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                                                                EXHIBIT 10.36

                                January 1, 1997

James D. Durham
Chairman and Chief Executive Officer
QuadraMed Corporation
157 West Blithedale
Mill Valley, California 94941

Dear Mr. Durham:

        We are pleased to inform you that the Board of Directors (the "Board")
of QuadraMed Corporation (the "Company") has authorized an employment package
for you which will provide certain assurances concerning the terms and
conditions of your continued employment with the Company and will allow you to
participate in a program of severance benefit payments should your employment
terminate. The purpose of this letter agreement (the "Agreement") is to
document the terms of your employment package by providing you with a formal
employment contract.

        The Company considers it essential to the continuing operation of the
Company and in the best interests of its stockholders to assure the continuous
dedication of key management personnel. It is recognized in the context of
public ownership that a termination of an employee's employment without cause
may be sought and that such circumstances could prove distracting to key
executives and detrimental to the ongoing management and administration of the
Company. Such distraction is not in the best interest of the stockholders of
the Company. Accordingly, the Board has determined to discourage the inevitable
distraction to you in the face of potentially disturbing circumstances inherent
in any uncertainty regarding your employment status. This Agreement is intended
to secure and encourage your ongoing retention by providing separation benefits
in the event that your employment is altered as hereinafter described. In order
to induce you to remain in the employ of the Company, and in consideration of
your agreement set forth in Sections 10, 11, 12 and 13 of Part Two hereof, the
Company agrees to pay the severance payments and benefits set forth in this
Agreement, under the circumstances described herein.

        This Agreement supersedes any written employment agreement between you
and the Company prior to the date hereof.

        Part One of this Agreement sets forth certain definitional provisions
to be in effect for purposes of determining your benefit entitlements. Part Two
specifies the terms and conditions which will apply to your continued
employment with the Company, including the severance payments and benefits to
which you will become entitled in the event your employment should be
terminated. Part Two concludes this Agreement with a series of general terms
and conditions applicable to your employment benefits.


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                             PART ONE - DEFINITIONS

        DEFINITIONS.  For purposes of this Agreement, including in particular 
the severance payments and benefits to which you may become entitled under Part
Two, the following definitions will be in effect:

        "CHANGE IN CONTROL" means:

        (i)     a merger or acquisition in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Company's incorporation;

        (ii)    the sale, transfer or other disposition of all or substantially
all of the assets of the Company in liquidation or dissolution of the Company.

        (iii)   a transfer of all or substantially all of the Company's assets
pursuant to a partnership or joint venture agreement or similar arrangement
where the Company's resulting interest is less than fifty percent (50%);

        (iv)    any reverse merger in which the Company is the surviving
entity but in which fifty percent (50%) or more of the Company's outstanding
voting stock is transferred to holders different from those who held the stock
immediately prior to such merger; 

        (v)     on or after the date hereof, a change in ownership of the
Company through an action or series of transactions, such that any person is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing fifty percent (50%) of more of the securities of the
combined voting power of the Company's outstanding securities;

        (vi)    a majority of the members of the Board are replaced during any
twelve-month period by directors whose appointment or election is not endorsed
by a majority of the members of the Board prior to the date of such appointment
of election; or

        (vii)   the occurrence of any other event constituting a "change in
control" under Code Section 280G or the Treasury regulations promulgated 
thereunder.

        "CODE" means the Internal Revenue Code of 1986, as amended from time
to time.

        "EMPLOYEE" means James D. Durham.

        "EMPLOYEE BENEFIT PLAN" shall have the meaning given the term under
Section 3 of ERISA.


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        "EMPLOYMENT PERIOD" means the period of your employment with the
Company governed by the terms and provisions of this Agreement.

        "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as in effect from time to time.

