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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) þ
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31, 2005
 OR o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from  to Commission file number 1-12214 CHAD Therapeutics, Inc.  California
    
    95-3792700(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 21622 Plummer Street, Chatsworth, CA
    
    91311(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (818) 882-0883 Securities registered pursuant to Section 12(b) of the Act: Name of each exchangeTitle of each class
    
    on which registeredCommon Shares, $.01 par value
    
    American Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None. 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 þ No o Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation
SK (229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes o No þ As of September 30, 2004, the last business day of the registrants most recently completed
second fiscal quarter, the approximate aggregate market value of voting and non-voting common stock
held by non-affiliates of the registrant was $40,938,000 (based upon the last closing price for
shares of the registrants common stock as reported by the American Stock Exchange as of that
date). Shares of common stock held by each officer, director, and holder of 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive determination for other
purposes. There were approximately 10,134,000 shares of common stock outstanding as of June 14, 2005. Certain information required in Part III hereto is incorporated by reference to the Proxy
Statement (Proxy Statement) for the Registrants 2005 Annual Meeting of Shareholders to be filed
with the Securities Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Form 10-K. Portions of the Registrants Annual Report
to Shareholders for the year ended March 31, 2005 (Annual Report) are incorporated into Part II
as set forth herein and only such portions of the Annual Report as are specifically incorporated by
reference are thereby made a part of this Annual Report on Form 10-K.   1




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures about Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KSIGNATURESExhibit IndexExhibit 13.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2Exhibit 99.11    Table of Contents  
 PART I 
 Item 1. Business CHAD Therapeutics, Inc. (CHAD or the Company) was organized in August 1982 to develop,
produce and market respiratory care devices designed to improve the efficiency of oxygen delivery
systems for both home and hospital treatment of patients who require supplemental oxygen. The
Company introduced its first respiratory care device in the market in June of 1983 and has
introduced additional respiratory care devices in subsequent years. Pulmonary Disease and Oxygen Therapy The Company was organized to pursue the development and marketing of devices that improve the
efficiency of systems used to administer oxygen to patients requiring supplemental oxygen. These
are primarily patients suffering from chronic obstructive pulmonary diseases. Chronic obstructive pulmonary diseases (COPD) are progressive, debilitating conditions that
affect millions of Americans, severely limiting their activities and shortening their lives. Such
conditions, which include chronic bronchitis, emphysema and severe asthma, decrease the capacity of
the lungs to oxygenate the blood. To make up for this deficiency, it is common medical practice to
administer supplemental oxygen, usually on a 24 hours per day basis in an amount sufficient to
increase blood oxygenation to near normal levels. According to the National Heart, Lung and Blood Institute of the National Institutes of Health
(NIH) COPD represents the fourth leading cause of death in the United States and is predicted to be
the third largest cause of death by 2020. The American Lung Association reported that in 2002 there were 12.1 million Americans
suffering from COPD. This report also notes that in 2004 the annual cost to the nation for COPD in
health care and indirect costs was estimated to be $37.2 billion. Although precise data are not available, various individual and institutional sources and
reports estimate that there are more than one (1) million homecare patients receiving supplementary
administration of oxygen. Medicare, which accounts for about 60% of home oxygen dealers revenues,
spent approximately $1.8 billion in 2002 for home oxygen, according to a report by the Centers for
Medicare and Medicaid Services Office of Actuary. This represented a 13% increase over the
previous year, according to the report. Chronic obstructive pulmonary diseases are also prevalent in other countries, particularly in
some European nations and the Far East, where the incidence is higher than in the United States. We
believe the potential international market for home oxygen is expected to grow to 150% of the U.S.
market over the next five to ten years. The primary oxygen supply for home patients are concentrators that concentrate oxygen from
the ambient air (85-90%), reservoirs containing liquid oxygen (10-15%) and cylinders containing
compressed gaseous oxygen (less than one percent (1%)). Standard oxygen delivery systems are characteristically inefficient, permitting over 67% of
the oxygen supply delivered to the patient to be wasted, primarily because the oxygen is
administered steadily to the patient, even while he is exhaling. Since the normal breathing cycle
consists of an exhalation period that is approximately twice as long as the inhalation period, at
least two-thirds (2/3) of the oxygen from this continuous flow system is wasted. Furthermore, it
is generally accepted that the oxygen breathed in during the first one-third (1/3) of the
inhalation period provides most of the 2




