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                                                                    EXHIBIT 10.2

                                 AMENDMENT NO. 5
                                       TO
                               DAOU SYSTEMS, INC.
                             1996 STOCK OPTION PLAN

      1.    PURPOSE. The Plan is intended to provide to officers, directors, key
Employees and Consultants of the Corporation an opportunity to acquire a
proprietary interest in the Corporation, to encourage such key individuals to
remain in the employ of or to contract with the Corporation, and to attract and
retain new Employees, Consultants and directors with outstanding qualifications.
Pursuant to the Plan, the Corporation may grant to officers, directors,
Consultants and key Employees of the Corporation options to purchase shares of
Common Stock upon such terms and conditions as provided herein.

      2.    DEFINITIONS.

            (a) "Affiliate" means any corporation (other than the Corporation)
in an unbroken chain of corporations that includes the Corporation if each of
such corporations, other than the last corporation in the chain, owns at least
50% of the total voting power of one of the other corporations.

            (b) "Board" means the Board of Directors of the Corporation.

            (c) "Code" means the Internal Revenue Code of 1986, as amended.

            (d) "Committee" means the committee appointed by the Board to
administer the Plan (as further described in Section 3 hereof), or if no such
committee is appointed, the Board.

            (e) "Common Stock" means the voting common stock of the Corporation.

            (f) "Consultant" means any person who, or any employee of any firm
which, is engaged by the Company or any Affiliate to render consulting services
and is compensated for such consulting services, and any non-employee director
of the Company whether compensated for such services or not.

            (g) "Corporation" means DAOU Systems, Inc., a Delaware corporation.

            (h) "Effective Date" means January 1, 1996.

            (i) "Employee" means any individual who is employed, within the
meaning of Section 3401 of the Code and the regulations thereunder, by the
Corporation or by any Affiliate. For purposes of the Plan and only for purposes
of the Plan, and in regard to Nonstatutory Stock Options but not for Incentive
Stock Options, a Consultant or director of the Corporation or any Affiliate will
be deemed to be an Employee, and service as a Consultant or director with the
Corporation or any Affiliate will be deemed to be employment, but no Incentive
Stock Option will be granted to a Consultant or director who is not an employee
of the Corporation or any Affiliate within the meaning of Section 3401 of the
Code and the regulations

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thereunder. In the case of a non-employee director or Consultant, the provisions
governing when a termination of employment has occurred for purposes of the Plan
will be set forth in the written Stock Option Agreement between the Optionee and
the Corporation, or, if not so set forth, the Committee will have the discretion
to determine when a termination of "employment" has occurred for purposes of the
Plan.

            (j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

            (k) "Exercise Price" means the price per Share at which an Option
may be exercised, as determined by the Committee and as specified in the
Optionee's stock option agreement.

            (l) "Fair Market Value" means the value of each Share as determined
by the Board, subject to the limitations of Section 260.140.50 of Title 10 of
the California Code of Regulations.

            (m) "Incentive Stock Option" means an Option of the type described
in Section 422(b) of the Code.

            (n) "Joint Escrow Instructions" means joint escrow instructions
entered into between an Optionee and the Corporation in such form as may be
approved by the Committee from time to time.

            (o) "Nonemployee Director" shall mean a member of the Board who (i)
is not currently an officer or Employee of the Corporation or a parent or
Subsidiary of the Corporation, (ii) has not received compensation for serving as
a Consultant or in any other non-director capacity or had an interest in any
transaction with the Corporation or a parent or Subsidiary of the Corporation
that would exceed the $60,000 threshold for which disclosure would be required
under Item 404(a) of Regulation S-K, or (iii) has not been engaged through
another party in a business relationship with the Corporation which would be
disclosable under Item 404(b) of Regulation S-K. If the Board determines that
compliance with Section 162(m) of the Code is desirable, then the term
"Nonemployee Director" shall also be interpreted to satisfy the definition of
"outside director" under Section 162(m) and applicable regulations issued
pursuant thereto.

            (p) "Nonstatutory Stock Option" means an Option of the type not
described in Sections 422(b) or 423(b) of the Code.

            (q) "Option" means an option to purchase Common Stock granted
pursuant to the Plan.

            (r) "Optionee" means any person who holds an Option pursuant to the
Plan.

            (s) "Outside Directors" shall mean a member of the Board who
qualifies as an "outside director" pursuant to Internal Revenue Code Section
162(m) and the Regulations promulgated thereunder.

            (t) "Plan" means the DAOU Systems, Inc. 1996 Stock Option Plan, as
amended from time to time.

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            (u) "Purchase Price" means at any particular time the Exercise Price
times the number of Shares for which an Option is being exercised.

            (v) "Share" means one share of authorized Common Stock.

      3. ADMINISTRATION.

            (a) The Committee. The Plan shall be administered by the Committee.
The Committee shall consist only of Nonemployee Directors of the Corporation who
are also Outside Directors and shall have at least two members. The Committee
shall meet such other requirements as may be established from time to time by
the Securities and Exchange Commission for plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act. The Board
may appoint a separate committee of the Board, composed of one or more directors
of the Corporation who need not be Nonemployee Directors, who may administer the
Plan with respect to Employees or Consultants who are not officers or directors
of the Corporation or incoming new directors of the Corporation, may grant
Options under the Plan to such persons and may determine the timing, number of
Shares subject to such Options and other terms of such grants.

            (b) Powers of the Committee. Subject to the provisions of the Plan,
the Committee will have the authority, in its discretion and on behalf of the
Corporation:

                  (i) to grant Options;

                  (ii) to determine the Exercise Price per Share of Options to
be granted;

                  (iii) to determine the Employees to whom, and the time or
times at which, Options will be granted and the number of Shares for which an
Option will be exercisable;

                  (iv) to interpret the Plan;

                  (v) to prescribe, amend, and rescind rules and regulations
relating to the Plan;

                  (vi) to determine the terms and provisions of each Option
granted and, with the consent of the holder thereof, modify or amend each
Option;

                  (vii) to accelerate or defer, with the consent of the
Optionee, the exercise date of any Option;

                  (viii) to authorize any person to execute on behalf of the
Corporation any instrument required to effectuate the grant of an Option
previously granted by the Committee;

                  (ix) with the consent of the Optionee, to reprice, cancel, and
regrant, or otherwise adjust the Exercise Price of an Option previously granted
by the Committee; and

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                  (x) to make all other determinations deemed necessary or
advisable for the administration of the Plan.

            (c) Board's Determination of Fair Market Value. The Board will have
the authority to determine, upon review of relevant information, the Fair Market
Value of the Common Stock, subject to the provisions of the Plan and
irrespective of whether the Board has appointed a Committee to administer the
Plan. The Board may delegate this authority to the Committee.

            (d) Committee's Interpretation of the Plan. The interpretation and
construction by the Committee of any provision of the Plan or of any Option
granted hereunder will be final and binding on all parties claiming an interest
in an Option granted under the Plan. No member of the Committee will be liable
for any action or determination made in good faith with respect to the Plan or
any Option.

            (e) Committee Procedures. The Committee shall designate one of its
members as chairman. The Committee may hold meetings at such times and places as
it shall determine. The acts of a majority of the Committee's members present at
meetings at which a quorum exists, or acts reduced to or approved in writing by
all of the Committee's members, shall be valid acts of the Committee.

      4. PARTICIPATION.

            (a) Eligibility. The Optionees will be such persons as the Committee
may select from among the Employees, provided that Consultants are not eligible
to receive Incentive Stock Options.

            (b) Ten Percent Shareholders. Any Employee who owns more than 10% of
the total combined voting power of all classes of outstanding stock of the
Corporation or any Affiliate will not be eligible to receive an Option unless:

                  (i) the Exercise Price of the Shares subject to such Option
when granted is at least 110% of the Fair Market Value of such Shares, and

                  (ii) such Option by its terms is not exercisable after the
expiration of five years from the date of grant.

