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
  þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the fiscal year ended March 31, 2008
 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)
   Name of each exchangeTitle of each class
    
    on which registeredCommon Shares, $.01 par value
    
    American Stock Exchange
  o þ
 o þ
 þ o
 o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
þ
 o þ




---



##### 



2




---



##### 



3




---



##### 



Products Under Development
 FloCHANNEL.
 FloPAP.
 Simple REM.
 Rhinomanometer.
 4




---



##### 



Other Products.
  Research and Development
  Licensing and Related Agreements
   Marketing
  5




---



##### 



Manufacturing and Sources of Supply
     Customers, Backlog and Orders
   
 2008
    
    2007
    
    2006SalesUnited States
    
    $
    10,166
    
    
    $
    15,795
    
    
    $
    17,996Canada
    
    
    144
    
    
    
    174
    
    
    
    193Japan
    
    
    241
    
    
    
    346
    
    
    
    506Europe
    
    
    702
    
    
    
    2,054
    
    
    
    3,337Indonesia
    
    
    175
    
    
    
    271
    
    
    
    42All other countries
    
    
    363
    
    
    
    341
    
    
    
    280Total
    
    $
    11,791
    
    
    $
    18,981
    
    
    $
    22,354
   6




---



##### 



Competition
  Patents and Trademarks
      7




---



##### 



.
 Governmental Regulation
     Employees
  Risk Factors
  We depend upon our unproven products for the sleep disorder market for our future success.
  8




---



##### 



Most of our sleep disorder products remain in the development stage and we do not know when,
if ever, we will generate any revenues from such products.
  We will require additional financial resources to implement our strategy with respect to the
sleep disorder market. Failure to obtain such resources will diminish our prospects for success.
    Our future results will depend upon our ability to continue to successfully introduce new
products. Difficulties encountered in introducing new products will harm our future operating
results.
  9




---



##### 



Failure to protect our intellectual property rights could hurt our ability to compete in the
sleep disorder market.
  If we are unable to stay abreast of continuing technological change, our products may become
obsolete, resulting in a decline in sales and profitability.
  Our operating results would be adversely affected if we incur uninsured losses due to product
liability claims.
  10




---



##### 



Unresolved Staff Comments.
  Properties
  Legal Proceedings
  Submission of Matters to a Vote of Security Holders
  SharesFor
    
    
    7,183,378Against
    
    
    49,300Abstain
    
    
    8,087
 11




---



##### 



Market for Registrants Common Equity, R elated Stockholder Matters, and Issuer
Purchases of Equity Securities
   Quarter Ended
    
    High
    
    LowJune 30, 2006
    
    
    3.05
    
    
    
    2.41September 30, 2006
    
    
    2.85
    
    
    
    1.46December 31, 2006
    
    
    3.06
    
    
    
    1.86March 31, 2007
    
    
    2.42
    
    
    
    1.42June 30, 2007
    
    
    2.19
    
    
    
    1.39September 30, 2007
    
    
    1.41
    
    
    
    .68December 31, 2007
    
    
    .96
    
    
    
    .26March 31, 2008
    
    
    .54
    
    
    
    .26
      Number of securitiesNumber of securities
    
    
    
    
    
    remaining available for futureto be issued upon
    
    Weighted-average
    
    issuance under equityexercise of
    
    exercise price of
    
    compensation plansoutstanding options,
    
    outstanding options,
    
    [excluding securities reflectedwarrants and rights
    
    warrants and rights
    
    in column (a)]Plan Category
    
    (a)
    
    (b)
    
    (c)Plan Approved by Security Holders1994 Stock Option Plan
    
    
    829,000
    
    
    $
    1.95
    
    
    
    -0-2004 Equity Compensation Plan
    
    
    15,000
    
    
    $
    3.45
    
    
    
    735,000Plans Not Approved by Security
Holders
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total
    
    
    844,000
    
    
    
    
    
    
    
    735,000
 12




---



##### 



13




---



##### 



14




---



##### 



15




---



##### 



16




---



##### 



17




---



##### 



18




---



##### 



Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109 Accounting for Income Taxes
   19




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 
 20




---



##### 



March 31,2008
    
    
    2007ASSETSCurrent assets:Cash
    
    $
    2,068,000
    
    
    $
    375,000Accounts receivable, less allowance for
doubtful accounts of $166,000 at
March 31, 2008, and $38,000 at
March 31, 2007
    
    
    526,000
    
    
    
    2,376,000Income taxes refundable
    
    
    1,000
    
    
    
    291,000Inventories (Note 2)
    
    
    
    
    
    
    6,557,000Prepaid expenses and other assets
    
    
    126,000
    
    
    
    321,000Total current assets
    
    
    2,721,000
    
    
    
    9,920,000Property and equipment, at cost
    
    
    65,000
    
    
    
    6,186,000Less accumulated depreciation
    
    
    30,000
    
    
    
    5,501,000Net property and equipment
    
    
    35,000
    
    
    
    685,000Intangible assets, net
    
    
    761,000
    
    
    
    1,107,000Other assets
    
    
    25,000
    
    
    
    36,000Total assets
    
    $
    3,542,000
    
    
    $
    11,748,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    95,000
    
    
    $
    1,282,000Accrued expenses
    
    
    2,274,000
    
    
    
    1,372,000Total current liabilities
    
    
    2,369,000
    
    
    
    2,654,000Commitments and contingencies (Note 10)Shareholders equity:Common shares, $.01 par value, authorized
40,000,000 shares; 10,180,000 and 10,180,000
shares issued and outstanding
    
    
    14,208,000
    
    
    
    13,526,000Accumulated deficit
    
    
    (13,035,000
    )
    
    
    (4,432,000
    )Total shareholders equity
    
    
    1,173,000
    
    
    
    9,094,000Total liabilities and shareholders equity
    
    $
    3,542,000
    
    
    $
    11,748,000
  21




---



##### 



Years EndedMarch 31,2008
    
    
    2007Costs and expenses:Selling, general, and administrative
    
    $
    2,293,000
    
    
    $
    2,545,000Research and development
    
    
    770,000
    
    
    
    217,000Costs and expenses from continuing operations
    
    
    3,063,000
    
    
    
    2,762,000Interest Income
    
    
    27,000
    
    
    
    62,000Interest Expense
    
    
    1,480,000
    
    
    
    5,000Loss from continuing operations before
income tax expense
    
    
    (4,516,000
    )
    
    
    (2,705,000
    )Income tax expense
    
    
    4,000
    
    
    
    992,000Net loss
from continuing operations
    
    
    (4,520,000
    )
    
    
    (3,697,000
    )Discontinued operations (Note 3)Gain (Loss) from discontinued operations
    
    
    (3,642,000
    )
    
    
    283,000Loss on sale
    
    
    (441,000
    )
    
    
    Net loss
    
    $
    (8,603,000
    )
    
    $
    (3,414,000
    )Basic and diluted loss per share,
continuing operations
    
    $
    (0.45
    )
    
    $
    (0.36
    )Basic and diluted loss per share,
disconintued operations
    
    $
    (0.40
    )
    
    $
    0.02Total basic and diluted loss per share
    
    $
    (0.85
    )
    
