<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

 /X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

                For the quarterly period ended September 30, 2001

                                       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)

                               5120 Shoreham Place
                           San Diego, California 92122
               (Address of Principal Executive Offices) (Zip Code)

                                 (858) 452-2221
              (Registrant's Telephone Number, Including Area Code)

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

The number of shares of registrant's Common Stock, par value $.001 per share,
outstanding as of November 8, 2001: 21,293,164

<PAGE>


                               DAOU SYSTEMS, INC.

                               Index to Form 10-Q

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

<C>        <S>                                                                                 <C>
Item 1.    Condensed Financial Statements                                                          2

           Condensed Balance Sheets at September 30, 2001 (unaudited) and December 31, 2000        2

           Condensed Statements of Operations (unaudited) for the Three Months and Nine
           Months Ended September 30, 2001 and 2000                                                3

           Condensed Statements of Cash Flows (unaudited) for the Nine Months Ended
           September 30, 2001 and 2000                                                             4

           Notes to Condensed Financial Statements                                                 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                              14

PART II.   OTHER INFORMATION

Item 1.    Legal Proceedings                                                                      15

Item 2.    Changes In Securities and Use of Proceeds                                              15

Item 6.    Exhibits and Reports on Form 8-K                                                       15

           SIGNATURES                                                                             16
</TABLE>

--------------------------------------------------------------------------------
                                        1

<PAGE>

PART I.    FINANCIAL INFORMATION

Item 1.    Condensed Financial Statements

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

<TABLE>
<CAPTION>

                                                                         September 30,     December 31,

                                                                             2001              2000
                                                                       ------------------------------------
                                                                          (unaudited)
<S>                                                                      <C>            <C>
Assets
Current assets:
   Cash and cash equivalents                                               $ 13,787          $ 10,504
   Short-term investments, available-for-sale                                    77                82
   Accounts receivable, net of allowance for doubtful accounts of
    $808 and $1,138 at September 30, 2001 and December 31, 2000,
    respectively                                                              7,725            11,900
   Contract work in progress                                                    429             1,060
   Other current assets                                                         500               558
                                                                           --------          --------
Total current assets                                                         22,518            24,104

Equipment, furniture and fixtures, net                                        1,354             2,565
Other assets                                                                     69               163
                                                                           --------          --------
Total Assets                                                               $ 23,941          $ 26,832
                                                                           ========          ========

Liabilities and Stockholders' Equity
Current liabilities:
   Trade accounts payable and other accrued liabilities                    $  1,764          $  3,286
   Accrued salaries and benefits                                              2,925             2,273
   Deferred revenue                                                             672               397
   Current portion of severance payable                                         210               210
                                                                           --------          --------
Total current liabilities                                                     5,571             6,166

Long-term liabilities                                                           156               306

Commitments and contingencies

Stockholders' equity:
   Convertible preferred stock, $.001 par value.  Authorized 3,520
    shares; issued and outstanding 2,182 shares at September 30, 2001
    and December 31, 2000                                                         2                 2
   Common stock, $.001 par value.  Authorized shares 50,000 shares;
    issued and outstanding 21,293 shares at September 30, 2001 and
    17,831 shares at December 31, 2000                                           23                18
   Additional paid-in capital                                                53,399            51,614
   Notes receivable from stockholders                                        (1,282)             --
   Accumulated other comprehensive income                                       (54)              (49)
   Accumulated deficit                                                      (33,874)          (31,225)
                                                                           --------          --------
Total stockholders' equity                                                   18,214            20,360
                                                                           --------          --------
Total Liabilities and Stockholders' Equity                                 $ 23,941          $ 26,832
                                                                           ========          ========
</TABLE>

          See accompanying notes to the condensed financial statements.



