<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 June 30, 2002

                                       OR

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

          For the transition period from                to
                                         --------------    -----------

                         Commission File No.: 000-22073

                               Daou Systems, Inc.
             (Exact name of registrant as specified in its charter)

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

                           412 Creamery Way, Suite 300
                            Exton, Pennsylvania 19341
               (Address of principal executive offices) (Zip Code)

                                 (610) 594-2700
              (Registrant's telephone number, including area code)

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

The number of shares of Registrant's Common Stock, par value $.001 per share,
outstanding as of August 10, 2002: 21,623,466

<PAGE>

                               Daou Systems, Inc.

                               Index to Form 10-Q

<TABLE>
<CAPTION>
                                                                                              Page
                                                                                              ----
<S>                                                                                            <C>
PART I.    FINANCIAL INFORMATION

Item 1.    Condensed Financial Statements                                                       2

           Condensed Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001          2

           Condensed Statements of Operations (unaudited) for the Three Months and Six
           Months Ended June 30, 2002 and 2001                                                  3

           Condensed Statements of Cash Flows (unaudited) for the Six Months Ended June 30,
           2002 and 2001                                                                        4

           Notes to Condensed Financial Statements (unaudited)                                  5

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

Item 3.    Quantitative and Qualitative Disclosure about Market Risk                           15

PART II.   OTHER INFORMATION

Item 1.    Legal Proceedings                                                                   16

Item 2.    Changes in Securities and Use of Proceeds                                           16

Item 3.    Defaults Upon Senior Securities                                                     16

Item 4.    Submission of Matters to a Vote of Security Holders                                 17

Item 5.    Other Information                                                                   17

Item 6.    Exhibits and Reports on Form 8-K                                                    17

           SIGNATURES                                                                          18
</TABLE>

                                       1

<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

                               Daou Systems, Inc.
                            Condensed Balance Sheets
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                           June 30,    December 31,
                                                                             2002         2001
                                                                         (unaudited)
                                                                         --------------------------
<S>                                                                       <C>            <C>
Assets
Current assets:
   Cash and cash equivalents                                              $ 11,936       $ 14,868
   Restricted cash                                                              --            147
   Short-term investments, available-for-sale                                   61             59
   Accounts receivable, net of allowance for doubtful accounts of $667
      and $715 at June 30, 2002 and December 31, 2001, respectively          8,749          7,572
   Contract work in progress                                                   162            310
   Other current assets                                                        997            328
                                                                         --------------------------
Total current assets                                                        21,905         23,284

Equipment, furniture and fixtures, net                                       1,091            970
Other assets                                                                   145            130
                                                                         --------------------------
Total Assets                                                              $ 23,141       $ 24,384
                                                                         ==========================

Liabilities and Stockholders' Equity
Current liabilities:
   Trade accounts payable and other accrued liabilities                   $  2,495       $  2,933
   Accrued salaries and benefits                                             3,757          3,254
   Deferred revenue                                                            362            585
   Current portion of severance payable                                         95            193
                                                                         --------------------------
Total current liabilities                                                    6,709          6,965

Long-term liabilities                                                           40             51

Commitments and contingencies

Stockholders' equity:
    Convertible preferred stock, $.001 par value.  Authorized 3,520
     shares; issued and outstanding 2,182 shares at June 30, 2002 and
     December 31, 2001, with a liquidation preference of $14,399 and
     $13,912 at June 30, 2002 and December 31, 2001                              2              2
   Common stock, $.001 par value.  Authorized 50,000 shares; issued
     and outstanding 21,623 shares at June 30, 2002 and 21,556 shares
     at December 31, 2001                                                       23             22
   Additional paid-in capital                                               54,523         53,989
   Notes receivable from stockholders                                       (1,281)        (1,281)
   Deferred compensation                                                      (207)          (261)
   Accumulated other comprehensive loss                                        (70)           (72)
   Accumulated deficit                                                     (36,598)       (35,031)
                                                                         --------------------------
Total stockholders' equity                                                  16,392         17,368
                                                                         --------------------------
Total Liabilities and Stockholders' Equity                                $ 23,141       $ 24,384
                                                                         ==========================
</TABLE>

          See accompanying notes to the condensed financial statements.

                                       2

<PAGE>

                               Daou Systems, Inc.
                       Condensed Statements of Operations
                      (In thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                Three Months Ended June 30,   Six Months Ended June 30,
                                                      2002       2001              2002      2001
                                                ---------------------------   -------------------------
<S>                                                  <C>       <C>                <C>       <C>
Revenues before reimbursements (net revenues)        $ 9,734   $10,121            $18,838   $22,881
Out-of-pocket reimbursements                             829       822              1,605     1,760
                                                ---------------------------   -------------------------
   Total revenues                                     10,563    10,943             20,443    24,641

Cost of revenues before reimbursable expenses          7,336     8,431             13,865    18,763
Out-of-pocket reimbursable expenses                      829       822              1,605     1,760
                                                ---------------------------   -------------------------
   Total cost of revenues                              8,165     9,253             15,470    20,523
                                                ---------------------------   -------------------------
Gross profit                                           2,398     1,690              4,973     4,118

