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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For Quarter Ended: September 30, 2002

Commission file number: 0-11363

CHAD THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)

|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|California
(State of other jurisdiction of
incorporation or organization) |  | 95-3792700
(I.R.S. Employer
Identification No.)

21622 Plummer Street, Chatsworth, CA 91311
(Address of principal executive offices)(Zip Code)

(818) 882-0883
(Registrants telephone number, including area code)



---

(Former Address)


(Former name, former address and former fiscal year, if changed since last report.)

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date:

|              |  |  |            | 
|------------- |  |  | ---------- | 
|Common Shares |  |  | 10,068,000 | 





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TABLE OF CONTENTS



|              |                                          |                                                                                       |  |  |  |  |  | 
|------------- | ---------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  | 
|              |                                          | Condensed Balance Sheets                                                             
|              |                                          | Condensed Statements of Operations                                                   
|              |                                          | Condensed Statement of Shareholders Equity                                          
|              |                                          | Condensed Statements of Cash Flows                                                   
|              |                                          | Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 4. Controls and Procedures         
|PART II      
|              | Item 6. Exhibits and Reports on Form 8-K
|SIGNATURES   
|Exhibit Index
|EXHIBIT 99.1 



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CHAD THERAPEUTICS, INC.
Condensed Balance Sheets
September 30, 2002 and March 31, 2002
(Unaudited)

ASSETS

|                                     |                                                                                                                          |  |                                            |            |               |            |           |            |   |            | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------ | ---------- | ------------- | ---------- | --------- | ---------- | - | ---------- | 
|                                     |                                                                                                                          |  |                                            |            | September 30, |            | March 31,
|                                     |                                                                                                                          |  |                                            |            | 2002          |            | 2002     
|                                     |                                                                                                                          |  |                                            |            |               |            |          
|Current Assets:                      |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     | Cash                                                                                                                     |  | $                                          | 1,404,000  |               |            | $         | 520,000    |  
|                                     | Accounts receivable, less allowance for
doubtful accounts of $84,000 at
September 30, 2002 and $76,000 at
March 31, 2002 |  |                                            | 2,665,000  |               |            |           | 2,333,000  |  
|                                     | Income taxes refundable                                                                                                  |  |                                            |           |               |            |           | 995,000    |  
|                                     | Inventories (Note 2)                                                                                                     |  |                                            | 5,321,000  |               |            |           | 5,284,000  |  
|                                     | Prepaid expenses                                                                                                         |  |                                            | 358,000    |               |            |           | 315,000    |  
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     |                                                                                                                          |  | Total current assets                       |            |               | 9,748,000  |           |            |   | 9,447,000  | 
|Property and equipment, at cost      |                                                                                                                          |  | 6,119,000                                  |            |               |            | 5,972,000 |           
|                                     | Less accumulated depreciation                                                                                            |  |                                            | 4,658,000  |               |            |           | 4,320,000  |  
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     |                                                                                                                          |  | Net property and equipment                 |            |               | 1,461,000  |           |            |   | 1,652,000  | 
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|Other assets, net                    |                                                                                                                          |  | 1,156,000                                  |            |               |            | 1,224,000 |           
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     |                                                                                                                          |  | Total assets                               |            | $             | 12,365,000 |           |            | $ | 12,323,000 | 
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     | Accounts payable                                                                                                         |  | $                                          | 686,000    |               |            | $         | 777,000    |  
|                                     | Accrued expenses                                                                                                         |  |                                            | 1,108,000  |               |            |           | 1,169,000  |  
|                                     | Income taxes payable                                                                                                     |  |                                            | 9,000      |               |            |           | 4,000      |  
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     | Total current liabilities                                                                                                |  |                                            | 1,803,000  |               |            |           | 1,950,000  |  
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|Shareholders equity:                |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     | Common shares, $.01 par value, authorized
40,000,000 shares; 10,068,000 and 10,059,000
shares issued and outstanding     |  |                                            | 13,106,000 |               |            |           | 13,097,000 |  
|                                     | Accumulated deficit                                                                                                      |  |                                            | (2,544,000 | )             |            |           | (2,724,000 | )
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           
|                                     |                                                                                                                          |  | Total shareholders equity                 |            |               | 10,562,000 |           |            |   | 10,373,000 | 
|                                     |                                                                                                                          |  |                                            |            |               |            |           |            |   |            | 
|                                     |                                                                                                                          |  | Total liabilities and shareholders equity |            | $             | 12,365,000 |           |            | $ | 12,323,000 | 
|                                     |                                                                                                                          |  |                                            |            |               |            |           |           

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.




Condensed Statements of Operations


For the three months ended September 30, 2002 and 2001
(Unaudited)