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oxygenation benefit to the patient. Currently, Medicare provides a prospective flat fee monthly payment for home oxygen services
based solely on the patients prescribed oxygen requirement and disregards modality, the type of
system in use. Consequently, with the incentive to operate efficiently, inexpensive concentrators
have grown in popularity because of their low cost and less frequent servicing requirements. At the
same time, interest in oxygen conserving devices which can extend the life of oxygen supplies and
reduce service calls by dealers has heightened. There is also a separate fixed allowance from
Medicare for patients who need to be mobile and therefore require portable oxygen systems. In November 2003 Congress enacted the Medicare Improvement and Modernization Act, which had
and will continue to impact reimbursement for home oxygen over the next several years. The new
legislation will result in continued pressure on homecare providers to reduce the cost of providing
home oxygen services. While these cost pressures have intensified, mobility has increased in importance as the
treatment of pulmonary patients has moved away from hospitals and into home care. Also, the
American Long Association indicates that to reduce and control symptoms, pulmonary patients should
live a healthy lifestyle that includes excercise F. Maintaining quality of life and compliance with
prescribed exercise programs require that the patient be as mobile as possible and thus increase
the demand for portable oxygen equipment. CHADs Products Recognizing the need for more efficient oxygen delivery systems, the Company has pursued,
since its inception, the development and marketing of devices that are designed to conserve oxygen.
The benefits of such improvements include substantial cost savings for the homecare provider, as
well as increased mobility for ambulatory patients who require portable oxygen supplies. These
devices extend the life of oxygen supplies and make possible more compact and longer lasting
portable systems, thereby improving the quality of life for home oxygen patients. OXYMIZER® and OXYMIZER Pendant Oxygen-Conserving Devices. In June 1983 the
Company began marketing its first product, the OXYMIZER disposable oxygen-conserving device, a
unique, patented, disposable device developed to provide up to four to one (4:1) savings of oxygen
as compared to continuous flow when used with any oxygen supply source. The OXYMIZER device contains a collapsible reservoir, which captures incoming oxygen delivered
during expiration and prevents its waste. The oxygen captured in this reservoir is then inhaled by
the patient during the first instant of his next inspiration. Thus the OXYMIZER device both
conserves oxygen and provides the patient with an extra rich supply of oxygen at the beginning of
the inhalation period when it can be most effectively utilized. Extensive clinical testing and trials over the past 22 years have repeatedly demonstrated that
patients using the OXYMIZER device are able to achieve equivalent blood oxygenation levels while
using significantly less oxygen. There have been more than 32 clinical evaluations from
institutions worldwide that have confirmed the efficacy and oxygen savings of the OXYMIZER devices. The greater efficiency provided by these devices over standard oxygen delivery systems also
permits home health care patients to achieve greater mobility by enabling them to use smaller
portable cylinders or by obtaining two (2) to four (4) times the life from standard sized portable
cylinders. For home oxygen dealers, the disposable OXYMIZER devices afford the cost advantages of oxygen
conservation without capital investment in expensive equipment. In addition, the OXYMIZER 3




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devices
can be utilized to achieve higher flow setting equivalencies for standard oxygen concentrators. In hospitals, the OXYMIZER devices are used for maintenance of certain patients requiring
higher flow levels of oxygen without having to resort to uncomfortable oxygen masks. The Company is pursuing a marketing strategy that emphasizes the cost savings, efficiencies
and level of patient comfort associated with the use of the OXYMIZER devices. See Marketing and
Competition. The OXYMIZER Pendant device is similar to the OXYMIZER device except that its reservoir is
located in a pendant that hangs over the patients chest rather than under the nose. The
OXYMIZER Pendant has a more traditional appearance than the OXYMIZER. The Company began marketing
the OXYMIZER Pendant in August 1984. OXYMATIC® Electronic Oxygen Conservers. The Company began marketing the
OXYMATIC conserver in March 1986. This product is a small electronic device designed for use with
portable oxygen systems. The OXYMATIC conserver electronically senses the optimal moment in the
breathing cycle for delivery of oxygen and at that moment, releases a very brief pulse of oxygen to
the patient. The OXYMATIC conserver concentrates the administration of oxygen during the first
one-third (1/3) of the inhalation phase, when oxygen is most efficiently utilized. There have been
at least 12 controlled clinical trials and studies of patient groups using the OXYMATIC conserver,
all of which have confirmed its efficacy and efficiency. In June 1993 the Company introduced a different version of the OXYMATIC conserver, the
OXYMATIC  2400. This model incorporates substantial improvements and additional features,
including an alarm system, which are designed to allow it to be used 24 hours a day with both
primary and portable oxygen sources. The OXYMATIC  2400 conserver affords the same oxygen savings
ratios as the original OXYMATIC conserver. In July 2000 the Company introduced the first of the OXYMATIC 400 series of conservers.
Additional models were added to this line in January and March of 2001. This new line of
conservers was designed to capitalize on the proven reliability and efficiency of the Companys
previous models. In addition, features and options were added to create state-of-the-art
conservers that would give homecare providers a wide choice of products to service their patients
individual needs and preferences. These new conservers include a built-in regulator, expanded flow
rates and provide average savings of five to one (5:1) over continuous flow oxygen. In November 2001 the Company introduced the SEQUOIA OXYMATIC line of conservers. These
conservers utilize the same electronic features as the OXYMATIC 400 series conservers but do not
contain a built-in regulator. The Company received clearance from the Food and Drug Administration (FDA) to market the LOTUS
Electronic Oxygen Conserver in October 2004. The Company plans to begin shipping in July 2005.
The LOTUS weighs less than one (1) pound and will be offered with or without a breath-sensing
alarm. It will also offer additional liter flow settings and an extended battery life of up to
four (4) months of normal usage on two (2) AA-size batteries. CYPRESS OXYPneumatic® Conservers. In July 2002 the Company began marketing
the CYPRESS pneumatic conserver, which allowed the Company to compete in the pneumatic segment of
the conserver market for the first time. This device incorporates no electronic parts, thus
eliminating the need for batteries. It is lightweight, small and allows the use of a standard,
single-lumen cannula, unlike many other pneumatic conservers that require special cannulas. The
CYPRESS conserver provides flow rates from one (1) to six (6) liters per minute and oxygen savings
greater than three to one (3:1) over 4