    $
    (0.34
    )Weighted shares outstanding:Basic
    
    
    10,180,000
    
    
    
    10,170,000Diluted
    
    
    10,180,000
    
    
    
    10,170,000
  22




---



##### 



Common Shares
    
    
    AccumulatedShares
    
    
    Amount
    
    
    DeficitBalance as of March 31, 2006
    
    
    10,158,000
    
    
    
    13,413,000
    
    
    $
    (1,018,000
    )Stock-based
compensation - options
    
    
    
    
    
    
    33,000
    
    
    
    Stock-based compensation -
restricted stock
    
    
    22,000
    
    
    
    80,000
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (3,414,000
    )Balance as of March 31, 2007
    
    
    10,180,000
    
    
    
    13,526,000
    
    
    
    (4,432,000
    )Stock-based compensation -
options
    
    
    
    
    
    
    8,000
    
    
    
    Warrants
    
    
    
    
    
    
    674,000Net loss
    
    
    
    
    
    
    
    
    
    
    (8,603,000
    )Balance at March 31, 2008
    
    
    10,180,000
    
    
    
    14,208,000
    
    
    $
    (13,035,000
    )
  23




---



##### 



Twelve Months EndedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (8,603,000
    )
    
    $
    (3,414,000
    )Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Depreciation and amortization of property and equipment
    
    
    271,000
    
    
    
    350,000Amortization of intangibles
    
    
    38,000
    
    
    
    42,000Loss on asset disposition due to discontinued operations
    
    
    443,000
    
    
    
    Loss on impairment of tangible and intangible assets
    
    
    308,000
    
    
    
    Amortization of deferred financing fees
    
    
    431,000
    
    
    
    Provision for losses on receivables
    
    
    128,000
    
    
    
    (14,000
    )Decrease (increase) in deferred income taxes
    
    
    
    
    
    
    1,266,000Stock-based compensation
    
    
    8,000
    
    
    
    113,000Warrant costs
    
    
    674,000
    
    
    
    Changes in assets and liabilities:Decrease (increase) in accounts receivable
    
    
    760,000
    
    
    
    858,000Decrease (increase) in inventories
    
    
    982,000
    
    
    
    (176,000
    )Decrease (increase) in income taxes refundable
    
    
    290,000
    
    
    
    92,000Decrease (increase) in prepaid expenses and other assets
    
    
    (258,000
    )
    
    
    (108,000
    )Increase (decrease) in accounts payable
    
    
    (820,000
    )
    
    
    767,000Increase (decrease) in accrued expenses
    
    
    1,091,000
    
    
    
    (63,000
    )Net cash (used in) provided by operating activities
    
    
    (4,257,000
    )
    
    
    (287,000
    )Cash flows from investing activities:Additions to other assets
    
    
    (355,000
    )
    
    
    (177,000
    )Proceeds from asset sales due to discontinued operations
    
    
    4,193,000
    
    
    
    Capital expenditures
    
    
    (161,000
    )
    
    
    (85,000
    )Net cash (used in) provided by investing activities
    
    
    3,677,000
    
    
    
    (262,000
    )Cash flows from financing activities:Proceeds from borrowings from revolving line of credit
    
    
    2,750,000
    
    
    
    Payments on borrowings from revolving line of credit
    
    
    (1,159,000
    )
    
    
    Borrowings under long term debt
    
    
    750,000
    
    
    
    Payments on long term debt
    
    
    (68,000
    )
    
    
    (11,000
    )Net cash (used in) provided by financing activities
    
    
    2,273,000
    
    
    
    (11,000
    )Net increase (decrease) in cash
    
    
    1,693,000
    
    
    
    (560,000
    )Cash beginning of period
    
    
    375,000
    
    
    
    935,000Cash end of period
    
    $
    2,068,000
    
    
    $
    375,000Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    806,000
    
    
    $
    Non-Cash Financing ActivitiesDuring the year payments were made on the revolving line of credit and the term note in the amount of $1,591,000
and $682,000 respectively directly from escrow funds received from the sale to Inovo.
  24




---



##### 



1.
    
    Basis of Presentation and Going ConcernThe CompanyCHAD Therapeutics, Inc. (the Company) is now working exclusively on the development and
commercialization of diagnostic and therapeutic devices for the sleep disorder market. In
February and March 2008, the Company sold all of its oxygen product assets and exited the oxygen
market entirely. The Company closed its production facilities located in Chatsworth, California
in June 2008, and there will be no further costs or revenues associated with its former oxygen
product line. The Company is developing diagnostic and therapeutic products for the sleep
disorder market. It expects to receive 510k clearance for its first product in July 2008.
Currently, the Company is not generating revenues from the sleep products it has in development.The Companys financial statements have been prepared and presented on a basis assuming it will
continue as a going concern. However, the Companys prospects must be considered in light of
substantial risks. The Company has experienced net losses since its fiscal year ended March 31,
2006 and as of March 31, 2008, it had an accumulated deficit of approximately $13,035,000. For
the year ended March 31, 2008, the Company had a net loss of $8,603,000 and utilized
approximately $4,257,000 of cash in operating activities. The Company expects operating losses
to continue through its foreseeable future as the sleep products do not yet generate revenue.
The Company is in need of additional financing or a strategic arrangement in order to continue
operations. These factors, amongst others, raise substantial doubts about the Companys ability
to continue as a going concern.On November 16, 2007, the Company entered into a definitive agreement, subject to shareholder
approval, to sell to Inovo, Inc. (the Buyer) substantially all of the assets of the Company
related to the oxygen conserver business including accounts receivable, inventory, and certain
equipment and intellectual property (the Asset Sale) pursuant to an Asset Purchase Agreement
(the APA). Pursuant to the APA, the Buyer assumed certain liabilities and obligations related
to the Companys oxygen conserver business. The Companys shareholders voted to approve the
sale of the Companys oxygen conserver business on January 31, 2008 and the Asset Sale was
completed for $5,250,000 on February 15, 2008. On March 6, 2008, the Company entered into an
Asset Purchase Agreement (the Purchase Agreement) with Respironics, Inc., (Respironics).
Pursuant to the Purchase Agreement, Respironics acquired the Companys assets related to the
transfilling oxygen business, the Total O2 Delivery System, including the OMNI-5 In-Home Filling
System, OMNI-2 In-Home Filling System, Omni Fill technology and the Companys Post Valve patent
for the purchase price of $1.825 million. Under the terms of the Purchase Agreement, Respironics
assumed certain liabilities and obligations related to the Companys transfilling oxygen
business and the Company agreed to indemnify Respironics for expenses arising out of any breach
of its representations or warranties. As a result of the discontinued operations presentation,
the net earnings (loss) related to the discontinued operations of $(3,942,000) and $283,000 for
the fiscal years 2008 and 2007 respectively has been presented in the Statements of Operations
as a component of earnings (loss) from discontinued operations.During the next twelve months, the Company intends to seek outside financing arrangements in
order to facilitate its ability to fund anticipated capital expenditures, support its
development of the sleep products, and enhance its working capital resources. Financing may be
obtained through the sale of equity or debt securities, through the establishment of credit
arrangements or through some combination of the foregoing. The Company has no established lines
of credit or other arrangements in place to obtain working capital, and no assurance can be
given regarding if and when other sources of working capital would be available. Moreover, the
Company does not currently have in place any arrangements to raise additional funds through the
sale of securities and it is not possible at this time to predict the terms upon which
securities might be sold, or if the Company can raise any funds from prospective investors.
 25




