<PAGE>
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                                    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 June 30, 1998
                             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                                       330284454
(State or other jurisdiction of                        (IRS Employer
incorporation or organization)                       Identification No.)


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

                                   (619) 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 XX  No
                                                                    --     --

       The number of shares of Registrant's Common Stock outstanding as of June
30, 1998:
                                      17,670,393

                                 -------------------

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<PAGE>

                                 DAOU SYSTEMS, INC.
                                          
                                 Index to Form 10-Q

PART I.         FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements         Page

Condensed Consolidated Balance Sheets (unaudited)
    June 30, 1998 and December 31, 1997                         3

Condensed Consolidated Statements of Operations 
    (unaudited) Three Months and Six Months Ended 
       June 30, 1998 and 1997                                   4

Condensed Consolidated Statements of Cash Flows 
    (unaudited) Six Months Ended June 30, 1998 and 1997         5

Notes to Condensed Consolidated Financial Statements          6-9

Item 2.     Management's Discussion and Analysis of
            Financial Condition and Results of Operations   10-13

PART II.    OTHER INFORMATION                                  14

SIGNATURES                                                     16


                                                                              2
<PAGE>

Item 1.    Condensed Consolidated Financial Statements

                                 DAOU SYSTEMS, INC.
                       CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT FOR SHARE DATA)
                                       ASSETS

<TABLE>
<CAPTION>
                                                       JUNE 30,     DECEMBER 31,
                                                         1998           1997
                                                     -----------    ------------
                                                             (unaudited)
<S>                                                  <C>            <C>
Current assets
   Cash and equivalents                                $  5,795       $  7,973
   Short-term investments                                 3,004         10,170
   Accounts receivable, net                              19,978         15,743
   Contract work in progress                             22,329         13,292
   Other current assets                                   3,057          2,089
                                                       --------       --------
       Total current assets                              54,163         49,267
Equipment, furniture and fixtures, net                    4,629          3,860
Other assets                                              1,095            983
                                                       --------       --------
                                                       $ 59,887       $ 54,110
                                                       --------       --------
                                                       --------       --------

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable and accrued expenses               $  6,945       $  4,341
   Accrued liabilities                                    6,692          4,061
   Current portion of long-term debt                      2,355          1,437
                                                       --------       --------
       Total current liabilities                         15,992          9,839

Long-term liabilities                                     3,877          2,433
Commitments and contingencies                                  

Stockholders' equity
   Preferred stock, $.001 par value
       Authorized shares - 5,000 
       Issued and outstanding - none                          -              -
   Common stock, $.001 par value
       Authorized shares - 50,000
       Issued and outstanding - 17,670 and 17,551
             at June 30, 1998 and December 31, 1997,
             respectively                                    18             18
   Additional paid-in capital                            37,226         36,043
   Deferred compensation                                   (778)          (907)
   Unrealized gain on short-term investments                232            146
   Retained earnings                                      3,320          6,538
                                                       --------       --------
       Total stockholders' equity                        40,018         41,838
                                                       --------       --------
                                                       $ 59,887       $ 54,110
                                                       --------       --------
                                                       --------       --------
</TABLE>

See accompanying notes.

                                                                              3
<PAGE>

                                 DAOU SYSTEMS, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                    (UNAUDITED)

<TABLE>
<CAPTION>
                                              PERIODS ENDED JUNE 30, 
                                       THREE MONTHS            SIX MONTHS
                                     1998        1997       1998       1997
                                   --------    --------   --------   --------
<S>                                <C>         <C>        <C>        <C>
Revenues                           $ 28,043    $ 14,848   $ 52,028   $ 27,945
Cost of revenues                     18,947       9,822     33,435     18,646
                                   --------    --------   --------   --------
Gross profit                          9,096       5,026     18,593      9,299
Operating expenses:
   Sales and marketing                3,069       2,036      5,802      3,856
   General and administrative         3,545       2,561      6,673      4,918
   Merger and related costs           1,029           -      2,825          -
                                   --------    --------   --------   --------
       Total operating expenses       7,643       4,597     15,300      8,774
                                   --------    --------   --------   --------
Income from operations                1,453         429      3,293        525
Other income, net                        59         237        201        364
                                   --------    --------   --------   --------
Income before income taxes            1,512         666      3,494        889
Provision for income taxes            2,200         215      3,114         95
                                   --------    --------   --------   --------
Net income (loss)                  $   (688)   $    451   $    380   $    794
                                   --------    --------   --------   --------
                                   --------    --------   --------   --------
Net income (loss) per share:
  Basic                            $   (.04)   $    .03   $    .02   $    .05
                                   --------    --------   --------   --------
                                   --------    --------   --------   --------
  Diluted                          $   (.04)   $    .03   $    .02   $    .05
                                   --------    --------   --------   --------
                                   --------    --------   --------   --------