Operating expenses:
      Sales and marketing                              1,293       724              2,427     1,652
      General and administrative                       1,767     1,957              3,737     3,962
                                                ---------------------------   -------------------------
                                                       3,060     2,681              6,164     5,614
                                                ---------------------------   -------------------------
Loss from operations                                    (662)     (991)            (1,191)   (1,496)
Other income, net                                         49       125                111       203
                                                ---------------------------   -------------------------
Net loss                                                (613)     (866)            (1,080)   (1,293)

Accrued dividends on preferred stock                    (245)     (196)              (487)     (391)
                                                ---------------------------   -------------------------
Net loss available to common stockholders            $  (858)  $(1,062)           $(1,567)  $(1,684)
                                                ===========================   =========================
Basic and diluted net loss per share                 $ (0.05)  $ (0.06)           $ (0.08)  $ (0.10)
                                                ===========================   =========================
Shares used in computing basic and
   diluted net loss per share                         18,864    17,198             18,682    17,512
                                                ===========================   =========================
</TABLE>

          See accompanying notes to the condensed financial statements.

                                       3

<PAGE>

                               Daou Systems, Inc.
                       Condensed Statements of Cash Flows
                                 (In thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                              Six Months Ended June 30,
                                                                    2002     2001
                                                                  -------   -------
<S>                                                               <C>       <C>
Operating activities
Net loss                                                          $(1,080)  $(1,293)
Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
      Depreciation and amortization                                   438       709
      Amortization of deferred compensation                            54         -
      Provision for uncollectible accounts                             91       399
      (Gain) loss on retirement of fixed assets                       (10)      352
   Changes in operating assets and liabilities:
      Restricted cash                                                 147        --
      Accounts receivable                                          (1,268)    3,238
      Contract work in process                                        148       710
      Other current assets                                           (669)      (53)
      Accounts payable and accrued liabilities                       (438)   (1,709)
      Accrued salaries and benefits                                   503       921
      Other                                                          (332)      285
                                                                  -------   -------
Net cash (used in) provided by operating activities                (2,416)    3,559

Investing activities
Purchases of equipment, furniture and fixtures, net                  (549)     (135)
Changes in other assets                                               (15)       56
                                                                  -------   -------
Net cash used in investing activities                                (564)      (79)

Financing activities
Proceeds from issuance of common stock                                 48        55
Purchase of treasury stock                                             --      (198)
                                                                  -------   -------
Net cash provided by (used in) financing activities                    48      (143)

(Decrease) increase in cash and cash equivalents                   (2,932)    3,337
Cash and cash equivalents at beginning of period                   14,868    10,504
                                                                  -------   -------
Cash and cash equivalents at end of period                        $11,936   $13,841
                                                                  =======   =======
Supplemental Disclosure of Non-cash Activities:
Common stock issued for services                                  $    --   $    25
                                                                  =======   =======
Common stock issued for settlement                                $    --   $     3
                                                                  =======   =======
Common stock issuable for notes receivable from stockholder       $    --   $ 1,204
                                                                  =======   =======
Accrued preferred stock dividends                                 $   487   $   391
                                                                  =======   =======
</TABLE>

          See accompanying notes to the condensed financial statements.

                                       4

<PAGE>

                               Daou Systems, Inc.
                     Notes to Condensed Financial Statements
                                   (unaudited)

1.   Basis of Presentation

The unaudited condensed financial statements of Daou Systems, Inc. ("Daou" or
the "Company") at June 30, 2002 and for the three- and six-month periods ended
June 30, 2002 and 2001 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 June 30, 2002 and the results of operations for the three-and six-month
periods ended June 30, 2002 and 2001. The results of operations for the three
and six months ended June 30, 2002 are not necessarily indicative of the results
to be expected for the year ending December 31, 2002. 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 balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

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 financial statements 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 April 1, 2002.

In late 2001, the Company further defined the mission and focus of each of its
business units and has assigned profit responsibilities to each business unit
leader. Effective January 1, 2002, certain overhead expenses directly
attributable to the business units and formerly recorded as general and
administrative expenses are now recorded as cost of revenues before reimbursable
expenses. The prior period amounts have been reclassified to conform to their
current period presentation.

2.   New Accounting Standard

On January 1, 2002, the Company adopted the provisions of the Emerging Issues
Task Force ("EITF") Topic D-103, Income Statement Characterization of
Reimbursements for "Out-of-Pocket" Expenses Incurred. In accordance with the
provisions of EITF Topic D-103, the Company adjusted revenues and cost of
revenues for all periods reported to include out-of-pocket expenses. The Company
has reclassified its prior period financial statements in accordance with this
accounting pronouncement. Adoption of the provisions of EITF Topic D-103 had no
impact on reported net loss, net loss available to common stockholders or net
loss per share for the periods presented.

3.   Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.