            (c) Stock Ownership. For purposes of Section 4(b), in determining
stock ownership, an Employee will be considered as owning the stock owned,
directly or indirectly, by or for his or her brothers and sisters, spouse,
ancestors, and lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate, or trust will be considered as being
owned proportionately by or for its shareholders, partners, or beneficiaries,
respectively. Stock with respect to which such Employee holds an Option will be
counted in the determination of stock ownership for purposes of the above
Section 4(b).

            (d) Outstanding Stock. For purposes of Section 4(b), the term
"outstanding stock" will include all stock actually issued and outstanding
immediately after the grant of the

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Option to the Optionee but will not include any share for which an Option is
exercisable by any person.

            (e) Maximum Number of Options to One Person. No single Optionee
shall be entitled to receive more than One Hundred Fifty Thousand (150,000)
Options in any year pursuant to this Plan.

      5. SHARES.

            (a) Shares Subject to This Plan. The aggregate number of Shares
which may be issued upon exercise of Options under the Plan will not exceed Five
Million (5,000,000) shares of Common Stock, subject to adjustment pursuant to
Section 9; provided, however, that in no event shall the number of shares of
Common Stock underlying Options granted pursuant to the Plan exceed twenty-five
percent (25%) of the number of the outstanding shares of Common Stock at the end
of the immediately preceding fiscal quarter.

            (b) Options Not to Exceed Shares Available. The number of Shares for
which an Option is exercisable at any time will not exceed the number of Shares
remaining available for issuance under the Plan. If any Option expires or is
terminated, the number of Shares for which such Option was exercisable may be
made exercisable pursuant to other Options under the Plan. The limitations
established by this Section 5(b) will be subject to adjustment in the manner
provided in Section 9 upon the occurrence of an event specified therein.

      6. TERMS AND CONDITIONS OF OPTIONS.

            (a) Stock Option Agreements. Options will be evidenced by written
stock option agreements between the Optionee and the Corporation in such form as
the Committee will from time to time determine. No Option or purported Option
will be a valid and binding obligation of the Corporation unless so evidenced in
writing.

            (b) Number of Shares. Each stock option agreement will state the
number of Shares for which the Option is exercisable and will provide for the
adjustment thereof in accordance with Section 9. Each stock option agreement
will also specify whether the option is a Nonstatutory Stock Option or an
Incentive Stock Option.

            (c) Vesting. An Optionee may not exercise his or her Option for any
Shares until the Option, in regard to such Shares, has vested. Each stock option
agreement will include a vesting schedule which will show when the Option
becomes exercisable, provided each Option will vest at a rate of at least 20%
per year over a period of five years with the first 20% becoming exercisable on
the first anniversary of the date when the Options were granted. The vesting
schedule will not impose upon the Corporation or any Affiliate any obligation to
retain the Optionee in its employ or under contract for any period or otherwise
change the employment-at-will status of an Optionee who is an Employee.

            (d) Lapse of Options. Each stock option agreement will state the
time or times when the Option covered thereby lapses and becomes unexercisable
in part or in full. An Option will lapse on the earliest of the following events
(unless otherwise determined by the Committee and reflected in an option
agreement):

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                  (i) The tenth anniversary of the date of grant of the Option;

                  (ii) The first anniversary of the Optionee's death;

                  (iii) The first anniversary of the date when the Optionee
ceases to be an Employee due to Total and Permanent Disability (within the
meaning of Section 22(e)(3) of the Code);

                  (iv) On the date provided in Section 6(h)(i), unless with
respect to a Nonstatutory Stock Option, the Committee otherwise extends such
period before the applicable expiration date;

                  (v) On the date provided in Section 9 for a transaction
described in such section;

                  (vi) The date the Optionee files or has filed against him or
her a petition in bankruptcy; or

                  (vii) The expiration date specified in the Optionee's stock
option agreement.

            (e) Exercise Price. Each stock option agreement will state the
Exercise Price for the Shares for which the Option is exercisable. Subject to
Section 4(b), the Exercise Price of an Incentive Stock Option and a Nonstatutory
Stock Option will, when granted, be not less than 100% and 85% of the Fair
Market Value of the Shares for which the Option is exercisable, respectively,
and not less than the par value of the Shares.

            (f) Medium and Time of Payment. The Purchase Price will be payable
in full in cash upon the exercise of an Option but the Committee may allow the
Optionee to pay the Purchase Price:

                  (i) by surrendering Shares, in good form for transfer, owned
by the Optionee for more than 12 months and which have a Fair Market Value on
the date of exercise equal to the Purchase Price; or

                  (ii) in any combination of such consideration or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable law as long as the sum of the consideration so paid
equals the Purchase Price.

The Committee or a stock option agreement may prescribe requirements with
respect to the exercise of Options, including the submission by the Optionee of
such forms and documents as the Committee may require and the delivery by the
Optionee of cash sufficient to satisfy applicable withholding requirements. The
Committee may vary the exercise requirements and procedures from time to time to
facilitate, for example, the broker-assisted exercise of Options.

            (g) Nontransferability of Options. During the lifetime of the
Optionee, the Option will be exercisable only by the Optionee or the Optionee's
conservator or legal representative and will not be assignable or transferable
except pursuant to a qualified domestic

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relations order as defined by the Code. In the event of the Optionee's death,
the Option will not be transferable by the Optionee other than by will or the
laws of descent and distribution.

            (h) Termination of Employment Other than by Death or Disability.

                  (i) If an Optionee ceases to be an Employee for any reason
other than his or her death or disability, the Optionee will have the right,
subject to the provisions of this Section 6, to exercise any Option held by the
Optionee for 30 days after his or her termination of employment, but not beyond
the otherwise applicable term of the Option and only to the extent that on such
date of termination of employment the Optionee's right to exercise such Option
had vested.

                  (ii) For purposes of this Section 6(h), the employment
relationship will be treated as continuing intact while the Optionee is an
active employee of the Corporation or any Affiliate, or is on military leave,
sick leave, or other bona fide leave of absence to be determined in the sole
discretion of the Committee. The preceding sentence notwithstanding, in the case
of an Incentive Stock Option, employment will be deemed to terminate on the date
that the Optionee ceases active employment with the Corporation or any
Affiliate, unless the Optionee's reemployment rights are guaranteed by statute
or contract.

            (i) Death of Optionee. If an Optionee dies while an Employee, or
after ceasing to be an Employee but during the period while he or she could have
exercised an Option under Section 6(h), any Option granted to the Optionee may
be exercised, to the extent it had vested at the time of death and subject to
the Plan, at any time within 12 months after the Optionee's death, by the
executors or administrators of his or her estate or by any person or persons who
acquire the Option by will or the laws of descent and distribution, but not
beyond the otherwise applicable term of the Option.

            (j) Disability of Optionee. If an Optionee ceases to be an Employee
due to becoming totally and permanently disabled within the meaning of Section
22(e)(3) of the Code, any Option granted to the Optionee may be exercised to the
extent it had vested at the time of cessation and, subject to the Plan, at any
time within 12 months after the Optionee's termination of employment, but not
beyond the otherwise applicable term of the Option.

            (k) Rights as a Shareholder. An Optionee, or a transferee of an
Optionee, will have no rights as a shareholder of the Corporation with respect
to any Shares for which his or her Option is exercisable until the date of the
issuance of a stock certificate for such Shares. No adjustment will be made for
dividends, ordinary or extraordinary or whether in currency, securities, or
other property, distributions, or other rights for which the record date is
prior to the date such stock certificate is issued, except as provided in
Section 9.

            (l) Modification, Extension, and Renewal of Options. Within the
limitations of the Plan, the Committee may modify, extend or renew outstanding
Options or accept the cancellation of outstanding Options for the granting of
new Options in substitution therefor. Notwithstanding the preceding sentence, no
modification of an Option will, without the consent of the Optionee, alter or
impair any rights or obligations under any Option previously granted.

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            (m) Rule 16b-3. Options granted to persons who are subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3 promulgated thereunder and shall contain such additional conditions
or restrictions as may be required thereunder to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to the Plan's
transactions; provided, however, that this provision shall not apply if, at the
time of such option grant, the Plan, as it relates to such grant, is not
administered by a Committee consisting solely of Nonemployee Directors.

