<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, 1999

                                       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 Identification No.)
incorporation or organization)

                               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 X No

The number of shares of Registrant's Common Stock outstanding as of April 14,
1999:

                                   17,689,728


                                       1
<PAGE>

                               DAOU SYSTEMS, INC.



                               Index to Form 10-Q



PART I.    FINANCIAL INFORMATION

<TABLE>
<CAPTION>

Item 1.    Condensed Consolidated Financial Statements                      Page
<S>                                                                         <C>
           Condensed Consolidated Balance Sheets at March 31, 1999 
             (unaudited) and December 31, 1998                                 3

           Condensed Consolidated Statements of Operations (unaudited)
             for the Three Months Ended March 31, 1999 and 1998                4

           Condensed Consolidated Statements of Cash Flows (unaudited)
             for the Three Months Ended March 31, 1999 and 1998                5

           Notes to Condensed Consolidated Financial Statements              6-7

Item 2.    Management's Discussion and Analysis of  Financial Condition
             and Results of Operations                                      8-13

PART II.   OTHER INFORMATION                                                  14

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,
                                                                                   1999              1998
                                                                                (UNAUDITED)
                                                                                  -------------------------
<S>                                                                             <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                      $  4,617         $  6,756
   Short-term investments, available-for-sale                                        1,113            1,024
   Accounts receivable, net of allowance for doubtful accounts of
     $1,054 and $956 at March 31, 1999 and December 31, 1998,
     respectively                                                                   25,098           24,582
   Contract work in progress                                                         8,059           12,272
   Deferred income taxes                                                             4,520            3,362
   Other current assets                                                              1,476            1,306
                                                                                  -------------------------
Total current assets                                                                44,883           49,302

Equipment, furniture and fixtures, net                                               4,696            4,735
Other assets                                                                           410              480
                                                                                  -------------------------
                                                                                  $ 49,989         $ 54,517
                                                                                  -------------------------
                                                                                  -------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Trade accounts payable and other accrued liabilities                           $  6,336         $  8,277
   Accrued salaries and benefits                                                     4,092            3,907
   Current portion of long-term liabilities and lines of credit                      4,158            5,453
                                                                                  -------------------------
Total current liabilities                                                           14,586           17,637

Long-term liabilities                                                                  702              684
Deferred income taxes                                                                1,421            1,421

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.001 par value:
     Authorized shares - 5,000
     Issued and outstanding shares - none                                             --               --
   Common stock, $.001 par value:
     Authorized shares - 50,000           
     Issued and outstanding shares - 17,689 at March 31, 1999 and at
     December 31, 1998                                                                  18               18
   Additional paid-in capital                                                       38,419           38,419
   Deferred compensation                                                              (898)            (980)
   Accumulated other comprehensive income                                              327              236
   Retained deficit                                                                 (4,586)          (2,918)
                                                                                  -------------------------
Total stockholders' equity                                                          33,280           34,775
                                                                                  -------------------------
                                                                                  $ 49,989         $ 54,517
                                                                                  -------------------------
                                                                                  -------------------------
</TABLE>

SEE ACCOMPANYING NOTES 

                                       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,
                                                                      1999            1998
                                                                    --------         -------
<S>                                                               <C>                <C>
Revenues                                                            $ 27,323         $23,985
Cost of revenues                                                      21,820          14,488
                                                                    --------         -------
Gross profit                                                           5,503           9,497

Operating expenses:
   Sales and marketing                                                 2,905           2,733
   General and administrative                                          5,336           3,128
   Merger and related expenses                                          --             1,796
                                                                    --------         -------
                                                                       8,241           7,657
                                                                    --------         -------

Income (loss) from operations                                         (2,738)          1,840
Interest income (expense), net                                           (86)            142
                                                                    --------         -------

Income (loss) before income taxes                                     (2,824)          1,982
Provision (benefit) for income taxes                                  (1,156)            914
                                                                    --------         -------

Net income (loss)                                                   $ (1,668)        $ 1,068
                                                                    --------         -------
                                                                    --------         -------

Net income (loss) per common share:
   Basic                                                            $  (0.09)        $  0.06
                                                                    --------         -------
                                                                    --------         -------

   Diluted                                                          $  (0.09)        $  0.06
                                                                    --------         -------
                                                                    --------         -------

Shares used in computing net income (loss) per common share:
   Basic                                                              17,689          17,596
                                                                    --------         -------
                                                                    --------         -------

   Diluted                                                            17,689          18,576
                                                                    --------         -------
                                                                    --------         -------
</TABLE>


SEE ACCOMPANYING NOTES.

