<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, 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 May 10, 2002: 21,555,228

<PAGE>

                               Daou Systems, Inc.

                               Index to Form 10-Q


<TABLE>
<CAPTION>
PART I.   FINANCIAL INFORMATION                                                                  Page
                                                                                              ----------
<S>                                                                                           <C>
Item 1.   Condensed Financial Statements                                                          2

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

          Condensed Statements of Operations (unaudited) for the Three Months Ended March
          31, 2002 and 2001                                                                       3

          Condensed Statements of Cash Flows (unaudited) for the Three Months Ended March
          31, 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                                                                             9

Item 3.   Quantitative and Qualitative Disclosure about Market Risk                              13

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings                                                                      14

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

          SIGNATURES                                                                             15
</TABLE>

________________________________________________________________________________

                                        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>
                                                                           March 31,       December 31,
                                                                             2002              2001
                                                                          (unaudited)
                                                                       ------------------------------------
<S>                                                                      <C>              <C>
Assets
Current assets:
   Cash and cash equivalents                                             $      11,931    $      14,868
   Restricted cash                                                                   -              147
   Short-term investments, available-for-sale                                       53               59
   Accounts receivable, net of allowance for doubtful accounts of $709
     and $715 at March 31, 2002 and December 31, 2001, respectively              7,950            7,572
   Contract work in progress                                                       159              310
   Other current assets                                                            547              328
                                                                       ------------------------------------
Total current assets                                                            20,640           23,284

Equipment, furniture and fixtures, net                                             923              970
Other assets                                                                       139              130
                                                                       ------------------------------------
Total Assets                                                             $      21,702    $      24,384
                                                                       ====================================

Liabilities and Stockholders' Equity
Current liabilities:

   Trade accounts payable and other accrued liabilities                  $       2,012    $       2,933
   Accrued salaries and benefits                                                 2,181            3,254
   Deferred revenue                                                                409              585
   Current portion of severance payable                                            140              193
                                                                       ------------------------------------
Total current liabilities                                                        4,742            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 March 31, 2002 and December
     31, 2001, with a liquidation preference of $14,154 and $13,912
     at March 31, 2002 and December 31, 2001                                         2                2
   Common stock, $.001 par value.  Authorized 50,000 shares; issued and
      outstanding 21,556 shares at March 31, 2002 and December 31, 2001             22               22
   Additional paid-in capital                                                   54,229           53,989
   Notes receivable from stockholders                                           (1,281)          (1,281)
   Deferred compensation                                                          (234)            (261)
   Accumulated other comprehensive loss                                            (78)             (72)
   Accumulated deficit                                                         (35,740)         (35,031)
                                                                       ------------------------------------
Total stockholders' equity                                                      16,920           17,368
                                                                       ------------------------------------
Total Liabilities and Stockholders' Equity                               $      21,702    $      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 March 31,
                                                                    2002             2001
                                                               -------------   -------------
<S>                                                            <C>             <C>
Revenues before reimbursements (net revenues)                   $   9,104       $   12,760
Out-of-pocket reimbursements                                          776              938
                                                               -------------   -------------
   Total revenues                                                   9,880           13,698

Cost of revenues before reimbursable expenses                       6,529           10,332
Out-of-pocket reimbursable expenses                                   776              938
                                                               -------------   -------------
   Total cost of revenues                                           7,305           11,270
                                                               -------------   -------------
Gross profit                                                        2,575            2,428

Operating expenses:
   Sales and marketing                                              1,134              928
   General and administrative                                       1,970            2,005
                                                               -------------   -------------
                                                                    3,104            2,933
                                                               -------------   -------------
Loss from operations                                                 (529)            (505)
Other income, net                                                      62               78
                                                               -------------   -------------
Net loss                                                             (467)            (427)

Accrued dividends on preferred stock                                 (242)            (195)
                                                               -------------   -------------
Net loss available to common stockholders                       $    (709)      $     (622)
                                                               =============   =============

Basic and diluted net loss per share                            $   (0.04)      $    (0.03)
                                                               =============   =============

Shares used in computing basic and diluted net loss per share      18,498           17,831
                                                               =============   =============
</TABLE>

          See accompanying notes to the condensed financial statements.

________________________________________________________________________________

                                        3

<PAGE>

                               Daou Systems, Inc.
                       Condensed Statements of Cash Flows
                                 (In thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                               Three Months Ended March 31,
                                                                2002                  2001
                                                           ----------------     -----------------
<S>                                                        <C>                  <C>
Operating activities
Net loss                                                    $        (467)         $      (427)
Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
   Depreciation and amortization                                      228                  364
   Provision for uncollectible accounts                                43                  367
   (Gain) loss on retirement of fixed assets                          (10)                 315
  Changes in operating assets and liabilities:
   Restricted cash                                                    147                    -
   Accounts receivable                                               (421)                 344
   Contract work in process                                           151                 (267)
   Other current assets                                              (219)                 183
   Accounts payable and accrued liabilities                          (921)                (404)
   Accrued salaries and benefits                                   (1,073)                 (43)
   Other                                                             (242)                 (50)
                                                           ----------------     -----------------
Net cash (used in) provided by operating activities                (2,784)                 382