--------------------------------------------------------------------------------
                                        2

<PAGE>

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

<TABLE>
<CAPTION>
                                                      Three Months Ended September 30,           Nine Months Ended September 30,
                                                        2001                     2000              2001                    2000
                                                      --------                 --------          --------               --------
<S>                                                   <C>                      <C>               <C>                    <C>
Revenues                                              $  9,129                 $ 15,341          $ 32,010               $ 49,043
Cost of revenues                                         7,051                   13,259            23,665                 42,260
                                                      --------                 --------          --------               --------
Gross profit                                             2,078                    2,082             8,345                  6,783

Operating expenses:
Sales and marketing                                        725                    1,390             2,375                  4,831
General and administrative                               2,235                    4,791             8,348                 13,433
Restructuring charges                                        -                        -                 -                    827
                                                      --------                 --------          --------               --------
                                                         2,960                    6,181            10,723                 19,091
                                                      --------                 --------          --------               --------

Loss from operations                                      (882)                  (4,099)           (2,378)               (12,308)
Other income, net                                          162                      184               426                    517
                                                      --------                 --------          --------               --------

Loss before income taxes                                  (720)                  (3,915)           (1,952)               (11,791)
Provision for income taxes                                  19                        -                80                      -
                                                      --------                 --------          --------               --------
Net loss                                                  (739)                  (3,915)           (2,032)               (11,791)

Accrued dividends on preferred stock                      (226)                    (189)             (618)                  (558)
                                                      --------                 --------          --------               --------
Net loss available to common stockholders             $   (965)                $ (4,104)         $ (2,650)              $(12,349)
                                                      ========                 ========          ========               ========

Basic and diluted net loss available to common
stockholders per common share                         $  (0.06)                $  (0.23)         $  (0.15)              $  (0.70)
                                                      ========                 ========          ========               ========

Shares used in computing basic and diluted net loss
available to common stockholders per common share       17,372                   17,713            17,465                 17,712
                                                      ========                 ========          ========               ========
</TABLE>

          See accompanying notes to the condensed financial statements.


--------------------------------------------------------------------------------
                                        3

<PAGE>

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

<TABLE>
<CAPTION>
                                                             Nine Months Ended September 30,
                                                                2001                 2000
                                                              -------             ---------
<S>                                                           <C>                  <C>
Operating Activities
Net loss                                                      $(2,032)            $(11,791)
Adjustments to reconcile net loss to net cash provided
   by (used in) operating activities:
   Depreciation and amortization                                1,038                1,898
   Stock based compensation                                        35                    -
   Provision for uncollectible accounts                           447                  197
   Loss on retirement of fixed assets                             350                    -
   Changes in operating assets and liabilities:
        Accounts receivable                                     3,728                8,324
        Contract work in process                                  631                2,493
        Other current assets                                       58                 (713)
        Accounts payable and accrued liabilities               (1,522)              (2,468)
        Accrued salaries and benefits                             652                 (729)
        Deferred revenue                                          275                    -
        Other long term liabilities                              (150)                  (5)
                                                              -------             --------
Net cash provided by (used in) operating activities             3,510               (2,794)

Investing Activities:
Purchases of equipment, furniture and fixtures, net              (177)                (893)
Purchases of short-term investments                                 -                  (20)
Changes in other assets                                            94                  262
                                                              -------             --------
Net cash used in investing activities                             (83)                (651)

Financing Activities:
Repayments of long-term debt and line of credit                     -                    -
Proceeds from issuance of common stock                             54                    1
Purchase of treasury stock                                       (198)                   -
                                                              -------             --------
Net cash (used in) provided by financing activities              (144)                   1
                                                              -------             --------

Increase (decrease) in cash and cash equivalents                3,283               (3,444)
Cash and cash equivalents at beginning of period               10,504               15,480
                                                              -------             --------
Cash and cash equivalents at end of period                    $13,787               12,036
                                                              =======             ========

Supplemental Disclosure of Non-cash Activities:
Common stock issued for services                              $    25             $      -
                                                              =======             ========
Unrealized (gain) loss on investments                         $     5             $    (13)
                                                              =======             ========
Common stock and options issued for settlement                $    10             $      -
                                                              =======             ========
Common stock issuable for notes receivable from
   stockholder                                                $ 1,204             $      -
                                                              =======             ========
Accrued preferred stock dividends                             $   618             $    558
                                                              =======             ========
</TABLE>

          See accompanying notes to the condensed financial statements.



--------------------------------------------------------------------------------
                                        4

<PAGE>

                               DAOU SYSTEMS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation

The unaudited condensed financial statements of DAOU Systems, Inc. ("DAOU" or
the "Company") at September 30, 2001 and for the three and nine-month periods
ended September 30, 2001 and 2000 have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information. Accordingly, they do not include all information and
footnotes required by accounting principles generally accepted in the United
States 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 September 30, 2001 and the results of operations for the three
and nine-month periods ended September 30, 2001 and 2000. The results of
operations for the three and nine-months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2001. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
revenues, expenses and net income or losses will continue.

