<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q

 /X/      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

                                       OR

 / /      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the transition period from ______________ to ___________,

                         Commission File No.: 000-22073

                               DAOU SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                        33-0284454
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
  incorporation or organization)

                               5120 Shoreham Place
                           San Diego, California 92122
               (Address of principal executive offices) (Zip Code)

                                 (858) 452-2221
              (Registrant's telephone number, including area code)

 Indicate by check mark whether the registrant (1) has filed all reports
 required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
 1934 during the preceding 12 months (or for such shorter period that the
 registrant was required to file such reports), and (2) has been subject to such
 filing requirements for the past 90 days: Yes X  No
                                              ---   ---

The number of shares of Registrant's Common Stock, par value $.001 per share,
outstanding as of May 12, 2000: 17,712,368


                                       1
<PAGE>


                               DAOU SYSTEMS, INC.



                               Index to Form 10-Q

<TABLE>
<CAPTION>

PART I.         FINANCIAL INFORMATION                                                                    Page
                                                                                                      ----------
<S>             <C>                                                                                   <C>
Item 1.         Condensed Consolidated Financial Statements

                Condensed Consolidated Balance Sheets at March 31, 2000 (unaudited) and
                  December 31, 1999                                                                         3

                Condensed Consolidated Statements of Operations (unaudited) for the Three
                  Months Ended March 31, 2000 and 1999                                                      4

                Condensed Consolidated Statements of Cash Flows (unaudited) for the Three
                  Months Ended March 31, 2000 and 1999                                                      5

                Notes to Condensed Consolidated Financial Statements                                        6

Item 2.         Management's Discussion and Analysis of  Financial Condition and Results of
                 Operations                                                                                10
Item 3.         Quantitative and Qualitative Disclosure about Market Risk                                  13

PART II.        OTHER INFORMATION

Item 1.         Legal Proceedings                                                                          14
Item 6.         Exhibits and Reports on Form 8-K                                                           14

                SIGNATURES                                                                                 15

</TABLE>


                                       2
<PAGE>


PART I.    FINANCIAL INFORMATION

Item 1.    Condensed Consolidated Financial Statements

                               DAOU Systems, Inc.
                      Condensed Consolidated Balance Sheets
                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                           MARCH 31,       DECEMBER 31,
                                                                             2000              1999
                                                                          (UNAUDITED)
                                                                       ------------------------------------
<S>                                                                      <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                             $      12,642    $      15,480
   Short-term investments, available-for-sale                                       59               68
   Accounts receivable, net of allowance for doubtful accounts of
     $1,849 and $1,868 at March 31, 2000 and December 31, 1999,
     respectively                                                               16,857           21,912
   Contract work in progress                                                     3,743            2,816
   Income tax receivable                                                             -              378
   Other current assets                                                          1,660              670
                                                                       ------------------------------------
Total current assets                                                            34,961           41,324

Due from officers/stockholders                                                      95               98
Equipment, furniture and fixtures, net                                           4,126            4,319
Other assets                                                                       246              319
                                                                       ------------------------------------
TOTAL ASSETS                                                             $      39,428    $      46,060
                                                                       ====================================

LIABILITIES AND STOCKHOLDERS' EQUITY
   Current liabilities:
   Trade accounts payable and other accrued liabilities                  $       3,019    $       4,698
   Accrued salaries and benefits                                                 3,706            4,248
   Current portion of severance payable                                            210              210
                                                                       ------------------------------------
Total current liabilities                                                        6,935            9,156

Long-term liabilities                                                              567              548

Commitments and contingencies


Redeemable convertible preferred stock, $.001 par value. Authorized 3,520
   shares; issued and outstanding 2,182 shares at March 31, 2000
   and December 31, 1999                                                        11,566           11,382

Stockholders' equity:
   Common stock, $.001 par value.  Authorized shares 50,000 shares;
     issued and outstanding 17,712 shares at March 31, 2000 and
     December 31, 1999                                                              18               18
   Additional paid-in capital                                                   37,395           37,395
   Deferred compensation                                                          (155)            (192)
   Accumulated other comprehensive income                                          (44)             (43)
   Retained deficit                                                            (16,854)         (12,204)
                                                                       ------------------------------------
Total stockholders' equity                                                      20,360           24,974
                                                                       ------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $       39,428   $       46,060
                                                                       ====================================