Investing activities
Purchases of equipment, furniture and fixtures, net                  (144)                 (76)
Changes in other assets                                                (9)                  47
                                                           ----------------     -----------------
Net cash used in investing activities                                (153)                 (29)

(Decrease) increase in cash and cash equivalents                   (2,937)                 353
Cash and cash equivalents at beginning of period                   14,868               10,504
                                                           ----------------     -----------------
Cash and cash equivalents at end of period                  $      11,931          $    10,857
                                                           ================     =================
</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 March 31, 2002 and for the three-month periods ended March 31,
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 March 31, 2002 and the results of operations for the three-month periods
ended March 31, 2002 and 2001. The results of operations for the three months
ended March 31, 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 months ended
March 31, 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)
<TABLE>
<CAPTION>
                                                                          Three Months Ended
                                                                              March 31,
                                                                          2002         2001
                                                                       ----------------------
        <S>                                                            <C>          <C>
        Numerator:
           Net loss available to common stockholders                    $   (709)   $   (622)
        Denominator:
           Weighted average common shares outstanding                     21,556      17,831
           Weighted average unvested common shares subject to
             repurchase agreements                                        (3,058)          -
                                                                       ----------------------
        Denominator for basic and diluted calculation                     18,498      17,831
                                                                       ======================
        Basic and diluted net loss per share                            $  (0.04)   $  (0.03)
                                                                       ======================
</TABLE>

5. 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 following table summarizes the restructuring and other related charges paid
in 2002 and remaining charges in accrued liabilities as of March 31, 2002.

<TABLE>
<CAPTION>
                                                                               Restructuring Charges
                                                               ------------------------------------------------------
                                                                Accrued as of     Paid in Three      Accrued as of
                                                                December 31,       Months Ended        March 31,
                                                                    2001          March 31, 2002          2002
                                                               ------------------------------------------------------
    <S>                                                        <C>                <C>                <C>
    Severance costs for involuntary employee terminations          $   151,000        $   52,000         $   99,000
    Costs related to closure and combination of facilities           1,161,000           755,000            406,000
                                                               ------------------------------------------------------
                                                                   $ 1,312,000        $  807,000         $  505,000
                                                               ======================================================
</TABLE>
________________________________________________________________________________

                                       6

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

6. 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.

(in thousands)
<TABLE>
<CAPTION>
                                                   Application      Technology
                                                     Services        Services
                                                     Division        Division         Total
                                              ------------------------------------------------
<S>                                                <C>              <C>             <C>
Three months ended March 31, 2002
---------------------------------
Revenues before reimbursements (net revenues)      $  4,399          $  4,705        $  9,104
Cost of revenues before reimbursable expenses         3,097             3,432           6,529
                                              -----------------------------------------------
Gross profit                                          1,302             1,273           2,575
Gross profit percent                                     30%               27%             28%

Sales and marketing                                                                     1,134
General and administrative                                                              1,970
                                                                                   ----------
Loss from operations                                                                 $   (529)
                                                                                   ==========
Three months ended March 31, 2001
---------------------------------
Revenues before reimbursements (net revenues)      $  4,605          $  8,155        $ 12,760
Cost of revenues before reimbursable expenses         3,383             6,949          10,332
                                              -----------------------------------------------
Gross profit                                          1,222             1,206           2,428
Gross profit percent                                     27%               15%             19%

Sales and marketing                                                                       928
General and administrative                                                              2,005
                                                                                   ----------
Loss from operations                                                                 $   (505)
                                                                                   ==========
</TABLE>
________________________________________________________________________________

                                       7

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

7. 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, which
was recorded in the second and third quarters of 2001.

8. 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 no later than May 16, 2002. If they fail to do so in the time
allotted, the Court will dismiss the case with prejudice without further notice
to the parties. 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. While the Company has been served, proper service has not been
effected upon the balance of the defendants. On April 24, 2002 the Company filed
a Motion to Dismiss the First Amended Complaint. The Court has scheduled a
hearing on such motion for May 24, 2002.

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.

________________________________________________________________________________

                                        8

<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.

________________________________________________________________________________

                                       9

<PAGE>

          Technology Services Division ("TSD") - provides services focused on
          two vital components of a healthcare organization's infrastructure:
          the information technology itself and the experts 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 outsourcing services
                         including co-source or outsource of call centers, help
                         desks, desktop support, server management, network
                         management, voice management and complete IT department
                         outsourcing.

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.