---



##### 



Fair Value of Financial InstrumentsThe carrying amounts of financial instruments approximate fair value as of March 31, 2008, and
2007. The carrying amounts related to cash, accounts receivable, other current assets, and
accounts payable approximate fair value due to the relatively short maturity of such
instruments.InventoriesInventories are valued at the lower of cost or market. Cost is determined based on standard
cost which approximates first-in, first-out method.Property and EquipmentProperty and equipment are stated at cost. Depreciation of property and equipment is provided
using the straight-line method based on the estimated useful lives of the related assets as
follows:
 Office Equipment and Furniture
    
    5  10 yearsMachinery and Equipment
    
    3  10 yearsTooling
    
    4 years
 Amortization of leasehold improvements is over the life of the related lease or asset, whichever
is shorter.Depreciation expense was $271,000 and $350,000 for the years ended March 31, 2008 and 2007,
respectively.Use of EstimatesManagement of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, and the disclosure of contingent assets and liabilities, at
the balance sheet date, and the reporting of revenues and expenses during the periods, to
prepare these financial statements in conformity with accounting principles generally accepted
in the United States. Actual results could differ from those estimates.Significant estimates include the allowance for doubtful accounts, inventory valuation, deferred
income tax asset valuation allowances, and the estimated future operating cash flows form the
Companys long-lived assets, including its intangible assets. Considerable management judgment
is necessary to estimate future operating cash flows as future cash flows are impacted by
competitive and other factors that are generally out of managements control. Accordingly,
actual results could vary significantly from managements estimates.Valuation of Accounts ReceivableThe Company makes judgements as to the collectibility of accounts receivable based on historical
trends and future expectations. Management estimates an allowance of doubtful accounts, which
represents the collectibility of accounts receivable. This allowance adjusts gross accounts
receivable downward to its estimated net realizable value. To determine the allowance for
doubtful accounts, management reviews specific customer risk and the Companys accounts
receivable aging.Impairment of Long-Lived AssetsThe company reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to its estimated fair value. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
 26




---



##### 



Revenue RecognitionRevenue from product sales is recognized upon shipment of merchandise when title and risk of
loss
transfers to the customer and the earnings process is complete. Products are shipped FOB
shipping point and title to the products transfers to the purchaser upon shipment. Under a
sales-type lease agreement, revenue is recognized at the time of the shipment with interest
income recognized over the life of the lease. Shipping charges billed to customers are included
in net sales. Allowance for customer returns have not been established, as historically
customer return experience has been minor. Costs paid to shipping companies are recorded as a
cost of sales.Comprehensive Income (Loss)The Company did not have components of other comprehensive income other than its net earnings
(loss) during the periods ended March 31, 2008, and 2007. As a result, comprehensive income
(loss) is the same as net earnings (loss) for the periods ended March 31, 2008 and 2007.Royalty ExpenseThe Company charges royalties incurred on product licenses to costs of sales.Earnings per ShareOptions to purchase 844,000 shares of common stock at prices ranging from $.50 to $5.00 per
share and 904,000 shares of common stock at prices ranging from $.50 to $11.50 were not included
in the computation of diluted earnings per share for the years ended March 31, 2008 and 2007,
respectively, because their effect would have been anti-dilutive.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis and net operating loss and tax credit carryforwards. In assessing whether there is a
need for a valuation allowance on deferred tax assets, we determine whether it is more likely
than not that we will recognize tax benefits associated with deferred tax assets. In making
this determination, we consider future taxable income and tax planning strategies that are both
prudent and feasible. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.Major Customers
 Twelve Months EndedMarch 31,2008
    
    
    2007Customer A**
    
    
    38.3
    %
    
    
    41.3
    %
 
 **
    
    Indicates national chain customer The Companys customers are affected by Medicare reimbursement policy as approximately 80% of
home oxygen patients are covered by Medicare and other government programs.Concentration of Credit RiskAt times the Company maintains balances of cash that exceed $100,000 per financial institution,
the maximum insured by the Federal Deposit Insurance Corporation. Further, the Company
maintains a portion of its cash funds in an interest bearing, uninsured account. The Companys
right to the cash is subject to the risk that the financial institution will not pay when cash
is requested. The potential loss is the amount in any one financial institution over $100,000
and/or all funds in the interest bearing account. At March 31, 2008, the amount at risk was
approximately $1,468,000.
 27




---



##### 



The significant outstanding accounts receivable balances at March 31, 2008 and 2007 were as
follows:
 Twelve Months EndedMarch 31,2008
    
    2007Customer A**
    
    
    
    *
    
    
    41.0
    %Customer B
    
    
    47.1
    %
    
    
    
    *Customer C**
    
    
    
    *
    
    
    12.6
    %Customer D
    
    
    20.8
    %
 
 *
    
    Indicates receivables balance less than 10% of the Companys net accounts receibable balance.**
    
    Indicates national chain customer Stock Option PlanOn April 1, 2006, the Company adopted Statement of Financial Accounting Standards 123R,
Share-Based Payment, which revised SFAS 123, Accounting for Stock-Based Compensation. The
Company adopted FAS 123R using the modified prospective transition method. Previously, the
Company had followed APB 25, accounting for employee stock options at intrinsic value.
Accordingly, during the years ended March 31, 2008 and 2007, the Company recorded stock-based
compensation expense for awards granted prior to, but not yet vested, as of April 1, 2006, as if
the fair value method required for pro forma disclosure under FAS 123 were in effect for expense
recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after
April 1, 2006, the Company would recognize compensation expense based on the estimated grant
date fair value method using the Black-Scholes valuation model. For these awards, the Company
would recognize compensation expense using a straight-line method. As FAS 123R requires that
stock based compensation expense be based on awards that are ultimately expected to vest,
stock-based compensation for the years ended March 31, 2008 and 2007, has been reduced for
estimated forfeitures. For the twelve-month period ended March 31, 2008, stock-based
compensation expense of $8,000 was recorded to selling, general, and administrative expenses,
all of which was due to FAS 123R option expense. For the year ended march 31, 2007, stock-based
compensation expense of $113,000 was recorded to selling, general, and administrative expenses.
Of the $113,000 in stock-based compensation recorded for the year ended March 31, 2007, $33,000
related to FAS 123R option expense with the remaining $80,000 related to restricted stock issued
to directors that vested March 31, 2007. Due to the prospective adoption of SFAS No. 123R,
results for prior period have not been restated.The Company has an equity incentive plan (the Plan) for key employees as defined under Section
422(A) of the Internal Revenue Code. The Plan provides that 750,000 common shares be reserved
for issuance under the Plan, which expires on September 8, 2014, of which approximately 735,000
were available for future grant at March 31, 2008. In addition, the Plan provides that
non-qualified options can be granted to directors and independent contractors of the Company.
Stock options are granted with an exercise price equal to the market value of a share of the
Companys stock on the date of the grant. Historically, grants to non-employee directors have
vested over two years, while the majority of grants to employees have vested over two to five
years of continuous service.The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option valuation model. Expected volatility is based on the historical volatility
of the Companys stock. No expected dividend yield is used since the Company has not
historically declared or paid dividends and no dividends are expected in the foreseeable future.
The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the
expected term of the
option. The Company did not grant any stock options during the years ended March 31, 2008 and
 28