The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financials should be read in conjunction with the audited
financial statements and the related notes thereto contained in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC") on March 30, 2001.

The Company has two operating divisions: Application Services and Technology
Services. The Application Services division provides clients with strategic
consulting, software implementation, project management, and support services,
including staff augmentation. The Technology Services division provides clients
with solutions in key areas, including network infrastructure (servers, data and
voice networks, and security), web development and integration projects, help
desk solutions (remote or on-site) and network management.

Certain of the 2000 amounts have been reclassified to conform to the current
presentation.

2. 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.

3. 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 nine months
ended September 30, 2001 and 2000, diluted loss per share is unchanged from
basic loss per share because the effects of the assumed conversion of stock
options and warrants would be anti-dilutive.


--------------------------------------------------------------------------------
                                        5

<PAGE>

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

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

<TABLE>
<CAPTION>

                                                       Three Months Ended     Nine Months Ended
                                                          September 30,         September 30,
                                                          2001     2000        2001       2000
                                                       --------  --------    -------   ---------
<S>                                                     <C>      <C>         <C>      <C>
Numerator:
   Net loss available to common stockholders           $  (965)  $ (4,104)   $(2,650)  $(12,349)

Denominator:
   Weighted average common shares outstanding           21,293     17,713     19,249     17,712
   Weighted average unvested common shares subject to
     repurchase agreements                              (3,921)         -     (1,784)         -
                                                       -------   --------    -------   --------
Denominator for diluted basic and diluted calculation   17,372     17,713     17,465     17,712
                                                       =======   ========    =======   ========

Basic and diluted net loss per share                   $ (0.06)  $  (0.23)   $ (0.15)  $  (0.70)
                                                       =======   ========    =======   ========
</TABLE>

4. Comprehensive Loss

Comprehensive loss for the three months ended September 30, 2001 and 2000
totaled $(965,000) and $(4,104,000), respectively. Comprehensive loss for the
nine months ended September 30, 2001 and 2000 totaled $(2,650,000) and
$(12,349,000), respectively. The difference from reported net loss arises from
the unrealized gains and losses on short-term investments.

5. Stockholders Equity

Treasury Stock

On April 25, 2001, the Company re-purchased 992,111 shares of the Company's
common stock from the former Chairman of the Board of the Company at a price
equal to $.20 per share for a total purchase price of $198,000. The Company
holds these shares in treasury as of September 30, 2001.

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. Employees pay the
lower of 85% of the fair market value of the common stock at the beginning of
the measurement period or 85% of the fair market value of the common stock at
the end of the measurement period. On June 30, 2001, the Company recorded the
issuance of 205,714 shares of common stock under the ESPP with proceeds of
$55,000. On September 30, 2001, 1,176,061 shares remained reserved for issuance
under the ESPP.

6. Related Party Transactions

On July 24, 2001, the Company agreed to sell 150,000 shares of restricted common
stock at the July 24, 2001 closing price of $.52 per share to Mr. Dan Malcolm of
the Company in exchange for a full-recourse note receivable that accrues
interest at a rate of 6.75% due on July 23, 2006.

On June 1, 2001, the Company agreed to sell 1,500,000, 150,000 and 2,500,000
shares of restricted common stock at the June 1, 2001 closing price of $.29 per
share to Messers. James T. Roberto, Neil R. Cassidy and Vincent K. Roach,
respectively, of the Company in exchange for full-recourse notes receivable that
accrue interest at a rate of 6.75% and which are due on May 31, 2006. As part of
the agreement, 1,710,000 options to purchase common stock previously granted to
these executive officers were cancelled.

7. Series A Preferred Stock

Holders of the Series A Preferred Stock are entitled to receive cumulative
dividends payable in the form of shares of


--------------------------------------------------------------------------------
                                        6

<PAGE>

Series A Preferred Stock. The dividends accrued at a rate of six percent per
annum for the first two years. On July 26, 2001, the dividend rate increased to
seven percent per annum. The dividend rate increases by one percent each
successive year after the second anniversary. As of September 30, 2001, the
Company has accrued but undeclared preferred stock dividends of $1,675,215,
which are payable in shares of Series A Preferred Stock.