                                       5

<PAGE>

                               Daou Systems, Inc.
               Notes to Condensed Financial Statements - continued
                                   (unaudited)

4.   Net Loss Per Share

Net loss per share is computed in accordance with FASB Statement No. 128,
Earnings Per Share. Basic net loss per share is computed using the weighted
average number of common shares outstanding during each period. Diluted net loss
per share includes the dilutive effect of common shares potentially issuable
upon the exercise of stock options and warrants. For the three and six months
ended June 30, 2002 and 2001, diluted loss per share is unchanged from basic
loss per share because the effects of the assumed conversion of Series A
Preferred Stock, stock options and warrants would be anti-dilutive.

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

                  (In thousands, except per share information)

                                       Three Months Ended   Six Months Ended
                                            June 30,            June 30,
                                        2002       2001      2002      2001
                                       ------------------   -----------------
Numerator:
   Net loss available to common        $  (858)  $(1,062)   $(1,567)  $(1,684)

Denominator:
   Weighted average common shares
      outstanding                       21,559    17,198     21,557    17,512
   Weighted average unvested common
      shares subject to repurchase
      agreements                        (2,695)       --     (2,875)       --
                                       ------------------   -----------------
Denominator for basic and diluted
      calculation                       18,864    17,198     18,682    17,512
                                       ==================   =================

Basic and diluted net loss per share   $ (0.05)  $ (0.06)   $ (0.08)  $ (0.10)
                                       ==================   ==================

5.   Employee Stock Purchase Plan

Under the Company's Employee Stock Purchase Plan ("ESPP"), employees are allowed
to purchase the Company's common stock at six month intervals at the lower of
85% of the fair market value at the beginning of the measurement period or 85%
of the fair market value at the end of the measurement period. On June 30, 2002,
the Company issued 54,237 shares of common stock at $0.8415 per share. At June
30, 2002, 1,009,719 shares remained available for issuance under the ESPP.

6.   Restructuring Plan

In connection with the Company's decision to close and combine certain
facilities, the Company recorded restructuring charges totaling $1.3 million
during the fourth quarter of 2001. These charges include severance costs related
to a reduction in workforce of approximately 28 employees and the costs
estimated to be incurred in connection with the closure of certain facilities.
Such charges were determined in accordance with SEC SAB No. 100, Restructuring
And Impairment Charge, and EITF No. 94-3, Liability Recognition For Certain
Employee Termination Benefits And Other Costs To Exit An Activity (Including
Certain Cost Incurred In A Restructuring).

In 2000, the Company recorded restructuring charges totaling approximately $2.1
million in connection with the various actions to reduce the cost structure of
the Company. These charges, which were recorded in accordance with SEC SAB No.
100 and EITF No. 94-3, included severance costs related to a reduction in
workforce of approximately 50 employees and the closure of certain facilities.

The Company anticipates that the above restructuring plans will be completed by
December 31, 2003.

                                       6

<PAGE>

                              Daou Systems, Inc.
               Notes to Condensed Financial Statements - continued
                                   (unaudited)

6. Restructuring Plan (continued)

The following table summarizes the restructuring and other related charges paid
in 2002 and remaining charges in accrued liabilities as of June 30, 2002.

<TABLE>
<CAPTION>
                                                                     Restructuring Charges
                                                         ---------------------------------------------
                                                         Accrued as of    Paid in Six    Accrued as of
                                                          December 31,   Months Ended      June 30,
                                                             2001        June 30, 2002       2002
                                                         ---------------------------------------------
<S>                                                        <C>              <C>            <C>
Severance costs for involuntary employee terminations      $  151,000       $151,000       $     --
Costs related to closure and combination of facilities      1,161,000        844,000        317,000
                                                         ---------------------------------------------
                                                           $1,312,000       $995,000       $317,000
                                                         =============================================
</TABLE>

7. Disclosure of Segment Information

For internal control and marketing/sales synergy purposes, the Company continues
to group its business units within two divisions - Technology Services Division
("TSD") and Application Services Division ("ASD"). Externally, with respect to
marketing/sales and related customer service, the Company's interaction with
customers will take place at the business unit level. TSD consists of the
following three business units: (i) Infrastructure Services Group ("ISG"), which
designs and deploys HIT infrastructure components essential to delivering and
securing access to applications across the enterprise; (ii) Sentient
("Sentient"), which builds and supports M/MUMPS-based systems typically used by
government healthcare organizations; and (iii) Daou Technology Center (the
"DTC", formerly "RTC"), which provides Help Desk services to mitigate risk via
systems support of the desktop, network, server and security environments. ASD
is comprised of the following two business units: (i) Technology Management
("TMI"), which provides strategic consulting services to payors and providers,
including those related to the Health Insurance Portability & Accountability Act
of 1996 ("HIPAA") and provides application planning, implementation and support
of payor-based HIT applications to insurance companies and managed care
organizations; and (ii) Resources in Healthcare Innovation ("RHI"), which
provides temporary staffing resources to hospitals, IDNs and third-party vendors
focused on the implementation and support of provider-based HIT applications.