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continuous flow oxygen. Sales of OXYMATIC electronic and CYPRESS OXYPneumatic conservers accounted for
approximately 73%, 77% and 74% of the Companys sales in 2005, 2004 and 2003, respectively. The OXYMATIC electronic and CYPRESS pneumatic conservers extend the time the contents of the
cylinders will last over continuous flow oxygen. They provide ambulatory patients with greater
mobility and less weight. The Company believes these systems offer a superior alternative to
commonly used liquid oxygen systems for mobile patients and are more cost effective for homecare
dealers to supply. SAGEOxygen Therapeutic Device In May 2004 the Company received
clearance from the FDA to market its new SAGE Oxygen Therapeutic Device. The SAGE device is the
first in a planned family of oxygen therapeutic devices that use the Companys proprietary
technologies to sense a patients movements and automatically adjust the rate of oxygen delivery to
reduce the risk of desaturation as activity increases. The SAGE device combines the industrys
first truly dynamic, patented delivery technology with the proven oxygen sensor technology in the
Companys OXYMATIC 400 series conserver. As a result, the device addresses the common problem of
oxygen desaturation, which causes a patient to feel weak and out of breath when activity increases,
yet it still maximizes patient ambulatory capability. OXYCOIL® Coiled Oxygen Tubing. In January 1986 the Company began marketing
the OXYCOIL coiled oxygen tubing, a device which replaces the standard supply tubing for the
OXYMIZER devices, the OXYMATIC conserver or conventional nasal cannulas. The OXYCOIL tubing is a
convenience and safety device that can be used with any oxygen system to help keep the supply
tubing out of the patients way, thus minimizing the tripping and tangling problems associated with
standard supply tubing. TOTAL O2® Delivery System. In January 1998, the Company began
marketing the TOTAL O2Delivery System. This system provides stationary
oxygen for patients at home, portable oxygen including an oxygen conserving device for ambulation
and a safe and efficient mechanism for filling portable oxygen cylinders. The TOTAL
O2Delivery System was designed to provide homecare dealers with a more cost
effective means to provide home oxygen services while at the same time providing the patients with
a higher quality of service. This can be accomplished as the homecare dealer will no longer be
required to make regular monthly service calls to deliver full portable cylinders, and the patient
will no longer be dependent on the dealer for those deliveries to obtain full cylinders. Initial sales of the TOTAL O2 system have been adversely affected by several
factors, including the overall home oxygen market climate and homecare providers reluctance to
invest in the higher cost of the TOTAL O2 system to achieve the lower monthly operating
costs it affords. Recent changes in home oxygen reimbursement appears to be causing homecare
providers to examine their operating costs more carefully, which should have a positive impact on
sales of the TOTAL O2 system. No assurances can currently be given regarding the level
of success the Company may achieve with the TOTAL O2 system. See Outlook: Issues &
Risks  New Product in the Companys Annual Report to Shareholders. The technology for each of the devices described above has been licensed from the inventors
thereof, with the exception of the CYPRESS OXYPneumatic conserver, which belongs to the Company.
The Company has acquired exclusive licenses to manufacture and market the OXYMIZER devices, the
OXYMATIC conservers, the OXYCOIL tubing and the TOTAL O2 system. See Licensing and
Related Agreements. Other Products. The Company also offers a variety of ancillary products that support
the principal oxygen conserving products. These include oxygen cylinders of various sizes and
compositions, 5




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regulators, cannulas and connecting tubing and assorted carrying bags. In addition,
with a field sales force of manufacturers representatives and direct sales representatives
covering the entire United States (see Marketing), the Company will utilize this team as part of
a strategy to market and sell additional products that are targeted for the Companys current
customer base, the homecare provider. Products Under Development It is the Companys objective to continuously improve and add to its oxygen conserving and
related products. During the fiscal years ended March 31, 2004 and 2003, the Company entered into
contracts with outside vendors to develop products in the home oxygen market and sleep disorder
market. Development efforts continue on these products. No assurance can be given that any
products developed pursuant to these contracts will be successfully marketed or that the Company
will ever derive significant revenues or earnings from the sale of such products. Research and Development For the year ended March 31, 2005, the Company expended approximately $1,473,000 on research
and development and has expended approximately $9,092,000 since its inception in August of 1982.
The Company operates in an industry that is subject to rapid technological change, and its ability
to compete successfully depends upon, among other things, its ability to stay abreast or ahead of
new technological developments. Accordingly, the Company expects to expend increasing amounts for
the development or acquisition of new products or the improvement of existing products. In the
next fiscal year the Company expects to spend approximately $1,512,000 on several projects. The
Company conducts research and development internally and also utilizes the services of outside
firms and consultants for its research and development activities. Licensing and Related Agreements The Company has entered into license agreements (the Inventors License Agreements) with
Brian L. Tiep, M.D., Robert E. Phillips and Ben A. Otsap, the inventors of the OXYMIZER device (the
Inventors), with respect to that device and each of the additional oxygen conserving devices
developed by them. Pursuant to the Inventors License Agreements, the Inventors grant to the Company an exclusive
license (with the right to grant sublicenses) to manufacture, use and sell such device. Through
September 2003, the Inventors License Agreements provided that the Company pay royalties to the
Inventors on the net proceeds of sales of the device covered by the agreement at the rate of six
percent (6%) on amounts up to ten (10) million dollars and three percent (3%) on amounts of ten
(10) million dollars or more. The Inventors License Agreements also provided that the Company
pays minimum advance royalties for each license year in the amount of $10,000. The advance
payments are to be applied toward royalties payable for the corresponding license year. As of
September 2003, no further royalty payments are due. The Company is obligated to prosecute and
defend, at its own expense, any infringement suits related to manufacture or sale of each device
covered by any such agreement. Each Inventors License Agreement continues until the expiration of the last to expire of any
patent covering the related device or, if no patent is issued, for 17 years. The Inventors may
terminate the Inventors License Agreements at an earlier date if the Company is in arrears for 60
days on any royalty payment or if the Company defaults in performing any other term of the
agreement and fails to cure such default within 60 days. The Company has also entered into a license agreement (the Carleton License Agreement) with
the Life Support Division of Carleton (formerly Litton Life Support) for the TOTAL O2
Delivery System. Pursuant to the Carleton License Agreement, the Licensor grants to the Company an
exclusive 6