|                    |  |                                     |           |                              |           |                                 |            |      |           |   |            | 
|------------------- |  | ----------------------------------- | --------- | ---------------------------- | --------- | ------------------------------- | ---------- | ---- | --------- | - | ---------- | 
|                    |  |                                     |           |                              |           | Three Months
Ended
September 30
|                    |  |                                     |           |                              |           |                                
|                    |  |                                     |           |                              |           | 2002                            |            | 2001
|                    |  |                                     |           |                              |           |                                 |            |     
|Net sales           |  | $                                   | 4,763,000 |                              |           | $                               | 5,106,000  |     
|Cost of sales       |  |                                     | 2,706,000 |                              |           |                                 | 3,234,000  |     
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Gross profit                 |           |                                 | 2,057,000  |      |           |   | 1,872,000  | 
|Costs and expenses: |  |                                     |           |                              |           |                                 |            |     
|                    |  | Selling, general and administrative |           |                              | 1,822,000 |                                 |            |      | 1,620,000 |  
|                    |  | Research and development            |           |                              | 225,000   |                                 |            |      | 200,000   |  
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Total costs and expenses     |           |                                 | 2,047,000  |      |           |   | 1,820,000  | 
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Operating income             |           |                                 | 10,000     |      |           |   | 52,000     | 
|                    |  | Other income  interest income, net |           |                              | 5,000     |                                 |            |      | 17,000    |  
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Earnings before income taxes |           |                                 | 15,000     |      |           |   | 69,000     | 
|Income tax expense  |  |                                     | 13,000    |                              |           |                                 | 2,000      |     
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Net earnings                 |           | $                               | 2,000      |      |           | $ | 67,000     | 
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Basic earnings per share     |           | $                               |           |      |           | $ | .01        | 
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Diluted earnings per share   |           | $                               |           |      |           | $ | .01        | 
|                    |  |                                     |           |                              |           |                                 |            |     
|                    |  |                                     |           | Weighted shares outstanding: |           |                                 |            |      |           |   |            | 
|                    |  |                                     |           | Basic                        |           |                                 | 10,068,000 |      |           |   | 10,053,000 | 
|                    |  |                                     |           | Diluted                      |           |                                 | 10,406,000 |      |           |   | 10,409,000 | 
|                    |  |                                     |           |                              |           |                                 |            |     

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.

Condensed Statements of Operations


For the six months ended September 30, 2002 and 2001
(Unaudited)


|                    |                                     |                              |           |           |                  |            |           |           |           |            | 
|------------------- | ----------------------------------- | ---------------------------- | --------- | --------- | ---------------- | ---------- | --------- | --------- | --------- | ---------- | 
|                    |                                     |                              |           |           | Six Months Ended
|                    |                                     |                              |           |           | September 30    
|                    |                                     |                              |           |           |                 
|                    |                                     |                              |           |           | 2002             |            | 2001     
|                    |                                     |                              |           |           |                  |            |          
|Net sales           |                                     | $                            | 9,726,000 |           |                  | $          | 9,953,000 |          
|Cost of sales       |                                     |                              | 5,518,000 |           |                  |            | 6,355,000 |          
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Gross profit                 |           |           | 4,208,000        |            |           |           | 3,598,000 |           
|Costs and expenses: |                                     |                              |           |           |                  |            |           |          
|                    | Selling, general and administrative |                              |           | 3,533,000 |                  |            |           | 3,141,000 |          
|                    | Research and development            |                              |           | 488,000   |                  |            |           | 405,000   |          
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Total costs and expenses     |           |           | 4,021,000        |            |           |           | 3,546,000 |           
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Operating income             |           |           | 187,000          |            |           |           | 52,000    |           
|                    | Other income  interest income, net |                              |           | 9,000     |                  |            |           | 31,000    |          
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Earnings before income taxes |           |           | 196,000          |            |           |           | 83,000    |           
|Income tax expense  |                                     |                              | 16,000    |           |                  |            | 3,000     |          
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Net earnings                 |           | $         | 180,000          |            |           | $         | 80,000    |           
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Basic earnings per share     |           | $         | .02              |            |           | $         | .01       |           
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Diluted earnings per share   |           | $         | .02              |            |           | $         | .01       |           
|                    |                                     |                              |           |           |                  |            |           |          
|                    |                                     | Weighted shares outstanding: |           |           |                  |            |           |           |           |           
|                    |                                     |                              | Basic     |           |                  | 10,068,000 |           |           |           | 10,053,000 | 
|                    |                                     |                              | Diluted   |           |                  | 10,417,000 |           |           |           | 10,340,000 | 
|                    |                                     |                              |           |           |                  |            |           |          

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.




Condensed Statement of Shareholders Equity


For the six months ended September 30, 2002
(Unaudited)


|                              |  |               |            |        |  |         |            |             |  |   |            |  
|----------------------------- |  | ------------- | ---------- | ------ |  | ------- | ---------- | ----------- |  | - | ---------- | -
|                              |  | Common Shares |            |        |  |         |            | Accumulated
|                              |  | Shares        |            | Amount |  | Deficit
|                              |  |               |            |        |  |        
|Balance at March 31, 2002     |  |               | 10,059,000 |        |  | $       | 13,097,000 |             |  | $ | (2,724,000 | )
|Exercise of stock options     |  |               | 9,000      |        |  |         | 9,000      |             |  |   |           |  
|Net earnings                  |  |               |           |        |  |         |           |             |  |   | 180,000    |  
|                              |  |               |            |        |  |         |            |             |  |   |            |  
|Balance at September 30, 2002 |  |               | 10,068,000 |        |  | $       | 13,106,000 |             |  | $ | (2,544,000 | )
|                              |  |               |            |        |  |         |            |             |  |   |            |  

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.




Condensed Statements of Cash Flows


For the six months ended September 30, 2002 and 2001
(Unaudited)