            (n) Other Provisions. The stock option agreements authorized under
the Plan may contain such other provisions which are not inconsistent with the
terms of the Plan, including, without limitation, restrictions upon the exercise
of the Option, as the Committee will deem advisable.

      7. $100,000 PER YEAR LIMITATION ON VESTING OF ISOs. To the extent that the
Fair Market Value of Shares (determined for each Share as of the date of grant
of the Option covering such Share) subject to Options granted under the Plan (or
any other plan of the Corporation or any Affiliate), which are designated as
Incentive Stock Options and which become exercisable by an Optionee for the
first time during a single calendar year, exceeds $100,000, the Options (or
portion thereof) covering such Shares will be recharacterized (to the extent of
such excess over $100,000) as a Nonstatutory Stock Option. In determining which
Option(s) will be treated as Nonstatutory Stock Options under the preceding
sentence, the Options will be taken into account in the order granted, with the
result that a later granted Option will be recharacterized as a Nonstatutory
Stock Option prior to such recharacterization of a previously granted Option.

      8. TERM OF PLAN. Options may be granted pursuant to the Plan until a date
no more than ten (10) years from the date when the Plan is adopted or the date
when the Plan is approved by the shareholders of the Corporation, whichever is
earlier, and all Options which are outstanding on such date will remain in
effect until they are exercised or expire by their respective terms.

      9. RECAPITALIZATION, TAKEOVERS, AND LIQUIDATIONS.

            (a) Reorganizations. The number of Shares covered by the Plan, as
provided in Section 5, and the number of Shares for which each Option is
exercisable will be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, a reverse stock split, the
payment of a stock dividend, recapitalization, combination or reclassification
of the Corporation's stock or any other event which results in an increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Corporation, and the Exercise Price will be proportionately
increased in the event the number of Shares subject to such Option are decreased
and will be proportionately decreased in the event the number of Shares subject
to such Option are increased. For the purposes of this Section 9(a), the
conversion of any convertible securities of the Corporation will not be deemed
to have been "effected without receipt of consideration." Adjustments will be
made by the Board, whose determination in that respect will be final, binding
and conclusive. Except as expressly provided in the Plan, no issuance by the
Corporation of shares of stock of any class, or securities

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convertible into shares of stock of any class, will affect, and no adjustment by
reason thereof will be made with respect to, the number or price of Shares
subject to an Option.

            (b) Liquidation. In the event of the dissolution or liquidation of
the Corporation, each Option will terminate immediately prior to the
consummation of such action. The Committee will notify the Optionee not less
than 15 days prior to the proposed consummation of a pending dissolution or
liquidation, and such Option will be exercisable as to all Shares which are
vested prior to expiration until immediately prior to the consummation of such
action.

            (c) Merger. In the event of (i) a proposed merger of the Corporation
with or into another corporation, as a result of which the Corporation is not
the surviving corporation and (ii) the Option is not assumed or an equivalent
option substituted by the successor corporation or a parent or subsidiary of the
successor corporation, then in such case the Option will terminate immediately
prior to the consummation of such transaction. The Committee will notify the
Optionee not less than 15 days prior to the proposed consummation of such
transaction, and the Option will be exercisable as to all Shares which are
vested prior to expiration and until immediately prior to the consummation of
such transaction.

            (d) Determination by Committee. All adjustments described in this
Section 9 will be made by the Committee, whose determination will be conclusive
and binding on all persons.

            (e) Limitation on Rights of Optionee. Except as expressly provided
in this Section 9, no Optionee will have any rights by reason of any payment of
any stock dividend, stock split or reverse stock split or any other increase or
decrease in the number of shares of stock of any class, or by reason of any
reorganization, consolidation, dissolution, liquidation, merger, exchange,
split-up or reverse split-up, or spin-off of assets or stock of another
corporation. Any issuance by the Corporation of Shares, Options or securities
convertible into Shares or Options will not affect, and no adjustment by reason
thereof will be made with respect to, the number or Exercise Price of the Shares
for which an Option is exercisable. Notwithstanding the foregoing, if the
Corporation enters into a transaction affecting the Corporation's capital stock
or distributions to the holders of its capital stock for which a revision in the
terms of each Option is not required pursuant to this Section 9, the Committee
will have the right, but not the obligation, to revise the terms of each Option
in a manner that the Committee, in its sole discretion, deems fair and
reasonable given the transaction involved. If necessary or appropriate in
connection with such transaction, the Committee may declare that any Option will
terminate as of a date fixed by the Committee and give each Optionee the right
to exercise his or her Option in whole or in part, including exercise as to
Shares to which the Option would not otherwise be exercisable.

            (f) No Restriction on Rights of Corporation. The grant of an Option
will not affect or restrict in any way the right or power of the Corporation to
make adjustments, reclassifications, reorganizations, or changes of its capital
or business structure, or to merge or consolidate, or to dissolve, liquidate,
sell, or transfer all or any part of its business or assets.

      10. SECURITIES LAW REQUIREMENTS.

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            (a) Legality of Issuance. No Share will be issued upon the exercise
of any Option unless and until the Corporation has determined that:

                  (i) The Corporation and the Optionee have taken all actions
required to exempt the issuance of the Shares from the registration requirements
under the Securities Act of 1933, as amended (the "Act"), or the Corporation and
the Optionee will determine that the registration requirements of the Act do not
apply to such exercise;

                  (ii) Any applicable listing requirement of any stock exchange
on which the Common Stock is listed has been satisfied; and

                  (iii) Any other applicable provision of state or Federal law
has been satisfied.

            (b) Restrictions on Transfer; Representations of Optionee; Legends.
Regardless of whether the offering and sale of Shares has been registered under
the Act or has been registered or qualified under the securities laws of any
state, the Corporation may impose restrictions upon the sale, pledge, or other
transfer of such Shares, including the placement of appropriate legends on stock
certificates, if, in the judgment of the Corporation and its counsel, such
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the Act, the securities laws of any state, or any other law. If
the sale of Shares is not registered under the Act and the Corporation will
determine that the registration requirements of the Act apply to such sale, but
an exemption is available which requires an investment representation or other
representation, the Optionee will be required, as a condition to purchasing
Shares by exercise of his or her Option, to represent that such Shares are being
acquired for investment, and not with a view to the sale or distribution
thereof, except in compliance with the Act, and to make such other
representations as are deemed necessary or appropriate by the Corporation and
its counsel. Stock certificates evidencing Shares acquired pursuant to an
unregistered transaction to which the Act applies will bear a restrictive legend
substantially in the following form and such other restrictive legends as are
required or deemed advisable under the Plan or the provisions of any applicable
law:

            "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
            UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
            QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. THESE SHARES HAVE
            BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN
            CONNECTION WITH ANY DISTRIBUTION THEREOF, AND MAY NOT BE SOLD,
            MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN
            EFFECTIVE REGISTRATION UNDER THE ACT AND/OR QUALIFICATION UNDER ANY
            APPLICABLE STATE SECURITIES LAWS, OR WITHOUT AN OPINION OF COUNSEL
            ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION
            OR QUALIFICATION IS NOT REQUIRED."

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Any determination by the Corporation and its counsel in connection with any of
the matters set forth in this Section 10 will be conclusive and binding on all
persons.

            (c) Registration or Qualification of Securities. The Corporation
may, but will not be obligated to, register or qualify the sale of Shares under
the Act or any other applicable law. In connection with any such registration or
qualification, the Corporation will provide each Optionee with such information
required pursuant to all applicable laws and regulations.

            (d) Exchange of Certificates. If, in the opinion of the Corporation
and its counsel, any legend placed on a stock certificate representing Shares
issued hereunder is no longer required, the Optionee or the holder of such
certificate will be entitled to exchange such certificate for a certificate
representing the same number of Shares but without such legend.