</TABLE>

SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       3
<PAGE>


                               DAOU Systems, Inc.
                 Condensed Consolidated Statements of Operations
                    (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                          THREE MONTHS ENDED MARCH 31,
                                                                         2000                     1999
                                                                   ------------------       ------------------
<S>                                                                <C>                      <C>
Revenues                                                           $        17,575          $        27,323
Cost of revenues                                                            15,956                   21,820
                                                                   ------------------       ------------------
Gross profit                                                                 1,619                    5,503

Operating expenses:
   Sales and marketing                                                       1,790                    2,905
   General and administrative                                                4,464                    5,336
                                                                   ------------------       ------------------
                                                                             6,254                    8,241
                                                                   ------------------       ------------------

Loss from operations                                                        (4,635)                  (2,738)
Interest income (expense), net                                                 169                      (86)
                                                                   ------------------       ------------------

Loss before income taxes                                                    (4,466)                  (2,824)
Provision (benefit) for income taxes                                             -                   (1,156)
                                                                   ------------------       ------------------
Net loss                                                                    (4,466)                  (1,668)

Accrued dividends on preferred stock                                          (184)                       -
                                                                   ------------------       ------------------
Net loss available to common stockholders                          $        (4,650)         $        (1,668)
                                                                   ==================       ==================

Basic and diluted net loss per common share                        $         (0.26)         $         (0.09)
                                                                   ==================       ==================

Shares used in computing basic and diluted net loss per
      common share:                                                         17,712                   17,689
                                                                   ==================       ==================

</TABLE>

SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL statements.


                                       4
<PAGE>


                               DAOU Systems, Inc.
                 Condensed Consolidated Statements of Cash Flows
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                               THREE MONTHS ENDED MARCH 31,
                                                                2000                  1999
                                                          -----------------     ------------------
<S>                                                       <C>                   <C>
OPERATING ACTIVITIES
Net loss                                                  $        (4,466)      $        (1,668)
Adjustments to reconcile net loss to net cash used in
   operating activities:
   Depreciation and amortization                                      637                   458
    Provision for uncollectible accounts                               75                    98
    Deferred income taxes                                               -                (1,158)
  Changes in operating assets and liabilities:
     Accounts receivable                                            4,980                  (615)
     Contract work in process                                        (927)                4,212
     Other current assets                                            (612)                 (170)
     Accounts payable and accrued liabilities                      (1,679)               (1,686)
     Accrued salaries and benefits                                   (542)                  185
     Other accounts                                                    19                    44
                                                          -----------------     ------------------
Net cash used in operating activities                              (2,515)                 (552)


INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures                       (407)                 (337)
Changes in other assets and maturities of
    short-term investments                                             84                    74
                                                          -----------------     ------------------
Net cash used in investing activities                                (323)                 (265)

FINANCING ACTIVITIES:
Repayments of long-term debt and line of credit                         -                (1,322)
                                                          -----------------     ------------------
Net cash used in financing activities                                   -                (1,322)
                                                          -----------------     ------------------


Decrease in cash and cash equivalents                              (2,838)               (2,139)
Cash and cash equivalents at beginning of period                   15,480                 6,756
                                                          -----------------     ------------------
Cash and cash equivalents at end of period                $        12,642       $         4,617
                                                          =================     ==================

</TABLE>

   SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       5
<PAGE>


                               DAOU SYSTEMS, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Basis of Presentation

The unaudited condensed consolidated financial statements of DAOU Systems, Inc.
("DAOU" or the "Company") at March 31, 2000 and for the three-month periods
ended March 31, 2000 and 1999 have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information.
Accordingly, they do not include all information and footnotes required by GAAP
for a complete set of financial statements. These financial statements reflect
all adjustments, consisting of normal recurring adjustments, which in the
opinion of management are necessary to fairly present the financial position of
the Company at March 31, 2000 and the results of operations for the three month
periods ended March 31, 2000 and 1999. The results of operations for the three
months ended March 31, 2000 are not necessarily indicative of the results to be
expected for the year ending December 31, 2000. The Company has experienced
significant quarterly fluctuations in operating results and it expects that
these fluctuations in revenues, expenses and net income or losses will continue.