---



##### 



2007, respectively. A summary of stock option activity as of and for the twelve-months ended
March 31, 2008, is presented below:
 RemainingExercise
    
    ContractualPrice Per
    
    TermShares
    
    Share
    
    (in years)Outstanding at March 31, 2007
    
    
    904,000
    
    
    $
    2.09Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    60,000
    
    
    
    3.91Outstanding at March 31, 2008
    
    
    844,000
    
    
    $
    2.01
    
    
    
    3.0As of March 31, 2008:Exercisable
    
    
    844,000
    
    
    $
    2.01
    
    
    
    3.0Vested and expected to vest
    
    
    844,000
    
    
    $
    2.01
    
    
    
    3.0
 No options were granted or exercised during the years ended March 31, 2008 and 2007.The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the quoted price of the Companys common stock at March 31, 2008 for the
options that were in-the-money at March 31, 2008. The intrinsic value at March 31, 2008 was $0.
As of March 31, 2008, there was no unrecognized compensation cost related to unvested
stock-based compensation arrangements granted under the Plan.2.
    
    InventoriesDue to the sales of its oxygen assets in February and March of 2008, the Company did not have
any inventory at March 31, 2008. At March 31, 2007, inventories consisted of the following:
 2008
    
    
    2007Finished goods
    
    $
    
    
    
    $
    1,841,000Work-in-process
    
    
    
    
    
    
    2,240,000Raw materials
    
    
    
    
    
    
    2,476,000$
    
    
    
    $
    6,557,000
 3.
    
    Discontinued OperationsA protracted period of reductions in reimbursement for home respiratory care and continuing
uncertainty with respect to future prospects for an adequate reimbursement regime caused the
Company to make the decision to exit the oxygen business. In February and March 2008, the
Company exited the oxygen therapy business by selling all of its oxygen assets in two separate
transactions. On November 16, 2007, the Company entered into a definitive agreement, subject to
shareholder approval, to sell to Inovo, Inc. (the Buyer) substantially all of the assets of
the Company related to the oxygen conserver business including accounts receivable, inventory,
and certain equipment and intellectual property (the Asset Sale) pursuant to an Asset Purchase
Agreement (the APA). Pursuant to the APA, the Buyer would assume certain liabilities and
obligations related to the Companys oxygen conserver business. The Companys shareholders
voted to approve the sale of the Companys oxygen conserver business on January 31, 2008 and the
Asset Sale was completed for $5,250,000 on February 15, 2008. On March 6, 2008, the Company
entered into an Asset Purchase Agreement (the Purchase Agreement) with Respironics, Inc.,
 29




---



##### 



(Respironics). Pursuant to the Purchase Agreement, Respironics acquired the Companys assets
related to the transfilling oxygen business, the Total O2 Delivery System, including the OMNI-5
In-Home Filling System, OMNI-2 In-Home Filling System, Omni Fill technology and the Companys
Post Valve patent for the purchase price of $1,825,000. Under the terms of the Purchase
Agreement, Respironics assumed certain liabilities and obligations related to the Companys
transfilling oxygen business and the Company agreed to indemnify Respironics for expenses
arising out of any breach of its representations or warranties. As a result of the discontinued
operations presentation, the net earnings (loss) related to the discontinued operations have
been presented in the Statements of Operations as a component of earnings (loss) from
discontinued operations.In accordance with provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets,  it was determined that the oxygen therapy business should be presented as a
discontinued operation in the financial statements. In fiscal 2008, the Company recorded a loss
of $3,642,000 related to the operations of the oxygen business and recorded a loss on the sales
of assets of $441,000.The assets sold to the buyer and liabilities of the oxygen business assumed by the buyer at the
time of sale were as follows:
 Accounts receivable, net
    
    $
    1,272,000Inventory
    
    
    5,575,000Other current assets
    
    
    33,000Property, Plant and Equipment
    
    
    440,000Other non-current assets
    
    
    455,000Assets of discontinued operations
    
    $
    7,775,000Accounts payable
    
    $
    368,000Other current liabilities
    
    
    233,000Liabilities of discontinuted operations
    
    $
    601,000
  2008
    
    
    2007Net sales
    
    $
    11,791,000
    
    
    $
    18,981,000Cost of sales
    
    
    8,926,000
    
    
    
    13,677,000Gross profit
    
    
    2,865,000
    
    
    
    5,304,000Operating expenses
    
    
    4,058,000
    
    
    
    5,021,000Other expenses
    
    
    2,449,000
    
    
    
    Earnings (loss) from discontinued operations
    
    $
    (3,642,000
    )
    
    $
    283,000
 4.
    
    Long-Term Debt and Revolving Line of CreditIn March 2007, the Company entered into a one-year factoring arrangement that provided for the
sale
of up to $1,500,000 of the Companys accounts receivable. Assignments under the agreement
incurred interest at the banks prime rate plus two percent (2%) to three percent (3%) depending
on the total accounts receivable balance. The Company had a minimum monthly interest payment of
$6,000 beginning April 2007. The Company voluntarily terminated the factoring agreement on July
30, 2007.
 30




---



##### 



On July 30, 2007, the Company entered into a financing transaction with Calliope Capital
Corporation , a Delaware corporation (the Investor) pursuant to which the Company issued to
the Investor a $750,000 convertible term note (Convertible Note) and a $2,750,000 revolving
credit line (Credit Line), all secured by the Companys assets. The Convertible Note is
payable in equal installments over 36 months beginning in November 2007 and maturing in July
2010 and bears interest at prime plus 2%, and the Credit Line bears interest at prime plus 1.5%.
A portion of the financing was used to pay all outstanding obligations on the Companys
factoring arrangement. At the Investors option, the Convertible Note may be converted into
shares of the Companys common stock any time during the term of the note at a conversion price
of $1.18. The closing price of the Companys common stock on the issue date of the Convertible
Note was $1.00 per share. In addition, warrants to purchase up to 976,744 shares of the
Companys common stock were issued to the Investor with an exercise price of $1.24 per share.
The Investor was granted registration rights with respect to the shares underlying the warrants.
The warrants include a lock-up feature for a period of 12 months after any warrants are
exercised. On February 13, 2008, the Company voluntarily terminated both the Convertible Note
and the revolving Credit Line. The warrants issued to Calliope Capital Corporation remain
outstanding but unexercised at March 31, 2008.In order to address the Companys limited ability to draw against its Credit Line at the end of
the second fiscal quarter, on January 2, 2008, the Company entered a Subordinated Secured Note
and Warrant Purchase Agreement (the Credit Facility) with Mr. Earl Yager and Mr. Thomas Jones,
our Chief Executive Officer and our Chairman of the Board, respectively. The Company entered into
the financing arrangement after it was unsuccessful in obtaining financing on acceptable terms
from a third party. The terms of the financing arrangement were negotiated and approved by the
Companys independent directors who concluded that the terms were more favorable to the Company
than those available from third party lenders. Pursuant to the terms of the Credit Facility, the
Company may draw an aggregate of $1,000,000, subject to certain conditions. As of February 12,
2008, the Company had borrowed $550,000 under this facility. The Company voluntarily terminated
the Credit Facility on February 15, 2008.In connection with the Credit Facility, Mr. Yager and Mr. Jones each received 321,428 warrants
to purchase our common stock at a price per share equal to $.28 (the average closing price of
our common stock on the American Stock Exchange for the five days immediately preceding the
initial funding under the Credit Facility). The number of shares issuable for each warrant will
be equal to (a) the principal amount of the Note issued at the initial closing multiplied by
0.30, divided by (b) the exercise price. The warrants have a term of five years. No additional
warrants are issuable in connection with any additional borrowings the Company may make under
the Credit Facility.Upon the repayment of its loans the Company recognized all of its deferred financing fees of
$443,000.5.
    