      11. EXERCISE OF UNVESTED OPTIONS. The Committee may grant to any Optionee
the right to exercise any Option prior to the complete vesting of such Option.
Without limiting the generality of the foregoing, the Committee may provide that
if an Option is exercised prior to having completely vested, the Shares issued
upon such exercise will remain subject to vesting at the same rate as under the
Option so exercised and will be subject to a right, but not an obligation, of
repurchase by the Corporation with respect to all unvested Shares if the
Optionee ceases to be an Employee for any reason. For the purposes of
facilitating the enforcement of any such right of repurchase, at the request of
the Committee, the Optionee will enter into Joint Escrow Instructions with the
Corporation and deliver every certificate for his or her unvested Shares with a
stock power executed in blank by the Optionee and by the Optionee's spouse, if
required for transfer.

      12. AMENDMENT OF THE PLAN. The Board or the Committee may, from time to
time, terminate, suspend or discontinue the Plan, in whole or in part, or revise
or amend the Plan in any respect whatsoever including, but not limited to, the
adoption of any amendment(s) deemed necessary or advisable to qualify the
Options under rules and regulations promulgated by the Securities and Exchange
Commission with respect to Employees who are subject to the provisions of
Section 16 of the Exchange Act or to correct any defect or supply any omission
or reconcile any inconsistency in the Plan or in any Option granted thereunder,
without approval of the shareholders of the Corporation, but without the
approval of the Corporation's shareholders, no such revision or amendment will:

            (a) Increase the number of Shares subject to the Plan, other than
any increase pursuant to Section 9;

            (b) Materially modify the requirements as to eligibility for
participation in the Plan;

            (c) Materially increase the benefits accruing to Optionees under the
Plan;

            (d) Extend the term of the Plan; or

            (e) Amend this Section 12 to defeat its purpose.

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            No amendment, termination or modification of the Plan will affect
any Option theretofore granted in any material adverse way without the consent
of the Optionee.

      13. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Common Stock pursuant to the exercise of an Option will be used for
general corporate purposes.

      14. APPROVAL OF SHAREHOLDERS. The Plan will be subject to approval by the
affirmative vote of the holders of a majority of all classes of the outstanding
shares present and entitled to vote at the first meeting of shareholders of the
Corporation following the adoption of the Plan or by written consent, and in no
event later than one year following the Effective Date. Prior to such approval,
Options may be granted but will not be exercisable. Any amendment described in
Section 12.(a) to (d) will also be subject to approval by the Corporation's
shareholders.

      15. WITHHOLDING OF TAXES. In the event the Corporation or an Affiliate
determines that it is required to withhold federal, state, or local taxes in
connection with the exercise of an Option or the disposition of Shares issued
pursuant to the exercise of an Option, the Optionee or any person succeeding to
the rights of the Optionee, as a condition to such exercise or disposition, may
be required to make arrangements satisfactory to the Corporation or the
Affiliate to enable it to satisfy such withholding requirements. Alternatively
the Corporation may issue or transfer Shares net of the number of Shares
sufficient to satisfy withholding tax requirements. For withholding tax
purposes, the Shares will be valued on the date the withholding obligation is
incurred.

      16. RIGHTS AS AN EMPLOYEE. Neither the Plan nor any Option granted
pursuant thereto will be construed to give any person the right to remain in the
employ of the Corporation or any Affiliate, or to affect the right of the
Corporation or any Affiliate to terminate such individual's employment at any
time with or without cause. The grant of an Option will not entitle the Optionee
to, or disqualify the Optionee from, participation in the grant of any other
Option under the Plan or participation in any other benefit plan maintained by
the Corporation or any Affiliate.

      17. DISAVOWAL OF REPRESENTATIONS, UNDERTAKINGS, OR CREATION OF IMPLIED
RIGHTS. In adopting and maintaining the Plan and granting options hereunder,
neither the Corporation nor any Affiliate makes any representations or
undertakings with respect to the initial qualification or treatment of Options
under federal or state tax or securities laws. The Corporation and each
Affiliate expressly disavows the creation of any rights in Employees, Optionees,
or beneficiaries of any obligations on the part of the Corporation, any
Affiliate or the Committee, except as expressly provided herein.

      18. INSPECTION OF RECORDS. Copies of the Plan, records reflecting each
Optionee's Option(s), and any other documents and records which an Optionee is
entitled by law to inspect will be open to inspection by the Optionee and his or
her duly authorized representative at the office of the Committee at any
reasonable business hour.

                                       12

<PAGE>

      19. INFORMATION TO OPTIONEES. Each Optionee will be provided with such
information regarding the Corporation as the Committee from time to time deems
necessary or appropriate; provided however, that each Optionee will at all times
be provided with such information as is required to be provided from time to
time pursuant to applicable regulatory requirements, including, but not limited
to, the requirement in Section 260.140.46 of Title 10 of the California Code of
Regulations of annual financial statements, or any applicable successor
regulation, and any other applicable requirements of the Securities and Exchange
Commission, the California Department of Corporations, and other state
securities agencies.

                                       13

<PAGE>

      20. EXECUTION. To record the adoption of the Plan by the Board effective
as of May 31, 2000 the Corporation has caused its authorized officer to execute
the same.

                                           DAOU SYSTEMS, INC.,
                                           a Delaware corporation

                                           By:      /s/ Neil R. Cassidy
                                                --------------------------
                                                Neil R. Cassidy, President

                                       14<PAGE>

                                                                   Exhibit 10.25

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of November 6, 2001 by
                                 ---------
and between DAOU Systems, Inc., a Delaware corporation ("Company"), and Daniel
                                                         -------
Malcolm, an individual resident of Pennsylvania ("Employee").
                                                  --------

                                    AGREEMENT

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

1.   Commencement of Employment. Employee's employment with the Company
     --------------------------
commenced July 24, 2001 (the "Effective Date"), and the terms of this Agreement
                              --------------
will be effective retroactive to that date.

2.   Employment Terms and Duties.
     ---------------------------

     2.1  Employment. The Company employs Employee, and Employee accepts
          ----------
employment by the Company (the "Employment"), upon the terms and conditions set
                                ----------
forth in this Agreement.

     2.2  At-Will Employment. Employee's employment relationship with the
          ------------------
Company is at-will, terminable by either the Company or Employee at any time and
for or no reason, and with or without "Cause" as defined in Section 7.1 of this
Agreement. Although certain provisions of this Agreement describe events that
could occur at a particular time in the future, nothing in this Agreement may be
construed as a guarantee of Employee's employment for any length of time.

     2.3  Duties. Effective upon his appointment by the Company's Board of
          ------
Directors ("Board"), Employee will serve as President - Technology Services
            -----
Division and Chief Marketing Officer of the Company and will have such
reasonable duties as are assigned or delegated to Employee by the Chief
Executive Officer and the Board. Employee will: (i) devote his entire business
time, attention, skill, and energy exclusively to the business of the Company;
(ii) use his best efforts to promote the success of the Company's business; and
(iii) cooperate fully with the Board in the advancement of the best interests of
the Company. The parties acknowledge that Employee presently serves, and will
continue to serve, as a member of the board of directors of Prophet 21, Inc., a
for-profit company engaged in the distribution industry software business, and
for several not-for-profit organizations. Employee may continue to serve on
these and other boards or advisory committees of other organizations whose
business and activities are not competitive with the Company's.

     2.4  Compliance with the Company's Policies. Employee acknowledges and
          --------------------------------------
agrees that compliance with the Company's policies, practices and procedures is
a term and condition of the Employment. Employee agrees to execute and comply
with the terms and conditions of the Company's Employee Confidentiality and
Inventions Agreement, a copy of which is attached as Exhibit A and is
                                                     ---------
incorporated by this reference.

<PAGE>

3.   Compensation.
     ------------

     3.1  Salary. Employee will be paid salary in the amount of Two Hundred and
          ------
Forty Thousand Dollars ($240,000) per year, less any applicable state and
federal taxes or other payroll deductions ("Base Salary"). Any adjustment to the
                                            -----------
Salary is at the sole discretion of the Company.

     3.2  Benefits. Employee will be permitted to participate in such sick
          --------
leave, pension, profit sharing, life insurance, hospitalization, long term
disability, major medical and other employee benefit plans of the Company
(collectively, the "Benefits"), that may be in effect from time to time for
                    --------
management level employees, to the extent that Employee is eligible under the
terms of those plans.