The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financials should be read in conjunction with the audited
financial statements and the related notes thereto contained in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC") on March 30, 2000 and in the Company's Proxy Statement Schedule 14A
Information filed with the SEC on May 1, 2000.

2. Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
about the future that affect the amounts reported in the financial statements
and disclosures made in the accompanying notes of the financial statements. The
actual results could differ from those estimates.


3. Lines of Credit

On June 29, 1999, the Company secured a replacement $8.0 million revolving line
of credit, which expires June 29, 2001. The line of credit bears interest at
prime plus 1% per annum and is secured by substantially all of the assets of the
Company and contains customary covenants and restrictions. There are no
compensating balance requirements and borrowings under the line of credit are
limited to 80% of qualifying receivables. No amounts were outstanding under this
revolving line of credit as of March 31, 2000.


4. Related Party Transactions

In 1999, the Company provided implementation services to a company in which
the Chairman of the Board is an investor. The Company has $514,000 in
accounts receivable outstanding at March 31, 2000 related to the
implementation services provided during 1999.

5. Net Loss Per Share

Net loss per share is computed in accordance with FASB Statement No. 128,
EARNINGS PER SHARE. Basic net loss per share is computed using the weighted
average number of common shares outstanding during each period.


                                       6
<PAGE>


Diluted net loss per share includes the dilutive effect of common shares
potentially issuable upon the exercise of stock options and warrants. In 1999,
diluted loss per share is unchanged from basic loss per share because the
effects of the assumed conversion of stock options and warrants would be
antidilutive.

The following table details the computation of basic and diluted net loss per
share:

(In thousands, except per share information)
(unaudited)

<TABLE>
<CAPTION>

                                                                      Three Months Ended
                                                                           March 31,
                                                                     2000             1999
                                                                ---------------- ---------------
<S>                                                             <C>              <C>
Numerator:
   Net loss available to common stockholders                    $        (4,650) $       (1,668)

Denominator:
   Denominator for basic net loss per share - weighted
     average common shares outstanding                                   17,712          17,689
   Effect of dilutive securities:

      Warrants                                                                -               -
      Common stock options                                                    -               -
      Preferred stock                                                         -               -
                                                                ---------------- ---------------
                                                                              -               -
                                                                ---------------- ---------------
   Denominator for diluted net loss per share -adjusted
     weighted average common shares outstanding                          17,712          17,689
                                                                ================ ===============

Basic net loss per share                                        $         (0.26) $        (0.09)
                                                                ================ ===============

Diluted net loss per share                                      $         (0.26)  $       (0.09)
                                                                ================ ===============

</TABLE>


6. Comprehensive Loss

Comprehensive loss for the three months ended March 31, 2000 and 1999 totaled
$(4,651,000) and $(1,577,000), respectively. The difference from reported net
loss arises from the unrealized gains and losses on short-term investments.

7.  Series A Preferred Stock

Holders of the Series A Preferred Stock are entitled to receive cumulative
dividends at the rate of six percent per annum, payable in the form of shares of
Series A Preferred Stock. Such dividend rate shall increase an additional
one-percent per annum for each successive year after the second anniversary of
the purchase date. As of March 31, 2000, the Company has accrued but undeclared
preferred stock dividends of $492,000, payable in shares of Series A Preferred
Stock.


                                       7
<PAGE>


8.       Disclosure of Segment Information

For the three months ended March 31, 2000 and 1999, the Company has the
following five reportable segments: information technology (IT) consulting
and managed care implementation, communications infrastructure, applications
implementation, integration services, and outsourcing. Beginning in early
2000, the Company formed a new segment, Enosus. The IT consulting and managed
care implementation group focuses on providing senior consultants to assist
healthcare management to plan and meet their business and IT objectives. The
communications infrastructure group installs, implements and maintains IT
infrastructure for healthcare organizations. The applications implementation
group provides IT consulting resources to hospitals and other healthcare
organizations. The integration services group concentrates on integration of
existing healthcare systems (financial, clinical and management) to reduce
overall costs and improve the quality of care. The outsourcing group performs
a full range of IT outsourcing services including co-source or outsource of
call centers, help desks, desktop support, server management, network
management, voice management and complete IT department outsourcing. Enosus
provides Internet professional services and solutions to healthcare and other
organizations executing an eBusiness strategy.