                                       4

<PAGE>

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


<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED MARCH 31,
                                                                1999             1998
                                                               ------------------------
<S>                                                           <C>              <C>
OPERATING ACTIVITIES

Net income (loss)                                              $(1,668)        $  1,068
Adjustments to reconcile net income (loss) to net cash
   used in operating activities:
   Depreciation and amortization                                   458              436
Changes in operating assets and liabilities                        658          (10,512)
                                                               ------------------------
Net cash used in operating activities                             (552)          (9,008)


INVESTING ACTIVITIES

Purchases of equipment, furniture and fixtures                    (337)            (947)
(Purchases) maturities of short-term investments                     2            3,161
Changes in other assets                                             70               35
                                                               ------------------------
Net cash (used in) provided by investing activities               (265)           2,249

FINANCING ACTIVITIES

Repayments of long-term liabilities and lines of credit         (1,322)            (278)
Proceeds from issuance of common stock                            --                820
Distributions to stockholders                                     --               (152)
Other                                                             --                 (4)
                                                               ------------------------
Net cash (used in) provided by financing activities             (1,322)             386
                                                               ------------------------
                                                               ------------------------

Decrease in cash and cash equivalents                           (2,139)          (6,373)
Cash and cash equivalents at beginning of period                 6,756            7,981
                                                               ------------------------
Cash and cash equivalents at end of period                     $ 4,617         $  1,608
                                                               ------------------------
                                                               ------------------------
</TABLE>


SEE ACCOMPANYING NOTES.

                                       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, 1999 and for the three-month periods
ended March 31, 1999 and 1998 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, 1999 and the results of operations for the three month
periods ended March 31, 1999 and 1998. The results of operations for the three
months ended March 31, 1999 are not necessarily indicative of the results to be
expected for the year ending December 31, 1999. 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 31, 1999 and in the Company's Annual Report on Form 10-K/A
filed with the SEC on April 30, 1999.

2. Use of Estimates

The preparation of financial statements in conformity with GAAP 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

During June 1998, the Company secured two borrowing facilities, a $2.0 million
revolving line of credit and an $8.0 million line of credit under which no funds
are currently available for future borrowings. As of March 31, 1999, the Company
was not in compliance with one of the covenants and has been informed by the
bank that the Company cannot avail itself to the unused lines of credit.
Management is actively negotiating for a replacement line of credit, believes
that a replacement line will be obtained before expiration of the existing lines
of credit and that the Company has sufficient liquidity to fund operations until
this new line is in place.

In addition, the Company has an additional $700,000 line of credit, which
expires May 1, 1999. The $700,000 line of credit bears interest at prime plus
0.25% (8.00% at March 31, 1999) per annum. There are no compensating balance
requirements and borrowings under the line of credit are limited to 65% of
qualifying receivables. At March 31, 1999 no amounts were outstanding under the
line of credit.

4. Related Party Transactions

The Company has an agreement with an officer that guarantees a cash bonus
(approximately $650,000 at March 31, 1999) in the amount of any difference
between (i) the net value at November 11, 1999 of the options granted to the
officer during 1996 and (ii) $1,550,000.


                                       6
<PAGE>

5. Net Income (loss) Per Share

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

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

<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                                                        March 31,
                                                                   1999           1998
                                                                ------------------------
<S>                                                             <C>              <C>
Numerator:
   Net income (loss)                                            $ (1,668)        $ 1,068

Denominator:
   Denominator for basic net income (loss) per share -
       weighted average common shares outstanding                 17,689          17,596
   Effect of dilutive securities:

      Warrants                                                      --               106
      Common stock options                                          --               874
                                                                ------------------------
                                                                    --               980
                                                                ------------------------
   Denominator for diluted net income (loss) per share -
        adjusted weighted average common shares
        outstanding and assumed conversion of preferred
        stock                                                     17,689          18,576
                                                                ------------------------
                                                                ------------------------

Basic net income (loss) per share                               $  (0.09)        $  0.06
                                                                ------------------------
                                                                ------------------------

Diluted net income (loss) per share                             $  (0.09)        $  0.06
                                                                ------------------------
                                                                ------------------------
</TABLE>


6. Comprehensive Income (loss)

Comprehensive income (loss) for the three months ended March 31, 1999 and 1998
totaled $(1,577,000) and $1,171,000, respectively. The difference from reported
net income (loss) arises from the unrealized gains and losses on short-term
investments.