     3.3  Bonus. On December 31, 2001, Employee will receive a sign on bonus of
          -----
Forty Thousand Dollars ($40,000), less applicable state and federal taxes or
other payroll deductions. In addition, Employee is eligible for future bonus at
the discretion of the Board and in an amount to be determined by the Board, in
accordance with an Incentive Compensation Plan that will be created on behalf of
the Company's senior management staff. The parties currently anticipate that the
future bonus plan will provide for payment as bonus a percentage of Base Salary
to paid upon achievement of stated Employee and Company goals. In order to be
eligible for bonuses under this Section 3.3, Employee must be employed by the
Company on the date that bonuses customarily are distributed by the Company.

     3.4  Interest Amounts. Employer will pay Employee additional compensation
          ----------------
in an amount equal to Employee's interest obligations less applicable taxes
("Interest Amounts") pursuant to the Promissory Note executed by Employee in
  ----------------
favor of Employer, a form of which is attached as Exhibit 2 to Exhibit B of this
                                                               ---------
Agreement.

4.   Equity Interest.
     ---------------

     4.1  Grant of Shares.
          ---------------

          (a) Employer shall offer, and Employee shall purchase, an aggregate of
One Hundred Fifty Thousand (150,000) shares of Employer's common stock, par
value $.001 per share (the "Shares"), at the closing price of the Common Stock
                            ------
on the date this Agreement is executed, substantially in accordance with the
terms of the Restricted Stock Agreement (the "Purchase Agreement"), attached to
                                              ------------------
this Agreement as Exhibit B.
                  ---------

          (b) Employer shall register the Shares for resale on a Form S-1 with
the Securities and Exchange Commission (the "SEC") pursuant to the Registration
                                             ---
Rights Agreement, attached as Exhibit 4 to Exhibit B.
                              ---------    ---------

     4.2  Grant of Options.
          ----------------

          (a) On, or as soon as practicable after, the date this Agreement is
executed, the Company will grant to Employee options to purchase Eight Hundred
and Fifty Thousand (850,000) shares of the Company's Common Stock (the
"Options") which Options shall be issued outside the Company's 1996 Stock Option
 -------
Plan (the "Plan"). The Options will be non-
           ----

                                       2

<PAGE>

qualified options (non-statutory options). The exercise price for the Options
will be the closing price per share of the Company's Common Stock on the date of
grant. In addition to the terms set forth in this Section 4, all of the Options
will be subject to such other terms, conditions and limitations as generally are
included in the Plan and in any related stock option agreement, as well as
applicable state and federal laws including, but not limited to, tax and
securities laws. The Options will vest as set forth below in Section 4.2(b) and
shall terminate under such conditions as generally are included in the Plan and
any related stock option agreement.

     (b)  Vesting of the Options.
          ----------------------

          (i)   125,000 Options will vest on the sooner of (a) the first date
following ten (10) consecutive trading days during which the Common Stock trades
at a value of at least $2.50 per Share as adjusted for any stock combination,
stock dividend, stock split or other recapitalization event occurring with
respect to the Company's Common Stock (a "Recapitalization"); or (b) five (5)
                                          ----------------
years from the date of grant.

          (ii)  125,000 Options will vest on the sooner of (a) the first date
following ten (10) consecutive trading days during which the Common Stock trades
at a value of at least $5.00 per Share as adjusted for any Recapitalization; or
(b) five (5) years from the date of grant.

          (iii) 600,000 Options will vest in thirty-six equal increments on the
monthly anniversary of the Effective Date through July 24, 2004. Any of these
600,000 Options that are unvested at the time of a Change in Control immediately
will vest and become exercisable in the event of a Change in Control. For
purposes of this Section, "Change in Control" is defined to have occurred if,
                           -----------------
and only if:

                (1) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or person, or any syndicate
or group deemed to be a person under Section 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), is or becomes the "beneficial
                              ------------
owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the
Exchange Act), directly or indirectly, of securities of the Company representing
50% or more of the combined voting power of the Company's then outstanding
securities entitled to vote in the election of directors of the Company;

                (2) there occurs a reorganization, merger, consolidation or
other corporate transaction involving the Company ("Transaction"), in each case,
                                                    -----------
with respect to which the stockholders of the Company immediately prior to such
Transaction do not, immediately after the Transaction, own more than fifty
percent (50%) of the combined voting power of the Company or other corporation
resulting from such Transaction; or

                (3) all or substantially all of the assets of the Company are
sold, liquidated or distributed.

     (c) Continued Employment. Except as described in this Section and Section 7
         --------------------
or otherwise in any related option agreement, vesting of the Opions pursuant to
this Agreement is earned only by continuing as an employee of the Company at the
will of the Company (not through the act of being granted the Option or
acquiring shares under this Agreement). This

                                       3

<PAGE>

Agreement, the transactions contemplated under it and the vesting schedule set
forth in this Agreement do not constitute an express or implied promise of
continued engagement for the vesting period, for any period, or at all.

5.   Expenses. The Company will pay on behalf of Employee (or reimburse
     --------
Employee) reasonable expenses incurred by Employee at the request of, or on
behalf of, the Company in the performance of Employee's duties pursuant to this
Agreement, and in accordance with the Company's employment policies, including
reasonable expenses incurred by Employee (a) while attending conventions,
seminars and other business meetings, (b) for appropriate business entertainment
activities and (c) for appropriate promotional expenses. In addition, the
Company will reimburse Employee for the reasonable costs of equipping a home
office (e.g. computer, phone line, printer and facsimile). Employee shall file
expense reports with respect to such expenses in accordance with the Company's
policies.

6.   Vacations and Holidays. Employee will be entitled to paid vacation in an
     ----------------------
amount of four weeks per year. Employee may carry-over from one year to the next
any accrued but unused vacation up to a maximum of six weeks of vacation. Once
Employee accrues the maximum vacation, he will not accrue additional vacation
until he takes enough vacation to bring his accrual below the maximum. Employee
may take vacation at such time or times as approved by the Chief Executive
Officer. Employee is entitled to holidays in accordance with the holiday
policies of the Company in effect for its employees from time to time.

7.   Payment upon Termination of Employment. Upon termination of Employee's
     --------------------------------------
Employment, the Company will be obligated to pay to Employee only such
compensation as is provided in this Section 7.

     7.1  Termination of Employment prior to July 24, 2004 without Cause or with
          ----------------------------------------------------------------------
Good Reason. In the event that prior to July 24, 2004 the Company terminates
-----------
Employee's Employment without "Cause" or Employee terminates Employment with
                               -----
Good Reason, Employee will be eligible for payment of the Salary and accrued but
unused vacation through the date of such termination, plus severance payments
("Severance Payment") in an aggregate amount equal to twelve (12) months' Base
  -----------------
Salary. Further, in the event that prior to July 24, 2004 (a) Employee's
Employment is terminated by the Company without Cause or by Employee for Good
Reason; (b) the Options described in Section 4.2(b)(i) or (ii) of this Agreement
have not vested as of the date on which Employee's employment is terminated
pursuant to this Section, the Options described in Section 4.2(b)(i) or (ii) of
this Agreement will not expire but shall continue in effect and shall expire on
the date set forth in the related stock option agreement; and (c) any unvested
Options among the 600,000 Options described in Section 4.2(b)(iii) immediately
will vest and become exercisable on the date of termination. The Severance
Payment will be paid over a twelve-month period in accordance with the Company's
regular payroll system. Employee's receipt of the termination benefits described
in this section is conditioned upon his execution of a release of all claims
effective as of the termination date, in substantially the form attached to this
Agreement as Exhibit C.

          (a)  Termination for "Cause" occurs if Employee is terminated for any
                                -----
one of the following reasons: (i) Employee's material breach of this Agreement;
(ii) Employee's material failure to adhere to any written policy of the Company
that is legal and generally

                                       4

<PAGE>

applicable to officers of the Company; (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.