Shares used in calculation of 
   net income (loss) per share:
   Basic                             17,645      16,910     17,620     16,161
                                   --------    --------   --------   --------
                                   --------    --------   --------   --------
   Diluted                           17,645      17,513     18,513     16,978
                                   --------    --------   --------   --------
                                   --------    --------   --------   --------
</TABLE>

See accompanying notes.


                                                                             4
<PAGE>

                                 DAOU SYSTEMS, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (IN THOUSANDS)
                                    (UNAUDITED)

<TABLE>
<CAPTION>
                                                       SIX MONTHS ENDED JUNE 30,
                                                          1998           1997
                                                        --------       --------
<S>                                                     <C>            <C>
Operating activities:
   Net income                                           $   380        $   794
   Adjustments to reconcile net income to net 
     cash provided by (used in) operating activities:
     Depreciation and amortization                          899            468
     Changes in operating assets and liabilities         (7,365)          (440)
                                                        -------        -------

Net cash flows provided by (used in) operating
    activities                                           (6,086)           822

Investment activities:
   Additions to equipment, furniture
     and fixtures                                        (1,539)        (1,534)
   Proceeds from (purchases of) short-term
      investments                                         7,166         (9,475)
   Changes in other assets                                 (173)          (307)
                                                        -------        -------

Net cash flows provided by (used in)
   investing activities                                   5,454        (11,316)


Financing activities:
   Sale of common stock, net                              1,183         15,703
   Proceeds from lines of credit and long-term debt,
      net                                                   869            118
   Distributions to stockholders of acquired companies   (3,598)          (451)
                                                        -------        -------

Net cash flows provided by (used in)
   financing activities                                  (1,546)        15,370
                                                        -------        -------

Net increase (decrease) in cash and cash equivalents     (2,178)         4,876
Cash and cash equivalents at 
   beginning of period                                    7,973          3,123
                                                        -------        -------

Cash and cash equivalents at
   end of period                                        $ 5,795        $ 7,999
                                                        -------        -------
                                                        -------        -------
</TABLE>


See accompanying notes.

                                                                             5

<PAGE>


                                 DAOU SYSTEMS, INC.
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The condensed consolidated financial statements of DAOU Systems, Inc. (the 
"Company") at June 30, 1998 and for the six-month periods ended June 30, 1998 
and 1997 are unaudited.  These financial statements reflect all adjustments, 
consisting of only normal recurring adjustments, which in the opinion of 
management are necessary to fairly present the financial position of the 
Company at June 30, 1998 and the results of operations for the three and 
six-month periods ended June 30, 1998 and 1997.  The results of operations 
for the three or six months ended June 30, 1998 are not necessarily 
indicative of the results to be expected for the year ending December 31, 
1998.  For more information, these financial statements should be read in 
conjunction with the Company's Form 10-KSB and the audited supplemental 
financial statements included in the Company's Current Report on Form 8-K 
filed with the Securities and Exchange Commission ("SEC") on May 19, 1998. 
However, these documents do not reflect the acquisitions discussed in 
paragraph 2 of Note 3.

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. Acquisitions

During March 1998, the Company acquired Synexus Incorporated ("Synexus"), a
privately-held company specializing in the planning, design and
implementation of enterprise networks in healthcare environments, and
Sentient Systems, Inc. ("Sentient"), a privately-held company which provides
integration and support services primarily to healthcare organizations.  The
shareholders of Synexus and Sentient received a total of 161,235 and
1,397,550 shares, respectively, of the Company's common stock in exchange for
all of the outstanding stock of each of these companies. The acquisitions
have been accounted for under the pooling-of-interests method of accounting,
and accordingly, the historical financial statements of periods prior to the
consummation of the combinations have been restated as though the companies
had been combined for all periods presented.