    Income TaxesIncome tax expense (benefit) for fiscal 2008 and 2007 consisted of the following:
 2008
    
    2007Current:Federal
    
    $
    
    
    
    $
    (282,000
    )State
    
    
    4,000
    
    
    
    80004,000
    
    
    
    (274,000
    )Deferred:Federal
    
    
    
    
    
    
    837,000State
    
    
    
    
    
    
    429,000
    
    
    
    1,266,000Total
    
    $
    4,000
    
    
    $
    992,000
 31




---



##### 



A reconciliation of the difference between the Companys income tax expense (benefit) and the
statutory income tax for the years ended March 31, 2008 and 2007 is as follows:
 2008
    
    2007Statutory tax expense (benefit)
    
    $
    (2,930,000
    )
    
    $
    (825,000
    )State income tax, net
    
    
    (293,000
    )
    
    
    (57,000
    )Valuation allowance
    
    
    3,555,000
    
    
    
    1,858,000Warranty and other
    
    
    (328,000
    )
    
    
    16,000$
    4,000
    
    
    $
    992,000
 The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets at March 31, 2008 and 2007 are mainly related to net operating loss carryforwards.
The Company has Federal net operating loss carryforwards of approximately $12,000,000 of which
$1,459,000 expires in 2027 and the balance in 2028 and California net operating loss
carryforwards of approximately $11,000,000 of which $3,442,000 expires in 2013 and the balance
expiring in 2014. In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax asset will not be
realized. At March 31, 2008 and 2007, the Companys deferred tax assets are fully offset by a
valuation allowance.6.
    
    Intangible AssetsIntangible assets include amounts paid for licenses on new and existing products. License fees
are being amortized using the straight-line method over the life of the related patents.
Accumulated amortization on the license fees amounted to $107,000 and $138,000 at March 31, 2008
and 2007, respectively. Annual amortization on intangible assets currently in service will be
approximately $28,000 for each of the next five years. Intangible assets were $761,000 and
$1,107,000, and amortization expense was $38,000 and $42,000 at March 31, 2008 and 2007,
respectively.7.
    
    Shareholders EquityThe Company has an equity incentive plan (the Plan) for key employees as defined under Section
422(A) of the Internal Revenue Code. The Plan provides that 750,000 common shares be reserved
for issuance under the Plan, which expires on September 8, 2014. In addition, the Plan provides
that non-qualified options can be granted to directors and independent contractors of the
Company. Transaction involving the equity plan and the 1994 stock option plan, which expired in
2004, are summarized as follows:
 32




---



##### 



WeightedAverageOption
    
    
    Price PerShares
    
    
    ShareIncentive options:Outstanding March 31, 2006
    
    
    675,000
    
    
    $
    2.10Cancelled
    
    
    (28,000
    )
    
    
    3.42Outstanding March 31, 2007
    
    
    647,000
    
    
    
    2.02Cancelled
    
    
    (52,000
    )
    
    
    3.35Outstanding March 31, 2008
    
    
    595,000
    
    
    $
    1.91Exercisable March 31, 2008
    
    
    595,000
    
    
    $
    1.91Non-qualified optioins:Outstanding March 31, 2006
    
    
    270,000
    
    
    $
    9.56Cancelled
    
    
    (5,000
    )
    
    
    3.90Expired
    
    
    (8,000
    )
    
    
    11.50Outstanding March 31, 2007
    
    
    257,000
    
    
    
    2.26Expired
    
    
    (8,000
    )
    
    
    7.62Outstanding March 31, 2008
    
    
    249,000
    
    
    $
    2.09Exercisable March 31, 2008
    
    
    249,000
    
    
    $
    2.09
 At March 31, 2008, information regarding outstanding options is summarized as follows:
 Range of Exercise Price$.50
 $1.88
    
    

$2.00
 $5.00Number outstanding
    
    
    438,000
    
    
    
    406,000Weighted average remaining life (years)
    
    
    1.9
    
    
    
    4.2Weighted average exercise price
    
    $
    1.09
    
    
    $
    3.01Number exercisable
    
    
    438,000
    
    
    
    406,000Weighted average exercise price
    
    $
    1.09
    
    
    $
    3.01
 Incentive and non-qualified options were granted at prices not less than 100% of market value at
dates of grant. Options under the Plan become exercisable on the anniversary of the grant date
on a pro rata basis over a defined period and expire ten (10) years after the date of grant. To
the extent the Company derives a tax benefit from options exercised by employees, such benefit
is credited to Common Shares.8.
    
    Employee Benefit PlanIn December 1992, the Company adopted a defined contribution profit sharing plan, including
features under Section 401(k) of the Internal Revenue Code. The purpose of the plan is to
provide an
incentive for employees to make regular savings for their retirement. Company contributions to
the profit sharing plan are discretionary and are determined by the Board of Directors. There
have been no contributions since 2002.
 33




---



##### 



9.
    
    Accrued ExpensesAt March 31, 2008 and 2007, accrued expenses consist of the following:
 2008
    
    2007Accrued Severance
    
    $
    1,845,000
    
    
    $
    Accrued royalties
    
    
    2,000
    
    
    
    301,000Accrued vacation
    
    
    142,000
    
    
    
    216,000Warranty reserve
    
    
    
    
    
    
    163,000Payroll and incentive compensation
    
    
    108,000
    
    
    
    102,000Accrued inventory in transit
    
    
    
    
    
    
    200,000Customer deposits
    
    
    
    
    
    
    103,000Accrued extended warranty
    
    
    
    
    
    
    91,000Other
    
    
    177,000
    
    
    
    196,000$
    2,274,000
    
    
    $
    1,372,000
 10.
    