The Company manages segment reporting at a gross margin level. Sales and
marketing, general and administrative expenses, and capital assets are
managed at the corporate level separately from the segments and therefore are
not separately allocated to the segments. The Company's segments are managed
on an integrated basis in order to serve clients by assembling
multi-disciplinary teams, which provide comprehensive services across its
principal services.

<TABLE>
<CAPTION>

                               IT
                           Consulting
                               and
                          Managed Care     Communications   Application   Integration
                          Implementation   Infrastructure  Implementation   Services    Outsourcing   Enosus    Total
                          --------------------------------------------------------------------------------------------
<S>                       <C>              <C>             <C>            <C>           <C>           <C>       <C>
THREE MONTHS ENDED
    MARCH 31, 2000
-------------------------
Total revenues            $     1,400      $    3,948     $    4,397    $    2,512   $   5,271      $   47    $ 17,575
Cost of services                1,323           3,453          4,354         2,175       4,489         160      15,956
                          --------------------------------------------------------------------------------------------
Gross profit                       77             495             43           337         782        (113)      1,619
Gross profit percent                6%             13%             1%           13%         15%       (240)%         9%
Sales and marketing                                                                                              1,790
General and
  administrative                                                                                                 4,464
                                                                                                              --------
Loss from operations                                                                                          $  (4,635)
                                                                                                              ========

THREE MONTHS ENDED
    MARCH 31, 1999
-------------------------
Total revenues            $     2,342      $    8,450     $    7,351    $    3,421   $   5,759      $    -    $ 27,323
Cost of services                1,496           9,695          4,054         2,178       4,397           -      21,820
                          --------------------------------------------------------------------------------------------
Gross profit                      846          (1,245)         3,297         1,243       1,362                   5,503
                                                                                                         -
Gross profit percent               36%            (15)%           45%           36%         24%                     20%
Sales and marketing                                                                                              2,905
General and
  administrative                                                                                                 5,336
                                                                                                              --------
Loss from operations                                                                                          $ (2,738)
                                                                                                              ========

</TABLE>

9.       Contingencies

On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998,
separate complaints were filed against the Company and certain of its officers
and directors in the United States District Court for the Southern District of
California. A group of shareholders has been appointed the lead plaintiffs and
they filed an amended consolidated complaint on February 24, 1999. The new
complaint realleges the same theory of liability previously asserted, namely the
alleged improper use of the percentage-of-completion accounting method for
revenue


                                       8
<PAGE>


recognition. These complaints were brought on behalf of a purported class of
investors in the Company's Common Stock and do not allege specific damage
amounts. In addition, on October 7, 1998 and October 15, 1998, separate
complaints were filed in the Superior Court of San Diego, California. These
additional complaints mirror the allegations set forth in the federal
complaints and assert common law fraud and the violation of certain
California statutes. By stipulation of the parties, the state court
litigation has been stayed pending the resolution of a motion to dismiss that
was filed on April 12, 2000 in the federal litigation. The Company believes
that the allegations set forth in all of the foregoing complaints are without
merit and intends to defend against these allegations vigorously. No
assurance as to the outcome of this matter can be given, however, and an
unfavorable resolution of this matter could have a material adverse effect on
the Company's business, results of operations and financial condition.

                                       9
<PAGE>


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. Forward-looking statements
usually contain the words "estimate," "anticipate," "believe," "expect" or
similar expressions. All forward-looking statements are inherently uncertain
as they are based on various expectations and assumptions concerning future
events and are subject to numerous known and unknown risks and uncertainties.
The forward-looking statements included herein are based on current
expectations and entail various risks and uncertainties as those set forth
herein and in the Company's other SEC filings, including those more fully set
forth in the "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other sections of the
Company's Form 10-K for the year ended December 31, 1999 on file with the
SEC, and in the Company's Proxy Statement Schedule 14A Information filed with
the SEC on May 1, 2000. These risks and uncertainties could cause the
Company's actual results to differ materially from those projected in the
forward-looking statements. The Company disclaims any obligation to update or
publicly announce revisions to any such statements to reflect future events
or developments.

OVERVIEW

DAOU provides integrated information technology (IT) solutions and services to
the U.S. healthcare and Internet professional services industries. The Company's
capabilities range from strategic planning (using IT to support key business
goals), to the design and integration of IT components (voice, video and data
networks, application implementation, Internet infrastructure, data warehouses),
to the management and delivery of operational services (IT department, desktop
management, ASP services, network management), and to Internet solutions and
professional services supporting organizations executing an eBusiness strategy.