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



                                       7

<PAGE>
                               Daou Systems, Inc.
               Notes to Condensed Financial Statements - continued
                                   (unaudited)

7.   Disclosure of Segment Information (continued)
(in thousands)
                                       Application   Technology
                                        Services      Services
                                        Division      Division    Total
                                       ---------------------------------
Three months ended June 30, 2002
--------------------------------
Revenues before reimbursements (net
revenues)                                $4,993        $4,741     $9,734
Cost of revenues before reimbursable
   expenses                               3,670         3,666      7,336
                                       ---------------------------------
Gross profit                              1,323         1,075      2,398
Gross profit percent                         26%           23%        25%

Sales and marketing                                                1,293
General and administrative                                         1,767
                                                                  ------
Loss from operations                                              $ (662)
                                                                  ======
Three months ended June 30, 2001
--------------------------------
Revenues before reimbursements (net
   revenues)                             $4,345        $5,776     $10,121
Cost of revenues before reimbursable
   expenses                               3,810         4,621       8,431
                                       ----------------------------------
Gross profit                                535         1,155       1,690
Gross profit percent                         12%           20%         17%

Sales and marketing                                                   724
General and administrative                                          1,957
                                                                  -------
Loss from operations                                              $ (991)
                                                                  =======

                                       Application   Technology
                                        Services      Services
                                        Division      Division     Total
                                       ----------------------------------
Six months ended June 30, 2002
--------------------------------
Revenues before reimbursements (net
   revenues)                              $9,392      $ 9,446     $18,838
Cost of revenues before reimbursable
   expenses                                6,767        7,098      13,865
                                       ----------------------------------
Gross profit                               2,625        2,348       4,973
Gross profit percent                          28%          25%         26%

Sales and marketing                                                 2,427
General and administrative                                          3,737
                                                                  -------
Loss from operations                                              $(1,191)
                                                                  =======

Six months ended June 30, 2001
--------------------------------
Revenues before reimbursements (net
   revenues)                              $8,950      $13,931     $22,881
Cost of revenues before reimbursable
   expenses                                7,193       11,570      18,763
                                       ----------------------------------
Gross profit                               1,757        2,361       4,118
Gross profit percent                          20%          17%         18%

Sales and marketing                                                 1,652
General and administrative                                          3,962
                                                                  -------
Loss from operations                                              $(1,496)
                                                                  =======
                                       8

<PAGE>
                               Daou Systems, Inc.
               Notes to Condensed Financial Statements - continued
                                   (unaudited)

8.   Termination of Outsourcing Agreement

The Company provided on-site outsourcing services to a customer under a
five-year outsourcing agreement which began January 1, 1999. On March 30, 2001,
the Company entered into a termination agreement in which the outsourcing
agreement terminated as of March 31, 2001. Under the termination agreement, all
of the Company's on-site employees transferred to the customer effective April
1, 2001 and the customer paid the Company a transition fee of $643,000, of which
$386,000 was recorded in net revenues in the second quarter of 2001 and $257,000
was recorded in the third quarter of 2001.

9.   Contingencies

On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998,
separate complaints were filed against the Company and certain of its former
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 a second amended consolidated class action complaint
on January 21, 2000. The new complaint realleges the same theory of liability
previously asserted, namely the alleged improper use of the
percentage-of-completion accounting method for revenue recognition. Claims are
pleaded under both the Securities Act of 1933, as amended, (relating to the
Company's initial public offering) and section 10b of the 1934 Securities
Exchange Act. The complaint was brought on behalf of a purported class of
investors who purchased the Company's Common Stock between February 13, 1997 and
October 28, 1998, but it does 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. As with their Federal court
counterparts, they do not allege specific damage amounts. On April 1, 1999, a
consolidated amended class action was filed on behalf of the same plaintiffs and
the new state complaint alleges the same factual basis as is asserted in the
Federal litigation. By stipulation of the parties, the state court litigation
has been stayed pending the resolution of a motion to dismiss that was filed on
February 22, 2000 in the federal litigation. That motion was granted on March
27, 2002, but the Court extended to plaintiffs the opportunity to file a Third
Amended Complaint. The plaintiffs filed their Third Amended Complaint on May 16,
2002, to which the Company responded with another Motion to Dismiss. The motion
was filed on June 24, 2002 and challenged the legal sufficiency of the
allegations. The plaintiffs have until August 14, 2002 to oppose the motion with
the Company's reply to the opposition due August 30, 2002. The hearing on the
Motion to Dismiss is calendared for September 9, 2002. 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.

On February 27, 2002, a complaint was filed against certain of the Company's
former officers and directors, as well as Daou On-Line, Inc., in the Superior
Court of New Jersey located in Bergen County. A First Amended Complaint was
filed on March 1, 2002 adding the Company and its former Chief Financial Officer
as parties-defendant. The gravamen of the First Amended Complaint is two-fold.
First, it alleges Daou's financial statements were misleading and fraudulently
induced the plaintiff to merge his company with Daou. Second, the First Amended
Complaint alleges breach of an idemnification and severance agreement obligating
the Company to defend the plaintiff in a lawsuit filed by Traci Melia, a former
employee. Neither the Complaint nor the First Amended Complaint allege specific
damage amounts. On April 24, 2002 the Company filed a Motion to Dismiss the
First Amended Complaint. The Court conducted a hearing on June 7, 2002 and
granted the Company's motion. On July 23, 2002, the plaintiff filed a Notice of
Appeal. A hearing date for the appeal has not yet been set.