    Commitments and ContingenciesThe Company is currently leasing its administrative and plant facilities and certain office
equipment under noncancelable operating leases that expire in June 2008. The Company will
vacate those premises in June 2008 upon expiration of the lease. The Company has entered into a
new lease for an administrative and warehouse facility of approximately 1,200 square feet which
will expire in December 2008 and has a monthly obligation of $1,200. Rent expense amounted to
$617,000 and $571,000 for the years ended March 31, 2008 and 2007, respectively. The Company is
also responsible for common area maintenance costs, including taxes, insurance and other
maintenance costs.Employee obligations consist of an employment agreement (the Employment Agreement) with Thomas
E. Jones, Chairman of the Board of Directors. The Employment Agreement does not have a specific
term and provides for a base salary of $160,000 per year, which is subject to annual review by
the Board of Directors. The Employment Agreement may be terminated at any time by the Company,
with or without cause, and may be terminated by Mr. Jones upon 90 days notice. If Mr. Jones
resigns or is terminated for cause (as defined in the Employment Agreement), he is entitled to
receive only his base salary and accrued vacation through the effective date of his resignation
or termination. If Mr. Jones is terminated without cause, he is entitled to receive a severance
benefit in accordance with the Companys Severance and Change of Control Plan, or if not
applicable, a severance benefit equal to 200% of his salary and incentive bonus for the prior
fiscal year. In estimating its contractual obligation, the Company has assumed that Mr. Jones
will voluntarily retire at the end of the year he turns 65 and that no severance benefit will be
payable. This date may not represent the actual date the Companys payment obligations under
the Employment Agreement are extinguished.In addition to the severance agreement with Mr. Jones, the Company is also a party to a
severance agreement with its CEO. Under the agreement, the CEO is entitled to a severance pay
equal to 200% of his annual salary upon a change of duties, as defined in the agreement. The
company has not recorded the obligation under the severance agreement for these two individuals
because 100% of their salaries are still being accrued, and management believes a change in
duties has not occurred. However, only a small fraction of their salary has been paid to them.
Should the Company not pay
their salary in full, or a change of duties occur, the Company will be obligated to pay them
$800,000 in severance pay.
 34




---



##### 



From time to time, the Company becomes involved in certain legal actions in the ordinary course
of business. The Company is not currently a party to any pending legal actions.
 11.
    
    Geographic InformationThe Company has one reportable operating segment. Geographic information regarding the
Companys net sales is as follows:
 2008
    
    
    2007United States
    
    $
    10,166,000
    
    
    $
    15,795,000Canada
    
    
    144,000
    
    
    
    174,000Japan
    
    
    241,000
    
    
    
    346,000Europe
    
    
    702,000
    
    
    
    2,054,000Indonesia
    
    
    175,000
    
    
    
    271,000All other countries
    
    
    362,000
    
    
    
    341,000$
    11,790,000
    
    
    $
    18,981,000
 The above sales are solely of the Companys oxygen related products. Due to the sale of all of
the Companys oxygen assets, there will be no further sales of oxygen related products. The
Company has not yet brought any of its sleep products to market.All long-lived assets are located in the United States.Sales of OXYMATIC®, LOTUS and CYPRESS OXYPneumatic® conservers and SAGE Therapeutic devices
accounted for 65% and 69% of the Companys net sales for the years ended March 31, 2008 and
2007, respectively.12.
    
    Valuation and Qualifying Accounts and ReservesThe following is the Companys schedule of activity an qualifying accounts and reserves for the
years ended March 31, 2008 and 2007, respectively:
 Balance at
    
    Charged toBeginning of
    
    Costs and
    
    
    
    
    
    Balance atYear
    
    Expenses
    
    Deductions
    
    End of YearAllowance for doubtful accounts:2007
    
    $
    52,000
    
    
    
    27,000
    
    
    
    41,000
    
    
    $
    38,0002008
    
    $
    38,000
    
    
    
    171,000
    
    
    
    43,000
    
    
    $
    166,000Warranty reserve:2007
    
    $
    139,000
    
    
    
    46,000
    
    
    
    22,000
    
    
    $
    163,0002008
    
    $
    163,000
    
    
    
    
    
    
    
    163,000
    
    
    $
    
 13.
    
    WarrantsIn connection with the Convertible Note financing transaction that the Company entered into in
July 2007, the Company issued warrants to purchase up to 997,702 shares of the Companys common
stock at an exercise price of $1.24 per share. The closing price of the Companys common stock
on the issue date of the warrants was $1.00 per share. The fair value of the warrants was
approximately $601,000 and was determined using a Black Scholes pricing model using the
following assumptions;
 35




---



##### 



volatility  67%, interest rate  4.8%, projected term  seven (7) years,
dividend yield  zero. These warrants expire ten years from the date of issue and have a
lock-up period of 12 months after any
warrants are exercised. The Company recognized $601,000 of expense related to the issuance of
the warrants as of March 31, 2008 upon repayment of the financing.
 In connection with the Credit Facility that the Company entered into in January 2008, the
Company issued Mr. Yager and Mr. Jones each 321,428 warrants to purchase the Companys common
stock at a price per share equal to $.28 (the average closing price of our common stock on the
American Stock Exchange for the five days immediately preceding the initial funding under the
Credit Facility). The number of shares issuable for each warrant will be equal to (a) the
principal amount of the Note issued at the initial closing multiplied by 0.30, divided by (b)
the exercise price. The warrants have a term of five years. The company fully recognized
warrant expense of $73,000 upon repayment of the Credit Facility in February 2008. The value
was calculated using the Black Scholes pricing model with the following assumptions: volatility
 67%, interest rate  4.8%, projected term  five (5) years, dividend yield  zero.
 14.
    
    Quarterly Financial Data (Unaudited)The Companys quarterly results including amounts from discontinued operations was as follows:
 Basic & DilutedRevenue
    
    Gross Profit
    
    Net Loss
    
    Loss Per Share2008First quarter
    
    $
    3,973,000
    
    
    $
    795,000
    
    
    $
    (1,290,000
    )
    
    $
    (0.13
    )Second quarter
    
    
    3,206,000
    
    
    
    599,000
    
    
    
    (1,353,000
    )
    
    
    (0.13
    )Third quarter
    
    
    2,929,000
    
    
    
    1,159,000
    
    
    
    (868,000
    )
    
    
    (0.09
    )Fourth quarter
    
    
    1,683,000
    
    
    
    312,000
    
    
    
    (5,092,000
    )
    
    
    (0.50
    )Year
    
    $
    11,791,000
    
    
    $
    2,865,000
    
    
    $
    (8,603,000
    )
    
    $
    (0.85
    )2007First quarter
    
    $
    5,476,000
    
    
    $
    1,814,000
    
    
    $
    (116,000
    )
    
    $
    (0.01
    )Second quarter
    
    
    4,983,000
    
    
    
    1,617,000
    
    
    
    (307,000
    )
    
    
    (0.03
    )Third quarter
    
    
    4,307,000
    
    
    
    1,059,000
    
    
    
    (435,000
    )
    
    
    (0.04
    )Fourth quarter
    
    
    4,215,000
    
    
    
    814,000
    
    
    
    (2,556,000
    )
    
    
    (0.26
    )Year
    
    $
    18,981,000
    
    
    $
    5,304,000
    
    
    $
    (3,414,000
    )
    
    $
    (0.34
    )
 15.
    