7. Income Tax Expense

The effective income tax rate for the three months ended March 31, 1999 and 1998
was (41)% and 46%, respectively. The effective tax rate for the three months
ended March 31, 1998 differed from the expected consolidated federal statutory
rate of 35% 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.

At March 31, 1999, net deferred tax assets were approximately $3.1 million.
Because the Company incurred an operating loss for 1998 and through the first
quarter for 1999, management will continue to evaluate the realization of the
net deferred tax assets. If realization becomes doubtful a valuation allowance
will be provided.


                                       7
<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, and Section 21E of the
Securities Exchange Act of 1934. 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, 1998 on file with the
SEC. 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

The Company provides integrated information technology solutions and services to
the U.S. healthcare industry. DAOU's capabilities range from up-front strategic
consulting to information technology ("IT") system design, implementation and
long-term tactical support. DAOU's IT offerings include application
implementation, communications infrastructure, management consulting and
integration services. The Company's application implementation group supplies
staffing resources to hospitals and other healthcare organizations. DAOU's
vendor certified consultants are capable of installing nearly 90% of the most
common healthcare applications. The Company's communications infrastructure
group focuses on the information superstructure in healthcare enterprises,
including networking, Intranet and Internet, desktop, and voice, video and data
solutions. Management consulting develops business plans and solves problems for
healthcare IT managers, installs and integrates applications, engineers,
installs and integrates infrastructure, and manages IT systems. DAOU's
integration services group analyzes, implements and supports information systems
that meet a customer's business objectives and reduce the cost and improve the
quality of care. 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. Also, the Company often hires employees in
anticipation of commencement of a project and if delays in contract signings
occur the Company's gross margins could vary due to the associated loss of
revenue to cover the fixed labor costs.

Results of Operations

The Company's revenues were $27.3 million and $24.0 million for the three months
ended March 31, 1999 and 1998, respectively, representing an increase of 14%.
Revenues increased primarily due to the increased number of professional
services consulting contracts, which accounted for $3.5 million of the increase,
and professional services management contracts, which accounted for $3.4 million
of the increase. Growth in these two service areas was offset by a $3.5 million
decrease in revenues from implementation and cabling contracts for the three
months ended March 31, 1999 as compared to 1998. Services to DAOU's five largest
customers accounted for $7.6 million of total revenues in for the three months
ended March 31, 1999, representing 28% of total revenues.

Cost of revenues was $21.8 million and $14.5 million for the three months ended
March 31, 1999 and 1998, respectively, representing an increase of 51%. Gross
margin was 20% and 40% for the three months ended March 31, 1999 and 1998,
respectively. This decrease in gross margin during the three months ended March
31, 1999 was primarily due to the following: i) an increase in the product
content of the Company's large network implementation contracts, and ii)
decreases in networking labor utilization rates due to decreases in network
sales within the communications infrastructure group.

Sales and marketing expenses were $2.9 million and $2.7 million for the three
months ended March 31, 1999 and 1998, respectively, representing an increase of
6%. This increase was primarily due to an increase in sales personnel


                                       8
<PAGE>

and related expenses to support the increased sales volume and activity. Sales
and marketing expenses were approximately 11% of total revenues for the three
months ended March 31, 1999 and 1998. Although the Company believes that it can
achieve a decrease in these expenses as a percentage of revenue, the Company
also expects that sales and marketing expenses will continue to increase in
absolute dollars to support the anticipated growth in the Company's business.

General and administrative expenses were $5.3 million and $3.1 million for the
three months ended March 31, 1999 and 1998, respectively, representing an
increase of 71%. The primary factors contributing to this increase were costs
associated with additional administrative staffing and other increased
infrastructure requirements to support growth and integration of acquired
companies, increased legal fees and increased recruiting costs. General and
administrative expenses were approximately 20% and 13% of total revenues for the
three months ended March 31, 1999 and 1998, respectively. The Company expects
that general and administrative expenses will increase in dollar terms to
support the anticipated growth in the Company's business and the continued
integration of acquired companies.

Other income (expense), net, was $(86,000) and $143,000 for the three months
ended March 31, 1999 and 1998, respectively. Other income is primarily interest
income on cash and cash equivalents, and short-term investments. Interest
expense consists primarily of interest associated with the Company's business
lines of credit. The decrease in net other income (expense), net was primarily
due to overall lower average cash reserves available for investment during the
three months ended March 31, 1999 as compared to 1998.