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license (with the right to grant sublicenses) to manufacture, use and sell such device in
the health care market. The Carleton License Agreement provides that the Company pay royalties to
the Licensor on the net proceeds of sales of the device covered by the agreement at the rate of
seven percent (7%) and requires minimum annual royalties of $100,000, $300,000 and $500,000 in
1999, 2000 and subsequent years, respectively. The Carleton License Agreement continues until the
expiration of the last to expire of any
patent covering the related device or until the Company ceases use of the licensed technology. The
Licensors may terminate the Carleton License Agreement at an earlier date if the Company is in
arrears for 30 days on any royalty payment or if the Company defaults in performing any other
material obligation of the agreement and fails to cure such default within 30 days. The Company has also entered into a license a agreement (the Phillips and Otsap License
Agreement) with Robert E. Phillips and Ben A. Otsap for the SAGE Oxygen Therapeutic Device.
Pursuant to the Phillips and Otsap Agreement, the Licensor grants to the Company an exclusive
license (with the right to grant sublicenses) to manufacture, use and sell such devices in the
health care market. The Phillips and Otsap License Agreement provides that the Company pay
royalties to the Licensor on the net proceeds of sales of the device covered by the agreement at
the rate of three percent (3%) for unit sales up to 1,499 units, four percent (4%) for unit sales
from 1,500 to 1,999 units per month, five percent (5%) for unit sales from 2,000 to 2,499 units
per month and six percent (6%) for unit sales of 2,500 or more per month. The agreement also
requires minimum annual royalties of $15,000 in the first year after FDA clearance is received to
market the product and $30,000 per annum thereafter. The Phillips and Otsap License Agreement
continues until the expiration of the last to expire of any patent covering the related devise or
until the Company ceases use of the licensed technology. The Licensors may terminate the Phillips
and Otsap License Agreement at an earlier date if the Company is in arrears for six (6) days on any
royalty payment or if the Company defaults in performing any other material obligation of the
agreement and fails to cure such default within 30 days. Manufacturing and Sources of Supply The Company tests and packages its products in its own facility and performs some
manufacturing operations on certain products. Some manufacturing processes are conducted by other
firms and the Company expects to continue using outside firms for certain manufacturing processes
for the foreseeable future. All outside manufacturing is conducted under the supervision and
control of the Company and with tooling provided by the Company. Pursuant to a written agreement, the Company purchases finished units of the OXYMIZER devices
from a supplier in Hong Kong. The Company believes that other injection molding facilities would
be available in the event of a termination of this arrangement. Production of the OXYMATIC 300 series, 2400 and 400 series conservers, the LOTUS, the CYPRESS
pneumatic conservers, and the SAGE Oxygen Therapeutic Device are being handled internally with only
a portion of the electronic assembly for electronic conservers being subcontracted outside the
Company. The Company is currently subcontracting with two (2) electronic assembly facilities and
believes that other facilities would be available in the event of an interruption of supply from
the existing facilities. Production of the TOTAL O2 system is being handled internally with a number of
subassemblies being subcontracted outside the Company. The Company believes that there are
alternate sources of supply for these subassemblies, including internal manufacturing as production
quantities increase. The Company is not aware of any shortages of materials necessary for the manufacture of its
products. The Company provides customers the right to return merchandise for credit and requires
payment within a time frame consistent with industry standards. The Company provides warranties
for certain of its products based on industry standards and accrues for the estimated expenses
associated with 7