|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |          |         |            |          |  
|------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------- | ----------------------------------------- | ------- | ---------------- | --------- | -------- | ------- | ---------- | -------- | -
|                                      |                                                                                     |                                                         |                                                |                                           |         | Six Months Ended
|                                      |                                                                                     |                                                         |                                                |                                           |         | September 30    
|                                      |                                                                                     |                                                         |                                                |                                           |         |                 
|                                      |                                                                                     |                                                         |                                                |                                           |         | 2002             |           | 2001    
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|Cash flows from operating activities: |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|                                      | Net earnings                                                                        |                                                         | $                                              | 180,000                                   |         |                  | $         | 80,000   |        
|                                      | Adjustments to reconcile net earnings to
net cash provided by operating activities: |                                                         |                                                |                                           |         |                  |           |          |        
|                                      |                                                                                     | Depreciation and amortization of property and
equipment |                                                |                                           | 338,000 |                  |           |          | 418,000 |           
|                                      |                                                                                     | Amortization of intangibles                             |                                                |                                           | 55,000  |                  |           |          | 57,000  |           
|                                      |                                                                                     | Changes in assets and liabilities:                      |                                                |                                           |         |                  |           |          |         |           
|                                      |                                                                                     |                                                         | Decrease (increase) in accounts receivable     |                                           |         | (332,000         | )         |          |         | (1,007,000 | )       
|                                      |                                                                                     |                                                         | Decrease (increase) in inventories             |                                           |         | (37,000          | )         |          |         | 258,000    |         
|                                      |                                                                                     |                                                         | Decrease (increase) in income taxes refundable |                                           |         | 995,000          |           |          |         |           |         
|                                      |                                                                                     |                                                         | Decrease (increase) in prepaid expenses        |                                           |         | (43,000          | )         |          |         | 89,000     |         
|                                      |                                                                                     |                                                         | Decrease (increase) in other assets            |                                           |         | 13,000           |           |          |         | 22,000     |         
|                                      |                                                                                     |                                                         | Increase (decrease) in accounts payable        |                                           |         | (91,000          | )         |          |         | 749,000    |         
|                                      |                                                                                     |                                                         | Increase (decrease) in accrued expenses        |                                           |         | (61,000          | )         |          |         | (64,000    | )       
|                                      |                                                                                     |                                                         | Increase (decrease) in income taxes payable    |                                           |         | 5,000            |           |          |         | (1,000     | )       
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|                                      |                                                                                     |                                                         |                                                | Net cash provided by
operating activities |         |                  | 1,022,000 |          |         |            | 601,000  |  
|Cash flows from investing activities: |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|                                      | Capital expenditures                                                                |                                                         |                                                | (147,000                                  | )       |                  |           | (237,000 | )      
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|                                      |                                                                                     |                                                         |                                                | Net cash used in investing activities     |         |                  | (147,000  | )        |         |            | (237,000 | )
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|Cash flows from financing activities: |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|                                      | Exercise of stock options                                                           |                                                         |                                                | 9,000                                     |         |                  |           |         |        
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|                                      |                                                                                     |                                                         |                                                | Net cash provided by financing activities |         |                  | 9,000     |          |         |            |         |  
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|Net increase in cash                  |                                                                                     |                                                         | 884,000                                        |                                           |         |                  | 364,000   |         
|Cash beginning of period              |                                                                                     |                                                         | 520,000                                        |                                           |         |                  | 1,059,000 |         
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         
|Cash end of period                    |                                                                                     | $                                                       | 1,404,000                                      |                                           |         | $                | 1,423,000 |         
|                                      |                                                                                     |                                                         |                                                |                                           |         |                  |           |         

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.
September 30, 2002
(Unaudited)



|1. |  | Interim Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Chad Therapeutics, Inc. (the Company) is in the business of developing,
producing and marketing respiratory care devices designed to improve the
efficiency of oxygen delivery systems for home health care and hospital
treatment of patients suffering from pulmonary diseases.                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In the opinion of management, all adjustments necessary, which are of a
normal and recurring nature, for a fair presentation of the results for the
interim periods presented have been made. The results for the six-month
period ended September 30, 2002, are not necessarily indicative of the
results expected for the year ended March 31, 2003. The interim statements
are condensed and do not include some of the information necessary for a
more complete understanding of the financial data. Accordingly, your
attention is directed to the footnote disclosures found in the March 31,
2002, Annual Report and particularly to Note 1 which includes a summary of
significant accounting policies.
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Inventories in 2002, are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|                |  |              |           |          |  |  |           | 
|--------------- |  | ------------ | --------- | -------- |  |  | --------- | 
|                |  | September 30 |           | March 31
|                |  |              |           |         
|Finished goods  |  | $            | 1,056,000 |          |  |  | 935,000   | 
|Work-in-process |  |              | 1,416,000 |          |  |  | 987,000   | 
|Raw materials   |  |              | 2,849,000 |          |  |  | 3,362,000 | 
|                |  |              |           |          |  |  |           | 
|                |  | $            | 5,321,000 |          |  |  | 5,284,000 | 
|                |  |              |           |          |  |  |           | 



|3. |  | Earnings Per Common Share                                                                                                                
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Following is a reconciliation of the numerators and denominators used in the
calculation of basic and diluted earnings per common shares:

|                            |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |            |            | 
|--------------------------- | -------------------------------------------------------- | ------------------------------------------ | - | ------------------ | ---------- | ---------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                            |                                                          |                                            |   | Three Months Ended |            | Six Months Ended
|                            |                                                          |                                            |   | September 30       |            | September 30    
|                            |                                                          |                                            |   | 2002               |            | 2001             |   | 2002       |            | 2001
|                            |                                                          |                                            |   |                    |            |                  |   |            |            |     
|Basic earnings per share:   |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |           
|                            | Numerator
 net earnings                                 |                                            | $ | 2,000              |            |                  | $ | 67,000     |            |      | $ | 180,000    |            |  | $ | 80,000     |           
|                            | Denominator
 weighted average
common shares outstanding |                                            |   | 10,068,000         |            |                  |   | 10,053,000 |            |      |   | 10,068,000 |            |  |   | 10,053,000 |           
|                            |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |            |           
|                            | Basic earnings per share                                 |                                            | $ | .00                |            |                  | $ | .01        |            |      | $ | .02        |            |  | $ | .01        |           
|                            |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |            |           
|Diluted earnings per share: |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |           
|                            | Numerator
 net earnings                                 |                                            | $ | 2,000              |            |                  | $ | 67,000     |            |      | $ | 180,000    |            |  | $ | 80,000     |           
|                            | Denominator:                                             |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |            |           
|                            |                                                          | Weighted average common
shares outstanding |   |                    | 10,068,000 |                  |   |            | 10,053,000 |      |   |            | 10,068,000 |  |   |            | 10,053,000 | 
|                            |                                                          | Dilutive effect of common
stock options    |   |                    | 338,000    |                  |   |            | 356,000    |      |   |            | 349,000    |  |   |            | 287,000    | 
|                            |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |            |           
|                            |                                                          |                                            |   | 10,406,000         |            |                  |   | 10,409,000 |            |      |   | 10,417,000 |            |  |   | 10,340,000 |           
|                            |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |            |           
|                            | Diluted earnings per share                               |                                            | $ | .00                |            |                  | $ | .01        |            |      | $ | .02        |            |  | $ | .01        |           
|                            |                                                          |                                            |   |                    |            |                  |   |            |            |      |   |            |            |  |   |            |           