The effective income tax rate for the three months ended March 31, 1999 and 1998
was (41)% and 46%, respectively. The effective tax rate for the three months
ended March 31, 1998 differed from the expected consolidated federal statutory
rate of 35% 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. At March 31, 1999, net
deferred tax assets were approximately $3.1 million. Because the Company
incurred an operating loss for 1998 and through the first quarter for 1999,
management will continue to evaluate the realization of the net deferred tax
assets. If realization becomes doubtful a valuation allowance will be provided.

Liquidity and Capital Resources

On March 31, 1999, the Company had working capital of $30.3 million, a decrease
of $1.4 million from $31.7 million on December 31, 1998. For the three months
ended March 31, 1999, cash used in operating activities was $552,000 compared to
cash used in operating activities of $9.0 million for the three months ended
March 31, 1998. This decrease resulted primarily from a decrease in contract
work in progress for the quarter ended March 31, 1999 as compared to 1998.

Net cash used in investing activities was $265,000 in the current period,
compared to net cash provided by investing activities of $2.2 million in the
comparable prior period. This change was primarily from $3.2 million in 1998 of
maturing marketable securities, which were not reinvested.

Net cash used in financing activities was $1.3 million for the three months
ended March 31,1999, compared to net cash provided by financing activities of
$386,000 in the comparable prior period. This change was primarily the result of
repayments of debt and lines of credit of acquired companies of $1.3 million
during the three months ended March 31, 1999.

During June 1998, the Company secured two borrowing facilities, a $2.0 million
revolving line of credit and an $8.0 million line of credit under which no funds
are currently available for future borrowings. As of March 31, 1999, the Company
was not in compliance with one of the covenants and has been informed by the
bank that the Company cannot avail itself to the unused lines of credit.
Management is actively negotiating for a replacement line of credit, believes
that a replacement line will be obtained before expiration of the existing lines
of credit and that the Company has sufficient liquidity to fund operations until
this new line is in place.

Although the Company has an accumulated deficit and has used cash in its
operating activities over the past three years, the Company believes that its
available funds together with anticipated cash from operating activities will be

                                       9
<PAGE>

sufficient to meet its capital requirements 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.

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

INTRODUCTION

The Company is preparing for the impact of the year 2000 issue on its 
business and the businesses of its customers and suppliers. The "year 2000 
issue" is a term used to describe the problems created by systems that are 
unable to accurately interpret dates after December 31, 1999. These problems 
are derived predominantly from the fact that software programs, computer 
equipment and embedded technology historically have categorized the "year" in 
a two-digit format.

The year 2000 issue creates potential risks that relate to, among other 
things, the Company's:

-  Internally-used information technology ("IT") and non-IT systems;

-  Third-party products and sales, service and maintenance agreements; and

-  Software products of its own design.

STATE OF READINESS

The Company has centralized its focus on the year 2000 issue through a 
cross-functional project team whose task is to identify, assess, test and 
remediate, as applicable, the Company's internal use systems, its sales, 
service and maintenance agreements and the software products of its own 
design. Although the Company's efforts to address year 2000 issues do not 
fall precisely into sequential phases, these efforts generally involve an 
assessment and testing phase, a deployment or remediation phase and a 
contingency planning phase. The Audit Committee of the Board of Directors is 
advised periodically on the status of the Company's year 2000 compliance 
program.

INTERNAL USE SYSTEMS.  Year 2000 issues relating to the Company's 
internally-used IT and non-IT systems, including computer equipment, software 
and devices with embedded technology (collectively, "Internal Use Systems"), 
could result in the Company's failure or inability to process transactions, 
send invoices, conduct communications or engage in similar business 
activities, any of which could affect materially and adversely the Company's 
business, results of operations and financial condition.

Based upon its assessment and testing efforts to date, the Company believes 
that its internal local area network systems are year 2000 compliant, but 
that certain hardware and software relating to its Internal Use Systems will 
require replacement or modification through, for example, ROM-BIOS upgrades 
to certain hardware components and year 2000 compliant software upgrades. In 
the ordinary course of replacing computer equipment and software, the Company 
also attempts to obtain replacements that it believes are year 2000 
compliant. As of March 31, 1999, the Company has assembled year 2000 
compliance statements from approximately 70% of its critical vendors and 
suppliers. Even where assurances are received from third parties, however, 
risks remain that the failure of the Company's Internal Use Systems could 
affect materially and adversely the Company's business, results of operations 
and financial condition.