The Company's service offerings are segmented into the following business units:

-    IT CONSULTING AND MANAGED CARE IMPLEMENTATION (IT Consulting) - develops
     business and IT strategic plans and solves execution challenges for managed
     care and healthcare delivery organizations, installs and integrates managed
     care applications, and manages IT systems.

-    COMMUNICATIONS INFRASTRUCTURE - focuses on the IT infrastructure in
     healthcare enterprises, primarily IDNs, hospitals, academic medical centers
     and medical groups, provides networking, desktop, and voice, video and data
     solutions.

-    APPLICATION IMPLEMENTATION - supplies hospitals and other healthcare
     organizations with temporary, certified consultants who are capable of
     installing and servicing approximately 90% of the most common healthcare
     software applications.

-    INTEGRATION SERVICES - focuses on integration of the customers information
     systems with existing or new infrastructure that allow healthcare
     organizations to share and access data housed across multiple platforms and
     environments.

-    OUTSOURCING - performs a full range of IT outsourcing services including
     co-source or outsource of call centers, help desks, desktop support, server
     management, network management, voice management and complete IT department
     outsourcing.

-    ENOSUS - provides Internet professional services and solutions to
     organizations executing an eBusiness strategy.

The Company's service offerings represent aggregated end-to-end healthcare IT
solutions. Depending on the specific needs of its customers, the Company's
relationships may begin anywhere along the IT solution process,


                                       10
<PAGE>


growing within one of the groups or developing cohesively across the complete
end-to-end IT solution process from conceptualization to operation.

The Company's gross margin with respect to fixed-fee based service contracts
varies significantly depending on the percentage of third-party products versus
professional services provided by the Company. Payments received in advance of
services performed are recorded as deferred revenues. Certain contract payment
terms may result in customer billing occurring at a pace slower than revenue
recognition. The resulting revenues recognized in excess of amounts billed and
project costs are included in contract work in progress on the Company's balance
sheet. In 1999, the Company began to focus on providing its professional
services on a "time and expense" basis, under which revenues are recognized as
the services are performed. Billings for these services occur on a semi-monthly
or monthly basis. The Company also provides support and management service
revenues, which are recognized ratably over the period that these services are
provided.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain statement of
operations data as a percentage of net revenues.

<TABLE>
<CAPTION>

                                                                  Three Months Ended March 31,
                                                                       2000            1999
                                                                 ----------------- -------------
        <S>                                                      <C>               <C>
        Revenues                                                       100%            100%
        Cost of revenues                                                91              80
                                                                 ----------------- -------------
        Gross profit                                                     9              20
        Operating expenses                                              35              30
                                                                 ----------------- -------------
        Loss from operations                                           (26)            (10)
        Interest income (expense), net                                   1               0
                                                                 ----------------- -------------
        Income (loss) before income taxes                              (25)            (10)
        Provision (benefit) for income taxes                            -               (4)
                                                                 ----------------- -------------
        Net income (loss)                                              (25)             (6)
                                                                 ================= =============

</TABLE>


The Company's revenues decreased 36% or $9.7 million to $17.6 million for the
three months ended March 31, 2000 from $27.3 million for the three months
ended March 31, 1999, primarily due to a continued lag in the Company's core
health care information technology business, attributable largely to weak
post Year 2000 market demand, and due to the closure of the Company's cabling
division, DAOU On-line, Inc. Services to DAOU's five largest customers
accounted for 33% or $5.8 million of total revenues for the three months
ended March 31, 2000.

Cost of revenues decreased 27% or $5.8 million to $16.0 million for the three
months ended March 31, 2000 from $21.8 million for the three months ended March
31, 1999, primarily as a result of a decrease in revenue. Gross margin
percentage decreased to 9% for the three months ended March 31, 2000 from 20%
for the three months ended March 31, 1999, as a result of the reduced demand for
professional services.