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CHAD THERAPEUTICS, INC.
September 30, 2002
(Unaudited)



|3. |  | Earnings Per Common Share (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Options to purchase 458,000 shares of common stock at prices ranging from
$3.35 to $13.47 per share and 429,000 shares of common stock at prices
ranging from $3.38 to $13.47 per share were not included in the computation
of diluted earnings per share for the three and six month periods ended
September 30, 2002 and 2001, respectively, because their effect would have
been anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|4. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Income taxes for the period ended September 30, 2002, relate primarily to
state income taxes which are provided for at an effective rate of 8.4%. The
Company has federal and California net operating loss carryforwards of
$673,000 and $2,640,000, respectively, against which a full valuation
allowance has been recorded. In September, 2002, the state of California
enacted legislation that suspends the utilization of net operating loss
carryforwards during tax years starting 2002 and 2003, effective
retroactively back to January 1, 2002. As a result, the Company will be
unable to use its California net operating loss carryforwards until the tax
year beginning April 1, 2004. Further, due to the retroactive nature of the
law, California income taxes of $12,000 have been recorded in the quarter
ended September 30, 2002, that relates to income earned in the quarter ended
June 30, 2002.
|  
|5. |  | Geographic Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The Company has one reportable operating segment. Geographic information
regarding the Companys sales is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                    |  |                        |           |              |  |      |           |      |  |   |           |  |  |   |           | 
|------------------- |  | ---------------------- | --------- | ------------ |  | ---- | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                    |  | Three Months Ended Six |           | Months Ended
|                    |  | September 30           |           | September 30
|                    |  | 2002                   |           | 2001         |  | 2002 |           | 2001
|                    |  |                        |           |              |  |      |           |     
|United States       |  | $                      | 4,529,000 |              |  | $    | 4,833,000 |      |  | $ | 9,261,000 |  |  | $ | 9,129,000 | 
|Canada              |  |                        | 68,000    |              |  |      | 92,000    |      |  |   | 105,000   |  |  |   | 195,000   | 
|Germany             |  |                        | 5,000     |              |  |      | 25,000    |      |  |   | 18,000    |  |  |   | 334,000   | 
|Japan               |  |                        | 66,000    |              |  |      | 52,000    |      |  |   | 117,000   |  |  |   | 123,000   | 
|All other countries |  |                        | 95,000    |              |  |      | 104,000   |      |  |   | 225,000   |  |  |   | 172,000   | 
|                    |  |                        |           |              |  |      |           |      |  |   |           |  |  |   |           | 
|                    |  | $                      | 4,763,000 |              |  | $    | 5,106,000 |      |  | $ | 9,726,000 |  |  | $ | 9,953,000 | 
|                    |  |                        |           |              |  |      |           |      |  |   |           |  |  |   |           | 



| |  | All long-lived assets are located in the United States.                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Sales of OXYMATIC® conservers and OXYLITE® systems accounted for 73% and
54% of the Companys sales for the six-month periods
ended September 30, 2002 and 2001, respectively.





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##### Table of Contents



CHAD THERAPEUTICS, INC.




Managements Discussion and Analysis of
Financial Condition and Results of Operations


September 30, 2002

Overview

The Company develops, assembles and markets medical devices that furnish
supplementary oxygen to home health care patients. The Company was a pioneer
in developing oxygen conserving devices that enhance the quality of life for
patients by increasing their mobility and, at the same time, lower operating
costs by achieving significant savings in the amount of oxygen actually
required to properly oxygenate patients. The market for oxygen conserving
devices has been significantly affected during the past several years by
increased competition, consolidation among home oxygen dealers and revisions
(and proposed revisions) in governmental reimbursement policies. All of these
factors, as described more fully below, contributed to an erosion of the
Companys market share, as devices that are less expensive but which provide
lower oxygen savings (or, in some cases, do not truly provide ambulatory
oxygen) prospered in this environment. The Companys market share for
conservers was also affected by the introduction of competing devices that
offer features not available on the OXYMATIC 301, which was the Companys
primary product in this market until July of 2000.

In 1998 the Company introduced the TOTAL O2 Delivery System, which combines the
benefits of an oxygen concentrator with a system enabling patients to refill their portable cylinders.
Initial sales of the TOTAL
O2 system by home oxygen dealers were slowed
by several factors discussed below.

