Daou Systems Inc. Releases Letter From Ernst & Young LLP Reaffirming Utilization of Accounting Methodology.

SAN DIEGO--(BUSINESS WIRE)--Oct. 12, 1998--DAOU Systems Inc. (Nasdaq:DAOU) announced today that its independent auditor Ernst & Young LLP has provided the Company a letter reaffirming the Company's position that its utilization of the percentage-of-completion accounting method is appropriate and consistent with generally accepted accounting principles, or "GAAP". The full text of the Ernst & Young letter follows:

"We have performed audits of the consolidated financial statements of DAOU Systems, Inc. (the "Company") for the years ended December 31, 1994, 1995, 1996 and 1997. In connection with our audits, we have considered all of the Company's significant accounting policies as disclosed in the notes to the financial statements, including accounting for its fixed-price contracts as required by the Statement of Position ("SOP") 81-1 entitled 'Accounting for Performance of Construction-Type and Certain Production-Type Contracts.' Based on our audits, we have issued our reports on the Company's financial statements for the years ended December 31, 1994, 1995, 1996 and 1997 and we have concluded that in our opinion the Company's financial statements present fairly, in all material respects, its consolidated financial position and consolidated results of operations in conformity with generally accepted accounting principles.

The Company has concluded and we concur, that the percentage-of-completion method of accounting for its fixed-price contracts is preferable in the Company's circumstances."

Commenting on the letter, Georges Daou, chairman and chief executive officer of DAOU Systems, stated: "In recent weeks, DAOU Systems has been the target of an unfair attack by certain investors and journalists regarding our use of the percentage-of-completion accounting method for recognizing revenue. In response, we have stood firmly behind the integrity of our accounting practices, stating consistently that they comply fully with current accounting standards. Now, our independent auditor Ernst & Young LLP, which has audited our financial statements since 1994, has reaffirmed our accounting methodology. We hope this will put to rest the unwarranted speculation that has surrounded DAOU Systems and our accounting methods. It is unfortunate that our stockholders have been adversely impacted by the resulting misperceptions, especially in light of DAOU's favorable position in the growing healthcare information technologies market."

Added Daou: "We are working actively on multiple fronts to build long-term value for DAOU stockholders. In recent months we have completed the strategic acquisition of several companies, enabling us to offer our healthcare customers a full range of end-to-end information technology solutions, including business and clinical applications. As we look to the future, key areas of opportunity for DAOU include Year 2000 compliance, Internet-enabled technologies and the convergence of voice, video and data communications in the healthcare field. In the next two years, the healthcare information technology market is projected to exceed $20 billion. DAOU currently offers solutions and services for a significant portion of that market. Additionally, there are only a few major competitors in DAOU's market today, and no one company has a dominant share. As a full-service provider of healthcare IT solutions and services, we believe we are extremely well positioned to compete for an increasing share of this growing market."

DAOU Systems Inc. is a provider of integrated Information Technology (IT) solutions and services to the U.S. healthcare industry. DAOU's capabilities range from up-front strategic consulting to IT system design, implementation and long-term tactical support. DAOU's IT offerings include data, voice and video networking, applications consulting and implementation, as well as operational and Internet solutions.

DAOU has over 800 employees, and has provided services to more than 1,300 healthcare organizations, including 50% of the nation's top 100 integrated delivery systems. DAOU's clients include organizations such as Stanford Health, Mercy Health Services, Saint Barnabas Health Care, and Humana Healthcare.

For additional information on DAOU, please contact us at 888/800-4928, or visit our web site at www.daou.com.

Except for the historical information contained herein, the matters discussed in this press release 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 the company's filings with the Securities Exchange Commission and other press releases of the company.