Sales and marketing expenses decreased 38% or $1.1 million to $1.8 million for
the three months ended March 31, 2000 from $2.9 million for the three months
ended March 31, 1999, primarily due to the continued consolidation of sales and
marketing efforts into the corporate office and a reduction of sales
expenditures. Sales and marketing expenses represented approximately 10% and 11%
of total revenues for the three months ended March 31, 2000 and 1999,
respectively.

General and administrative expenses decreased 15% or $800,000 to $4.5 million
for the three months ended March 31, 2000 from $5.3 million for the three months
ended March 31, 1999, primarily as a result of lower expenses caused by the
integration of acquired companies and decreases in legal, travel and recruiting
costs. General and administrative expenses represented approximately 25% and 20%
of total revenues for the three months ended


                                       11
<PAGE>


March 31, 2000 and 1999, respectively.

Other income (expense), net, was $169,000 and $(86,000) for the three months
ended March 31, 2000 and 1999, respectively. Other income is primarily interest
income on cash and cash equivalents, and short-term investments. Other expense
consists primarily of interest associated with the Company's business lines of
credit. The increase in net other income (expense), net, was primarily due to
higher average cash reserves available for investment and reduced interest
expense after the payoff of outstanding debt in 1999.

Income taxes provided in 2000 are based on the Company's estimated effective
tax rate. During 1999, the Company was estimating that it would receive tax
benefit for its losses. In the fourth quarter, the tax benefit previously
recorded was reversed due to the total loss in 1999.

LIQUIDITY AND CAPITAL RESOURCES

On March 31, 2000, the Company had working capital of $28.0 million, a
decrease of $4.2 million from $32.2 million on December 31, 1999. For the
three months ended March 31, 2000, cash used in operating activities was $2.5
million compared to cash used in operating activities of $552,000 for the
three months ended March 31, 1999. This change resulted primarily from the
loss from operations.

Net cash used in investing activities was $323,000 in the current period,
compared to net cash used in investing activities of $265,000 in the
comparable prior period. This change resulted primarily from slightly
increased equipment purchases for the three months ended March 31, 2000.

Net cash used in financing activities was $0 for the three months ended March
31, 2000, compared to net cash used in financing activities of $1.3 million in
the comparable prior period. This change resulted primarily from repayments of
debt and lines of credit of acquired companies of $1.3 million during the three
months ended March 31, 1999.

On June 29, 1999, the Company secured an $8.0 million revolving line of credit
that expires on June 29, 2001. The line of credit bears interest at prime plus
1% per annum, is secured by substantially all of the assets of the Company and
contains customary covenants and restrictions. There are no compensating balance
requirements and borrowings under the line of credit are limited to 80% of
qualifying receivables. No amount remained outstanding under this revolving line
of credit as of March 31, 2000.

Although the Company has an accumulated deficit as of March 31, 2000, the
Company believes that its available funds together with anticipated cash from
operating activities will be sufficient to meet its capital requirements,
including the start-up costs for Enosus, for the foreseeable future. The Company
may sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities or issuance of equity
securities in future acquisitions would result in dilution to the Company's
stockholders and the incurrence of additional debt could result in additional
interest expense.

In July 1999, the Company issued 2,181,818 shares of Series A Preferred Stock.
The Series A Preferred Stock accrues dividends at a six percent annual rate.
Such rate will increase one percent each year after the second anniversary of
the issue date of the Series A Preferred Stock. The dividend is payable in
shares of Series A Preferred Stock except in the case of redemption or
liquidation. The holders of the Series A Preferred Stock have the right to cause
the Company to redeem their stock for an aggregate amount equal to $12 million,
plus accrued dividends, which were $492,000 as of March 31, 2000, upon the
occurrence of certain events that are outside the Company's control. If the
Company is forced to redeem the Series A Preferred Stock, then the Company may
be forced to sell additional equity or debt securities, or draw down its credit
facility. The Company may not be able to raise additional capital on terms
favorable to the Company, if at all.


                                       12
<PAGE>


BUSINESS RISKS

In addition to the factors addressed in the preceding sections, certain dynamics
of the Company's markets and operations create fluctuations in the Company's
quarterly results. Uncertainty and cost containment in healthcare and
competitive conditions present various other risks to operating results which
are more fully described in the Company's Form 10-K filed with the SEC and other
SEC filings.