    Accounting StandardsIn February 2007, the FASB issued SFAS No. 159, The Fair Value Option of Financial Assets and
Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that unrealized gains
and losses on items for which the fair value option has been elected by reported in earnings.
SFAS No. 159 is effective as of the beginning of the entitys first fiscal year that begins
after November 15, 2007. SFAS No. 159 did not have any significant impact on the Companys
financial statements.In June 2006, the FASB issued interpretation no. 48, Accounting for Uncertainty in Income Taxes-
an interpretation of FASB Statement No. 109(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes(SFAS 109). This Interpretation
prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. FIN 48 did not have any significant impact on
the Companys financial statements.
 36




---



##### 



Internal ControlIntegrated Framework
     37




---



##### 



Directors, Executive Officers and Corporate Governance
  Name
    
    Age
    
    Position
    
    Director SinceClass IPhilip T. Wolfstein (1) (2) (3)
    
    
    57
    
    
    Director
    
    
    1994James M. Brophy (1) (2) (3)
    
    
    58
    
    
    Director
    
    
    2000Kathleen M. Griggs (1) (3) (4)
    
    
    53
    
    
    Director
    
    
    2003Class IIThomas E. Jones
    
    
    64
    
    
    Chairman of the Board and Director
    
    
    1997John C. Boyd (2) (3)
    
    
    75
    
    
    Director
    
    
    1986Earl L. Yager
    
    
    62
    
    
    Chief Executive Officer,
President and Director
    
    
    1988
 
 (1)
    
    Member of Audit Committee(2)
    
    Member of Compensation Committee(3)
    
    Member of Corporate Governance Committee(4)
    
    Audit Committee Expert 
   38




---



##### 



Shareholder Communications with the Board
  
 39




---



##### 



Change inpension valueandFees
    
    
    
    
    
    
    
    
    
    Non-equity
    
    nonqualifiedearned or
    
    Stock
    
    Option
    
    incentive plan
    
    deferred
    
    All otherpaid in
    
    awards
    
    awards
    
    compensation
    
    compensation
    
    compensation
    
    TotalName
    
    cash ($)
    
    ($)
    
    ($)
    
    ($)
    
    earnings
    
    ($)
    

($)John C. Boyd
    
    $
    34,000
    
    
    None
    
    None
    
    None
    
    None
    
    None
    
    $
    34,000James M. Brophy
    
    $
    34,000
    
    
    None
    
    None
    
    None
    
    None
    
    None
    
    $
    34,000Kathleen M. Griggs
    
    $
    38,000
    
    
    None
    
    None
    
    None
    
    None
    
    None
    
    $
    38,000Philip T. Wolfstein
    
    $
    34,000
    
    
    None
    
    None
    
    None
    
    None
    
    None
    
    $
    34,000
 Name
    
    Age
    
    PositionThomas E. Jones
    
    
    64
    
    
    Chairman of the BoardEarl L. Yager
    
    
    62
    
    
    President and Chief Executive OfficerTracy A. Kern
    
    
    40
    
    
    Chief Financial OfficerAlfonso Del Toro
    
    
    50
    
    
    Vice President, ManufacturingKevin McCulloh
    
    
    47
    
    
    Senior Vice President, Engineering and 
Product
Development and Regulatory AffairsPaula OConnor
    
    
    55
    
    
    Secretary
 
 Change inpension valueandnonqualifiedNon-equity
    
    deferredName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    Option
    
    incentive plan
    
    compensation
    
    All otherprincipal
    
    
    
    
    
    Salary
    
    Bonus
    
    awards
    
    awards
    
    compensation
    
    earnings
    
    compensation
    
    Totalposition
    
    Year
    
    ($)
    
    (1) ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    (2) ($)
    
    ($)Earl L. Yager,
President and Chief
Executive Officer
    
    
    2008
    
    
    
    240,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    7,500
    
    
    
    247,500Thomas E. Jones,
Chairman
    
    
    2008
    
    
    
    160,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    7,500
    
    
    
    167,500Kevin McCulloh, Sr,
VP Engineering,
Product Development
and Regulatory
Affairs
    
    
    2008
    
    
    
    165,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    4,800
    
    
    
    169,800
 
 (1)
    
    Annual bonus amounts are earned and accrued during the fiscal years indicated and paid within
30 days subsequent to the end of the fiscal year indicated.(2)
    
    These amounts consist of contributions by the Company in 2008 to the CHAD Therapeutics, Inc.
Employee Savings and Retirement Plan. 40




---



##### 



Option AwardsEquity incentive planNumber of securities
    
    
    
    
    
    
    
    
    
    awards: number ofunderlying unexercised
    
    Option
    
    Option
    
    securities underlyingoptions (#)
    
    exercise
    
    expiration
    
    unexercised
    
    StockName
    
    Exercisable\Unexercisable
    
    price ($)
    
    date
    
    unearned options (#)
    
    AwardsEarl L. Yager
    
    
    8,107/-0-
    
    
    
    1.50
    
    
    
    01/29/200930,000/-0-
    
    
    
    1.00
    
    
    
    09/14/200950,000/-0-
    
    
    
    1.00
    
    
    
    09/14/2010Thomas E. Jones
    
    
    27,779\-0-
    
    
    
    1.50
    
    
    
    01/29/200950,000\-0-
    
    
    
    1.00
    
    
    
    09/14/200950,000\-0-
    
    
    
    1.00
    
    
    
    09/14/2010Kevin McCulloh
    
    
    10,000/-0-
    
    
    
    1.75
    
    
    
    12/01/20086,000/-0-
    
    
    
    1.00
    
    
    
    09/13/20095,000/-0-
    
    
    
    2.00
    
    
    
    03/21/201020,000/-0-
    
    
    
    1.00
    
    
    
    09/14/2010
       41




---



##### 



Security Ownership of Certain Beneficial Owners and Management
  Name and Address (1)
    
    Amount (2)
    
    Percent OwnedThomas E. Jones
    
    
    347,392
    
    
    
    3.4
    %Earl L. Yager
    
    
    299,903
    
    
    
    3.0
    %John C. Boyd
    
    
    208,619
    
    
    
    2.1
    %Philip T. Wolfstein
    
    
    202,280
    
    
    
    2.0
    %James M. Brophy
    
    
    103,579
    
    
    
    1.0
    %Kathleen M. Griggs
    
    
    77,405
    
    
    
    0.8
    %All Officers & Directors as a group (9 people)
    
    
    1,399,411
    
    
    
    13.8
    %Kevin Kimberlin (3)
    
    
    836,560
    
    
    
    8.2
    %
 
 (1)
    
    The address of each director is 10200 Mason Avenue, Suite 114, Chatsworth, CA 91311.(2)
    
    Includes shares subject to options which are currently exercisable or which become
exercisable within sixty (60) days: Thomas E. Jones  127,779 shares, John C. Boyd  35,448
shares, Philip T. Wolfstein  35,448 shares, James M. Brophy
 43,174 shares, Kathleen M.
Griggs  15,000 shares, Earl L. Yager  88,107 shares, all Officers and Directors as a group 
558,210 shares.(3)
    
    Mr. Kimberlins address is c/o Spencer Trask, 535 Madison Avenue, New York, NY 10022. Certain Relationships and Related Transactions and Director Independence
  42