        "INVOLUNTARY TERMINATION" means the termination of your employment with
the Company:

        (i)     involuntarily upon your discharge, dismissal or the Company's
failure to renew this Agreement pursuant to Section 3 of Part Two, whether or
not in connection with a Change in Control; or

        (ii)    voluntarily or involuntarily, provided such termination occurs
in connection with (a) a change in your position with the Company which
materially reduces your level of responsibility or changes your title from
Chief Executive Officer, (b) a reduction in your level of compensation
(including base salary, fringe benefits and any non-discretionary bonuses or
other incentive payments earned pursuant to objective standards or criteria) or
(c) a relocation of your principal place of employment by more than forty-five
(45) miles and such change, reduction or relocation is effected without your
written concurrence.

        "OPTION" means any option granted to you under the Stock Option Plan
which is outstanding at the time of your Involuntary Termination.

        "STOCK OPTION PLAN" means the Company's 1996 Stock Incentive Plan
(including the predecessor 1994 Stock Option Plan), as amended through the date
hereof.

        "TERMINATION FOR CAUSE" will mean an Involuntary Termination of your
employment for (i) one or more alleged acts of fraud, embezzlement,
misappropriation of proprietary information, misappropriation of the Company's
trade secrets or other confidential information, a verifiable breach of your
fiduciary duties to the Company or any other verifiable misconduct adversely
affecting the business reputation of the Company in a material manner or (ii)
your failure to devote your full working time and effort to the performance of
your duties hereunder; provided, however, you will have the right to perform
incidental services as are necessary in connection with (a) your private
passive investments, (b) your charitable or community activities and (c) your
participation in trade or professional organizations, but only to the extent
such incidental services do not materially interfere with the performance of
your services hereunder.


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                 PART TWO -- TERMS AND CONDITIONS OF EMPLOYMENT

        The following terms and conditions will govern your employment with the
Company throughout the Employment Period and will also, to the extent indicated
below, remain in effect following your termination date.

        1.      EMPLOYMENT AND DUTIES. The Company will continue to employ you
as an executive officer in the position of Chief Executive Officer. You agree
to continue in such employment for the duration of the Employment Period and to
perform in good faith and to the best of your ability all services which may be
required of you in your executive position and to be available to render such
services at all reasonable times and places in accordance with reasonable
directives and assignments issued by the Board. During your Employment Period,
you will devote your full time and effort to the business and affairs of the
Company within the scope of your executive office. Your principal place of
operations will be at the Company's corporate offices in Larkspur, California.

        2.      TERM OF AGREEMENT. This Agreement shall be effective as of the
date hereof. The term of this Agreement shall continue in effect from such date
for a period of two (2) years from such date, subject to the provisions of this
Part Two, unless sooner terminated by the parties in accordance with the
provisions hereof. For and in consideration of his entering into this
Agreement, Employee shall not be an employee-at-will, but shall be hereafter
employed for a definite term. No termination or expiration of this Agreement
shall affect any rights, obligations or liabilities of Employee or the Company
that shall have accrued on or prior to the date of termination or expiration.

        3.      AUTOMATIC EXTENSION. Commencing on the second anniversary of
the effective date hereof, and on each succeeding anniversary of the date
hereof, the term of this Agreement shall automatically be extended for one (1)
additional year unless, not later than three (3) months preceding such
anniversary date, the Company shall have given written notice pursuant to
Section 7 of Part Three that it will not extend the term of this Agreement.

        4.      COMPENSATION.

                A.      For service in the 1997 calendar year, your base salary
will be paid at the annual rate of Two Hundred Twenty Five Thousand Dollars
($225,000). Your annual rate of base salary may be subject to adjustment each
calendar year by the Board.

                B.      Your base salary will be paid at periodic intervals in
accordance with the Company's payroll practices for salaried employees.

                C.      You will be entitled to such bonuses (if any) for
service rendered during the Employment Period as the Board may determine in its
sole discretion and based upon the recommendation of the Company's Compensation
Committee and such additional factors as the


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Board deems appropriate, including your individual performance and the
Company's financial results.

                D.      The Company will deduct and withhold, from the 
compensation payable to you hereunder, any all applicable federal, state and
local income and employment withholding taxes and any other amounts required to
be deducted or withheld by the Company under applicable statute or regulation.