          (b)  Termination by Employee for "Good Reason" occurs if Employee
                                            -----------
terminates his employment within three (3) months after the first occurrence of
any of the following events:

               (i)   any reduction in Employee's Base Salary;

               (ii)  any significant reduction in Employee's responsibilities
and authority or a material change in Employee's responsibility or authority
that would be inconsistent or interfere with the duties described in Section 2.3
of this Agreement;

               (iii) a relocation of Employee's place of employment (Exton,
Pennsylvania) without Employee's agreement, outside a fifty (50) mile radius of
Employee's current place of employment;

               (iv)  any failure by Employer to pay Employee's Compensation in a
timely manner.

               An event described in Section 7.1(b)(i) through (iii) will not
constitute Good Reason unless Employee provides written notice to the Company of
his intention to terminate his employment for Good Reason and unless the Company
does not cure the Good Reason within thirty (30) days of Employer's receipt of
the written notice.

     7.2  Termination with Cause or Without Good Reason. If at any time the
          ---------------------------------------------
Company terminates the Employment for Cause or Employee terminates the
Employment without Good Reason (Employee resigns), Employee will be entitled to
receive the portion of Base Salary and vacation accrued and owing to Employee
through the date of such termination. Employee is not entitled to any other
payment at termination except that at the option of the Company in its sole
discretion, Employee may be eligible for the Severance Payments described in
Section 7.1, or some portion thereof, in exchange for his execution of a release
of all claims effective as of the termination date, in substantially the form
attached to this Agreement as Exhibit C or other consideration.
                              ---------

     7.3  Termination without Cause or with Good Reason any reason after July
          -------------------------------------------------------------------
24, 2004. If after July 24, 2004 the Company terminates the Employment without
--------
Cause or Employee terminates the Employment with Good Reason (Employee resigns),
Employee will be entitled to receive the portion of Base Salary and vacation
accrued and owing to Employee through the date of such termination. Employee
also is entitled to Severance Payments in an aggregate amount equal to six (6)
months' Base Salary, to be paid over a six (6) month period, in exchange for
Employee's agreement that for a period of one (1) year after Employee's
Employment with Employer is terminated for the reasons described in this
Section, Employee shall not (a) accept

                                       5

<PAGE>

employment with or consultation for any business whose products or activities
compete in whole or in part with the products or activities of the Technology
Services Division of Employer, anywhere within the United States where Employer
then currently is doing business or is marketing its Technology Services; (b)
directly or indirectly, either for himself or any other person or entity,
solicit the business of any current or prospective customer of Employer who
became known to Employee through his Employment. Employee acknowledges and
agrees that the purpose of this requirement is to protect Employer's
relationship with its customers and its interest in the customer good will
generated by Employee, that Employer currently is performing technology services
in a majority of states and is currently marketing such services throughout the
United States and that this covenant is reasonable with respect to its duration,
geographical area and scope. In the event employee acts in contradiction with
the provisions of Section 7.3, employee is not entitled to any Severance
Payments under this Section. The provisions of this Section 7.3 are in addition
to the requirements described in Exhibit B to this Agreement.

     7.4  Termination of Employment following Death or Disability. Where the
          -------------------------------------------------------
Employment is terminated following Employee's death or where the Employment is
terminated as a result of Employee suffering a disability which cannot be
reasonably accommodated and which renders him unable to perform the essential
functions of his position for 120 days, Employee or his estate will be entitled
to receive the portion of Base Salary and vacation accrued and owing to Employee
only through the date of such termination.

     7.5  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.   General Provisions.
     ------------------

     8.1  Representations and Warranties by Employee. Employee represents and
          ------------------------------------------
warrants to the Company that the execution of this Agreement and the performance
by Employee of his obligations under this Agreement will not: (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.

     8.2  Obligations Contingent on Performance. The obligations of the Company
          -------------------------------------
under this Agreement, including its obligation to pay the compensation provided
for in this Agreement, are contingent upon Employee's performance of Employee's
obligations under this Agreement.

     8.3  Waiver. No waiver of any provision or consent to any exception to the
          ------
terms of this Agreement or any agreement contemplated by this Agreement will be
effective unless in writing and signed by the party to be bound and then only to
the specific purpose, extent, and instance so provided.

     8.4  Binding Effect; Delegation of Duties Prohibited. This Agreement shall
          -----------------------------------------------
inure to the benefit of, and shall be binding upon, the parties to this
Agreement 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

                                       6

<PAGE>

transferred. The duties and covenants of Employee under this Agreement, being
personal, may not be delegated.

     8.5  Notices. All notices, amendments, 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 the Company:        DAOU Systems, Inc.
                                    5120 Shoreham Place
                                    San Diego, CA 92122
                                    Attention:  James T. Roberto
                                    Facsimile No.: (619) 452-2789

          With a copy to:           Baker & McKenzie
                                    101 W. Broadway, Suite 1200
                                    San Diego, California 92101
                                    Attention:  Abby Silverman, Esq.
                                    ---------
                                    Facsimile No.: (619) 236-0429

          If to Employee:           Daniel J. Malcolm

                                    Facsimile No.:

     8.6  Entire Agreement; Amendments. This Agreement, including its exhibits,
          ----------------------------
contains the entire agreement between the parties with respect to the subject
matter of this Agreement and supersedes all prior agreements and understandings,
oral or written, between the parties with respect to the subject matter of this
Agreement. This Agreement may not be amended orally, but only by an agreement in
writing signed by the parties to this Agreement.

     8.7  Governing Law. This Agreement will be governed by the laws of
          -------------
Pennsylvania without regard to conflicts of law principles.

     8.8  Jurisdiction. Any proceeding seeking to enforce any provision of, or
          ------------
based on any right arising out of, this Agreement will be brought against any of
the parties in the United States District Court for Pennsylvania or in any other
state in which the Company has its principal place of business, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
that venue. Process in any action or proceeding referred to in the preceding
sentence may be served on any party anywhere in the world.

     8.9  No Undue Influence. This Agreement is executed voluntarily and without
          ------------------
any duress or undue influence. Employee acknowledges that he has read this
Agreement and

                                       7

<PAGE>

executed it with his full and free consent. No provision of this Agreement 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 Agreement.

     8.10 Arbitration. The parties agree that any controversy between the
          -----------
Company and Employee arising from the Employment or termination of the
Employment, including, without limitation, any controversy related to the
construction or application of any of the terms of this Agreement, arbitrability
of this Agreement, claims for statutory violations, including claims for
violation of the Civil Rights Act of 1991 (Title VII), the Age Discrimination in
Employment Act, the Americans with Disabilities Act, any state law equivalent,
or any amendments to those statutes, claims for wages or other compensation, or
other claims arising out of the Employment, shall, on the written request of
Employee or the Company, be submitted to final and binding arbitration.
Arbitration shall be pursuant to the Employment Arbitration Rules (the "Rules")
                                                                        -----
of the American Arbitration Association (the "AAA"). The arbitration will take
                                              ---
place in Exton, Pennsylvania, or in any other city in which the Company has its
principal place of business, at the offices of the AAA. All fees and costs will
be allocated to the parties to the arbitration as determined by the arbitrator;
provided, however, that each party will pay one-half of the estimated
--------  -------
arbitrator's fees up front and, if either party fails to do so, then 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.
Nothing in this Agreement will prevent a party from applying to a court that
would otherwise have jurisdiction for provisional or interim injunctive or other
equitable measures.

     8.11 Section Headings, Construction. The section headings in this Agreement
          ------------------------------
are provided for convenience only and will not affect its construction or
interpretation.

     8.12 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.

     8.13 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.