The Company is party to various claims and legal actions arising in the normal
course of business. Although the ultimate outcome of the matters is not
presently determinable, management believes that the resolution of all such
pending matters, net of amounts accrued, will not have a material adverse affect
on the Company's business, results of operations or financial condition;
however, there can be no assurance that the ultimate resolution of these matters
will not have a material impact on the Company's results of operations, cash
flows or financial position.
                                       9

<PAGE>

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

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. Forward-looking statements
usually contain the words "estimate," "anticipate," "believe," "expect" or
similar expressions. All forward-looking statements are inherently uncertain as
they are based on various expectations and assumptions concerning future events
and are subject to numerous known and unknown risks and uncertainties. The
forward-looking statements included herein are based on current expectations and
entail various risks and uncertainties as those set forth herein and in the
Company's other SEC filings, including those more fully set forth in the "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other sections of the Company's Forms 10-K for the
year ended December 31, 2001 on file with the SEC, and in the Company's Proxy
Statement Schedule 14A Information filed with the SEC on April 30, 2002. 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.

Recent Developments

In late March of 2002, the Company began moving its corporate headquarters from
San Diego, California to Exton, Pennsylvania and completed the move by mid-April
of 2002. In connection with this move, the Company recorded a one-time charge of
approximately $1.3 million in the fourth quarter of 2001 related to the buyout
of its office lease in San Diego, as well as certain expenses related to the
reduction of staff and consolidation of marketing and administrative staff in
Exton, Pennsylvania.

Overview

Daou Systems, Inc. provides expert consulting and management services to
healthcare organizations in the design, deployment and support of IT
infrastructure and application systems. The firm offers a range of comprehensive
services, from strategic consulting, to IT application design and
implementation, to long-term, outsourced operational management. Daou has
provided services to more than 1,500 healthcare organizations, including leading
private and public hospitals, managed care organizations on both the payor and
provider sides of the market, as well as integrated healthcare delivery networks
(IDNs) and government healthcare. Daou Systems, Inc. is a publicly traded
company listed on the OTC Bulletin Board under the stock symbol DAOU. Daou
currently has approximately 235 employees.

The Company's service offerings are segmented into the following operating
divisions and service lines:

     Application Services Division ("ASD") - provides strategic IT consulting
     and planning services, including HIPAA consulting and remediation, managed
     care system implementation, post-implementation support, transition
     management and interim staffing.

          .    TMI - performs strategic IT consulting, HIPAA consulting and
               remediation, managed care system implementation and
               post-implementation support to help healthcare management meet
               their business and IT objectives and anticipate and plan their
               future IT needs.

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

                                       10

<PAGE>

     Technology Services Division ("TSD") - provides services focused on two
     vital components of a healthcare organization's infrastructure: the
     information technology itself and the resources who manage it. TSD provides
     solutions in key areas, including deployment of the network infrastructure,
     helping clients extend the value of legacy systems and enabling them to
     work with emerging technologies, web development and integration projects,
     and long-term management of complex information technologies, including
     help desk solutions and network management.

          .    ISG - focuses on IT infrastructure solutions for healthcare
               enterprises, including IDNs, hospitals and large academic medical
               centers. ISG services include the design and delivery of network
               infrastructure and the underlying components essential to
               delivering information and securing access to applications across
               the healthcare enterprise. The group supports healthcare
               organizations in all stages of infrastructure design and
               implementations, from the requisition and purchase of hardware to
               the installation and support of turn-key data networks.

          .    Sentient - Sentient capabilities include building and supporting
               the M/MUMPS-based systems typically used by government-run
               healthcare organizations and focuses on integration of the
               customers information systems within government healthcare with
               existing or new infrastructure that allow healthcare
               organizations to share and access data housed across multiple
               platforms and environments.

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

The Company generates substantially all of its revenues from professional
services, primarily on a "time and expense" project basis, under which revenues
are recognized as the services are performed. Billings for these services occur
on a semi-monthly or monthly basis as specified by the contract with a
particular customer. The Company's billing rates are commensurate with the
healthcare-domain IT expertise, know-how and skills of its consultants. The
Company's time and expense projects generally range from three to six months,
although certain projects have been for periods in excess of a year. The Company
also provides support, management and help desk services, under multi-year
engagements, which revenues are recognized ratably over the period that these
services are provided. Fees for these outsourcing services are typically
determined on a price per call or a price per node basis. Revenues on fixed-fee
contracts are recognized using the percentage-of-completion method with progress
to completion measured by labor costs incurred to date compared to total
estimated labor costs. The Company's gross margin with respect to fixed fee
contracts varies significantly depending on the percentage of such services
consisting of third-party products (with respect to which the Company obtains a
lower margin) versus professional services.