8.  Restructuring Plan

The Company recorded restructuring charges in 2000, totaling $2,133,000 in
connection with its restructuring plans. Such charges were determined in
accordance with Staff Accounting Bulletin No. 100, RESTRUCTURING AND IMPAIRMENT
CHARGES, and Emerging Issues Task Force No. 94-3, LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING).

The following table summarizes the restructuring and other related charges paid
in 2001 and remaining charges in accrued liabilities as of September 30, 2001.

<TABLE>
<CAPTION>

                                                                              Restructuring Charges
                                                              ------------------------------------------------------
                                                                Accrued as of     Paid in Nine       Accrued as of
                                                                 December 31,     Months Ended       September 30,
                                                                     2000       September 30, 2001       2001
                                                              ---------------- ------------------- -----------------
<S>                                                            <C>             <C>                 <C>
Severance costs for involuntary employee terminations             $   388,000       $  388,000          $        -

Costs related to closure and combination of facilities                918,000          553,000             365,000
                                                              ---------------- ------------------- -----------------
                                                                  $ 1,306,000       $  941,000          $  365,000
                                                              ================ =================== =================
</TABLE>

9.  Disclosure of Segment Information

For the three and nine months ended September 30, 2001, the Company has the
following two reportable segments: Application Services division and Technology
Services division.

Application Services - provides clients with strategic consulting, software
implementation, project management, and support services, including staff
augmentation.

Technology Services - provides clients with solutions in key areas, including
network infrastructure, application development and integration projects, help
desk solutions and network management.

The Company manages segment reporting at a gross margin level. Certain selling,
general and administrative expenses, and fixed 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.

Segment disclosures for the three and nine months ended September 30, 2000 were
restated to correspond to the 2001 reportable segment disclosures for
comparative purposes.

<TABLE>
<CAPTION>

                                                             Technology        Application
                                                              Services          Services            Total
                                                         ----------------- ------------------ -----------------
<S>                                                      <C>               <C>                <C>
Three months ended September 30, 2001
-------------------------------------
Total revenues                                           $      5,064      $      4,065       $        9,129
Cost of services                                                3,657             3,394                7,051
                                                         ----------------- ------------------ -----------------
Gross profit                                                    1,407               671                2,078
Gross profit percent                                               28%               17%                  23%

Sales and marketing                                                                                      725
General and administrative                                                                             2,235
Restructuring charges                                                                                      -
                                                                                              -----------------
Loss from operations                                                                          $         (882)
                                                                                              =================
</TABLE>

                                       7

<PAGE>
<TABLE>

<S>                                                      <C>               <C>                <C>
Three months ended September 30, 2000
-------------------------------------
Total revenues                                           $      9,628      $      5,713       $      15,341
Cost of services                                                8,469             4,790              13,259
                                                         ----------------- ------------------ -----------------
Gross profit                                                    1,159               923               2,082
Gross profit percent                                               12%               16%                 14%

Sales and marketing                                                                                   1,390
General and administrative                                                                            4,791
Restructuring charges                                                                                     -
                                                                                              -----------------
Loss from operations                                                                          $      (4,099)
                                                                                              =================

                                                            Technology        Application
                                                             Services          Services            Total

Nine months ended September 30, 2001
------------------------------------
Total revenues                                           $     18,994       $    13,016       $      32,010
Cost of services                                               13,860             9,805              23,665
                                                         ----------------- ------------------ -----------------
Gross profit                                                    5,134             3,211               8,345
Gross profit percent                                               27%               25%                 26%

Sales and marketing                                                                                   2,375
General and administrative                                                                            8,348
Restructuring charges                                                                                     -
                                                                                              -----------------
Loss from operations                                                                          $      (2,378)
                                                                                              =================


Nine months ended September 30, 2000
------------------------------------
Total revenues                                           $     32,032      $     17,011        $     49,043
Cost of services                                               27,772            14,488              42,260
                                                         ----------------- ------------------ -----------------
Gross profit                                                    4,260             2,523               6,783
Gross profit percent                                               13%               15%                 14%

Sales and marketing                                                                                   4,831
General and administrative                                                                           13,433
Restructuring charges                                                                                   827
                                                                                              -----------------
Loss from operations                                                                          $     (12,308)
                                                                                              =================
</TABLE>

10.  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. For the
three months ended September 30, 2001 the Company recorded the remaining
$257,000 of the transition fee as revenue.