        5.      EXPENSE REIMBURSEMENT.  You will be entitled to reimbursement
from the Company for all customary, ordinary and necessary business expenses
incurred by you in the performance of your duties hereunder, provided you
furnish the Company with vouchers, receipts and other substantiation of such
expenses in accordance with Company policies. You will also be entitled to
continued reimbursement of $500 per month with respect to the automobile
currently leased by or owned by yourself or as otherwise approved by the Board
and with respect to mileage driven in accordance with the Company's then
existing policies. The Company will also pay or reimburse you for the costs of
the preparation of your federal, state and local income tax returns by the
Company's independent certified public accounting firm.

        6.      FRINGE BENEFITS.  During the Employment Period, you will be
eligible to participate in any group life insurance plan, group medical and/or
dental insurance plan, accidental death and dismemberment plan, short-term
disability program and other employee benefit plans, including profit sharing
plans, cafeteria benefit programs and stock purchase and option plans, which
are made available to executives and for which you qualify.

        7.      VACATION.  You will accrue four (4) weeks of paid vacation
benefits during each calendar year of the Employment Period in accordance with
the Company policy in effect for executive officers.

        8.      DEATH OR DISABILITY.

                A.      Upon your death or disability during the Employment
Period, the employment relationship created pursuant to this Agreement will
immediately terminate, and no further compensation will become payable to you
pursuant to Part Two, Section 4. In connection with such termination by reason
of death, the Company will only be required to pay you (or your estate) any
unpaid compensation earned under Part Two, Section 4 for services rendered
through the date of your death, together with a special termination payment
equal to the additional amount of base salary you would have earned hereunder
had your employment continued for an additional thirty (30) days. In connection
with such termination by reason of disability, the Company will be required to
pay to you any unpaid compensation earned under Part Two, Section 4 for
services rendered through the date of your disability, together with the
severance benefits set forth in Section 9 below.




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                B.      You will be deemed disabled if you are so characterized
pursuant to the terms of the Company's disability insurance policies applicable
to you from time to time.

                C.      Upon death or disability the terms of the Stock Option
Plan will apply.

        9.      SEVERANCE BENEFITS.

                A.      You will be entitled to receive the severance benefits
specified below in the event there should occur on the termination of your
employment by reason of disability or an Involuntary Termination of your
employment (other than a Termination for Cause) which is not effected in
connection with a Change in Control:

                        (i)     SEVERANCE BENEFIT.  The Company will make a
severance payment to you, in one lump sum within thirty (30) days of the date
of your Involuntary Termination, in an aggregate amount equal to the sum of (a)
the average annual rate of base salary and (b) the average bonus paid to you by
the Company, in each case for service rendered in the two (2) immediately
preceding calendar years. If a bonus was paid for only one of those calendar
years, then the clause (b) amount will be equal to that bonus. You may elect,
in your sole discretion, to have the severance benefit payable pursuant to this
Section 9.A.(i) in monthly installments over a one year period following the
date of your Involuntary Termination.

                        (ii)    WELFARE BENEFITS.  For a period of twelve (12)
months, Employee (and his dependents, as applicable) shall be provided by the
Company with the same life, health and disability plan participation, benefits
and other coverages to which he was entitled as an employee immediately before
the disability or the Involuntary Termination. In the event that under
applicable law or the terms of the relevant Employee Benefit Plans such
participation, benefits and/or coverage cannot be provided to Employee
following his Involuntary Termination, such coverage and/or benefits shall be
provided directly by the Company pursuant to this Agreement on a comparable
basis. In its sole discretion, the Company may obtain such coverage and
benefits for Employee through private insurance acquired at the Company's
expense. Amounts paid or payable to or on behalf of Employee pursuant to any
"employee welfare benefit plan," as defined in ERISA, providing health and/or
disability benefits, that is sponsored by the Company or an affiliate of the
Company, shall be credited against amounts due under this Section 9.A.(ii). To
the maximum extent permitted by applicable law, the benefits provided under
this Section 9.A.(ii) shall be in discharge of any obligations of the Company
or any rights of Employee under the benefit continuation provisions under
Section 4980A of the Code and Part VI of Title I of ERISA ("COBRA") or any
other legislation or similar import.