The Company bills its customers for out-of-pocket expenses, primarily travel and
related expenses incurred with respect to services provided to customers, and
has adopted the provisions of the Emerging Issues Task Force ("EITF") Topic
D-103, Income Statement Characterization of Reimbursements for "Out-of-Pocket"
Expenses Incurred.

Payments received in advance of services performed are recorded as deferred
revenues. Certain contract payment terms may result in customer billing
occurring at a pace slower than revenue recognition. The resulting revenues
recognized in excess of amounts billed and project costs are included in
contract work in progress on the Company's balance sheet.

                                       11

<PAGE>

Cost of revenues primarily consist of all expenses that are directly
attributable to the business units and include the salaries, bonuses and related
benefits of client-serving professionals as well as non-billable managers and
support staff, subcontractor expenses, recruiting and training costs and office
space costs. The Company's consultant-related costs are relatively fixed and
therefore fluctuations in the Company's gross margin may occur due to changes in
project margins and utilization rates of its professional staff.

Sales and marketing expenses primarily consist of the salaries, benefits, travel
and other costs of the Company's sales and marketing teams, as well as marketing
initiatives and business development expenses.

General and administrative expenses primarily consist of the costs attributable
to the support of the Company's client-serving professionals, such as:
investments in information systems, salaries, expenses and office space costs
for executive management, financial accounting and human resources personnel,
legal and other professional services.

Results of Operations

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

                                       Three Months Ended   Six Months Ended
                                            June 30,            June 30,
                                          2002    2001        2002    2001
                                       --------------------------------------
Revenues before reimbursements (net
revenues)                                  100%    100%        100%    100%
Cost of revenues before reimbursable
expenses
                                            75      84          74      82
                                          ----    ----        ----    ----
Gross profit                                25      16          26      18
Operating expenses:                         31      26          33      25
                                          ----    ----        ----    ----
Loss from operations                        (6)    (10)         (7)     (7)
Other income, net                           --       1           1       1
                                          ----    ----        ----    ----
Net loss                                    (6)%    (9)%        (6)%    (6)%
                                          ====    ====        ====    ====

Three Months Ended June 30, 2002 and 2001

The Company's net revenues decreased 4% or $400,000 to $9.7 million for the
three months ended June 30, 2002 from $10.1 million for the three months ended
June 30, 2001. The decrease is primarily due to the Company's previously
announced decision to exit certain lines of business that were not profitable,
and termination of certain large outsourcing contracts in 2001, partially offset
by higher revenues from the Company's applications services offerings in the
payor market.

Services to the Company's five largest customers accounted for $3.4 million of
net revenues for the three months ended June 30, 2002, representing 35% of total
net revenues, with one customer in each of the DTC and the Sentient business
units each accounting for 9% of total net revenues. This compares to net
revenues from the five largest customers for the three months ended June 30,
2001 totaling $3.1 million, or 30% of total net revenues.

                                       12

<PAGE>

Cost of revenues before reimbursable expenses decreased 13%, or $1.1 million, to
$7.3 million for the three months ended June 30, 2002 from $8.4 million for the
three months ended June 30, 2001. This decrease is attributable primarily to the
above-referenced efforts to eliminate under-performing lines of businesses and a
reduction of costs and more effective management of the Company's workforce,
offset by higher costs in the Company's managed care applications business
associated with the higher revenue attainment in that business. At June 30,
2002, the Company had approximately 235 employees, compared with approximately
247 employees at June 30, 2001.

Gross margin increased to 25% for the three months ended June 30, 2002 compared
to 16% for the three months ended June 30, 2001. This increase is primarily
attributable to the above-referenced reduction of cost and elimination
of under-performing lines of business, resulting in higher utilization rates
primarily in the Company's managed care applications business and government
healthcare integration services business, and increased project realization
rates.

Second quarter 2002 operating results reflect a higher level of sales and
marketing expenses in support of the Company's goal of reemerging in the
healthcare IT market and increasing future revenues. During the second quarter
2002, sales and marketing expenses increased 86%, or $600,000, to $1.3 million
from $700,000 for the three months ended June 30, 2001. Daou expects the
increase in spending in sales and marketing to continue for the remainder of
2002 as it re-establishes market presence following a period of relative
inactivity as the Company focused internally to restructure and gain operating
efficiencies.

General and administrative expenses decreased 10%, or $200,000, to $1.8 million
for the three months ended June 30, 2002 from $2.0 million for the three months
ended June 30, 2001. The decrease year over year is primarily the result of a
decrease in legal expenses, as well as a decrease in depreciation, rent and
personnel costs as a result of the Company's relocation of its corporate
offices, offset by certain one-time, non-recurring expenses related to the
relocation.

Other income, net, declined to $49,000 for the three months ended June 30, 2002
from $125,000 for the three months ended June 30, 2001, due to lower cash levels
and lower interest rates. Other income is primarily interest income on cash and
cash equivalents and short-term investments.