During June 1998, the Company acquired (i) Technology Management, 
Inc.("TMI"), a privately-held company that provides information technology 
consulting services primarily to the healthcare industry, (ii) International 
Health Care Systems, Inc.("IHCS"), a privately-held company with a common 
shareholder with TMI that provides information technology consulting services 
primarily to the healthcare industry on behalf of TMI, (iii) Resources in 
Healthcare Innovations, Inc. ("RHI"), a privately-held information technology 
services firm that provides contract management services, for healthcare 
information systems to hospitals and managed care organizations, and (iv) 
Healthcare Transition Resources, Inc. ("HTR"), Ultitech Resources Group, Inc. 
("URG"), Innovative Systems Solutions, Inc. ("ISS") and Grand Isle 
Consulting, Inc. ("GIC"), each a privately held company with common 
shareholders with RHI that implements software applications from third 
parties and provides support services to healthcare enterprises. Shareholders 
of TMI, IHCS, RHI, HTR, URG, ISS and GIC received a total of 1,078,963, 
224,668, 1,839,381, 275,662, 282,551, 308,583 and 223,645 shares, 
respectively, of the Company's common stock

                                                                             6
<PAGE>

in exchange for the outstanding stock of each of these companies.  The 
acquisitions have been accounted for under the pooling-of-interests method of 
accounting, and accordingly, the historical financial statements of periods 
prior to the consummation of the combinations have been restated as though 
the companies had been combined for all periods presented.

Separate results for each of DAOU, Sentient, Synexus, TMI (including IHCS), 
and RHI (including HTR, URG, ISS and GIC) for the three and six months ended 
June 30, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
(In thousands)
                                  DAOU       SENTIENT       SYNEXUS       TMI       RHI       COMBINED
                                  ----       --------       -------       ---       ---       --------
<S>                            <C>           <C>            <C>        <C>        <C>         <C>
Three Months ended June 30,     
 1998:
  Total Revenues               $ 15,752       $ 3,839       $   626    $  2,991   $ 4,835     $ 28,043
  Net Income (loss)              (1,333)          493           167         (40)       25         (688)
Three Months ended June 30,
 1997:
  Total Revenues                  8,792         2,274           335       1,186     2,261       14,848
  Net Income (loss)                 117           120            96        (157)      275          451

Six Months ended June 30,         
 1998:
  Total Revenues                 30,821         6,364         1,093       5,748     8,002       52,028
  Net Income (loss)              (1,106)           14           110         860       502          380
Six Months ended June 30,         
 1997:
  Total Revenues                 15,886         4,787           814       2,359     4,099       27,945
  Net Income (loss)                 (12)          288           217        (184)      485          794

</TABLE>

In connection with these acquisitions, the Company recorded acquisition and
related costs during March 1998 and June 1998 totaling $1.8 million and $1.0
million, respectively.  These costs include transaction costs of
approximately $720,000, estimated costs to combine and integrate operations
of approximately $570,000, and other acquisition related costs of
approximately $1.5 million.

4. Lines of Credit

During June 1998, the Company secured two borrowing facilities, a $2.0 
million revolving line of credit, under which $1.5 million is available for
future borrowings at June 30, 1998 and an additional $8,000,000 line of
credit, under which no borrowings are outstanding at June 30, 1998.  Advances
under both the revolving line of credit and line of credit bear interest at
the bank's prime rate (currently 8.5%) plus 0.25% per annum.  Through June
30, 1998, borrowings under the revolving line of credit, which expires July
31, 1999, total approximately $485,000.  These lines of credit are secured by
substantially all of the assets of the Company and contain customary
covenants and restrictions. As of June 30, 1998, the Company was in
compliance with all such covenants and restrictions.

In addition, through its acquisition of RHI (and related companies), the
Company has an additional $700,000 line of credit with a bank, under which
outstanding borrowings totaled $700,000 at June 30, 1998, and a $1,000,000
note payable to a bank.  The $700,000 line of credit bears interest at prime
plus 0.25%

                                                                             7
<PAGE>

and the $1,000,000 note payable bears interest at 8.5%.  Both obligations are
due on October 30, 1998 and the line of credit is secured by all of the
assets of RHI.