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those warranties based on the best information available, primarily historical
claims experience. Marketing The Companys products are designed to reduce the cost of health care while maintaining or
enhancing the therapeutic benefits to the patient and improving the users quality of life. The
Companys
marketing efforts have focused primarily on providing home oxygen suppliers with products that they
can utilize to increase their revenues and provide a better quality of care at less cost. Homecare dealers have reportedly increased their revenues by assembling small portable systems
incorporating the Companys OXYMATIC electronic conserver or CYPRESS pneumatic conserver as a
vehicle to attract new and additional patients to their business. The Company believes these
lightweight, long-lasting, portable systems have both high professional and patient acceptance,
which allows the supplier promoting these products to attract new and additional customers. The
Company has been advised that medical professionals who frequently refer patients to specific home
oxygen suppliers find that these systems assist patients in more easily complying with prescribed
exercise programs and help them to achieve the therapeutic benefits of maintaining a lifestyle as
normal as possible. Patients, most of whom are free to select their oxygen supplier, are
reportedly receptive to changing suppliers in order to obtain equipment that will allow them to
travel and maintain their quality of life. A large portion of home oxygen patients are covered by Medicare or other government programs.
Since June 1989 home oxygen suppliers have been reimbursed on a fixed monthly fee basis by
Medicare. The monthly reimbursement amount does not vary with either the type of oxygen delivery
equipment provided or the amount of oxygen supplied. Since monthly per patient revenues are fixed,
home oxygen suppliers can only increase their per patient profitability by reducing costs. The
Companys oxygen conserving products and TOTAL O2 Delivery System allow these suppliers
to decrease their costs while providing their patients with improved therapeutic benefits and
quality of life. While the home respiratory care dealer remains the primary focus of the Companys marketing
efforts, this focus has been augmented by a major effort to increase professional awareness.
Promotional programs target respiratory care physicians, nurses and therapists. The Company markets its products directly to home oxygen suppliers throughout the U.S. The
Company currently has a Vice President of Sales & Marketing, two (2) Regional Vice Presidents of
Sales, a Director of Strategic Sales and Marketing, a manager of sales administration, an art and
media manager, a marketing manager, a customer relations manager and five (5) in-house sales and
customer service representatives who are in regular and frequent proactive telephone sales contact
with customers and potential customers. In addition, the Company has a field sales force of direct
sales representatives and independent manufacturers sales representatives to handle direct selling
to customers. This field sales force is currently comprised of seven (7) direct sales
representatives and 31 manufacturers sales representatives with coverage throughout the United
States. The Company also utilizes direct mail, trade show attendance, trade advertising and a web
site to promote the benefits of its products to homecare dealers. Additionally, the Company
actively seeks to increase professional awareness of its products through professional advertising
and participation in professional meetings. Home oxygen therapy markets outside the United States are, in most cases, at a much earlier
stage of development. In many countries, these patients are cared for in institutional settings.
As the trend develops to move patients into homecare, opportunities for the Companys products
should increase. Sales of conservers in Canada and Japan have become an important part of the
Companys business. Based on industry market research projections, the Company expects the
international market to increase to 150% of the U.S. potential over the next five (5) to ten (10)
years. The Company has entered into exclusive distributorship agreements in Germany, Japan, 8




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Australia
and several other countries. The Company also has non-exclusive distributors in many other
countries. Sales outside of the United States subject the Company to certain risks, including those
involving political and economic factors, interruption of shipments of products, currency
fluctuations and devaluations, and governmental restrictions and regulations. Customers, Backlog and Orders The Company presently has an active list of over 4,000 dealer and hospital customers. Based
upon information developed from various lists the Company believes that there are approximately
7,000 to 8,000 home oxygen dealers and 3,000 general hospitals in the United States that are
potential customers or customer sources for the Company. Of these 7,000 to 8,000 homecare
providers, approximately 48% are represented by three (3) major national chain accounts. One (1)
national chain customer accounted for 36%, 27%, and 24% of net sales during 2005, 2004, and 2003,
respectively, and one (1) other chain accounted for 11%, 14% and 11% of sales in 2005, 2004, and
2003, respectively. Financial Information Relating to Foreign and
Domestic Operations and Export Sales
(in 000s) 2005
    
    
    2004
    
    
    2003SalesUnited States
    
    $
    22,912
    
    
    $
    20,498
    
    
    $
    18,639Canada
    
    
    306
    
    
    
    303
    
    
    
    307Japan
    
    
    405
    
    
    
    238
    
    
    
    207Germany
    
    
    11
    
    
    
    44
    
    
    
    46All other countries
    
    
    653
    
    
    
    458
    
    
    
    342Total
    
    $
    24,287
    
    
    $
    21,541
    
    
    $
    19,541
 All identifiable assets are located in the United States. At March 31, 2005, the Company had no backlog of orders for any of its products. The Company
presently endeavors to maintain sufficient inventory to ship all of its products immediately upon
receipt of orders. The Company believes that maintaining such levels of inventory is necessary to
meet the requirements of its customers. Competition The Company is aware of several demand valve, electronically controlled devices currently
being marketed. Of these devices, those that have been the principal competitors of the OXYMATIC
conserver in the past were targeted primarily to a specific segment of the market  liquid oxygen
usage. Several companies, including Caire Inc. and Puritan Bennett, market small (3.4 to 5.5 lbs.)
portable liquid oxygen systems incorporating simple oxygen conserving devices that double the
useful life of these systems. Some of these companies have substantially greater marketing and
financial resources than the Company. However, these units are more expensive than systems
utilizing the OXYMATIC conservers and still require the supplier to make frequent and costly oxygen
deliveries. The Company does not know the levels of sales achieved by the companies marketing these
systems. Several of these competitors are now marketing conservers in direct competition with the
Companys OXYMATIC electronic and CYPRESS pneumatic conservers. Some of these conservers only
provide two to one (2:1) to three to one (3:1) savings ratios compared to continuous flow. As a 9