11.  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 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. They
filed an amended consolidated complaint on February 24, 1999 and a second
amended consolidated 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.
These complaints were brought on behalf of a purported class of investors in the
Company's Common Stock and do not allege specific damage amounts. In addition,
on October 7, 1998 and October 15, 1998, separate complaints were filed in the
Superior Court of San

                                        8

<PAGE>

Diego, California. These additional complaints mirror the allegations set forth
in the federal complaints and assert common law fraud and the violation of
certain California statutes. By stipulation of the parties, the state court
litigation has been stayed pending the resolution of a motion to dismiss, which
was filed on February 22, 2000 in the federal litigation. That motion was heard
on February 20, 2001 and the court took the matter under submission. 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.

                                        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 and
10-K/A-1 for the year ended December 31, 2000 on file with the SEC, and in the
Company's Proxy Statement Schedule 14A Information filed with the SEC on May 14,
2001. 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 Events

On June 1, 2001, the Company agreed to sell 1,500,000, 150,000 and 2,500,000
shares of restricted common stock at the June 1, 2001 closing price of $.29 per
share to Messers. James T. Roberto, Neil R. Cassidy and Vincent K. Roach,
respectively, of the Company in exchange for full-recourse notes receivable that
accrue interest at a rate of 6.75% and which are due on May 31, 2006. As part of
the agreement, 1,710,000 options to purchase common stock previously granted to
these executive officers were cancelled.

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. For the
three months ended September 30, 2001 the Company recorded the remaining
$257,000 of the transition fee as revenue.

On April 24, 2001, the Company received notice from The Nasdaq Stock Market that
the Company's common stock would be traded and quoted on the OTC Bulletin Board
("OTC"), under the symbol DAOU, effective immediately. The Company's common
stock previously had been quoted on The Nasdaq National Market, but the Company
was no longer in compliance with the $1 minimum bid price requirement for
continued listing.

Overview

DAOU is one of the top 50 healthcare information technology (IT) companies in
the United States. DAOU's services include applications consulting and
implementation, traditional network services, remote help desk and related
technology support services, and integrates legacy systems with emerging
technologies, such as wireless and other portable computing solutions for the
U.S. healthcare industry. The Company's service offerings are segmented into two
divisions: Application Services and Technology Services.

Application Services - provides clients with strategic consulting, software
implementation, project management and support services, including staff
augmentation.

Technology Services - provides clients with solutions in key areas, including
network infrastructure, application development and integration projects, help
desk solutions and network management.

The Company provides its professional services primarily on a "time and expense"
basis, under which revenues are generally recognized as services are performed.
Billings for these services occur on a semi-monthly or monthly basis. The
Company also provides support and management services, for which revenues are
recognized ratably

                                       10

<PAGE>

over the period that these services are provided. 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 provided by the Company.

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.

Results of Operations

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                   Nine Months Ended
                                                         September 30,                       September 30,
                                               ----------------------------------  ---------------------------------
                                                     2001            2000                2001             2000
                                               --------------- ------------------  ----------------- ---------------
<S>                                            <C>             <C>                 <C>               <C>
Revenues                                             100%            100%                100%             100%
Cost of revenues                                      77              86                  74               86
                                               --------------- ------------------  ----------------- ---------------
Gross profit                                          23              14                  26               14
Selling, general and administrative expenses          33              41                  33               37
Restructuring charges                                  -               -                   -                2
                                               --------------- ------------------  ----------------- ---------------
Loss from operations                                 (10)            (27)                 (7)             (25)
Other income, net                                      2               1                   1                1
                                               --------------- ------------------  ----------------- ---------------
Loss before income taxes                              (8)            (26)                 (6)             (24)
Provision for income taxes                             -               -                   -                -
                                               --------------- ------------------  ----------------- ---------------
Net Loss                                              (8)            (26)                 (6)             (24)
                                               =============== ==================  ================= ===============

</TABLE>

Three Months Ended September 30, 2001 and 2000

The Company's revenues decreased 40% or $6.2 million to $9.1 million for the
three months ended September 30, 2001 from $15.3 million for the three months
ended September 30, 2000, primarily due to the termination of a large
outsourcing contract. The Company also experienced a significant decrease in
revenue from a decline in the applications implementation services in the
provider segment and the termination of another large unprofitable outsourcing
contract in the Technology Services division in the third quarter of 2000. In
addition, the Company eliminated certain underperforming service lines in the
Technology Services division.

