SEPARATION AGREEMENT AND GENERAL RELEASE

EXHIBIT 10.3

SEPARATION AGREEMENT AND GENERAL RELEASE

             The parties to this Separation Agreement and General Release (“Agreement”) are Larry D. Grandia (“Grandia” ) and DAOU Systems, Inc. (“DAOU” or the “Company”), (collectively, the “Settling Parties”). The Effective Date of this Agreement is the date of execution.

RECITALS

             This Agreement is made with reference to the following facts:

        A.  Grandia intends to resign his position as Chief Executive Officer and President of the Company effective November 14, 2000 or as of the date a new Chief Executive Officer accepts employment with DAOU, whichever is sooner. The date of his resignation will be the “Separation Date” for purposes of this Agreement. For the period from October 31, 2000 through the Separation Date, Grandia agrees to devote significant attention and time as Chief Executive Officer of DAOU to the recruitment and selection of a new Chief Executive Officer of DAOU. As of the Separation Date, Grandia’s rights and obligations as an employee will cease, except as set forth in this Agreement.

        B.  The Company and Grandia desire to resolve and dispose of, fully and completely, all claims, demands, and causes of action, known or unknown, which Grandia may have against the Company or its subsidiaries or affiliates, including, those rights, claims, demands and causes of action arising out of the employment relationship, the June 15, 1999 employment agreement between Grandia and DAOU ( the “Employment Agreement”) and the termination of the employment relationship between Grandia and DAOU.

AGREEMENT

        1.  Effect of Separation on Salary and Benefits.

              1.1  On the Separation Date, DAOU shall provide Grandia with a final paycheck which includes accrued and unused vacation pay, less all applicable federal, state and local income, social security and other payroll taxes.

              1.2  Within 14 days of the Separation Date, DAOU will provide Grandia with election forms for medical insurance continuation as provided by the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”). Any cost associated with the continuation of Grandia’s medical, life and car insurance through November 30, 2000 will be assumed by DAOU.

              1.3  The Company will pay Grandia’s reasonable and customary business expenses, if any, through November 30, 2000.

        2.  Additional Consideration to Grandia.

              2.1  Forgiveness of Loan. As of the Separation Date, DAOU releases Grandia from his obligation under Section 3.5 of the Employment Agreement to repay principal and accrued interest on the loan of Two Hundred Thousand Dollar ($200,000.00) described in that Section 3.5.

              2.2  Transfer in Ownership of Company Car and other DAOU property. On the Separation Date, DAOU agrees to transfer ownership to Grandia of the 1999 Infinity Q45 that Grandia utilized during his employment with DAOU. Grandia further is entitled to retain two DAOU personal computers that he utilized during his employment with DAOU.

              2.3  Exceptions to Covenants. Pursuant to Section 7.2(b) of the Employment Agreement, Grandia is prohibited for a period of one (1) year from the Separation Date from soliciting business of the same or similar type being carried on by DAOU, from any person known by Grandia to be a customer of DAOU and with whom Grandia had personal contact during and by reason of his employment with DAOU. DAOU acknowledges that Grandia has accepted the position of Executive Vice President, Chief Technology Officer for Premier, Inc. By this Agreement, DAOU releases Grandia from his obligations under Section 7.2(b) of the Employment Agreement

for the limited purpose of satisfying his employment obligations to Premier, Inc. Other than this limited exception, Grandia understands and agrees that he continues to be bound by the obligations described in Section 7.2(b) through 7.2(d) of the Employment Agreement for the time periods defined in the Employment Agreement.

              2.4  Continuation of Vesting. In connection with the Employment Agreement, Grandia received non-statutory options (the “ Non-Statutory Options”) and incentive stock options (the “Incentive Stock Options”) to purchase shares of DAOU Common Stock. A portion of the Non-Statutory Options were granted pursuant to DAOU’s 1996 Stock Option Plan (the “Plan ”) and a portion of the Non-Statutory Options were granted outside the Plan.

                     After the Separation Date and during any period in which Grandia serves on DAOU’s Board of Directors (the “Board”) pursuant to Section 2.2 below, Grandia will continue vesting any Non-Statutory Options covered by the Plan according to the schedule set forth in any stock option agreement between DAOU and Grandia reflecting the grant of Non-Statutory Options under the Plan. Grandia’s time to exercise any vested Non-Statutory Options covered by this Section will run from the date he, for any reason, ceases to serve on the Board.

                     From the Separation Date, Grandia will cease accruing any Non-Statutory Stock Options granted outside the Plan and any Incentive Stock Options. Treatment of the Non-Statutory Stock Options granted outside the Plan will be pursuant to any stock option agreement reflecting that grant. Treatment of any Incentive Stock Options will be pursuant to the Plan and any stock option agreement between Grandia and DAOU reflecting that grant.

              2.5  No Other Obligations. Except as specified above, the Company shall have no payment or other obligation to Grandia.

              2.6  Tax Consequences. The Company has made no representations to Grandia as to his tax liability with respect to any of the above Consideration. Grandia acknowledges that he has consulted with his own professional advisors with respect to all tax matters, and is not relying on any representation by the Company on any tax matter. Grandia will be solely responsible for any and all tax responsibility for the payment by the Company, and for any additional tax responsibility which may be assessed either against his or against the Company, including any penalties assessed by any agency against any party, which may arise as a result of his characterization of any payment.

        3.  Consideration from Grandia.

              3.1  General Release. In exchange for the consideration set forth above, and specifically in Sections 2.1-2.3 above, and for other good and valuable consideration, each of the Settling Parties, except as to such rights or claims as may be created by this Agreement, releases and forever discharges each of the Settling Parties, their present and former agents, employees, officers, directors, shareholders, principals, predecessors, alter egos, partners, parents, subsidiaries, affiliates, attorneys, insurers, successors and assigns, from any and all claims, demands, grievances, causes of action or suit of any kind arising out of, or in any way connected with, the dealings between the parties through the Separation Date, including the employment relationship and its termination. The Settling Parties also release and waive any and all legal or administrative claims arising under any express or implied contract, law, rule, regulation, or ordinance, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Fair Labor Standards Act, the Americans with Disabilities Act, the California Fair Employment and Housing Act, the Family Rights’ Act, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or the Age Discrimination in Employment Act of 1967, as amended (“ADEA”). Grandia agrees that, except as described in this Agreement, as of the Separation Date and the execution of this Agreement, Grandia is not entitled to any benefits, consideration or sums from DAOU.

              3.2  Transition Services. In exchange for the consideration set forth above, and specifically in Sections 2.1-2.3 above, and for no other additional compensation, after the Separation Date and through December 31, 2000 Grandia agrees to provide the Company with transition services as shall be reasonably requested by the Board (the “Transition Services”). DAOU agrees that Grandia will not be required to provide Transition Services in an amount greater than two hours per week.

              3.3  Board of Directors. In exchange for the consideration to Grandia described in Section 2.4 above, Grandia agrees to serve as a member of the Board for a period of one (1) year from the Separation Date.