                                       10
<PAGE>

The Company estimates that, as of March 31, 1999, it had completed 
approximately 85% of the initiatives that it believes will be necessary to 
fully address potential year 2000 issues relating to its Internal Use 
Systems. The Company currently anticipates that its year 2000 identification, 
assessment, testing and remediation efforts with respect to its Internal Use 
Systems will be completed by September 30, 1999. Notwithstanding the above 
assessment, both IT and non-IT systems may contain embedded technology that 
could delay the Company's year 2000 identification, assessment, testing and 
remediation efforts with respect to its Internal Use Systems.

THIRD-PARTY PRODUCTS AND SALES, SERVICE AND MAINTENANCE AGREEMENTS.  
Third-party products ("Third-Party Products") that are re-sold, installed 
and/or maintained by the Company in connection with sales, service and 
maintenance agreements with its customers may fail to operate properly or as 
expected because of year 2000 issues. These system failures could disrupt 
customer operations through a temporary inability to, among other things, 
diagnose and treat patients, operate medical communications systems, access 
medical information and databases, process transactions, send invoices or 
engage in similar medical and business activities.

The Company is undertaking the following initiatives with key customers 
regarding Third-Party Products that it has sold or installed, or currently 
maintains in accordance with its contractual obligations:

-  compilation of vendor, manufacturer and service provider statements and 
   assurance regarding the year 2000 issue;

-  identification of year 2000 issues; and

-  notification and, as appropriate, remediation of year 2000 issues.

If vendors, manufacturers and service providers of Third-Party Products do 
not remediate successfully Third-Party Products by the year 2000 or 
adequately indemnify or provide pass-through warranties for products 
re-sold, installed and maintained by the Company, then the Company may face 
claims and increased obligations under its sales, service and maintenance 
agreements that could affect materially and adversely its business, results 
of operations and financial condition.

The Company currently is assessing its Year 2000 related obligations under 
its sales, service and maintenance agreements. To date, the Company has 
identified one major sales, service and maintenance agreement under which it 
has agreed to repair, modify and replace certain Third-Party Products that 
are not year 2000 compliant. Accordingly, the Company's year 2000 liability 
under this agreement depends on the year 2000 compliance of Third-Party 
Products that are re-sold, installed and/or maintained under the agreement 
and the Company's ability to seek adequate indemnification and/or warranty 
coverage from the vendors, manufacturers and service providers of Third-Party 
Products. The Company has verified that approximately 80% of the Third-Party 
Products covered by this agreement are year 2000 compliant. The customer has 
advised the Company that the remaining 20% of these Third-Party Products will 
be replaced for year 2000 compliance prior to the end of this year. Because 
this process is still incomplete, the Company presently cannot assure, 
however, that it will not incur significant expenses under this agreement 
that could impact materially and adversely

                                       11
<PAGE>

the Company's business, results of operations and financial condition.

The Company estimates that, as of March 31, 1999, it had completed 
approximately 30% of the initiatives that it believes will be necessary to 
fully address potential year 2000 issues relating to Third-Party Products and 
its contractual obligations under key sales, service and maintenance 
agreements. The Company currently anticipates that its year 2000 
identification, assessment, testing and remediation efforts with respect to 
Third-Party Products and key sales, service and maintenance agreements will 
be completed by September 30, 1999.

COMPANY SOFTWARE PRODUCTS.  The Company also distributes certain software 
products through its subsidiary, DAOU-Sentient, inc. The Company has 
completed its assessment and testing of these products and believes that they 
are year 2000 compliant.

COSTS

As of March 31, 1999, the Company had incurred costs of approximately 
$107,000 related to its year 2000 identification, assessment, testing and 
remediation, of which $37,000 was incurred for Internal Use Systems and 
$70,000 was incurred for its assessing liability and status of the year 2000 
compliance of Third-Party Products.

The Company currently estimates that the cost of its year 2000 
identification, assessment, remediation, and testing efforts will not exceed 
$200,000, of which the Company expects to incur additional costs of $63,000 
for year 2000 issues relating to Internal Use Systems and additional costs of 
$30,000 for the identification, assessment, and notification to customers of 
year 2000 issues relating to Third-Party Products that are re-sold, installed 
or maintained in accordance with the Company's contractual obligations. These 
expenditures will be funded from operating cash flows. Other non-year 2000 IT 
efforts have not been materially delayed or impacted by year 2000 initiatives.