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. Revenues
related to this contract were $257,000 and $2.5 million for the three months
ended September 30, 2001 and 2000, respectively.

Services to DAOU's five largest customers accounted for 35% or $3.2 million of
total revenues for the three months ended September 30, 2001.

Cost of revenues decreased 47% or $6.2 million to $7.1 million for the three
months ended September 30, 2001 from $13.3 million for the three months ended
September 30, 2000, primarily as a result of reductions in personnel and
material costs in line with the decrease in revenues, the termination of the
Company's largest outsourcing contract in the first quarter of 2001 and the
termination of unprofitable contracts in 2000. The Company further

                                       11

<PAGE>

reduced the number of employees during the first quarter of 2001 in connection
with its restructuring plan. Total employees as of September 30, 2001 were 243
compared to 492 as of September 30, 2000. Gross profit as a percentage of
revenues increased to 23% for the three months ended September 30, 2001 compared
to 14% for the three months ended September 30, 2000, primarily due to an
increase in billable utilization and the termination of certain unprofitable
service lines.

Sales and marketing expenses decreased 48% or $665,000 to $725,000 for the
three months ended September 30, 2001 from $1.4 million for the three months
ended September 30, 2000, primarily due to a restructuring of the Company's
national sales force and a reduction in marketing expenses related to the
Company's merger of its Enosus operating subsidiary with the Technology Services
division in January 2001. Sales and marketing expenses represented approximately
8% and 9% of total revenues for the three months ended September 30, 2001 and
2000, respectively.

General and administrative expenses decreased 53% or $2.6 million to $2.2
million for the three months ended September 30, 2001 from $4.8 million for the
three months ended September 30, 2000, primarily due to a reduction in corporate
and subsidiary personnel and related overhead expenses. The Company reduced the
on-going general and administrative costs from the same period in 2000,
primarily as a result of synergies related to the integration of acquired
companies, the closure of certain administrative offices, a reduction in
administrative staff and other cost control measures. General and administrative
expenses represented approximately 24% and 31% of total revenues for the three
months ended September 30, 2001 and 2000, respectively.

Other income, net, was $162,000 and $184,000 for the three months ended
September 30, 2001 and 2000, respectively. Other income is primarily interest
income on cash and cash equivalents and short-term investments.

Provision for income taxes was $19,000 for the three months ended September 30,
2001 due to various states income taxes. The provision for income taxes is based
on the Company's effective tax rate. Due to the Company's operating loss and the
loss carry forwards, no provision for taxes was recorded for the three months
ended September 30, 2000. The Company has fully reserved for the net deferred
tax assets resulting from previously recorded tax benefits.

Nine Months Ended September 30, 2001 and 2000

The Company's revenues decreased 35% or $17.0 million to $32.0 million for
the nine months ended September 30, 2001 from $49.0 million for the nine months
ended September 30, 2000, primarily due to a decrease in revenue from the
application implementation services in the provider segment and the termination
of a large outsourcing contract. In addition, the Company terminated two large
unprofitable outsourcing contracts in the Technology Services division in the
second and third quarters of 2000 and eliminated certain underperforming service
lines.

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. The
Company recorded the transition fee as revenue over the second and third
quarters of 2001. Revenues related to this contract were $2.9 million and $7.4
million for the nine months ended September 30, 2001 and 2000, respectively.

Services to DAOU's five largest customers accounted for 33% or $10.8 million of
total revenues for the nine months ended September 30, 2001.

Cost of revenues decreased 44% or $18.6 million to $23.7 million for the nine
months ended September 30, 2001 from $42.3 million for the nine months ended
September 30, 2000, primarily as a result of reductions in personnel and
material costs in line with the decrease in revenues, the termination of the
Company's largest outsourcing contract in the first quarter of 2001, and the
termination of unprofitable contracts in 2000. The Company further reduced the
number of employees in the first quarter of 2001 in connection with its
restructuring plan. Total employees as of September 30, 2001 were 243 compared
to 492 as of September 30, 2000. Gross profit as a percentage of revenues
increased to 26% for the nine months ended September 30, 2001 compared to 14%
for the nine months ended September 30, 2000, primarily due to an increase in
billable utilization and the termination of

                                       12

<PAGE>

certain unprofitable service lines.