5. Per Share Information

The following table details the computation of basic and diluted earnings (loss)
per share:

(In thousands, except per share information)

<TABLE>
<CAPTION>
                                       QUARTER ENDED        SIX MONTHS ENDED
                                          JUNE 30,               JUNE 30,
                                      1998        1997       1998       1997
                                    -----------------------------------------
<S>                                 <C>          <C>        <C>        <C>
Numerator:
  Net income (loss)                 $  (688)     $  451     $  380     $  794
                                    -----------------------------------------
Denominator:

  Denominator for basic earnings 
    (loss) per share - weighted 
    average common shares            17,645      16,910     17,620     16,161

  Effect of dilutive securities:
    Warrants                              -          65        102         58
    Common stock options                  -         538        791        488
    Convertible preferred stock           -           -          -        271
                                    -----------------------------------------
                                          -         603        893        817
                                    -----------------------------------------
Denominator for diluted earnings 
  (loss) per share -- adjusted 
  weighted average shares and 
  assumed conversions                17,645      17,513     18,513     16,978
                                    -----------------------------------------
                                    -----------------------------------------

Basic earnings (loss) per share    $  (0.04)    $  0.03    $  0.02    $  0.05
                                    -----------------------------------------
                                    -----------------------------------------

Diluted earnings (loss) per share  $  (0.04)    $  0.03    $  0.02    $  0.05
                                    -----------------------------------------
                                    -----------------------------------------
</TABLE>

Recent interpretations by the SEC of Financial Accounting Standard No. 128,
"Earnings per Share", have changed the treatment of convertible preferred 
stock previously included in the computation of basic earnings (loss) per 
share. For periods prior to its initial public offering ("IPO"), the Company
previously included preferred stock which converted into common stock upon
completion of the IPO as outstanding from the date of original issuance ("as
if converted method") in the computation of basic earnings (loss) per share.
To conform with recent interpretations, the effect of assuming the conversion
of these securities prior to their actual conversion in the basic earnings
(loss) per share calculation has been excluded.
 
6. New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures
About Segments of an Enterprise and Related Information," both of which are
effective for fiscal periods beginning after December 15, 1997.  The adoption
of Statements No. 130 and 131 did not have a material effect on the Company's
financial statements.

                                                                             8
<PAGE>

Comprehensive income (loss) for the three months ended  June 30, 1998 and
1997 totaled $(708,000) and $570,000, respectively.   Comprehensive income
for the six months ended  June 30, 1998 and 1997 totaled $466,000 and
$850,000, respectively.  The difference from reported net income arises from
the unrealized gains and losses on short-term investments.

7. Income Tax Expense

The effective income tax rate for the three and six months ended June 30,
1998 was 146% and 89%, respectively, due to the non-deductibility of certain
merger and related costs and adjustments made to convert the former S
corporation status of certain acquired businesses to the C corporation status
of the Company.

                                                                             9
<PAGE>

Item 2.    Management's Discussion and Analysis of Financial
             Condition and Results of Operations

This report contains certain statements of a forward-looking nature relating
to future performance of the Company. Prospective investors are cautioned
that such statements are only predictions and that actual events or results
may differ materially.

Overview

The Company designs, implements, supports and manages advanced computer
network systems primarily for hospitals, integrated delivery networks
("IDNs") and other provider organizations. The Company's design services
include an assessment of the customer's existing computer network system, the
preparation of voice, video and data network specifications, technical design
documentation and diagrams. DAOU's implementation services include the
purchase, delivery and installation of enterprise-wide computer network
systems. Implementation service revenues consist of third-party hardware and
software products, as well as the Company's professional services. The
Company's gross margin with respect to implementation services varies
significantly depending on the percentage of such services consisting of
products (with respect to which the Company obtains a lower margin) versus
professional services. The Company's support and management services include
remote and on-site network management, as well as information systems
function outsourcing. The Company typically provides these services under
multi-year contracts.

During March 1998, the Company acquired through a pooling-of-interests merger
all of the issued and outstanding shares of Synexus, a Pennsylvania
Corporation, that specializes in the planning, design and implementation of
enterprise networks in healthcare environments, and Sentient, a Maryland
Corporation that provides integration and support services primarily to
healthcare organizations. The shareholders of Synexus and Sentient received a
total of 161,235 and 1,397,550 shares, respectively, of the Company's common
stock in exchange for the outstanding stock of each of these companies.