                        (iii)   OPTION ACCELERATION.  Solely in connection with
the Involuntary Termination of your employment (other than Termination for
Cause), each of your Options under the Stock Option Plan will (to the extent
not then otherwise exercisable) automatically 



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accelerate so that each such Option will become immediately exercisable for the
total number of shares purchasable thereunder. Each such accelerated Option,
together with all of your other vested Options, will remain exercisable for a
period of three (3) years following your Involuntary Termination and may be
exercised for any or all of the accelerated shares in accordance with the
exercise provisions of the Option agreement evidencing the grant.

        B.      You will be entitled to receive the severance benefits
specified below in the event there should occur an Involuntary Termination of
your employment (other than a Termination for Cause) which is effected in
connection with a Change in Control:

                (i)     SEVERANCE BENEFIT.  The Company will make a severance
payment to you, in one lump sum within thirty (30) days of the date of your
Involuntary Termination, in an aggregate amount equal to two (2) times the sum
of (a) the average annual rate of base salary and (b) the average bonus paid to
you by the Company, in each case for service rendered in the two (2) 
immediately preceding calendar years. If a bonus was paid for only one of those
calendar years, then the clause (b) amount will be equal to that bonus. You may
elect, in your sole discretion, to have the severance benefit payable pursuant
to this Section 9.B.(i) in monthly installments over a one year period
following the date of your Involuntary Termination.

                (ii)    WELFARE BENEFITS.  For a period of twenty-four (24)
months, Employee (and his dependents, as applicable) shall be provided by the
Company with the same life, health and disability plan participation, benefits
and coverage to which he was entitled as an employee immediately before the
Involuntary Termination. In the event that under applicable law or the terms of
the relevant Employee Benefit Plans such participation, benefits and/or
coverage cannot be provided to Employee following his Involuntary Termination,
such coverage and/or benefits shall be provided directly by the Company
pursuant to this Agreement on a comparable basis. In its sole discretion, the
Company may obtain such coverage and benefits for Employee through private
insurance acquired at the Company's expense. Amounts paid or payable to or on
behalf of Employee pursuant to any "employee welfare benefit plan", as defined
in ERISA, providing health and/or disability benefits, that is sponsored by the
Company or an affiliate of the Company, shall be credited against amounts due
under this Section 9.B.(ii). To the maximum extent permitted by applicable law,
the benefits provided under this Section 9.B.(ii) shall be in discharge of any
obligations of the Company or any rights of Employee under the benefit
continuation provisions under COBRA or any other legislation of similar import.

                (iii)   OPTION ACCELERATION.  Each of your Options under the
Stock Option Plan will (to the extent not then otherwise exercisable)
automatically accelerate so that each such Option will become immediately
exercisable for the total number of shares purchasable thereunder. Each such
accelerated Option, together with all of your other vested Options, will remain
exercisable for a period of three (3) years following your Involuntary 


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Termination and may be exercised for any or all of the accelerated shares in
accordance with the exercise provisions of the Option agreement evidencing the
grant.

        10.     RESTRICTIVE COVENANT. During the Employment Period, you will
not directly or indirectly, whether for your own account or as an employee,
consultant or advisor, provide services to any business enterprise other than
the Company, unless otherwise authorized by the Company in writing.

        11.     NON-SOLICITATION AND NON-DISPARAGEMENT. During any period for
which you are receiving compensation payments pursuant to Part Two, Section 4
and one (1) year thereafter, you will not directly or indirectly (i) solicit
any Company employee, independent contractor or consultant to leave the
Company's employ or otherwise terminate such person's relationship with the
Company for any reason or interfere in any other manner with the employment or
other relationships at the time existing between the Company and its current
employees, independent contractors or consultants, (ii) solicit any of the
Company's customers for products or services substantially similar to those
offered by the Company, or (iii) disparage the Company or any of its
shareholders, directors, officers, employees or agents.