Sales and marketing expenses decreased 50% or $2.4 million to $2.4 million
for the nine months ended September 30, 2001 from $4.8 million for the nine
months ended September 30, 2000, primarily due to a restructuring of the
Company's national sales force and a reduction in marketing expenses related to
the Company's merger of its Enosus operating subsidiary with the Technology
Services division in January 2001. Sales and marketing expenses represented
approximately 7% and 10% of total revenues for the nine months ended September
30, 2001 and 2000, respectively.

General and administrative expenses decreased 38% or $5.1 million to $8.3
million for the nine months ended September 30, 2001 from $13.4 million for the
nine months ended September 30, 2000, primarily due to a reduction in corporate
and subsidiary personnel and related overhead expenses. The Company reduced the
on-going general and administrative costs from the same period in 2000,
primarily as a result of synergies related to the integration of acquired
companies, the closure of certain administrative offices, a reduction in
administrative staff and other cost saving measures. General and administrative
expenses represented approximately 26% and 27% of total revenues for the nine
months ended September 30, 2001 and 2000, respectively.

Other income, net, was $426,000 and $517,000 for the nine months ended September
30, 2001 and 2000, respectively. Other income is primarily interest income on
cash and cash equivalents and short-term investments.

Provision for income taxes was $80,000 for the nine months ended September 30,
2001 due to various states' income taxes. The provision for income taxes is
based on the Company's effective tax rate. Due to the Company's operating loss
and the loss carryforwards, no provision for taxes was recorded for the nine
months ended September 30, 2000. The Company has fully reserved for the net
deferred tax assets resulting from previously recorded tax benefits.

Liquidity and Capital Resources

On September 30, 2001, the Company had working capital of $16.9 million, a
decrease of $1.0 million from $17.9 million on December 31, 2000. For the nine
months ended September 30, 2001, cash provided by operating activities was $3.5
million compared to cash used in operating activities of $2.8 million for the
nine months ended September 30, 2000. The increase resulted primarily from
reduced operating expenses and increased gross margin. In addition, the Company
has experienced further declines in the accounts receivable and contract work in
progress balances which also contributed to the positive cash flow from
operating activities.

Net cash used in investing activities was $83,000 for the nine months ended
September 30, 2001, compared to net cash used in investing activities of
$651,000 in the comparable prior period, primarily due to fewer equipment
purchases.

On July 26, 1999, the Company issued 2,181,818 shares of Series A Preferred
Stock. Holders of the Series A Preferred Stock are entitled to receive
cumulative dividends payable in the form of shares of Series A Preferred Stock.
The dividends accrued at a rate of six percent per annum for the first two
years. On July 26, 2001, the dividend rate increased to seven percent per annum.
The dividend rate increases by one percent each successive year after the second
anniversary. As of September 30, 2001, the Company has accrued but undeclared
preferred stock dividends of $1,675,000, which are payable in shares of Series A
Preferred Stock.

On June 29, 2001, the Company's $8.0 million revolving line of credit expired.
No amounts were outstanding under this revolving line of credit as of June 29,
2001.

Although the Company has an accumulated deficit as of September 30, 2001, the
Company believes that its existing cash and short-term investments together with
anticipated cash from operating activities will be sufficient to meet its
capital requirements for the next twelve months. 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 terms acceptable to it, if at all.

                                       13

<PAGE>

Business Risks

In addition to the factors addressed in the preceding sections, certain dynamics
of the Company's markets and operations create fluctuations in the Company's
quarterly results. Uncertainty and cost containment in healthcare and
competitive conditions present 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 is exposed to changes in interest rates, primarily if it should
enter into variable-rate long-term debt arrangements and, to a lessor extent,
its investments in certain available-for-sale marketable securities. Under its
current policies, the Company does not use interest rate derivative instruments
to manage this exposure to interest rate changes. On June 29, 2001, the
Company's $8.0 million revolving line of credit expired. No amounts were
outstanding under this revolving line of credit as of June 29, 2001. A
hypothetical 1% adverse move in the interest rates along the entire interest
rate yield curve would not materially effect the fair value of the Company's
financial instruments that are exposed to changes in interest rates.