---



##### 



Principal Accountant Fees and Services
   Rose, Snyder and Jacobs
    
    KPMGFee Category
    
    Fiscal 2008 fees
    
    Fiscal 2007 fees
    
    Fiscal 2008 fees
    
    Fiscal 2007 feesAudit Fees (1)
    
    $
    87,900
    
    
    $
    14,400
    
    
    
    -0-
    
    
    $
    166,100Audit Related Fees (2)
    
    
    3,850
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Tax Fees (3)
    
    
    -0-
    
    
    
    -0-
    
    
    
    39,587
    
    
    
    26,905All Other Fees
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Total Feels
    
    $
    91,750
    
    
    $
    14,400
    
    
    $
    39,587
    
    
    $
    193,005
 
 (1)
    
    Aggregate fees billed for professional services rendered for the audit of our 2007 and 2006
fiscal year annual financial statements and review of financial statements included in our
quarterly reports on Form 10-Q or services that are normally provided in connection with
statutory and regulatory filings or engagements for the 2007 and 2006 fiscal years.(2)
    
    Aggregate fees billed for assurance and related services that are reasonably related to the
performance of the audit or review of our financial statements which are not reported under
Audit Fees above.(3)
    
    Aggregate fees billed for tax compliance and tax planning.     43




---



##### 



44




---



##### 



(3)
    
    Exhibits.3.1
    
    Articles of Incorporation of the Registrant, as amended (5)3.2
    
    Bylaws of the Registrant, as amended (1)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.) (1)10.20
    
    OXYCOIL tubing License Agreement with Mary Smart (licensed under the name
Respi-Coil). (3)10.23
    
    Summary plan description for CHAD Therapeutics, Inc. Employee Savings and
Retirement Plan (4)10.24
    
    1994 Stock Option Plan (6)10.25
    
    Lease on real property at 21622 Plummer Street, Chatsworth, California (6)10.26
    
    TOTAL O2 Delivery System License Agreement, as amended, with the Carleton
Life Support Division of Litton Industries, Inc. (7)10.27
    
    2004 Equity Incentive Plan (12)10.28
    
    Registration Rights Agreement between Calliope Capital Corporation and CHAD
Therapeutics, Inc., dated July 30, 2007 (15)10.29
    
    Security Agreement between Calliope Capital Corporation and CHAD Therapeutics, Inc.,
dated July 30, 2007 (15)10.30
    
    Secured Convertible Note between Calliope Capital Corporation and CHAD Therapeutics,
Inc., dated July 30, 2007 (15)10.31
    
    Secured Revolving Note between Calliope Capital Corporation and CHAD Therapeutics,
Inc., dated July 30, 2007 (15)10.32
    
    Common Stock Purchase Warrant Agreement between Calliope Capital Corporation and CHAD
Therapeutics, Inc., dated July 30, 2007 (15)10.33
    
    Asset Purchase Agreement between Inovo, Inc. and CHAD Therapeutics, Inc., dated
November 16, 2007 (16)10.34
    
    Subordinated Secured Note and Warrant Purchase Agreement between Mr. Earl Yager and
Mr. Thomas Jones and CHAD Therapeutics, Inc., dated January 2, 2008 (17)10.35
    
    Asset Purchase Agreement between Respironics, Inc. and CHAD Therapeutics, Inc., dated
March 6, 2008 (18)
 45




---



##### 



23.1
    
    Consent of Independent Registered Public Accounting Firm for the years ended
March 31, 2008 and 200731.1
    
    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 200299.1
    
    Letter from the FDA authorizing the Company to market the OXYMIZER oxygen
conserving device as a Class I device (1)99.2
    
    Letter from the FDA authorizing the Company to market the OXYMIZER Pendant oxygen
conserving device as a Class I device(2)99.3
    
    Letter from the FDA authorizing the Company to market the OXYMATIC electronic
oxygen conserver as a Class II device (3)99.4
    
    Letter from the FDA authorizing the Company to market the OXYCOIL coiled oxygen
tubing as a Class II device(3)99.5
    
    Letter from the FDA authorizing the Company to market the TOTAL O2
Delivery System as a Class II device (7)99.6
    
    Letter from the FDA authorizing the Company to market the OXYMATIC 411 conserver as a
Class II device (8)99.7
    
    Letter from the FDA authorizing the Company to market the OXYMATIC 401A and 411A
conservers as Class II devices (8)99.8
    
    Letter from the FDA authorizing the Company to market the TOTAL O2 Post
Valve Cylinders (9)99.9
    
    Letter from the FDA authorizing the Company to market the CYPRESS OXYPneumatic
conserver (10)99.10
    
    Letter from the FDA authorizing the Company to market the SAGE Oxygen Therapeutic
Device (11)99.11
    
    Letter from the FDA authorizing the Company to market the LOTUS Electronic Oxygen
Conserver (13)99.12
    
    Letter from the FDA authorizing the Company to market the Bonsai Pneumatic Conserver
(14)
 46




---



##### 



(1)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-18, File
No. 2-83926.(2)
    
    Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1984.(3)
    
    Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1986.(4)
    
    Previously filed as an Exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1993.(5)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1994.(6)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1996.(7)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 1998.(8)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 2001.(9)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 2002.(10)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 2003.(11)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 2004.(12)
    
    Previously filed as Appendix A of the Registrants Proxy Statement for the 2004 Annual
Shareholders Meeting.(13)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 2005.(14)
    
    Previously filed as an exhibit to the Registrants Annual Report on Form 10-K for the year
ended March 31, 2007.(15)
    
    Previously filed as an exhibit to the Registrants Form 8-K filed on August 3, 2007.(16)
    
    Previously filed as an exhibit to the Registrants Form 10-Q filed on November 19, 2007.(17)
    
    Previously filed as an exhibit to the Registrants Form 8-K filed on January 4, 2008.(18)
    
    Previously filed as an exhibit to the Registrants Form 8-K filed on March 11, 2008. 47




---



##### 



CHAD THERAPEUTICS, INC.By
    /s/ Earl L. YagerEarl L. Yager, Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Thomas E. Jones
    
    Chairman of the Board of Directors
    
    June 27, 2008Thomas E. Jones/s/ Earl L. Yager
    
    Chief Executive Officer, President, and Director
    
    June 27, 2008Earl L. Yager
    
    (Principal Executive Officer)/s/ Tracy A. Kern
    
    Chief Financial Officer
    
    June 27, 2008Tracy A. Kern
    
    (Principal Financial and Accounting Officer)/s/ Kathleen M. Griggs
    
    Director
    
    June 27, 2008Kathleen M. Griggs/s/ John C. Boyd
    
    Director
    
    June 27, 2008John C. Boyd/s/ Philip T. Wolfstein
    
    Director
    

June 27, 2008Philip T. Wolfstein/s/ James M. Brophy
    
    Director
    
    June 27, 2008James M. Brophy
 48




---



##### 



Exhibit IndexExhibit No.
    
    Document23.1
    
    Consent of Independent Registered Public Accounting Firm for the years ended March 31,
2008 and 200731.1
    
    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 2002