        12.     CONFIDENTIALITY.

                A.      You hereby acknowledge that the Company may, from time
to time during the Employment Period, disclose to you confidential information
pertaining to the Company's business and affairs and client base, including
(without limitation) customer lists and accounts, other similar items
indicating the source of the Company's income and information pertaining to
the salaries, duties and performance levels of the Company's employees. You
will not, at any time during or after such Employment Period, disclose to any
third party or directly or indirectly make use of any such confidential
information, including (without limitation) the names, addresses and telephone
numbers of the Company's customers, other than in connection with, and in
furtherance of, the Company's business and affairs. Nothing contained in this
paragraph shall be construed to prevent Employee from disclosing the amount of
his salary.

                B.      All documents and data (whether written, printed or
otherwise reproduced or recorded) containing or relating to any such
proprietary information of the Company which come into your possession during
the Employment Period will be returned by you to the Company immediately upon
the termination of the Employment Period or upon any earlier request by the
Company, and you will not retain any copies, notes or excerpts thereof.
Notwithstanding the foregoing, Employee shall be entitled to retain his file or
rolodex containing names, addresses and telephone numbers and personal diaries
and calendars; provided, however, that Employee shall continue to be bound by
the terms of Section 12.A. above to the extent such retained materials
constitute confidential information.


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                C.      Your obligations under this Section 12 will continue in
effect after the termination of your employment with the Company, whatever the
reason or reasons for such termination, and the Company will have the right to
communicate with any of your future or prospective employers concerning your
continuing obligations under this Section 12.

        13.     OWNERSHIP RIGHTS.

                A.      All materials, ideas, discoveries and inventions
pertaining to the Company's business or clients, including (without limitation)
all patents and copyrights, patent applications, patent renewals and extensions
and the names, addresses and telephone numbers of customers, will belong solely
to the Company.

                B.      All materials, ideas, discoveries and inventions which
you may devise, conceive, develop or reduce to practice (whether individually
or jointly with others) during the Employment Period will be the sole property
of the Company and are hereby assigned by you to the Company, except for any
idea, discovery or invention (i) for which no Company equipment, supplies,
facility or trade secret information is used, (ii) which is developed entirely
on your own time and (iii) which neither (a) relates at the time of conception
or reduction to practice, to the Company's business or any actual or
demonstrably-anticipated research or development program of the Company nor (b)
results from any work performed by you for the Company. The foregoing exception
corresponds to the assignment of inventions precluded by California Labor Code
Section 2870, attached as Exhibit A.

        C.      You will, at all times whether during or after the Employment
Period, assist the Company, at the Company's sole expense, in obtaining,
maintaining, defending and enforcing all legal rights and remedies of the
Company, including, without limitation, patents, copyrights and other
proprietary rights of the Company. Such assistance will include (without
limitation) the execution of documents and assistance and cooperation in legal
proceedings.

                D.      You will continue to be bound by all the terms and
provisions of your existing Proprietary Information Agreement with the Company,
and nothing in this document will be deemed to modify or affect your duties and
obligations under those other agreements.

        14.     TERMINATION OF EMPLOYMENT.

                A.      The Company (or any successor entity resulting from a
Change in Control) may terminate your employment under this Agreement at any
time for any reason, with or without cause, by providing you with at least
seven (7) days prior written notice. However, such notice requirement will not
apply in the event there is a Termination for Cause under subparagraph D below.

                B.      In the event there is a termination of your employment
by reason of disability or is an Involuntary Termination of your employment
with the Company (other than


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Termination for Cause) during the Employment Period, you will become entitled
to the benefits specified in Part Two, Section 9 in addition to any unpaid
compensation earned by you under Part Two, Section 4 for services rendered
prior to such termination.

                C.      Should your employment with the Company terminate by
reason of your death during the Employment Period, no severance benefits will
be payable to you under Part Two, Section 9, and only the limited death
benefits provided under Part Two, Section 8 will be payable.

                D.      The Company may at any time, upon written notice,
terminate your employment hereunder for any act qualifying as a Termination for
Cause. Such termination will be effective immediately upon such notice.

                E.      Upon such Termination for Cause, the Company will only
be required to pay you any unpaid compensation earned by you pursuant to Part
Two, Section 4 for services rendered through the date of such termination, and
no termination or severance benefits will be payable to you under Part Two,
Section 9.