In order to address this situation, the Company implemented a four-part
strategy:



| |  | Introduction of the OXYMATIC 400 series in July 2000 with improved
features, which should place these oxygen conservers at the forefront
of the industry;                                                                    
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Development of additional oxygen conserver models, including the
CYPRESS OXYPneumatic conserver introduced in July, 2002, that
diversify the product line in order to offer customers a range of
oxygen conservation choices;
| 
| |  | A continued promotional
and educational campaign with respect to the
benefits of the TOTAL O2
system, coupled with greater focus on
monitoring the performance of component suppliers; and                                   
| 
| |  | Cost cutting to align the Companys operating expenses more closely
with its revenue profile.                                                                                                                                

While these measures are beginning to have a positive impact and management
believes they should continue to enhance the Companys competitive position and
future operating performance, no assurances can be given that these objectives
will be achieved. Management of the Company will continually monitor the
success of these efforts and will attempt to remain flexible in order to adjust
to possible future changes in the market for oxygen conserving devices.





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##### Table of Contents



CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

Results of Operations

Sales for the three and six month periods ended September 30, 2002 decreased by
$343,000 (6.7%) and $227,000 (2.3%), respectively, as compared to the three and
six month periods ended September 30, 2001. Sales for the three and six month
periods ended September 30, 2001 increased by $1,972,000 (62.9%) and $3,854,000
(63.2%), respectively, from the comparable periods ended September 30, 2000.
During the last two years, the Company has experienced a significant increase
in sales of its conservers, primarily as a result of the introduction of the
OXYMATIC 400 series conservers. Domestic unit sales of conservers for the six
months ended September 30, 2002 increased 45% over the comparable period from
the prior year; the increase in revenues from conserver sales for the period
was 33% due to price reductions and the impact of national chain contract
pricing (see below). The continuing increase in conserver sales was offset in
2002 by lower sales of the TOTAL O2 system, due in large part to the loss of a
significant customer which was acquired by another company in October, 2001
(see below).

Sales to foreign distributors represented 8% and 5% of total sales for the six
months ended September 30, 2002 and 2001, respectively. Currently, management
expects an increase in sales to foreign distributors during the upcoming twelve
months, however, quarter-to-quarter sales may fluctuate depending on the timing
of shipments. All foreign sales are denominated in US dollars, except Canada.

The current procedures for reimbursement by Medicare for home oxygen services
provide a prospective flat fee monthly payment based solely on the patients
prescribed oxygen requirement. Under this system, inexpensive concentrators
have grown in popularity because of low cost and less frequent servicing
requirements. At the same time, interest heightened in oxygen conserving
devices, such as the Companys products, which can extend the life of oxygen
supplies and reduce service calls by dealers, thereby providing improved
mobility for the patient and cost savings for dealers.

In addition, other changes in the health care delivery system, including the
increase in the acceptance and utilization of managed care, have stimulated a
significant consolidation among home oxygen dealers. As major national and
regional home medical equipment chains attempt to secure managed care
contracts and improve their market position, they have expanded their
distribution networks through the acquisition of independent dealers in
strategic areas. Four major national chains accounted for approximately 53%
and 36% of the Companys domestic sales for the six-month periods ended
September 30, 2002 and 2001, respectively. One chain accounted for 26% and 18%
of sales in 2002 and 2001, respectively, and one other chain accounted for 13%
of sales in 2002. On July 31, 2002, a national chain accounting for less than
10% of sales in 2002 filed a Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code (the Plan). While the initial Plan proposes
that the unsecured creditors be paid in full over a three year term with
interest, no assurance can be given that the Plan as filed will be approved or
that the payments will be made as proposed under the Plan. This chain is
currently indebted to the Company for approximately $245,000. In addition, it
is too early to determine what impact, if any, this reorganization proceeding
will have on future sales by the Company to this chain. Margins on sales to
national chains are generally lower due to quantity pricing. In certain
instances, consolidation has resulted in reduced purchases as the former
independent provider complies with the chains purchasing policies. To
ensure continued awareness of the benefits of the Companys products
by chain head-quarters personnel, a





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##### Table of Contents



CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

Results of Operations (contd)

proactive marketing and communication program is in effect with all of the
major national chains.

The Company believes that its revenues during the three years ending March 31,
2001, were adversely affected by several factors. These include price
competition, continuing industry consolidation and competitive products with
features not found in the Companys products prior to the introduction of the
OM-400 series conservers discussed below. The effects of managed care and
concerns over the severity of reimbursement cuts have, in many cases,
resulted in the provision of systems to patients that do not
provide truly ambulatory oxygen. Management believes these factors may
continue to affect the Companys revenues from sales of oxygen conserving
devices for the foreseeable future. To combat the erosion in sales of the
oxygen conserver product line, the Company is developing and introducing
several new products in this area. The first of these, the OXYMATIC 401
conserver, received 501(k) clearance from the Food and Drug Administration in
June 2000, and shipments of the new product began in July 2000. The second,
the OXYMATIC 411 conserver was cleared in December 2000 and shipments began in
January 2001. The third, the OXYMATIC 401A and 411A conservers, received
clearance in March 2001 with shipments beginning that month. The Sequoia
OXYMATIC 300 series conservers began shipping in December 2001 and the Company
began shipment of the CYPRESS OXYPneumatic conserver in July 2002. Management
believes the features and improvements in these products have enabled the
Company to regain some of the market share lost in the conserver market prior
to 2001. No estimate can currently be made regarding the level of
success the Company may achieve with these new lines of conservers. For
information, which may affect the forward- looking statements made in this
paragraph about new conservers, see Outlook: Issues and Risks  New Products.