Six Months Ended June 30, 2002 and 2001

The Company's net revenues decreased 17% or $4 million to $18.9 million for the
six months ended June 30, 2002 from $22.9 million for the six months ended June
30, 2001. The decrease is primarily due to the previously announced termination
of certain large outsourcing contracts, its decision to exit certain lines of
business that were not profitable, and a reduction in revenues from temporary
staffing services, partially offset by higher revenues from the Company's
applications services offerings in the payor market. On March 30, 2001 the
Company entered into an agreement to terminate an outsourcing contract for its
largest customer effective March 31, 2001. Net revenues related to this contract
were $2.7 million for the six months ended June 30, 2001.

Services to the Company's five largest customers accounted for $6.4 million of
net revenues for the six months ended June 30, 2002, representing 34% of total
net revenues, with one customer in each of the DTC and the Sentient business
units each accounting for 9% of total net revenues. This compares to net
revenues from the five largest customers for the six months ended June 30, 2001
totaling $7.9 million, or 35% of total net revenues.

Cost of revenues before reimbursable expenses decreased 26%, or $4.9 million, to
$13.9 million for the six months ended June 30, 2002 from $18.8 million for the
six months ended June 30, 2001. This decrease is attributable primarily to the
above-referenced efforts to eliminate under-performing lines of businesses and a
reduction of costs and more effective management of the Company's workforce,
offset by higher costs in the Company's managed care applications business
associated with the higher revenue attainment in that business. At June 30,
2002, the Company had approximately 235 employees, compared with approximately
247 employees at June 30, 2001.

                                       13

<PAGE>

Gross margin increased to 26% for the six months ended June 30, 2002 compared to
18% for the six months ended June 30, 2001. This increase is primarily
attributable to the above-referenced reduction of cost and elimination of
under-performing lines of business, resulting in higher utilization rates
primarily in the Company's managed care applications, infrastructure services
and government healthcare integration businesses, and increased project
realization rates.

Operating results for the first six months of 2002 reflect a higher level of
sales and marketing expenses in support of the Company's goal of reemerging in
the healthcare IT market and increasing future revenues. Sales and marketing
expenses increased 50%, or $800,000, to $2.4 million for the six months ended
June 30, 2002 from $1.6 million for the six months ended June 30, 2001. Daou
expects the increase in spending in sales and marketing to continue for the
remainder of 2002 as it re-establishes market presence following a period of
relative inactivity as the Company focused internally to restructure and gain
operating efficiencies.

General and administrative expenses decreased 7%, or $300,000, to $3.7 million
for the six months ended June 30, 2002 from $4.0 million for the six months
ended June 30, 2001. The decrease year over year is primarily the result of a
decrease in legal expenses, as well as a decrease in depreciation, rent and
personnel costs as a result of the Company's relocation of its corporate
offices, offset by certain one-time, non-recurring expenses related to the
relocation and other employment related matters.

Other income, net, declined to $111,000 for the six months ended June 30, 2002
from $203,000 for the six months ended June 30, 2001, due to lower cash levels
and lower interest rates. Other income is primarily interest income on cash and
cash equivalents and short-term investments.

Liquidity and Capital Resources

On June 30, 2002, the Company had cash, cash equivalents and short term
investments available for sale of $12 million, a decrease of $2.9 million from
$14.9 million on December 31, 2001. For the six months ended June 30, 2002, cash
used in operating activities was $2.4 million compared to cash provided by
operating activities of $3.6 million for the six months ended June 30, 2001. The
use of cash during the six months ended June 30, 2002 is primarily due to an
increase in accounts receivable and other current assets, and includes
approximately $1 million of previously recorded restructuring liabilities
paid primarily related to the Company's relocation of its corporate headquarters
from San Diego, California to Exton, Pennsylvania. Days Sales Outstanding were
84 for the quarter ended June 30, 2002 compared with 83 in the first quarter of
2002 and 89 in the fourth quarter of 2001.

Net cash used in investing activities was $564,000 for the six months ended June
30, 2002, compared to net cash used in investing activities of $79,000 for the
six months ended June 30, 2001, primarily due to increased purchases of
equipment related to the Company's relocation of its corporate headquarters from
San Diego, California to Exton, Pennsylvania as well as investments in equipment
used in the Company's help desk service line.

Cash provided by financing activities was $48,000 for the six months ended June
30, 2002 and was related to proceeds from the issuance of the Company's common
stock.

On July 27, 1999 the Company issued 2,181,818 shares of Series A Preferred
Stock. The Series A Preferred Stock agreement contained a redemption feature
which was outside of the control of the Company. On November 9, 2000, the
holders of the Series A Preferred Stock permanently waived their redemption
rights in return for $2.0 million in cash and warrants to purchase 3,540,000
shares of the Company's common stock exercisable at $0.01 per share. Even though
the holders of the Series A Preferred Stock have waived their redemption rights,
the Company still has its right to redeem the Series A Preferred Stock anytime
after the fourth anniversary of the purchase date for the issue price and
accrued dividends per share.