During June 1998, the Company acquired (i) TMI, a privately-held company that
provides information technology consulting services primarily to the
healthcare industry, (ii) IHCS, a privately-held company with a common
shareholder with TMI that provides information technology consulting services
primarily to the healthcare industry on behalf of TMI, (iii) RHI, a
privately-held information technology services firm that provides contract
management services for healthcare information systems to hospitals and
managed care organizations, and (iv) HTR, URG, ISS and GIC, each a privately
held company with common shareholders with RHI that implements software
applications from third parties and provides support services to healthcare
enterprises. Shareholders of TMI, IHCS, RHI, HTR, URG, ISS and GIC received a
total of 1,078,963, 224,668, 1,839,381, 275,662, 282,551, 308,583 and 223,645
shares, respectively, of the Company's common stock in exchange for all of
the outstanding stock of each of these companies. The acquisistions have been
accounted for under the pooling-of-interests method of accounting, and
accordingly, the historical financial statements of periods prior to the
consummation of the combinations have been restated as though the companies
had been combined for all periods presented.

                                                                            10
<PAGE>

Results of Operations

The Company's revenues were $28.0 million and $14.8 million for the quarters
ended June 30, 1998 and 1997, respectively, representing an increase of 89%.
This increase was due primarily to the increased number of professional
consulting contracts and large network implementation contracts. Services to
five customers accounted for $6.7 million of total revenues in this quarter,
representing 24% of total revenues.  For the six months ended June 30, 1998
and 1997, respectively, sales were $52.0 million and $27.9 million, which
represents an increase of 86%.  This increase was primarily the result of
increased revenues from professional services consulting contracts, cabling
services, and large network implementation contracts.

Cost of revenues was $18.9 million and $9.8 million for the quarters ended
June 30, 1998 and 1997, respectively, representing an increase of 93%.  Gross
margin was 32% and 34% for the quarters ended June 30, 1998 and 1997,
respectively. This decrease in gross margin was primarily due to an increase
in the product content of the Company's large network implementation
contracts during the quarter.  Cost of revenues for the six-month period
ended June 30, 1998 and 1997 were $33.4 million and $18.6 million,
respectively, which is an increase of 79%. Gross margin for the six months
ended June 30, 1998 and 1997, was 36% and 33%, respectively. The increase in
gross margin for the latest period is primarily attributable to increased
professional services from consulting contracts, which have higher margins.

Sales and marketing expenses were $3.1 million and $2.0 million for the
quarters ended June 30, 1998 and 1997, respectively, representing an increase
of 51%. This increase was primarily due to continued development of a
regional sales structure, an increase in sales personnel and related expenses
due to increased sales volume and activity.  Sales and marketing expenses
were 11% and 14% of revenues for the quarters ended June 30, 1998 and 1997,
respectively.  For the six-month periods ended June 30, 1998 and 1997, sales
and marketing expenses were $5.8 million and $3.9 million, respectively,
representing 11% and 14% of revenues in those periods.  Although these
expenses continue to decrease as a percentage of revenue, the Company expects
that sales and marketing expenses will continue to increase in dollar terms
to support the anticipated growth in the Company's business.

General and administrative expenses were $3.5 million and $2.6 million for
the quarters ended June 30, 1998 and 1997, respectively, representing an
increase of 38%.  The primary factors contributing to this increase were
costs associated with additional administrative staffing and other increased
infrastructure requirements to support growth. General and administrative
expenses were 13% and 17% of revenues for the quarters ended June 30, 1998
and 1997, respectively. General and administrative expenses for the six-month
periods ended June 30, 1998 and 1997 were $6.7 million and $4.9 million, or
13% and 18% of revenues, respectively.  The Company expects some increase in
general and administrative expenses in dollar terms to support the
anticipated growth in the Company's business.  As a percentage of revenues,
these expenses should decrease with the increase in revenue.

                                                                            11
<PAGE>

Merger and related costs totaled $1.0 million during the quarter ended June 
30, 1998 in connection with the acquisitions of TMI, IHCS, RHI, HTR, URG, ISS 
and GIC.  Merger and related costs totaled $2.8 million during the six months 
ended June 30, 1998, which include costs recorded during the first quarter of 
1998 in connection with the acquisitions of Sentient and Synexus. The $2.8 
million total costs include transaction fees of approximately $720,000, 
estimated costs to combine and integrate operations of approximately $570,000 
and other acquisition related costs of approximately $1.5 million.

Other income, net, was $59,000 and $237,000 for the quarters ended June 30,
1998 and 1997, respectively.  For the six months ended June 30, 1998 and
1997, respectively, other income, net, was $201,000 and $364,000.  Other
income, net, is primarily interest income on cash and cash equivalents, and
short-term investments. Interest expense consists of interest associated with
the Company's business lines of credit and term financing of insurance
premiums, but was not significant during either period.