The TOTAL O2 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. This should provide
home care dealers with means to reduce their monthly cost of servicing patients
while at the same time providing a higher quality of service by maximizing
ambulatory capability. The Company received clearance in November 1997, to
sell this product from the Food and Drug Administration. Initial sales of the
TOTAL O2 system were adversely affected by several factors, including the
overall home oxygen market climate as well as start-up manufacturing and
related supplier quality issues. The Company has taken a number of steps to
resolve the manufacturing and supplier issues, however, further progress in
this regard will be required before the TOTAL O2 system can realize its full
market potential. In October 2001, a customer that was purchasing
significant numbers of TOTAL O2 systems was acquired by a national chain that
has discontinued those purchases, which has been a major factor in the decline
in TOTAL O2 system sales in the current year. No estimates can currently be
made regarding the level of success the Company may achieve with the TOTAL O2
system. The Company has approximately $997,000 in unamortized license fees
related to the TOTAL O2 system. This asset is subject to the review discussed
in Significant Accounting Policies  Intangible and Long-Lived Assets. In the
event that the carrying value of this asset was determined to be impaired, a
portion or all of the asset would be written off. For information that





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##### Table of Contents



CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

Results of Operations (contd)

may affect the outcome of forward-looking statements made in this paragraph
about the TOTAL O2 systems, see Outlook: Issues and
Risks  New Products.

Cost of sales as a percent of net sales decreased from 63.3% to 56.8% and from
76.6% to 63.3% for the three-month periods ended September 30, 2002 and 2001
and decreased from 63.9% to 56.7% and from 76.6% to 63.9% for the six-month
periods ended September 30, 2002 and 2001, respectively, as compared to the
prior years periods. Both periods were primarily affected by increased sales
volume while 2002 was also affected by the product mix as the TOTAL
O2 system
has a lower gross profit margin than conservers.

Selling, general and administrative expenditures increased from $1,620,000 (32%
of sales) to $1,822,000 (38% of sales) and from $1,268,000 (40% of sales) to
$1,620,000 (32% of sales) for the three-month periods ended September 30, 2002
and 2001 and increased from $3,141,000 (32% of sales) to $3,533,000
(36% of sales) and from $2,549,000 (40% of sales) to $3,141,000 (32%
of sales) for the six-month periods ended September 30, 2002 and 2001, respectively. The
increases are primarily the result of variable selling expenses that fluctuate
directly with sales volume and $165,000 in proxy contest expenses incurred
during the three and six month periods ended September 30, 2002. The
Companys cost reduction efforts over the past two years, including reductions
in personnel, should align staffing and operating expenses more closely with
current sales expectations, but will be offset to some extent by commissions
paid to the Companys field sales force of manufacturers representatives.
Research and development expenses increased by $25,000 and $83,000 for the
three and six month periods ended September 30, 2002 and 2001, as compared to
the prior years periods. Currently, management expects research and
development expenditures to total approximately $1,000,000 in the fiscal
year ending March 31, 2003, on projects to enhance and expand the
Companys product line. Interest income decreased $12,000 and $22,000 for the
three and six month periods ended September 30, 2002, respectively, as compared
to the prior years periods due to generally lower cash balances than in the
prior year and lower interest rates in the current year.

At September 30, 2002, the Company had fully utilized its net operating loss
carrybacks and had approximately $673,000 and $2,640,000 in Federal and
California net operating loss carryforwards, respectively. As a result of
valuation allowances placed on the net operating loss carryforwards and
deferred tax assets, these net operating loss carryforwards and deferred tax
assets will be available to offset future income tax expense when and if
the Company generates taxable income. In the fourth quarter of 2002, the
Company recorded an income tax benefit of $995,000 that resulted from recently
enacted federal income tax regulations extending the carryback periods for
operating losses incurred in 2002 and 2001. In September, 2002, the state of
California enacted legislation that suspends the utilization of net operating
loss carryforwards during tax years starting 2002 and 2003 effective
retroactively back to January 1, 2002. As a result, the Company will be unable
to use its California net operating loss carryforwards until the tax year
beginning April 1, 2004. Further, due to the retroactive nature of the law,
California income taxes of $12,000 have been recorded in the quarter ended
September 30, 2002, that relates to income earned in the quarter ended June 30,
2002.





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##### Table of Contents



CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

Financial Condition

At September 30, 2002, the Company had cash totaling $1,404,000 or 11% of total
assets, as compared to $520,000 (5% of total assets) at
March 31, 2002. Net working capital increased from $7,497,000 at March 31, 2002 to $7,945,000
at September 30, 2002. Accounts receivable increased $332,000 during the
period ended September 30, 2002, due to the increase in sales. For information
regarding the reorganization proceedings of one of our customers please see the
discussion in Results of Operations. Future increases or decreases in
accounts receivable will generally coincide with sales volume fluctuations
and the timing of shipments to foreign customers. During the same period,
inventories increased $37,000. This increase relates primarily to purchase of
raw materials to keep up with increasing sales demand. The Company attempts to
maintain sufficient inventories to meet its customer needs as orders are
received. Thus, future inventory and related accounts payable levels will be
impacted by the ability of the Company to maintain its safety stock levels. If
safety stock levels drop below target amounts, then inventories in subsequent
periods will increase more rapidly as inventory balances are replenished.
Currently, inventory balances are generally near safety stock levels.

Management believes cash balances and funds derived from operations should be
adequate to meet the Companys cash requirements for the next twelve months
given the recent recovery of market share for oxygen conservers. Cash derived
from operations will depend on the ability of the Company to maintain
profitable operations and the timing of increases in receivables and
inventories. If profitable operations do not continue, the Company may need to
seek other sources of working capital but currently has no such arrangements
in place and no assurances can be given that if and when needed other
sources of working capital would be available. The Company expects capital
expenditures during the next twelve months to be approximately $300,000.