DAOU SYSTEMS, INC.                                   EMPLOYEE:

By: /s/ James T. Roberto                             By: /s/ Daniel J. Malcolm
    --------------------                                 ---------------------
    James T. Roberto                                         Daniel J. Malcolm
    President and Chief Executive Officer

                                       8

<PAGE>

                                    EXHIBIT A
                                    ---------

                EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT

     The following confirms the agreement between me and DAOU SYSTEMS, INC., a
Delaware corporation (the "Company"), which is a material part of the
                           -------
consideration for my employment by the Company:

1.   I understand that the Company possesses and will possess Proprietary
Information which is important to its business. For purposes of this Agreement,
"Proprietary Information" is information that was or will be developed, created,
or discovered by or on behalf of the Company, or which became or will become
known by, or was or is conveyed to the Company, which has commercial value in
the Company's business. "Proprietary Information" includes, but is not limited
to, information about trade secrets, computer programs, designs, technology,
ideas, know-how, processes, compositions, data, techniques, improvements,
inventions (whether patentable or not), works of authorship, business and
product development plans, the salaries and terms of compensation of other
employees, customers and other information concerning the Company's actual or
anticipated business, research or development, or which is received in
confidence by or for the Company from any other person. Of particular importance
to the Company is the protecting the confidentiality of its unique manner and
method of integrating and managing health care information networks to increase
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. I
understand that my employment creates a relationship of confidence and trust
between me and the Company with respect to Proprietary Information.

2.   I understand that the Company possesses or will possess "Company Materials"
which are important to its business. For purposes of this Agreement, "Company
                                                                      -------
Materials" are documents or other media or tangible items that contain or embody
---------
Proprietary Information or any other information concerning the business,
operations or future/strategic plans of the Company, whether such documents have
been prepared by me or by others including but not limited to portions of the
Company's customer lists which have been specially compiled by the Company to
include information not available to the public such as customer preferences and
customer buying history. "Company Materials" also include, but are not limited
                          -----------------
to, blueprints, drawings, photographs, charts, graphs, notebooks, customer
lists, computer disks, tapes or printouts, sound recordings and other printed,
typewritten or handwritten documents.

3.   In consideration of my employment by the Company and the compensation
received by me from the Company I hereby agree as follows:

     (a)  All Proprietary Information and trade secret rights, and other
intellectual property and rights (collectively "Rights") in connection therewith
will be the sole property of the Company. At all times, both during my
employment by the Company and after its termination, I will keep in confidence
and trust and will not use or disclose any Proprietary Information or anything
relating to it without the prior written consent of an officer of the Company
except as

                                       9

<PAGE>

may be necessary and appropriate in the ordinary course of performing my duties
to the Company.

          (b)  All Company Materials will be the sole property of the Company. I
agree that during my employment by the Company, I will not remove any Company
Materials from the business premises of the Company or deliver any Company
Materials to any person or entity outside the Company, except as I am required
to do in connection with performing the duties of my employment. I further agree
that, immediately upon the termination of my employment by me or by the Company
for any reason, or during my employment if so requested by the Company, I will
return all Company Materials, apparatus, equipment and other physical property,
or any reproduction of such property, excepting only (i) my personal copies of
records relating to my compensation; (ii) my personal copies of any materials
previously distributed generally to stockholders of the Company; and (iii) my
copy of this Agreement.

          (c)  During the term of my employment and for two years thereafter, I
will not encourage or solicit any employee or consultant of the Company to leave
the Company for any reason. However, this obligation will not affect any
responsibility I may have as an employee of the Company with respect to the bona
fide hiring and firing of Company personnel.

          (d)  I promptly will disclose in writing to my immediate supervisor,
with a copy to the President of the Company, or to any persons designated by the
Company, all "Inventions", which includes all improvements, inventions, designs,
              ----------
formulas, works of authorship, trade secrets, technology, computer programs,
compositions, ideas, processes, techniques, know-how and data, whether or not
patentable, made or conceived or reduced to practice or developed by me, either
alone or jointly with others, during the term of my employment. I will also
disclose to the President of the Company all things that would be Inventions if
made during the term of my employment, conceived, reduced to practice, or
developed by me within six months after the termination of my employment with
the Company. Such disclosures will be received by the Company in confidence (to
the extent they are not assigned in Section 3(e) below) and do not extend the
                                    ------------
assignment made in Section 3 (e) below. I will not disclose Inventions to any
                   -------------
person outside the Company unless I am requested to do so by management
personnel of the Company.

          (e)  I agree that all Inventions which I make, conceive, reduce to
practice or develop (in whole or in part, either alone or jointly with others)
during my employment will be the sole property of the Company to the maximum
extent permitted by Section 2870 of the California Labor Code, a copy of which
is attached, and hereby assign such Inventions and all Rights therein to the
Company. No assignment in this Agreement will extend to inventions, the
assignment of which is prohibited by Labor Code Section 2870 (attached Exhibit
                                                                       -------
1). The Company will be the sole owner of all Rights in connection therewith.
-

          (f)  I agree to perform, during and after my employment, all acts
deemed necessary or desirable by the Company to permit and assist it, at the
Company's expense, in obtaining, maintaining, defending and enforcing Rights
with respect to such Inventions and improvements in any and all countries. Such
acts may include, but are not limited to, execution of documents and assistance
or cooperation in legal proceedings. I irrevocably designate and appoint the
Company and its duly authorized officers and agents, as my agents and
attorneys-in-fact to act for and in my behalf and instead of me, to execute and
file any documents and to do all other

                                       10

<PAGE>

lawfully permitted acts to further the above purposes with the same legal force
and effect as if executed by me.

     (g) Any assignment of copyright pursuant to this Agreement includes all
rights of paternity, integrity, disclosure and withdrawal and any other rights
that may be known as or referred to as "moral rights" (collectively "Moral
                                                                     -----
Rights"). To the extent such Moral Rights cannot be assigned under applicable
------
law and to the extent the following is allowed by the laws in the various
countries where Moral Rights exist, I hereby waive such Moral Rights and consent
to any action of the Company that would violate such Moral Rights in the absence
of such consent. I will confirm any such waivers and consents from time to time
as requested by the Company.

     (h) I have attached to this Agreement as Exhibit 2 a complete list of all
                                              ---------
existing Inventions or improvements to which I claim ownership as of the date of
this Agreement and that I desire to specifically clarify are not subject to this
Agreement, and I acknowledge and agree that such list is complete. If no such
list is attached to this Agreement, I represent that I have no such Inventions
and improvements at the time of signing this Agreement.    /s/ DM
                                                           ---------------------
[INITIAL HERE]

     (i) I agree that during my employment with the Company I will not engage in
any employment, business, or activity that is in any way competitive with the
business or proposed business of the Company, and I will not assist any other
person or organization in competing with the Company or in preparing to engage
in competition with the business or proposed business of the Company. The
provisions of this paragraph will apply both during normal working hours and at
all other times including, but not limited to, nights, weekends and vacation
time, while I am employed by the Company.

     (j) I represent that my performance of all the terms of this Agreement will
not breach any agreement to keep in confidence proprietary information acquired
by me in confidence or in trust prior to my employment by the Company. I have
not entered into, and I agree I will not enter into, any agreement either
written or oral in conflict herewith or in conflict with my employment with the
Company.

4.   I agree that this Agreement is not an employment contract and that I have
the right to resign and the Company has the right to terminate my employment at
any time, for any reason, with or without cause.

5.   I agree that this Agreement does not purport to set forth all of the terms
and conditions of my employment, and that as an employee of the Company I have
obligations to the Company which are not set forth in this Agreement.

6.   I agree that my obligations under sections 3(a) through 3(h) and section
                                       -------------         ----     -------
3(j) of this Agreement will continue in effect after termination of my
----
employment, regardless of the reason or reasons for termination, and whether
such termination is voluntary or involuntary on my part, and that I will notify
any future client, employer or potential employer or client of my obligations
under this Agreement. I agree that the Company is entitled to communicate my
obligations under this Agreement to any future employer or potential employer of
mine.

                                       11

<PAGE>

7.   I acknowledge and agree I have an obligation to protect the Company's
Propriety Information and Company Materials and that this obligation continues
in effect after termination of my employment, regardless of the reason or
reasons for termination, and whether such termination is voluntary or
involuntary on my part. Therefore, I agree that I will not disclose these
Propriety Information and Company Materials to assist any other person or
organization in competing with the Company or in preparing to engage in
competition with the business or proposed business of the Company.

8.   I agree that the Company has expended substantial efforts to maintain the
confidentiality and proprietary nature of the information described in this
Agreement and would be materially and irreparably injured by an unauthorized
disclosure of any of that information. Any breach of this Agreement will result
in irreparable and continuing damage to the Company for which there can be no
adequate remedy at law, and in the event of any such breach, the Company will be
entitled to immediate injunctive relief and other equitable remedies (without
any need to post any bond or other security) in addition to such other and
further relief as may be proper.

