8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): August 5, 2004

Daou Systems, Inc.

(Exact name of issuer as specified in charter)

DELAWARE	000-22073	33-0284454
(State or Other Jurisdiction of Incorporation or Organization)	(Commission File Number)	(I.R.S. Employer Identification Number)

412 Creamery Way, Suite 300

Exton, Pennsylvania 19341

(Address of principal executive offices)

(610) 594-2700

(Registrant’s telephone number, including area code)

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

(c) Exhibits

Exhibit No.	Description
99	Press release dated August 5, 2004, announcing financial results of Daou Systems, Inc. for the quarter ended June 30, 2004.

Item 12. Results of Operations and Financial Condition.

On August 5, 2004, Daou Systems, Inc. issued a press release announcing its financial results for the quarter ended June 30, 2004. A copy of the press release is attached as Exhibit 99 to this Form 8-K and is incorporated herein by reference.

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Signatures

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

	DAOU SYSTEMS, INC.
Date: August 5, 2004	By:
		John A. Roberts
		Chief Financial Officer

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Index to Exhibits

Exhibit No.	Description
99	Press release dated August 5, 2004, announcing financial results of Daou Systems, Inc. for the quarter ended June 30, 2004.

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EX-99

Exhibit 99

Contact:
Jay Roberts	Sandra Taylor, Ph.D.
Chief Financial Officer	Vice President of Marketing, Daou
610.594.2700	610.594.2700
ir@daou.com	sandra.taylor@daou.com

Daou Systems, Inc. Announces Second Quarter Financial Results

EXTON, Pa. — (August 5, 2004) — Daou Systems, Inc. (“Daou”) (OTCBB: DAOU) today reported financial results for the second quarter 2004. For the second quarter, Daou reported a net loss available to common stockholders of $1,323,000 or ($0.06) per basic and diluted share, on net revenue of $6,643,000. This compares to net income available to common stockholders of $556,000, or $0.03 per basic share and $0.02 per diluted share, on net revenue of $11,202,000 for the second quarter of 2003.

Daou’s net revenue decreased 41% or $4.6 million to $6.6 million for the three months ended June 30, 2004 from $11.2 million for the three months ended June 30, 2003. The decrease was primarily due to the discontinuation of support center management services, the completion of a large network upgrade project, the continued softness in the demand for new implementations of financial and administrative software solutions in the payer market, and the delays and resulting decline in activity with federal government health care.

Cost of revenue before reimbursable expenses decreased 31% or $2.2 million to $4.9 million for the three months ended June 30, 2004 from $7.1 million for the three months ended June 30, 2003. The decrease was attributable primarily to reductions in billable professionals as well as to a decrease in direct material costs of $0.7 million as a result of the completion of a large network upgrade project at the end of the first quarter 2004.

Gross margin was 26% in the second quarter of 2004, compared to 37% in the second quarter of 2003. Daou experienced lower margins on professional services related to infrastructure services, managed care system implementation services, and government healthcare integration services. Lower margins were attributable to downward pricing pressure for professional IT services and lower utilization of professional staff as a result of weakening trends in the demand for these services.

“We have experienced a continued downturn in revenue and earnings,” said Vincent K. Roach, newly named President and Chief Executive Officer, “and are actively considering further steps to offset these trends in revenue by improving our sales strategy to more effectively capture new opportunities and by aligning our expenses to fit the size of our business.” According to Roach, since being named to the CEO post only a few weeks ago, he is focused on assessing the current operational challenges faced by Daou, and developing a plan to improve earnings in the 2004 fiscal year.

Daou reported that management will not be holding an earnings conference call to discuss second quarter earnings results.

About Daou

Daou Systems, Inc. (OTCBB: DAOU) provides expert consulting and management services to healthcare organizations in the design, deployment and support of IT infrastructure and application systems. Daou offers a range of comprehensive services, from mobile health and web services strategies to application implementation and support; from government and commercial integration services to best practices in help desk, break/fix and desktop support. Daou has provided services to more than 1,600 healthcare organizations, including leading private and public hospitals, managed care organizations on both the payer and provider sides of the market, as well as integrated healthcare delivery networks and some of the nation’s largest government healthcare entities. Daou Systems, Inc. is a publicly traded company listed on the OTC Bulletin Board under the stock symbol DAOU.

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This press release 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. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of Daou Systems, Inc. You should not place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the word “estimate,” “anticipate,” “hope”, “believe,” “think”, “expect,” “intend”, “plan” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, you should carefully review various risks and uncertainties identified in this report, including the matters set forth under the captions “Risk Factors” and in Daou’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 Daou’s Form 10-K for the year ended December 31, 2003 on file with the SEC. These risks and uncertainties could cause Daou’s actual results to differ materially from those indicated in the forward-looking statements. We do not undertake any obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.

Daou Systems, Inc.

Statements of Operations

(In thousands, except for per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Revenue before reimbursements (net revenue)	$	6,643		$	11,202		$	15,481		$	22,419
Out-of-pocket reimbursements		595			915			1,304			1,845
Total revenue		7,238			12,117			16,785			24,264
Cost of revenue before reimbursable expenses		4,888			7,089			12,010			14,784
Out-of-pocket reimbursable expenses		595			915			1,304			1,845
Total cost of revenue		5,483			8,004			13,314			16,629
Gross profit		1,755			4,113			3,471			7,635
Operating expenses:
Sales and marketing		810			1,220			1,967			2,305
General and administrative		1,944			2,070			3,457			3,885
		2,754			3,290			5,424			6,190
Loss (income) from operations		(999	)		823			(1,953	)		1,445
Other income, net		45			50			88			102
(Loss) income before income taxes		(954	)		873			(1,865	)		1,547
Provision for income taxes		—			15			—			15
Net (loss) income		(954	)		858			(1,865	)		1,532
Accrued dividends on preferred stock		(369	)		(302	)		(733	)		(600	)
Net (loss) income available to common stockholders	$	(1,323	)	$	556		$	(2,598	)	$	932
(Loss) earnings per common share:
Basic	$	(0.06	)	$	0.03		$	(0.12	)	$	0.05
Diluted	$	(0.06	)	$	0.02		$	(0.12	)	$	0.04
Shares used in computing (loss) earnings per common share
Basic		21,675			20,813			21,506			20,686
Diluted		21,675			26,324			21,506			26,127

Daou Systems, Inc

Balance Sheets

(in thousands)

(Unaudited)

	June 30, 2004		December 31, 2003
Current assets:
Cash and cash equivalents	$	10,926	$	13,045
Short-term investments		109		102
Accounts receivable, net		6,229		8,226
Contract work in progress		151		1,457
Other current assets		745		640
Total current assets		18,160		23,470
Equipment, furniture and fixtures, net		1,092		1,144
Other assets		569		614
	$	19,821	$	25,228
Current liabilities:
Accounts payable and other accrued liabilities	$	1,687	$	2,171
Accrued salaries and benefits		2,219		4,063
Deferred revenue		220		1,426
Total current liabilities		4,126		7,660
Long-term liabilities		475		523
Stockholders’ equity		15,220		17,045
	$	19,821	$	25,228

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