The Company has not adopted any programs that provide for post employment
retirement benefits, however, it has on occasion provided such benefits to
individual employees. The Company does not have any off balance sheet
arrangements with any special purpose entities or any other parties, does not
enter into any transactions in derivatives and has no material transactions
with any related parties.

Significant Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates under different assumptions and conditions. Management
believes that the following discussion addresses the accounting policies and
estimates that are most important in the portrayal of the Companys financial
condition and results.

Allowance for doubtful accounts  the Company provides a reserve against
receivables for estimated losses that may result from our customers inability
to pay. The amount of the reserve is based on an analysis of known
uncollectible accounts, aged receivables, historical losses and
credit-worthiness. Amounts later determined and specifically identified to
be uncollectable are





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CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

Significant Accounting Policies (contd)

charged or written off against this reserve. The likelihood of material losses
is dependent on general economic conditions and numerous factors that affect
individual accounts.

Inventories  the Company provides a reserve against inventories for excess and
slow moving items. The amount of the reserve is based on an analysis of
inventory turnover for individual items in inventory. The likelihood of
material write-downs is dependent on customer demand and competitor product
offerings.

Intangible and long-lived assets  the Company assesses whether or not there
has been an impairment of intangible and long-lived assets in evaluating the
carrying value of these assets. Assets are considered impaired if the carrying
value is not recoverable over the useful life of the asset. If an asset is
considered impaired, the amount by which the carrying value exceeds the fair
value of the asset is written off. The likelihood of a material change in the
Companys reported results is dependent on each assets ability to continue to
generate income, loss of legal ownership or title to an asset and the impact of
significant negative industry or economic trends.

Deferred income taxes  the Company provides a valuation allowance to reduce
deferred tax assets to the amount expected to be realized. The likelihood of a
material change in the expected realization of these assets depends on the
Companys ability to generate future taxable income.

Outlook: Issues & Risks

This report contains forward-looking statements, which reflect the Companys
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
which may cause actual operating results to differ materially from currently,
anticipated results. Among the factors that could cause actual results to
differ materially are the following:

Dependence Upon a Single Product Line

Although the Company currently markets a number of products, these products
comprise a single product line for patients requiring supplementary oxygen.
The Companys future performance is thus dependent upon developments affecting
this segment of the health care market and the Companys ability to remain
competitive within this market sector.

New Products

The Companys future growth in the near term will depend in significant part
upon its ability to successfully introduce new products. In recent
years, the Company has introduced the OXYMATIC 400 series, Sequoia and
CYPRESS OXYPneumatic conservers, the TOTAL O2 Delivery System and the Company
is currently developing additional new products. The success of these
products will depend upon the health care communitys perception of such
products capabilities, clinical efficacy and benefit to patients as well
as obtaining timely regulatory approval. In addition, prospective sales
will be impacted by the degree of acceptance achieved among home oxygen dealers
and patients requiring supplementary oxygen. As with any product,





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CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

New Products (contd)

the Companys ability to successfully promote the OXYMATIC 400, Sequoia and
CYPRESS OXYPneumatic series conservers, the TOTAL O2 Delivery System and other
new products cannot be determined at this time.

Consolidation of Home Care Industry

The home health care industry is undergoing significant consolidation. As a
result, the market for the Companys products is increasingly influenced by
major national chains. Four major national chains accounted for 53% of the
Companys domestic sales during the six-month period ended September 30, 2002.
For information regarding the reorganization proceedings of one of our
customers please see the discussion in Results of Operations. Future sales
may be increasingly dependent on a limited number of customers, which may have
an impact on margins due to quantity pricing.

Competition

Chads success in the early 1990s has drawn new competition to vie for a share
of the home oxygen market. These new competitors include both small and very
large companies. While the Company believes the quality of its products and
its established reputation will continue to be a competitive advantage, some
competitors have successfully introduced lower priced products with features
not previously found in the Companys products but which do not provide oxygen
conserving capabilities comparable to the Companys products. Most of these
competitors have greater capital resources than the Company. No assurance can
be given that increased competition in the home oxygen market will not have an
adverse affect on the Companys operations.

Rapid Technological Change

The health care industry is characterized by rapid technological change. The
Companys products may become obsolete as a result of new developments. The
Companys ability to remain competitive will depend to a large extent upon
its ability to anticipate and stay abreast of new technological developments
related to oxygen therapy. The Company has limited internal research and
development capabilities. Historically, the Company has contracted with
outside parties to develop new products. Some of the Companys
competitors have substantially greater funds and facilities to pursue research
and development of new products and technologies for oxygen therapy.

Potential Changes in Administration of Health Care

A number of bills proposing to regulate, control or alter the method of
financing health care costs have been discussed and certain of such bills have
been introduced in Congress and various state legislatures. Because of the
uncertain state of health care proposals, it is not meaningful at this time to
predict the effect on the Company if any of these proposals is enacted.





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##### Table of Contents



CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

Potential Changes in Administration of Health Care (contd)

Approximately 80% of home oxygen patients are covered by Medicare and other
government programs. Federal law has altered the payment rates available to
providers of Medicare services in various ways during the last several years.
Congress has passed legislation, which has reduced Medicare spending. It
cannot yet be predicted how future changes in reimbursement levels will affect
the home oxygen industry and there can be no assurance that such changes will
not have an adverse effect on the Companys business.

Protection of Intellectual Property Rights

The Company pursues a policy of protecting its intellectual property changes in
reimbursement levels will affect the home oxygen industry and there can be
rights through a combination of patents, trademarks, trade secret laws and
confidentiality agreements. The Company considers the protection of its
proprietary rights and the patentability of its products 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 or
claims that the Companys products infringe the patent rights of others could
have an adverse impact upon the Companys business.