The costs of the Company's year 2000 identification, assessment, remediation, 
and testing efforts and the dates on which the Company believes it will 
complete such efforts are based upon management's best estimates, which are 
derived using numerous assumptions regarding future events. There can be no 
assurance that these estimates will prove to be accurate and actual results 
could differ materially from those currently anticipated. Specific factors 
that could cause material differences include, among others, increased 
obligations and liability under the Company's contractual obligations, the 
availability and cost of personnel trained in year 2000 issues and the 
ability to identify, assess and remediate Internal Use Systems and Third 
Party Products as appropriate. In addition, if year 2000 issues cause 
customers and prospects to defer current projects or prospective purchase 
decisions, then the Company's financial, business and operational goals may 
be delayed or may not be realized at all, causing the Company's business, 
results of operations and financial condition to be affected materially and 
adversely.

RISKS

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<PAGE>

If certain Internal Use Systems and Third-Party Products are not year 2000 
compliant, then the Company could experience a negative impact on its 
business, results of operations and financial condition relating to factors 
that include, among others:

-  diversion of resources by the Company to address and/or remediate year 
   2000 issues;

-  damage to the Company's reputation;

-  litigation;

-  service delays to the Company's customers arising from the failure of 
   vendors, manufacturers and service providers to adequately address year 
   2000 issues; and

-  increased warranty and other claims by the Company's customers and/or 
   increased product and system repair, replacement, service and maintenance 
   obligations under its existing and future sales, service and maintenance 
   agreements.

The Company currently cannot accurately assess or estimate the possible 
impact of the foregoing risks and liability because:

-  there is no uniform definition of "compliance with Year 2000;"

-  the legal standards for year 2000 liability presently are uncertain;

-  the Company's year 2000 obligations will depend on, among other things, 
   the varying contractual terms contained in its sales, service and 
   maintenance agreements with respect to the particular customer and the 
   nature of such customer's year 2000 issue; and

-  there can be no assurance that indemnification or pass-through 
   arrangements relating to the Company's sales, service and maintenance 
   agreements will cover all of the Company's liabilities and costs incurred 
   in year 2000 related claims.

Consequently, the Company cannot provide assurances that the aggregate cost 
of defending and resolving the foregoing issues and claims will not affect 
materially and adversely the Company's business, results of operations and 
financial condition.

CONTINGENCY PLANS

The Company has not yet developed a comprehensive contingency plan to address 
situations that may result if the Company or any of the third parties on 
which the Company depends is unable to achieve year 2000 readiness. However, 
the Company currently expects to complete its contingency planning by 
September 30, 1999. This contingency planning will encompass "worst case" 
scenarios that assume the failure of significant communications and computing 
infrastructures of the Company, its customers and suppliers, together with 
failures of governmental infrastructures affecting transportation. The 
Company subsequently may identify other factors that could affect materially 
and adversely the Company's business, results of operations and financial 
condition.

The foregoing statements are based on management's best estimates at the 
present time, which were derived using numerous assumptions of future events 
and conditions. There can be no assurance that these assumptions will be 
accurate and that estimates will be achieved. The Company's evaluation and 
assessment is ongoing and it expects that new or different information may 
become available as its assessment and evaluation continue.

                                       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,
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 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, 1999 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.


Item 6.   Exhibits and Reports on Form 8-K

(a)  Exhibits

Exhibit No.                              Description
-----------                              -----------



10.1 Consulting Agreement, dated as of March 15, 1999, between Larry D. Grandia
     and the Registrant.

27.  Financial Data Schedule


(b)  Current Reports on Form 8-K. The Registrant filed the following Current
     Reports on Form 8-K with the Commission during the quarter ended March 31,
     1999:

     1) On January 15, 1999, the Company filed a Current Report on Form 8-K
     announcing that it had entered into a five-year contract to provide
     information technology services to Saint Mary's Health Network of Reno,
     Nevada.


                                       14
<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.

Date:    May 17, 1999

DAOU SYSTEMS, INC.

<TABLE>
<CAPTION>
SIGNATURE                 TITLE                                                DATE
-----------------------------------------------------------------------------------------------
<S>                       <C>                                                  <C>
/s/ Larry D. Grandia      President and Director                               May 17, 1999
Larry D. Grandia

/s/ Fred C. McGee         Executive Vice President, Chief Financial            May 17, 1999
Fred C. McGee             Officer and Secretary
</TABLE>


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