                     PART THREE - MISCELLANEOUS PROVISIONS

        1.      MITIGATION.  Employee shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other
employment or otherwise. The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish Employee's existing rights which would accrue solely as a
result of the passage of time, under any Company Employee Benefit Plan,
"Payroll practice" (as defined in ERISA), compensation arrangement, incentive
plan, stock option or other stock-related plan.

        2.      SUCCESSORS.  This Agreement shall be binding upon and inure to
the benefit of the Company and any successor of the Company, including, without
limitation, any corporation or corporations acquiring directly or indirectly
all or substantially all of the stock, business or assets of the Company
whether by merger, consolidation, division, sale or otherwise (and such
successor shall thereafter be deemed "the Company" for the purposes of this
Agreement). The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company, by agreement in form and substance
satisfactory to Employee, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement entitling Employee to
the benefits hereunder, as though Employee was subject to Involuntary
Termination. This Agreement shall be binding upon and inure to the benefit of
Employee, his successors, assigns, executors, administrators or beneficiaries.


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<PAGE>   11
        3.      DEATH.  Should you die before receipt of all the separation
payments to which you may become entitled under Part Two, Section 8, then such
payment or payments will be made, on the due date or dates hereunder had you
survived, to the executors or administrators of your estate. Should you die
before you exercise your outstanding vested options, then each such option may
be exercised, within twelve (12) months after your death, by the executors or
administrators of your estate or by person to whom the option is transferred
pursuant to your will or in accordance with the laws of inheritance. In no
event, however, may any such vested option be exercised after the specified
expiration date of the option term.

        4.      INDEMNIFICATION.  The indemnification provisions for officers
and directors under the Company's Bylaws will (to the maximum extent permitted
by law) be extended to you, during the period following your Involuntary
Termination, with respect to any and all matters, events or transactions
occurring or effected during your Employment Period.

        5.      MISCELLANEOUS.  The provisions of this Agreement will be
construed and interpreted under the laws of the State of California. This
Agreement incorporates the entire Agreement between you and the Company
relating to the terms of your employment and the subject of severance benefits
and supersedes all prior agreements and understandings with respect to such
subject matter. This Agreement may only be amended by written instrument signed
by you and an authorized officer of the Company.

        6.      ARBITRATION.  Any controversy which may arise between you and
the Company with respect to the construction, interpretation or application of
any of the terms, provisions, covenants or conditions of this Agreement or any
claim arising from or relating to this Agreement will be submitted to final and
binding arbitration in San Francisco, California in accordance with the rules
of the American Arbitration Association then in effect.

        7.      NOTICES.  Any notice required to be given under this Agreement
shall be deemed sufficient, if in writing, and sent by certified mail, return
receipt requested, via overnight courier, or hand delivered to the Company at
80 East Sir Francis Drake Boulevard, Suite 2A, Larkspur, California 94939, and
to Employee at his most recent address reflected in the permanent Company
records. Copies of each such notice delivered by either the Company or Employee
shall be provided to each current member of the Board at each such director's
current address as listed in the Company's records.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



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<PAGE>   12
        Please indicate your acceptance of the foregoing provisions of this
Agreement by signing the enclosed copy of this Agreement and returning it to
the Company.

                                        Very truly yours,

                                        QUADRAMED CORPORATION


                                        By: /s/ John Cracchiolo
                                            ---------------------------------
                                        Title: CFO
ACCEPTED BY AND AGREED TO:


/s/ James D. Durham
---------------------------------
James D. Durham

Dated: 1/1/97








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<PAGE>   13


                                   EXHIBIT A


        Section 2870.  APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE WILL
ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER.

        (a)     Any provision in an employment agreement which provides that an
employee will assign, or offer to assign, any of his or her rights in an
invention to his or her employer will not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:

                (1)     Relate at the time of conception or reduction to
practice of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer;

                (2)     Result from any work performed by the employee for 
his employer.

        (b)     To the extent a provision in an employment agreement purports
to require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.





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