The effective income tax rate for the three and six months ended June 30,
1998 was 146% and 89%, respectively, due to the non-deductibility of certain
merger and related costs and adjustments made relative to the former S
corporation status of certain acquired businesses.

Liquidity and Capital Resources

At June 30, 1998, the Company had working capital of $38.3 million, which is
slightly down from the $39.5 million on December 31, 1997.  The Company has a
$2.0 million revolving line of credit, under which $1.5 million is available
for future borrowings at June 30, 1998.  In addition, the Company has secured
an additional $8,000,000 line of credit, all of which is available for future
borrowings at June 30, 1998.  Advances under both the revolving line of
credit and line of credit bear interest at the bank's reference rate
(currently 8.5%) plus 0.25% per annum.  Through June 30, 1998, borrowings
under the revolving line of credit, which expires July 31, 1999, are
approximately $485,000.  These lines of credit are secured by substantially
all of the assets of the Company and contain customary covenants and
restrictions. As of June 30, 1998, the Company was in compliance with all
such covenants and restrictions. For the six months ended June 30, 1998, cash
used in operating activities was $6.1 million which resulted primarily from
an increase in the Company's investment in work in process and accounts
receivable due to increased contract volume and timing of billings.
 
The Company believes that its present sources of liquidity will be sufficient
to finance operations for the foreseeable future and such sources of
liquidity may be used to fund additional acquisitions of complimentary
businesses, although the Company does not have any specific proposals,
arrangements or understandings with respect to any future acquisitions. The
Company may sell additional equity or debt securities or obtain additional
credit facilities.  The sale of additional equity securities or issuance of
same in future acquisitions could result in additional dilution to the
Company's stockholders and the incurrence of debt could result in additional
interest expense.

                                                                             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 certain other risks to operating results
which are more fully described in the Company's Form 10-KSB filed with the
Securities and Exchange Commission (SEC) and other SEC filings. Except for
the historical information presented herein, the matters discussed in this
document are forward-looking statements that involve numerous risks and
uncertainties. The Company's actual results could differ materially from
those projected in such forward-looking statements and will depend upon a
number of factors, including those discussed in this document and in prior
SEC filings, press releases and other public filings of the Company.

                                                                             13
<PAGE>

PART II       OTHER INFORMATION

1. Legal Proceedings

On February 25, 1997, Gary Colvin, an ex-employee of the Company filed a 
lawsuit against the Company and certain of its officers and directors in the 
U.S. District Court of the Southern District of California (Gary L. Colvin v. 
DAOU Systems, et al.).  In the complaint, the ex-employee alleges various 
claims related to his former employment with the Company, including, among 
other claims, wrongful termination, breach of contract, certain civil rights 
violations and claims of unpaid minimum wages and unpaid overtime, and seeks 
damages in the aggregate amount of approximately $30 million.  On February 9, 
1998, the parties stipulated to the dismissal of the ex-employee's remaining 
Federal claim under the Fair Labor Standards Act.  As a result, on March 4, 
1998, the lawsuit was dismissed without prejudice after the court declined to 
exercise supplemental jurisdiction over the remaining state law claims.

On September 18, 1997, seven present and/or former employees of the Company 
filed a lawsuit in the Superior Court of the State of California for the 
County of San Diego, titled Smyth, et al. V. DAOU Systems, Inc. (Case No. 
714187), purporting to represent a class of all present and former DAOU 
employees classified as exempt under Federal and California law from overtime 
pay and are entitled to pay for unpaid overtime and penalties in an unstated 
amount.  The Plaintiffs also claim that, in response to their filing 
complaints with the Labor Board for the State of California, they were 
subjected to retaliatory discrimination by the Company.  The lawsuit 
currently is in the preliminary stages of discovery.  On April 2, 1998, the 
Court denied a motion by the Plaintiffs requesting the court to assist them 
in notifying potential Plaintiffs of the opportunity to join this lawsuit 
against the Company.  As of the date of this report, the potential amount of 
exposure to the Company from this lawsuit, in the event of an unfavorable 
outcome, cannot be determined.  The Company believes that the lawsuit is 
without merit and intends to defend the lawsuit vigorously.