Product Liability

The nature of the Companys business subjects it to potential legal actions
asserting that the Company is liable for damages for product liability claims.
Although the Company maintains product liability insurance in an amount which
it believes to be customary in the industry, there is no assurance that this
insurance will be sufficient to cover the costs of defense or judgments which
might be entered against the Company. The type and frequency of these claims
could have an adverse impact on the Companys results of operations and
financial position.

Availability and Reliability of Third Party Component Products

The Company tests and packages its products in its own facility. Some of its
other manufacturing processes are conducted by other firms; the Company
expects to continue using outside firms for certain manufacturing processes for
the foreseeable future and is thus dependent on the reliability and quality of
parts supplied by these firms. The Companys agreements with its suppliers are
terminable at will or by notice. The Company believes that other suppliers
would be available in the event of termination of these arrangements. No
assurance can be given, however, that the Company will not suffer a material
disruption in the supply of parts required for its products.

Evaluation of Intangible Assets

The Company has approximately $997,000 in unamortized license fees related to
the TOTAL O2 system. This asset is subject to the review discussed in
Significant Accounting Policies  Intangible and Long-Lived Assets. In the
event that the carrying value of this asset was determined to be impaired, a
portion or all of the asset would be written off.





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CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002

Accounting Standards

Accounting standards promulgated by the Financial Accounting Standards Board
change periodically. Changes in such standards may have an impact on the
Companys future financial position.

In July 2001, the Financial Accounting Standards Board issued FASB Statement
No. 142, Accounting for Goodwill and Other Intangible Assets.Statement
142 requires that intangible
assets with estimable useful lives be amortized over their respective useful
lives to their estimated residual values and reviewed for impairment in
accordance with FAS Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,or, upon
adoption of FASB Statement No. 144 (see below).The Company adopted the
provisions of Statement 142 effective April 1, 2002. The adoption of Statement
142 did not have a material impact on the financial statements of the Company.

In October 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of,it retains many of the fundamental provisions of that
Statement. The Company adopted the provisions of Statement 144 effective April
1, 2002. The adoption of Statement 144 did not have a material impact on the
financial statements of the Company.

In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of the commitment to an exit or disposal plan.
This statement is effective prospectively to exit or disposal activities
initiated after December 31, 2002. We adopted SFAS 146 effective August 1,
2002, and the adoption of this standard did not have an impact on our financial
statements.

Additional Risk Factors

Additional factors, which might affect the Companys performance, may be listed
from time to time in the reports filed by the Company with the Securities and
Exchange Commission.




Item 4. Controls and Procedures

The Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of a date within 90 days prior to the
filing of this quarterly report on Form 10-Q (the Evaluation Date). Such
evaluation was conducted under the supervision and with the participation of
the Companys Chief Executive Officer (CEO) and its Chief Financial Officer
(CFO). Based upon such evaluation, the Companys CEO and CFO have concluded
that, as of the Evaluation Date, the Companys disclosure controls and
procedures were effective. There have been no significant changes in the
Companys internal controls or other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.





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CHAD THERAPEUTICS, INC.
Managements Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2002




PART II




Item 6. Exhibits and Reports on Form 8-K

(a)  99.1 Certification pursuant to 18 U.S.C. Section 1350





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SIGNATURES

Pursuant to the requirements 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.

|              |  |                                                                             
|------------- |  | ----------------------------------------------------------------------------
|              |  | CHAD THERAPEUTICS, INC.                                                     
|              |  |                                                                             
|              |  | (Registrant)                                                                
|             
|              |  |                                                                             
|Date 11/06/02 |  | /s/ Thomas E. Jones                                                         
|              |  |                                                                             
|              |  | Thomas E. Jones
Chief Executive Officer                                     
|             
|              |  |                                                                             
|Date 11/06/02 |  | /s/ Earl L. Yager                                                           
|              |  |                                                                             
|              |  | Earl L. Yager
Chief Operating Officer,
Chief Financial Officer and Secretary





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##### Table of Contents



I, Thomas E. Jones, as Chief Executive Officer of CHAD Therapeutics, Inc. (the
Company), hereby certify, pursuant to Rule 13a-14 (17 CFR 240.13a-14), that:



|(1) |  | I have reviewed this quarterly report on Form 10-Q of CHAD Therapeutics,
Inc.;                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|   
|(3) |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|   
|(4) |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|(5) |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

|                       |  |                                                                   
|---------------------- |  | ------------------------------------------------------------------
|Date: November 6, 2002 |  | /s/Thomas E. Jones                                                
|                       |  |                                                                   
|                       |  | Thomas E. Jones
Chief Executive Officer of CHAD Therapeutics, Inc.





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##### Table of Contents



I, Earl L. Yager, as Chief Financial Officer of CHAD Therapeutics, Inc. (the
Company), hereby certify, pursuant to Rule 13a-14 (17 CFR 240.13a-14), that:



|(1) |  | I have reviewed this quarterly report on Form 10-Q of CHAD Therapeutics,
Inc.;                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|   
|(3) |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|   
|(4) |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | (c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|(5) |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

|                       |  |                                                                 
|---------------------- |  | ----------------------------------------------------------------
|Date: November 6, 2002 |  | /s/ Earl L. Yager                                               
|                       |  |                                                                 
|                       |  | Earl L. Yager
Chief Financial Officer of CHAD Therapeutics, Inc.





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##### Table of Contents






Exhibit Index

|            |  |                                                 
|----------- |  | ------------------------------------------------
|Exhibit No. |  | Exhibit Index Document                          
|            |  |                                                 
|99.1        |  | Certification pursuant to 18 U.S.C. Section 1350