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result, these units while weighing about the same as the OXYMATIC conserver provide only one-third
(1/3) or one-half (1/2) as much ambulation time. In addition, the Company is aware of two (2)
companies marketing oxygen conserving devices that claim similar oxygen savings ratios as the
OXYMATIC conserver. The Company believes that some of these competitors have been able to offer
their oxygen conservers as part of a bundle of products with perceived pricing advantages over the
Companys products. The Company does not know the level of sales achieved by these companies. There are several other types of portable oxygen systems which compete with the Companys
OXYMATIC conservers but do not utilize oxygen conserving devices. Aluminum and steel oxygen
cylinders with continuous flow regulators are utilized by some oxygen suppliers as portable
systems. Although they do provide users with some portability, their size and bulk limit their use
by patients who need or want to be truly ambulatory. The most commonly used of these cylinders is
approximately three (3) feet high, weighs over 20 lbs., and provides an average patient with less
than five (5) hours of oxygen. These systems are enjoying some level of success due to their lower
unit price advantage. The OXYMATIC electronic and CYPRESS pneumatic conservers allow the use of
smaller, lighter cylinders and thus provides greater mobility. Until the availability of portable systems utilizing the OXYMATIC conservers and the
previously cited changes in Medicare oxygen reimbursement, liquid oxygen was the modality of choice
for truly mobile users. Portable liquid oxygen systems that weigh 3.4 to 10 lbs., provide an
average patient with six (6) to eight (8) hours of oxygen, compared to the smallest OXYLITE system
which weighs 4.5 lbs. and provides an average patient with 7.3 hours of oxygen. These systems are
more costly than systems utilizing the OXYMATIC conservers and require frequent and expensive
(often weekly) deliveries of bulk liquid oxygen to the patients home. In addition, the patient
must remain within range of the base unit for refilling, unlike with the systems utilizing the
OXYMATIC conservers with which a patient can take as many cylinders as needed to provide the amount
of time necessary to be away from their base unit. The Company is aware of one (1) combination oxygen concentrator and refilling station being
marketed in competition with the TOTAL O2 system. This system is larger and heavier and
does not contain some of the integrated features found in the TOTAL O2 system. The
competitor has substantially greater financial and marketing resources than the Company. The
Company does not know the level of sales achieved for this system by the competition. Patents and Trademarks The Company regards the products that it develops or licenses and its manufacturing processes
as proprietary and relies on a combination of patents, trademarks, trade secret laws and
confidentiality agreements to protect its rights in its products. U.S. patents have been issued
covering the original OXYMATIC conserver, the CYPRESS OXYPneumatic conserver, the TOTAL
O2 Delivery System, and the SAGE Oxygen Therapeutic Device. A number of foreign patent
applications pertaining to the Companys activities have also been issued. The Company pursues a policy of obtaining patents for appropriate inventions related to
products marketed or manufactured by the Company. The Company considers the patentability of
products developed for it to be significant to the success of the Company. To the extent that the
products to be marketed by the Company do not receive patent protection, competitors may be able to
manufacture and market substantially similar products. Such competition could have an adverse
impact upon the Companys business. There can be no assurance that patents, domestic or foreign, will be obtained with respect to
the Companys products, or that, if issued, they will provide substantial protection or be of
commercial benefit to the Company. In addition, the patent laws of foreign countries may differ
from those of the 10




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United States as to the patentability of the Companys products and processes
and, accordingly, the degree of protection afforded by foreign patents may be more or less than in
the United States. In the United States, although a patent has a statutory presumption of validity, the issuance
of a patent is not conclusive as to such validity or as to the enforceable scope of its claims
therein. The validity and enforceability of a patent can be attacked by litigation after its
issuance by the U.S. Patent and Trademark Office. If the outcome of such litigation is adverse to
the owner of the patent in that the patent is held to be invalid, other parties may then use the
invention covered by the patent. Accordingly, there can be no assurance that patents with respect
to the Companys products, if issued, will afford protection against competitors with similar
products, nor can there be any assurance that the patents will not be infringed upon or designed
around by others. Through patent searches, contacts in the industry and representations and indemnities received
from licensors and development partners, the Company seeks to ensure that its products do not
infringe on the intellectual property rights claimed by others. However, interpretation of the
scope and validity of existing patent rights may differ, and no assurance can be given that the
Company products will in all cases not infringe on the rights of others. Moreover, any dispute
regarding potential infringement may require substantial management and financial resources to
defend. The Company has obtained U.S. registration for the trademarks OXYMIZER, OXYMATIC, LOTUS,
OXYPneumatic, CHAD, OXYCOIL, and TOTAL O2. A series of foreign applications to
register the trademark OXYMIZER in a number of countries of commercial interest to the Company
have been filed. Governmental Regulation The commercialization of the OXYMIZER, OXYMATIC, LOTUS, CYPRESS, TOTAL O2,and SAGE
devices is subject to the Federal Food, Drug and Cosmetic Act (the Food and Drug Act) and to
regulations issued thereunder. The Company anticipates that commercialization of other devices
that it intends to market will also be subject to the Food and Drug Act. The Food and Drug Act is
administered by the FDA, which has authority to regulate the marketing, manufacturing, labeling,
packaging and distribution of products subject to the Food and Drug Act. In addition, there are
requirements under other federal laws and under state, local and foreign statutes that may apply to
the manufacture and marketing of the Companys products. The Medical Device Amendments of 1976 to
the Food and Drug Act (the Amendments) and the Safe Medical Device Act of 1990 significantly
extended the authority of the FDA to regulate the commercialization of medical devices. The
Amendments established three (3) classifications of medical devices: Class I, Class II and Class
III. With respect to all three (3) classes, the general provisions of the Food and Drug Act
prohibit adulteration and misbranding. A medical device may be adulterated if the device is or
could be adversely affected by its methods of manufacture, storage or packaging. A medical device
may be misbranded if its labeling is false or misleading or if its labeling
does not contain specific information required by law applicable to such type of device. In
addition, failure to register a medical device covered under the Food and Drug Act will render it
misbranded under the Food and Drug Act. All manufacturers of medical devices must register with the FDA and list all medical devices
produced by them. This listing must be updated annually. In addition, prior to commercial
distribution of additional devices, the manufacturer must file with the FDA and receive approval
prior to the commencement of such commercial distribution, a notice setting forth certain
information about the device, including the classification into which the manufacturer believes it
falls. Class I devices are subject only to the general controls concerning adulteration, misbranding,
good manufacturing practices, record keeping and reporting requirements. Class II devices must, in
addition, comply with performance standards as promulgated by the FDA. 11