                                   14

<PAGE>

PART II OTHER INFORMATION

Item 1.   Legal Proceedings

On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998,
separate complaints were filed against the Company and certain of its officers
and directors in the United States District Court for the Southern District of
California. A group of shareholders has been appointed the lead plaintiffs. They
filed an amended consolidated complaint on February 24, 1999 and a second
amended consolidated 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.
These complaints were brought on behalf of a purported class of investors in the
Company's Common Stock and do not allege specific damage amounts. In addition,
on October 7, 1998 and October 15, 1998, separate complaints were filed in the
Superior Court of San Diego, California. These additional complaints mirror the
allegations set forth in the federal complaints and assert common law fraud and
the violation of certain California statutes. By stipulation of the parties, the
state court litigation has been stayed pending the resolution of a motion to
dismiss, which was filed on February 22, 2000 in the federal litigation. That
motion was heard on February 20, 2001 and the court took the matter under
submission. The Company believes that the allegations set forth in all of the
foregoing complaints are without merit and intends to defend against these
allegations vigorously. No assurance as to the outcome of this matter can be
given, however, and an unfavorable resolution of this matter could have a
material adverse effect on the Company's business, results of operations and
financial condition.

Item 2.   Changes In Securities and Use of Proceeds

On July 24, 2001, the Company agreed to sell 150,000 shares of restricted
common stock at the July 24, 2001 closing price of $.52 per share to Mr. Dan
Malcolm of the Company in exchange for a full-recourse note receivable that
accrues interest at a rate of 6.75% due on July 23, 2006.

Item 6.   Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No.       Description

4.1      Restricted Stock Purchase Agreement, dated June 1, 2001, by and
         between the Company and Neil R. Cassidy

4.2      Registration Rights Agreement, dated June 1, 2001, by and between
         the Company and Neil R. Cassidy

4.3      Restricted Stock Purchase Agreement, dated June 1, 2001, by and
         between the Company and James T. Roberto

4.4      Registration Rights Agreement, dated June 1, 2001, by and between
         the Company and James T. Roberto

10.1     Amendment to Employment Agreement, dated June 1, 2001, by and between
         the Company and Neil R. Cassidy

10.2     Secured Promissory Note, dated June 1, 2001, by and between the
         Company and Neil R. Cassidy

10.3     Stock Pledge Agreement, dated June 1, 2001, by and between the Company
         and Neil R. Cassidy

10.4     Amendment to Employment Agreement, dated June 1, 2001, by and between
         the Company and James T. Roberto

10.5     Secured Promissory Note, dated June 1, 2001, by and between the
         Company and James T. Roberto

10.6     Stock Pledge Agreement, dated June 1, 2001, by and between the Company
         and James T. Roberto

----------
(b)  Current Reports on Form 8-K. The Registrant did not file any Current
     Reports on Form 8-K with the SEC during the quarter ended September 30,
     2001.

                                       15

<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:    November 8, 2001

                               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




                                       16

<PAGE>

Exhibit Index

4.1      Restricted Stock Purchase Agreement, dated June 1, 2001, by and
         between the Company and Neil R. Cassidy

4.2      Registration Rights Agreement, dated June 1, 2001, by and between the
         Company and Neil R. Cassidy

4.3      Restricted Stock Purchase Agreement, dated June 1, 2001, by and
         between the Company and James T. Roberto

4.4      Registration Rights Agreement, dated June 1, 2001, by and between the
         Company and James T. Roberto

10.1     Amendment to Employment Agreement, dated June 1, 2001, by and between
         the Company and Neil R. Cassidy

10.2     Secured Promissory Note, dated June 1, 2001, by and between the
         Company and Neil R. Cassidy

10.3     Stock Pledge Agreement, dated June 1, 2001, by and between the Company
         and Neil R. Cassidy

10.4     Amendment to Employment Agreement, dated June 1, 2001, by and between
         the Company and James T. Roberto

10.5     Secured Promissory Note, dated June 1, 2001, by and between the
         Company and James T. Roberto

10.6     Stock Pledge Agreement, dated June 1, 2001, by and between the Company
         and James T. Roberto


                                       17