
nature of the business conducted by Employer. Employee further confirms that he
has been advised by counsel and/or tax professionals with respect to the income
tax effects of the terms of his employment, including, but not limited to,
potential "golden parachute" tax liability. Subject to the final execution and
delivery of this Agreement, Employer will reimburse Employee for all reasonable
legal and tax consulting fees (not to exceed Five Thousand Dollars ($5,000))
associated with Employee's review and negotiation of this Agreement.

         Employee's covenants in SECTIONS 6 and 7 are independent covenants and
the existence of any claim by Employee against Employer under this Agreement or
otherwise will not excuse Employee's breach of any covenant in SECTION 6 or 7.

         If Employee's Employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of Employee in SECTIONS 6 and 7.

         10.3 REPRESENTATIONS AND WARRANTIES BY EMPLOYEE. Employee represents
and warrants to Employer that the execution and delivery by Employee of this
Agreement do not, and the

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performance by Employee of his obligations hereunder will not, with or
without the giving of notice or the passage of time, or both: (a) violate any
judgment, writ, injunction, or order of any court, arbitrator, or
governmental agency applicable to Employee; or (b) conflict with, result in
the breach of any provisions of or the termination of, or constitute a
default under, any agreement to which Employee is a party or by which
Employee is or may be bound.

         10.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of
Employer hereunder, including its obligation to pay the compensation provided
for herein, are contingent upon Employee's performance of Employee's
obligations hereunder.

         10.5 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.

         10.6 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 Employer may merge or consolidate or to which
all or substantially all of its assets may be transferred. The duties and
covenants of Employee under this Agreement, being personal, may not be
delegated.

         10.7 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):

                  If to Employer:   DAOU Systems, Inc.
                                    5120 Shoreham Place
                                    San Diego, CA  92122
                                    ATTENTION:      Chairman of the Board and
                                                    Chief Financial Officer
                                    Facsimile No.:  (619) 452-2789

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                  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 Employee:   Larry D. Grandia
                                    1934 S. 850 E.
                                    Bountiful, UT  84010

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

         10.9 GOVERNING LAW. This Agreement will be governed by the laws of
the State of California without regard to conflicts of laws principles.

         10.10 BINDING ARBITRATION. Subject to the arbitration provisions set
forth below, the parties hereto agree that all disputes arising out of or
related to the terms and conditions of this Agreement or to the performance,
breach or termination thereof, shall be submitted to binding arbitration
pursuant to the Expedited Procedures of the Commercial Arbitration Rules (the
"RULES") of the American Arbitration Association (the "AAA"). The arbitration
will take place in San Diego, California, at the offices of the AAA. The
dispute will be resolved by a single arbitrator appointed by the AAA in
accordance with the list procedure described in Paragraph 13 of the Rules,
except that the AAA will transmit the list within ten (10) Business Days of
the filing of the demand for arbitration, and the parties thereto will have
five (5) Business Days to return the list to the AAA with their objections
and preferences. Discovery will be limited to no more than seven (7)
depositions by each side and written document requests, requesting the
production of specific documents. The parties to the dispute will voluntarily
produce any and all documents that they intend to use at the hearing before
the close of discovery, subject to supplementation for purposes of rebuttal
or good cause shown. The period for taking discovery will be sixty (60)
Business Days, commencing upon the day that the answer is due under the
Rules. The arbitrator will hold a pre-hearing conference within three (3)
Business Days of the close of discovery and will schedule the hearing within
thirty (30) Business Days of the close of discovery. After the arbitrator is
selected, the arbitrator will have sole jurisdiction to hear such
applications, except that any measure ordered by the arbitrator may be
immediately and specifically enforced by a court otherwise having
jurisdiction over the parties. All fees and costs will be allocated to the
parties to the arbitration as determined by the arbitrator. Each party will
pay its own fees and costs associated with the arbitration and each party
will pay one-half the estimated arbitrator's fees up front and if either
party fails to do so a default will be entered against such party solely with
respect to such fees. Any determination of the arbitrator shall be final and
binding on the parties hereto. Nothing in this Agreement will prevent a party
hereto from applying to a court that would otherwise have jurisdiction for
provisional or interim injunctive or other equitable measures.

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<PAGE>

         10.11 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.

         10.12 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.

         10.13 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.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]








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

DAOU SYSTEMS, INC.                           EMPLOYEE:



By:   /s/ Georges J. Daou                    By: /s/ Larry D. Grandia
----------------------------------           ----------------------------------
   Georges J. Daou,                             Larry D. Grandia
   Chairman of the Board and
   Chief Executive Officer



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<PAGE>


                                  ATTACHMENT A

                           INCENTIVE COMPENSATION PLAN









                                       16
<PAGE>


                                  ATTACHMENT B

                EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT










                                       17
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                                  ATTACHMENT C

                         HOUSING AND RELOCATION BENEFITS



Employee will be entitled to the following housing and relocation benefits:

1.      In the event that, during the Employment Period, Employee elects to
relocate his personal residence in Salt Lake City, Utah (the "UTAH
RESIDENCE") to San Diego, California, Employee shall provide written notice
of such election to Employer. Within 15 days of the date of such written
notice, Employee shall obtain from three (3) licensed real estate appraisers
in the Salt lake City area three (3) separate appraisals of the fair market
value of the Utah Residence (collectively, the "APPRAISALS"). To the extent
that (i) Employee is unable to sell the Utah Residence within 90 days after
the conclusion of such 15-day period and (ii) Employee subsequently sells the
Utah Residence during the Employment Period and relocates to San Diego,
California to continue his employment with Employer, Employer agrees to pay
to Employee the amount, if any, by which the average value of the Appraisals
exceeds the actual sales price of the Utah Residence.

2.      Employer will reimburse Employee for standard closing costs relating
to Employee's sale of the Utah Residence as set forth above in item 1.


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