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The Company has registered with the Bureau of Medical Devices of the FDA as a Medical Device
Establishment and with the Department of Health Services of the State of California as a Medical
Device Manufacturer. In addition, the Company has developed procedures to comply with FDA
standards concerning good manufacturing practices, record keeping and reporting and is ISO 9001
certified. The Company has filed notification submissions pursuant to Section 510(k) of the Food and Drug
Act of its intent to market the OXYMIZER, the OXYMIZER Pendant, the OXYMATIC conserver, the LOTUS
conserver, the CYPRESS OXYPneumatic conserver, the OXYCOIL, the TOTAL O2 Delivery System, and the
SAGE Oxygen Therapeutic Device; it has been granted permission by the FDA to market the OXYMIZER
and the OXYMIZER Pendant as Class I devices. Permission has been granted to market
the OXYMATIC, the CYPRESS OXYPneumatic, the LOTUS Electronic Oxygen conserver, the OXYCOIL, the
TOTAL O2 Delivery System, and the SAGE Oxygen Therapeutic Device as Class II devices. Employees As of June 27, 2005, CHAD had 129 full-time employees and one (1) part-time employee.
Sixty-two (62) of the Companys employees are engaged in manufacturing and the remaining are
engaged in marketing, sales, administration and management. None of the Companys employees are
represented by unions, and the Company believes its employee relations are satisfactory. The
Company will employ additional personnel in all phases of its activities as required by the growth
in its activities. The number of additional personnel will be dependent on sales levels of
individual products. 
 Item 2. Properties. The Companys offices and manufacturing facilities are situated in premises located in
Chatsworth, California, and consist of approximately 55,500 square feet, at a monthly rental fee of
$34,000 pursuant to a lease expiring in June 2008. Management believes this facility should
adequately handle the Companys needs for the foreseeable future. The Company does not own any
real property and does not anticipate acquiring any in the foreseeable future. 
 Item 3. Legal Proceedings. The Company becomes involved in legal proceedings in the ordinary course of business. The
Company maintains product liability insurance in an amount it deems customary in the industry for
protection of the Company against potential product liability claims. Although the Company
believes its 12




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product liability insurance is sufficient and no pending legal proceeding poses a material threat,
no assurance can be given that pending or future proceedings will not have a material impact on the
Companys financial condition or results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 
 PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The information required herein is hereby incorporated by reference to the information
contained under the caption Corporate Data in the Companys Annual Report. 
 Item 6. Selected Financial Data. The information required herein is hereby incorporated by reference to the information
contained under the caption Selected Financial Data in the Companys Annual Report. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations. The information required herein is hereby incorporated by reference to the information
contained under the caption Managements Discussion and Analysis of Financial Condition and
Results of Operations in the Companys Annual Report. 
 Item 7a. Quantitative and Qualitative Disclosures about Market Risk The Company has no significant exposure to market risk sensitive instruments or contracts. 
 Item 8. Financial Statements and Supplementary Data. The information required herein is hereby incorporated by reference to the Financial
Statements and the Notes thereto contained in the Companys Annual Report. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
 Item 9A. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures.An evaluation as of the end of the
period covered by this report was carried out under the supervision and with the participation of
our management, including our principal executive officer and principal financial officer, of the
effectiveness of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) and Rule 15d 15(e) promulgated under the Securities Exchange Act of 1934, as amended
(the Exchange Act). Based on their evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are effective to ensure
that we record, process, summarize, and report information required to be disclosed by us in our
reports filed under the Securities Exchange Act within the time periods specified by the Securities
and Exchange Commissions rules and forms. 13