9.   I agree that any dispute in the meaning, effect or validity of this
Agreement will be resolved in accordance with the laws of California without
regard to the conflict of laws provisions to this Agreement. I further agree
that if one or more provisions of this Agreement are held to be illegal or
unenforceable under applicable California law, such illegal or unenforceable
portion(s) will be revised to make them legal and enforceable. The remainder of
this Agreement will otherwise remain in full force and effect and enforceable in
accordance with its terms.

10.  This Agreement will be effective as of the date I execute this Agreement
and will be binding upon me, my heirs, executors, assigns, and administrators
and will inure to the benefit of the Company, its subsidiaries, successors and
assigns.

11.  This Agreement can only be modified by a subsequent written agreement
executed by the President of the Company.

I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE OBLIGATIONS
WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR REPRESENTATIONS
HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I SIGN THIS AGREEMENT
VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING THAT ONE
COUNTERPART WILL BE RETAINED BY THE COMPANY AND THE OTHER COUNTERPART WILL BE
RETAINED BY ME.

Dated: November 6, 2001                     /s/ Daniel Malcolm
       ----------------                     ------------------------------------
                                            Employee

                                       12

<PAGE>

                                    EXHIBIT 1
                                    ---------

     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 these
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, or

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

                                       13

<PAGE>

                                    EXHIBIT 2
                                    ---------

DAOU SYSTEMS, INC.
5120 Shoreham Place
San Diego, California 92122

      1. The following is a complete list of inventions or improvements relevant
to the subject matter of my employment by DAOU SYSTEMS, INC. (the "Company")
                                                                   -------
that have been made or conceived or first reduced to practice by me alone or
jointly with others prior to my employment by the Company that I desire to
clarify are not subject to the Company's Proprietary Information and Inventions
Agreement.

___   No inventions or improvements

___   See below:

___   Additional sheets attached

      2. I propose to bring to my employment the following materials and
documents of a former employer:

___   No materials or documents

___   See below:

         /s/ Daniel Malcolm
      ---------------------------------------------
      Employee

                                       14

<PAGE>

                                    EXHIBIT C
                                    ---------

                                 GENERAL RELEASE

THIS GENERAL RELEASE (this "Release") is entered into effective as of
                            -------
_________________ ("Effective Date") by and between DAOU Systems, Inc., a
                    --------------
Delaware corporation (the "Company"), and Daniel J. Malcolm, an individual
                           -------
resident of Pennsylvania ("Employee"), with reference to the following facts:
                           --------

                                    RECITALS

       A.   The parties hereto entered into an Employment Agreement dated as of
November 6, 2001 (the "Agreement"). Pursuant to the terms and conditions of the
                        ---------
Agreement, and contingent upon satisfaction of the conditions described in the
Agreement, Employee would become eligible for severance payments as defined by
the Employment Agreement beginning on the eighth (8th) day following his
execution of this Release Agreement, 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 Employee may have against the Company in the manner set forth in this
Release.

                                    AGREEMENT

1.     Consideration for Release. In exchange for Employee's execution of this
       -------------------------
Release Agreement and releasing all claims against the Company as set forth in
Section 2, Employee will be paid or will be eligible for a Severance Payment in
an amount equal to ___________________ ($___ ) less all applicable federal,
state and local income, social security and other payroll taxes. Payment of this
Severance Payment will be on a bi-monthly basis, consistent with the Company's
regular payroll schedule, beginning the eighth day from Employee's execution of
this Agreement, or if the eighth day falls on a weekend or a holiday, on the
next business day.

2.     Release.
       -------

       2.1  Except for claims under the Workers' Compensation Act and the
Unemployment Insurance Code, in exchange for the consideration described in
Section 1, receipt of which Employee acknowledges, Employee, for himself and his
heirs, successors and assigns, fully releases, and discharges 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 suits of any kind arising out
of, or in any way connected with, the dealings between the parties through the
date his employment terminated (the "Separation Date"), including the employment
                                     ---------------
relationship and its termination. Employee also releases and waives any and all
legal or administrative claims arising under any express or implied contract,
law (federal, state or administrative), rule, regulation, or ordinance,
including, but not limited to, Title VII of the Civil Rights Act of 1964, the
Americans with Disabilities Act, the California Fair

                                       15

<PAGE>

Employment and Housing Act, or the Age Discrimination in Employment Act of 1967,
as amended ("ADEA"), and the Older Workers Benefit Protection Act, as amended
("OWBPA") (except a claim relating to whether this release or waiver is valid
under the ADEA and except for any claims under the ADEA that may arise after the
date this Agreement is executed by Employee).

3.   Section 1542 Waiver. The Release is intended as a full and complete release
     -------------------
and discharge of any and all claims that Employee may have against the Company
through the Separation Date. In making the Release, Employee intends to release
the Company 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.
Employee expressly waives all rights under Section 1542 of the Civil Code of the
State of California, which Employee 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 MATERIALLY AFFECTED HIS
          SETTLEMENT WITH THE DEBTOR.

     Employee acknowledges that he may discover facts different from or in
addition to those that he now believes to be true with respect to this Release.
Employee agrees that this Release shall remain effective even though Employee
may discover different or additional facts affecting this Release.

4.   Age Discrimination in Employment Claims. The Release set forth in Section 2
     ---------------------------------------
includes a waiver of rights or claims based on age discrimination in violation
of the ADEA and applicable state laws. The ADEA requires the Company to advise
Employee of the following to effectuate his knowing and voluntary waiver of
rights or claims under the ADEA:

     4.1  The Company advises Employee to consult with an attorney prior to
executing this Agreement and Employee acknowledges that the Company has advised
him in writing to do so.

     4.2  Employee acknowledges that he has been given twenty-one (21) days from
the date of this Agreement to consider entering into the waiver of the ADEA
claims, if any. Employee agrees that if he decides to shorten the 21-day period
by executing this Agreement before the expiration of 21 days, he does so
knowingly and voluntarily.

     4.3  Employee acknowledges that by this Agreement he has been informed that
he may revoke his waiver of the ADEA claims for up to 7 days after executing
this Agreement. To be effective, his revocation must be in writing, signed,
dated and delivered to the Company's President no later than 7 days from the
date on which Employee signs this Agreement. If the 7th day falls on a weekend
or holiday, Employee's revocation must be delivered the next business day.
Employee acknowledges his understanding that this Agreement shall not become
effective and enforceable until the revocation period expires and that the
Severance Payment provided for

                                       16

<PAGE>

in Section 2 will not be made until the revocation period expires without
revocation by Employee.

5.   No Undue Influence. This Release is executed voluntarily and without any
     ------------------
duress or undue influence. Employee 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.

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

7.   Governing Law. This Release is made and entered into in 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 California as applied to contracts entered into by and between residents
of California to be wholly performed within California.

8.   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.

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

10.  Arbitration. 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 (the
"AAA") and will be governed by the Model Employment Arbitration rules of the
 ---
AAA. All fees and costs will be allocated to the parties to the arbitration as
determined by the arbitrator; provided, however, that each party will pay
                              --------  -------
one-half of the estimated arbitrator's fees up front; and, if either party fails
to do so, then 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. Nothing in this Release will prevent a party hereto from applying
to a court that would otherwise have jurisdiction for provisional or interim
injunctive or other equitable measures.

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

                                       17

<PAGE>

12.    Modification; Waivers.  No modification, termination or attempted waiver
       ---------------------
of this Release will be valid unless in writing, signed by the party against
whom such modification, termination or waiver is sought to be enforced.

13.    Amendment.  This Release may be amended or supplemented only by a writing
       ---------
signed by Employee and the Company.

Dated:_________________
                                            ---------------------
                                            Daniel J. Malcolm

                                            DAOU Systems, Inc.

Dated:_________________
                                            --------------------
                                        By: James T. Roberto, President and
                                            Chief Executive Officer

                                       18

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