                                       14

<PAGE>

Although the Company has an accumulated deficit as of June 30, 2002, the Company
believes that its available funds together with anticipated cash from operating
activities will be 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. However, there can be no assurance that the Company
will be able to sell additional equity or debt securities, or be able to obtain
additional financing on acceptable terms, if at all.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company invests excess cash primarily in U.S. government securities and
marketable debt securities of financial institutions and corporations with
strong credit ratings. These instruments have maturities of three months or less
when acquired. The Company does not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive instruments,
positions or transactions in any material fashion. Accordingly, the Company
believes that, while the instruments held are subject to changes in the
financial standing of the issuer of such securities, the Company is not subject
to any material risks arising from changes in interest rates, foreign currency
exchanges rates, commodity prices, equity prices or other market changes that
affect market risk sensitive instruments.

                                       15

<PAGE>

PART II OTHER INFORMATION

Item 1. Legal Proceedings

                       DAOU SYSTEMS SECURITIES LITIGATION

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 former
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 a second amended consolidated class action complaint
on January 21, 2000. The new complaint realleges the same theory of liability
previously asserted, namely the alleged improper use of the
percentage-of-completion accounting method for revenue recognition. Claims are
pleaded under both the Securities Act of 1933, as amended, (relating to the
Company's initial public offering) and section 10b of the 1934 Securities
Exchange Act. The complaint was brought on behalf of a purported class of
investors who purchased the Company's Common Stock between February 13, 1997 and
October 28, 1998, but it does 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. As with their Federal court
counterparts, they do not allege specific damage amounts. On April 1, 1999, a
consolidated amended class action was filed on behalf of the same plaintiffs and
the new state complaint alleges the same factual basis as is asserted in the
Federal litigation. By stipulation of the parties, the state court litigation
has been stayed pending the resolution of a motion to dismiss that was filed on
February 22, 2000 in the federal litigation. That motion was granted on March
27, 2002, but the Court extended to plaintiffs the opportunity to file a Third
Amended Complaint. The plaintiffs filed their Third Amended Complaint on May 16,
2002, to which the Company responded with another Motion to Dismiss. The motion
was filed on June 24, 2002 and challenged the legal sufficiency of the
allegations. The plaintiffs have until August 14, 2002 to oppose the motion with
the Company's reply to the opposition due August 30, 2002. The hearing on the
Motion to Dismiss is calendared for September 9, 2002. 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.

                       DICKSON V DAOU SYSTEMS, INC. ET AL

On February 27, 2002, a complaint was filed against certain of the Company's
former officers and directors, as well as Daou On-Line, Inc., in the Superior
Court of New Jersey located in Bergen County. A First Amended Complaint was
filed on March 1, 2002 adding the Company and its former Chief Financial Officer
as parties-defendant. The gravamen of the First Amended Complaint is two-fold.
First, it alleges Daou's financial statements were misleading and fraudulently
induced the plaintiff to merge his company with Daou. Second, the First Amended
Complaint alleges breach of an idemnification and severance agreement obligating
the Company to defend the plaintiff in a lawsuit filed by Traci Melia, a former
employee. Neither the Complaint nor the First Amended Complaint allege specific
damage amounts. On April 24, 2002 the Company filed a Motion to Dismiss the
First Amended Complaint. The Court conducted a hearing on June 7, 2002 and
granted the Company's motion. On July 23, 2002, the plaintiff filed a Notice of
Appeal. A hearing date for the appeal has not yet been set.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

                                       16

<PAGE>

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

The Company's 2002 Annual Meeting of Stockholders was held on June 11, 2002. The
following matters were voted on the by stockholders:

1.   Election of two Class III Directors

     Vincent K. Roach and David W. Jahns were elected to the Board of Directors
     for terms expiring at the 2005 Annual Meeting of Stockholders and until
     their successors are duly qualified and elected. The vote was 14.3 million
     in favor of Mr. Roach and 29,000 votes withheld, and 14.3 million in favor
     of Mr. Jahns and 24,000 votes withheld.

2.   Ratification of Independent Auditors

     The stockholders ratified the selection of Ernst & Young LLP as the
     Company's independent auditors for the fiscal year ending December 31,
     2002. Ernst & Young LLP has audited the Company's financial statements
     annually since March 1995. The vote was 14.3 million in favor, with 37,000
     votes against and 1,000 withheld.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

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

   99.1       Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
              Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   99.2       Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
              Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)  Current Reports on Form 8-K. The Registrant did not file any Current
     Reports on Form 8-K with the Commission during the quarter ended June 30,
     2002.

                                       17

<PAGE>

                                   SIGNATURES

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

Date:    August 14, 2002

                                      Daou Systems, Inc.


                                      By: /s/ James T. Roberto
                                          --------------------------------------
                                          James T. Roberto
                                          President and Chief Executive Officer,
                                          duly authorized officer


                                      By: /s/ Neil R. Cassidy
                                          --------------------------------------
                                          Neil R. Cassidy
                                          Executive Vice President,
                                          Chief Financial Officer, and
                                          Secretary, principal financial
                                          and accounting officer

                                       18