YEAR 2000

The Company has experienced no significant disruptions in its critical
information technology and non-information technology systems and believes these
systems responded successfully to the year 2000 date change. The Company is not
aware of any material problems resulting from year 2000 compliance issues,
either with its internal systems, or with the products and services of third
parties. The Company will continue to monitor its critical computer
applications, as well as those of its suppliers and vendors throughout the year
2000 to ensure that any latent year 2000 compliance matters that may arise are
addressed promptly.


ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in interest rates, primarily from its
variable-rate long-term debt arrangements and, to a lessor extent, its
investments in certain available-for-sale marketable securities. Under its
current policies, the Company does not use interest rate derivatives instruments
to manage this exposure to interest rate changes. The Company does not have the
option to convert its variable-rate long-term debt arrangement to fixed-rate
debt arrangements for a nominal transaction fee. At March 31, 2000, the Company
had no outstanding balance on its variable-rate debt. A hypothetical 1% adverse
move in the interest rates along the entire interest rate yield curve would not
materially effect the fair value of the Company's financial instruments that are
exposed to changes in interest rates.


                                       13
<PAGE>


PART II OTHER INFORMATION

1.       Legal Proceedings


On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998,
separate complaints were filed against the Company and certain of its officers
and directors in the United States District Court for the Southern District of
California. A group of shareholders has been appointed the lead plaintiffs and
they filed an amended consolidated complaint on February 24, 2000. The new
complaint realleges the same theory of liability previously asserted, namely the
alleged improper use of the percentage-of-completion accounting method for
revenue recognition. These complaints were brought on behalf of a purported
class of investors in the Company's Common Stock and do not allege specific
damage amounts. In addition, on October 7, 1998 and October 15, 1998, separate
complaints were filed in the Superior Court of San Diego, California. These
additional complaints mirror the allegations set forth in the federal complaints
and assert common law fraud and the violation of certain California statutes. By
stipulation of the parties, the state court litigation has been stayed pending
the resolution of a motion to dismiss, which was filed on April 12, 2000 in the
federal litigation. That motion has been fully briefed and awaits the Court's
ruling which will occur at the June 12, 2000 hearing on the matter. The Company
believes that the allegations set forth in all of the foregoing complaints are
without merit and intends to defend against these allegations vigorously. No
assurance as to the outcome of this matter can be given, however, and an
unfavorable resolution of this matter could have a material adverse effect on
the Company's business, results of operations and financial condition.


Item 6.   Exhibits and Reports on Form 8-K

(a)      Exhibits

<TABLE>
<CAPTION>

    Exhibit No.       Description
    -----------       -----------
    <S>             <C>
     10.1           Retention and Severance Agreement, dated as of March 1,
                      2000, by and between DAOU Systems, Inc. and Eric Ringwall


     10.2           Retention and Severance Agreement, dated as of March 1,
                      2000, by and between DAOU Systems, Inc. and Stephen M. Casey

     10.3           Retention and Severance Agreement, dated as of March 1,
                      2000, by and between DAOU Systems, Inc. and Donald R. Myll

     27.1           Financial Data Schedule

</TABLE>


(b)  Current Reports on Form 8-K. The Registrant did not file any Current
     Reports on Form 8-K with the Commission during the quarter ended March 31,
     2000.


                                       14
<PAGE>


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

Date:    May 12, 2000

DAOU SYSTEMS, INC.

<TABLE>
<CAPTION>

SIGNATURE                TITLE                                                              DATE
---------------------------------------------------------------------------------------------------------
<S>                      <C>                                                                <C>

/s/ Larry  D. Grandia    President and Chief Executive Officer                              May 12, 2000
------------------------ (Principal Executive Officer)
Larry D. Grandia


/s/ Donald R. Myll       Executive Vice President, Chief Financial Officer and Secretary    May 12, 2000
------------------------ (Principal Financial and Accounting Officer)
Donald R. Myll


</TABLE>


                                       15
<PAGE>


Exhibit Index

     10.1      Retention and Severance Agreement, dated as of March 1, 2000, by
                  and between DAOU Systems, Inc. and Eric Ringwall

     10.2      Retention and Severance Agreement, dated as of March 1, 2000, by
                  and between DAOU Systems, Inc. and Stephen M. Casey

     10.3      Retention and Severance Agreement, dated as of March 1, 2000, by
                  and between DAOU Systems, Inc. and Donald R. Myll

     27.1      Financial Data Schedule




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