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(b) Changes in Internal Control Over Financial Reporting.There have not been any changes in
the Companys internal control over financial reporting during our fourth (4th) fiscal
quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant. The information required herein is hereby incorporated by reference to the information
appearing under the captions Election of Directors and Executive Officers in the Companys
definitive Proxy Statement to be filed with the Securities and Exchange Commission. 
 Item 11. Executive Compensation. The information required herein is hereby incorporated by reference to the information
appearing under the caption Compensation of Directors and Executive Officers in the Companys
definitive Proxy Statement to be filed with the Securities and Exchange Commission. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required herein is hereby incorporated by reference to the information
appearing under the caption Voting Securities and Principal Holders Thereof in the Companys
definitive Proxy Statement to be filed with the Securities and Exchange Commission. 
 Item 13. Certain Relationships and Related Transactions. None. 
 Item 14. Principal Accountant Fees and Services The information required herein is hereby incorporated by reference to the information
appearing under the caption Proposal 2: Ratification of Appointment of Independent Accountants in
the Companys definitive Proxy Statement to be filed with the Securities and Exchange Commission. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) Financial Statements. Included in Part II of this Report:  Report of Independent Registered Public Accounting FirmBalance Sheets  March 31, 2005 and 2004Statements of Operations  Years ended March 31, 2005, 2004, and 2003.Statements of Shareholders Equity  Years ended March 31, 2005, 2004, and 2003.Statements of Cash Flows  Years ended March 31, 2005, 2004, and 2003. 14




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Notes to Financial Statements. (a) (2) Financial Statement Schedules. See Notes to Financial Statements. (3) Exhibits. 3.1 Articles of Incorporation of the Registrant, as amended***** 3.2 Bylaws of the Registrant, as amended* 10.5 Pulser System License Agreement, as amended, with Robert E. Phillips, Brian L. Tiep,
M.D. and Ben A. Otsap. (The Pulser System is now called the OXYMATIC.)* 10.20 OXYCOIL tubing License Agreement with Mary Smart (licensed under the name
Respi-Coil).*** 10.23 Summary plan description for CHAD Therapeutics, Inc. Employee Savings and
Retirement Plan**** 10.24 1994 Stock Option Plan****** 10.25 Lease on real property at 21622 Plummer Street, Chatsworth, California****** 10.26 TOTAL O2 Delivery System License Agreement, as amended, with the Carleton
Life Support Division of Litton Industries, Inc.******* 10.27 2004 Equity Incentive Plan************ 13.1 Annual Report to Shareholders for the year ended March 31, 2005. 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Letter from the FDA authorizing the Company to market the OXYMIZER oxygen
conserving device as a Class I device.* 99.2 Letter from the FDA authorizing the Company to market the OXYMIZER Pendant oxygen
conserving device as a Class I device.** 99.3 Letter from the FDA authorizing the Company to market the OXYMATIC electronic 15




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oxygen conserver as a Class II device.*** 99.4 Letter from the FDA authorizing the Company to market the OXYCOIL coiled oxygen
tubing as a Class II device.*** 99.5 Letter from the FDA authorizing the Company to market the TOTAL O2
Delivery System as a Class II device******* 99.6 Letter from the FDA authorizing the Company to market the OXYMATIC 411 conserver as a
Class II device******** 99.7 Letter from the FDA authorizing the Company to market the OXYMATIC 401A and 411A
conservers as a Class II devices******** 99.8 Letter from the FDA authorizing the Company to market the TOTAL O2 Post
Valve Cylinders********* 99.9 Letter from the FDA authorizing the Company to market the CYPRESS OXYPneumatic
conserver********** 99.10 Letter from the FDA authorizing the Company to market the SAGE Oxygen Therapeutic
Device*********** 99.11 Letter from the FDA authorizing the Company to market the LOTUS Electronic Oxygen
Conserver 
 *
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-18,
File No. 2-83926.**
    
    Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1984.***
    
    Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1986.****
    
    Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K for the
year ended March 31, 1993.*****
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the
year ended March 31, 1994.******
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the
year ended March 31, 1996.*******
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1998.********
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 2001.*********
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the
year ended March 31, 2002.**********
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the
year ended March 31, 2003.***********
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the
year ended March 31, 2004.************
    
    Previously filed as Appendix A of the Registrants Proxy Statement for the 2004 Annual Shareholders Meeting. 16




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on the 20th day of June, 2004. CHAD THERAPEUTICS, INC.By
    /s/  Earl L. YagerEarl L. Yager, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ Thomas E. Jones
    
    Chairman of the Board of Directors
    
    June 27, 2005Thomas E. Jones/s/ Earl L. Yager
    
    Chief Executive Officer, President,
    
    June 27, 2005Earl L. Yager
    
    and Director(Principal Executive Officer)/s/ Tracy A. Kern
    
    Chief Financial Officer
    
    June 27, 2005Tracy A. Kern
    
    (Principal Financial and Accounting Officer)/s/ Kathleen M. Griggs
    
    Director
    
    June 27, 2005Kathleen M. Griggs/s/ John C. Boyd
    
    Director
    
    June 27, 2005John C. Boyd/s/ Edward Anthony Oppenheimer, M.D.
    
    Director
    
    June 27, 2005Edward Anthony Oppenheimer, MD/s/ Philip T. Wolfstein
    
    Director
    
    June 27, 2005Philip T. Wolfstein/s/ James M. Brophy
    
    Director
    
    June 27, 2005James M. Brophy
 17




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Exhibit Index Exhibit IndexExhibit No.
    
    Document13.1
    
    Annual Report to Shareholders for the year ended March 31, 2005.23.1
    
    Consent of Independent Accountant31.1
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.11
    
    Letter from the FDA authorizing the Company to market the LOTUS Electronic Oxygen
Conserver
 18