Cost of revenues consist of primarily 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
________________________________________________________________________________

                                       10

<PAGE>

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
and research 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 for the Three Months Ended March 31, 2002 and 2001

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

<TABLE>
<CAPTION>

                                                           Three Months Ended March 31,
                                                              2002              2001
                                                         ----------------------------------
         <S>                                             <C>              <C>
         Revenues before reimbursements (net revenues)        100%              100%
         Cost of revenues before reimbursable expenses         72                81
                                                         ---------------- -----------------
         Gross profit                                          28                19
         Operating expenses:                                   34                23
                                                         ---------------- -----------------
         Loss from operations                                  (6)               (4)
         Other income, net                                      1                 1
                                                         ---------------- -----------------
         Net loss                                              (5)%              (3)%
                                                         ================ =================
</TABLE>

The Company's net revenues decreased 29% or $3.7 million to $9.1 million for the
three months ended March 31, 2002 from $12.8 million for the three months ended
March 31, 2001. The decrease is primarily due to the previously announced
termination by the Company of certain large outsourcing contracts, its decision
to exit lines of business that were not profitable, and a softened demand for
temporary staffing services, offset by higher revenues from the Company's
managed care applications business. 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 $2.3
million for the three months ended March 31, 2001.

Services to the Company's five largest customers accounted for $3.1 million of
net revenues for the three months ended March 31, 2002, representing 34% of
total net revenues, with one customer in the DTC business group accounting for
9.8% of total net revenues. This compares to net revenues from the five largest
customers for the three months ended March 31, 2001 totaling $4.8 million, or
38% of total net revenues.

Cost of revenues before reimbursable expenses decreased 37%, or $3.8 million, to
$6.5 million for the three months ended March 31, 2002 from $10.3 million for
the three months ended March 31, 2001 primarily due to the 29% decrease in net
revenues and the Company's efforts to reduce headcount and other costs of
revenues to maximize productivity at the current revenue levels. At March 31,
2002, the Company had approximately 235 employees, compared with approximately
272 employees at March 31, 2001.

Gross margin increased to 28% for the three months ended March 31, 2002 compared
to 19% for the three months ended March 31, 2001. This increase is primarily
attributable to the above-referenced efforts to eliminate underperforming lines
of businesses, and a reduction of costs and more effective management of the
Company's workforce, resulting in higher utilization rates primarily in its
managed care applications and infrastructure services businesses.
________________________________________________________________________________

                                        11

<PAGE>

First quarter 2002 operating results reflect a higher level of sales and
maketing expenses in suport of the Company's goal of rebuilding its presence in
the healthcare IT market and increasing future revenues. During the first
quarter 2002, sales and marketing expenses increased 22%, or $200,000, to $1.1
million from $900,000 for the three months ended March 31, 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 remained relatively flat at $2.0 million for
each of the three months ended March 31, 2002 and 2001. General and
administrative expenses for the first quarter 2002 included certain one-time,
non-recurring expenses related to the relocation of the Company's corporate
offices and other employment related matters.

Other income, net, was $62,000 and $78,000 for the three months ended March 31,
2002 and 2001, respectively. Other income is primarily interest income on cash
and cash equivalents and short-term investments.

Liquidity and Capital Resources

On March 31, 2002, the Company had working capital of $15.9 million, a decrease
of $400,000 from $16.3 million on December 31, 2001. For the three months ended
March 31, 2002, cash used in operating activities was $2.8 million compared to
cash provided by operating activities of $400,000 for the three months ended
March 31, 2001. The use of cash during the quarter is primarily due to a
reduction of current liabilities, and includes approximately $1,350,000 of
previously recorded restructuring liabilities and other items paid primarily
related to the Company's relocation of its corporate headquarters from San
Diego, California to Exton, Pennsylvania. Days Sales Outstanding were 83 for the
quarter compared with 89 in the fourth quarter of 2001 and 88 in the first
quarter of 2001.

Net cash used in investing activities was $153,000 for the three months ended
March 31, 2002, compared to net cash used in investing activities of $29,000 for
the three months ended March 31, 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.

The Company did not have any financing activities for the three months ended
March 31, 2002 and 2001.

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.

The Company expects to spend approximately $5.0 million to $7.0 million during
2002 on increased marketing and sales activities and capital expenditures. The
Company intends to fund these expenditures from cash on hand. There is no
assurance that these expenditures will result in increased sales or additional
revenues.

Although the Company has an accumulated deficit as of March 31, 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
________________________________________________________________________________
                                       12

<PAGE>

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.

________________________________________________________________________________

                                       13

<PAGE>

PART II OTHER INFORMATION

Item 1. Legal Proceedings

                     IN RE DAOU SYSTEMS SECRITIES 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 (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 this 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 plantiffs the opportunity to file a third amended
complaint no later than May 16, 2002. If they fail to do so in the time
allotted, the Court will dismiss the case with prejudice without further notice
to the parties. 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 indemnification and severence 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. While the Company has been served, proper
service has not been effected upon the balance of the defendants. On April 24,
2002 the Company filed a Motion to Dismiss the First Amended Complaint. The
Court has scheduled a hearing on such motion for May 24, 2002.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

     Exhibit No.             Description
     ----------              -----------
     None

(b)  Current Reports on Form 8-K. The Registrant did not file any Current
     Reports on Form 8-K with the Commission during the quarter ended March 31,
     2002.

________________________________________________________________________________

                                       14

<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:  May 15, 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

________________________________________________________________________________

                                       15