Item 4.   Submission of Matters to a Vote of Security Holders.

On May 19, 1998, the Company held its Annual Meeting of Stockholders. At the
meeting, the stockholders approved management's slate of directors and the
other two additional proposals with the following vote distribution:

<TABLE>
<CAPTION>
                                                                        WITHHELD/   BROKER/
   ITEM                                  AFFIRMATIVE     NEGATIVE      ABSTENTIONS NON-VOTE
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
<S>                                      <C>             <C>           <C>         <C>
ELECTION OF BOARD MEMBERS

  CLASS I DIRECTORS (term
expiring at annual meeting
of stockholders in 2001)

     Georges J. Daou                     6,598,377           -           20,950        -

     Richard B. Jaffe                    6,598,377           -           20,950        -

  CLASS II DIRECTORS (term
expiring at annual meeting 
of stockholders in 2000)

     Daniel J. Daou                     6,598,377           -           20,950        -

     John H. Moragne                    6,598,377           -           20,950        -

  CLASS III DIRECTOR (term
expiring at annual meeting 
of stockholders in 1999)

     David W. Jahns                     6,598,377           -           20,950        -

OTHER MATTERS

  1) Increase the number of 
     shares issuable under the 
     Company's 1996 Stock Option
     Plan to 4,000,000 shares of
     Common Stock (subject to limit of
     25% of outstanding shares at
     end of immediately preceding 
     fiscal quarter) and limit
     the number of stock options
     issuable to any one optionee
     to 150,000.                        2,733,653       2,372,384       13,655    1,499,635

  2) Reappoint Ernst & Young L.L.P. as
     independent auditors for fiscal
     year 1998.                         6,614,504           2,300        2,523        -

</TABLE>

6.   Exhibits and Reports on Form 8-K  

(a)  Exhibits

Exhibit No.                              Description
-----------                              -----------
27                                  Financial Data Schedule

(b)  On June 19, 1998, a Form 8-K was filed to report that the Company entered
     into an Agreement and Plan of Merger Agreement on June 16, 1998 to exchange
     shares of the Company's common stock valued at $22.5 million for all of the
     outstanding shares of Technology Management, Inc.  The merger will be
     accounted for as a pooling of interests.

(c)  On May 19, 1998, a Form 8-K was filed which included audited supplemental
     consolidated financial statements, selected supplemental consolidated
     financial data and Management's Discussion and Analysis of Financial
     Condition and Results of Operations (supplemental) which reflect the
     Company's acquisitions of Sentient Systems, Inc. ("Sentient") and Synexus
     Incorporated ("Synexus") on March 31, 1998.  Each of the acquisitions was
     accounted for as 

<PAGE>

     a pooling-of-interests.

(d)  On May 19, 1998, a Form 8-K/A was filed which included audited financial
     statements of Sentient as of December 31, 1997 and 1996 and for the two
     years then ended and the one month ended December 31, 1995 and as of
     November 30, 1995 and the year then ended.  Also included was the unaudited
     pro forma combined condensed balance sheet at December 31, 1997 and
     unaudited pro forma combined condensed statements of operations for the
     years ended December 31, 1997, 1996 and 1995 which give effect to the
     acquisition of Sentient as of December 31, 1997 for the combined condensed
     pro forma balance sheet and January 1, 1995 for the combined condensed pro
     forma statements of operations.

(e)  On May 8, 1998, a Form 8-K was filed to report the unaudited revenue and
     net income of the Company for the 30 day period ended April 30, 1998.

(f)  On April 14, 1998, a Form 8-K was filed to report that the Company acquired
     Sentient Systems, Inc. and Synexus Incorporated through the issuance of
     1,397,550 and 161,235 shares, respectively, of the Company's common in
     exchange for all of the outstanding shares of Sentient and Synexus.  The
     mergers were effective on March 31, 1998 and will be accounted for as a
     pooling-of-interests.

(g)  On April 2, 1998, a Form 8-K was filed to report that the Company entered
     into merger agreements to exchange shares of the Company's common stock
     in exchange for all of the outstanding shares of Sentient and Synexus.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.

DAOU SYSTEMS, INC.


Date:  August __, 1998         By:  /s/ Daniel J. Daou   
Daniel J. Daou                      -------------------------------------
President



Date: August __, 1998          By:  /s/Fred C. McGee    
Fred C. McGee                       -------------------------------------
Chief Financial Officer






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