<PAGE>   1
                                 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:  June 30, 1998

     Commission file number:  0-11363


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

                California                       95-3792700
        (State or other jurisdiction of       (I.R.S. Employer
        incorporation or organization)       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          10,012,423




<PAGE>   2
                         CHAD THERAPEUTICS, INC.
                              Balance Sheets
                    June 30, 1998 and March 31, 1998


                                  ASSETS
                                  ------
                                                   June 30,        March 31,
                                                    1998             1998  
                                                 -----------    -------------  
                                                 (Unaudited)

Current assets:
   Cash                                          $   980,000     $ 1,579,000
   Accounts receivable, less allowance for
     doubtful accounts of $53,000 at
     June 30, 1998 and $105,000 at
     March 31, 1998                                2,799,000       2,469,000
   Inventories (Note 2)                            8,497,000       7,133,000
   Income taxes refundable                           501,000         572,000
   Prepaid expenses                                  217,000         249,000
   Deferred income taxes                              64,000          64,000
                                                  ----------      ----------

     Total current assets                         13,058,000      12,066,000


Property and equipment, at cost                    5,325,000       5,275,000
   Less accumulated depreciation                   1,511,000       1,310,000
                                                  ----------      ----------

     Net property and equipment                    3,814,000       3,965,000
                                                  ----------      ----------

Note receivable from related party                   125,000         126,000
Other assets, net                                  1,263,000       1,279,000
                                                  ----------      ----------

     Total assets                                $18,260,000     $17,436,000
                                                  ==========      ==========

                   LIABILITIES AND SHAREHOLDERS' EQUITY
                   ------------------------------------

Current liabilities:
   Accounts payable                              $ 1,131,000     $   730,000
   Accrued expenses                                  857,000         632,000
                                                  ----------      ----------

     Total current liabilities                     1,988,000       1,362,000
                                                  ----------      ----------

Shareholders' equity:
 Common shares, $.01 par value, authorized
  40,000,000 shares; 10,012,000 and 10,008,000
  shares issued and outstanding                   13,125,000      13,100,000
 Retained earnings                                 3,212,000       3,105,000
                                                  ----------      ----------
                                                  16,337,000      16,205,000
 Less treasury shares at cost, 8,000 and
  19,000 shares                                      (65,000)       (131,000)
                                                  ----------      ----------

     Net shareholders' equity                     16,272,000      16,074,000
                                                  ----------      ----------

     Total liabilities and shareholders' equity  $18,260,000     $17,436,000
                                                  ==========      ==========


See accompanying notes to financial statements.


<PAGE>   3
                          CHAD THERAPEUTICS, INC.
                          Statements of Earnings
             For the three months ended June 30, 1998 and 1997
                                (Unaudited)


                                                     THREE MONTHS ENDED
                                               ----------------------------    
                                                    1998            1997
                                                    ----            ----

Net sales                                       $4,197,000      $5,428,000
Cost of sales                                    2,257,000       2,443,000
                                                 ---------       ---------

        Gross profit                             1,940,000       2,985,000

Costs and expenses:
   Selling, general and administrative           1,571,000       1,537,000
   Research and development                        208,000         133,000
                                                 ---------       ---------

        Total costs and expenses                 1,779,000       1,670,000
                                                 ---------       ---------

        Operating income                           161,000       1,315,000

   Other income - interest income                   17,000          27,000
                                                 ---------       ---------

        Earnings before income taxes               178,000       1,342,000

Income taxes                                        71,000         538,000
                                                 ---------       ---------

        Net earnings                            $  107,000      $  804,000
                                                 =========       =========

            Basic earnings per share            $      .01      $      .08
                                                 =========       =========

        Diluted earnings per share              $      .01      $      .08
                                                 =========       =========


See accompanying notes to financial statements.


<PAGE>   4
                              CHAD THERAPEUTICS, INC.
                         Statement of Shareholders' Equity
                     For the three months ended June 30, 1998
                                     (Unaudited)



                                   Common Shares         Retained     Treasury
                                 Shares     Amount       Earnings      Shares
                              ----------  -----------  -----------   ----------

Balance at
 March 31, 1998               10,008,000  $13,100,000  $ 3,105,000   $(131,000)

Exercise of stock options          4,000       24,000        -           -

Common Shares issued for
 purchases under employee
 benefit plan                      -            1,000        -          66,000

Net earnings                       -            -          107,000       -
                               ---------   ----------   ----------    --------

Balance at
 June 30, 1998                10,012,000  $13,125,000  $ 3,212,000   $ (65,000)
                              ==========   ==========   ==========    =========



See accompanying notes to financial statements.


<PAGE>   5
                          CHAD THERAPEUTICS, INC.
                          Statements of Cash Flows
              For the three months ended June 30, 1998 and 1997
                                (Unaudited)


                                                        Three Months Ended
                                                     -------------------------  
                                                        1998          1997
                                                        ----          ----
Cash flows from operating activities:
   Net earnings                                      $   107,000   $   804,000
   Adjustments to reconcile net earnings to net
     cash provided by (used in) operating activities:
       Depreciation and amortization                     201,000       123,000
       Changes in assets and liabilities:
         Decrease (increase) in accounts receivable     (330,000)     (453,000)
         Decrease (increase) in inventories           (1,364,000)      929,000
         Decrease (increase) in income taxes
           refundable                                     71,000       527,000
         Decrease (increase) in prepaid expenses          32,000      (336,000)
         Decrease (increase) in deferred income taxes      -             -
         Decrease (increase) in note receivable
           from related party                              1,000         -
         Decrease (increase) in other assets              16,000      (299,000)
         Increase (decrease) in accounts payable         401,000      (172,000)
         Increase (decrease) in accrued expenses         225,000       168,000
         Increase (decrease) in income taxes payable       -            11,000
                                                      ----------    ----------

             Net cash provided by (used in)
               operating activities                     (640,000)    1,302,000
                                                      ----------    ----------

Cash flows from investing activities:
   Capital expenditures                                  (50,000)     (240,000)
                                                      ----------    ----------

               Net cash used in investing
               activities                                (50,000)     (240,000)
                                                      ----------    ----------

Cash flows from financing activities:
   Exercise of stock options                              24,000         -
   Common Shares repurchased                               -          (253,000)
   Common Shares issued                                   67,000        56,000
                                                      ----------    ----------

               Net cash provided by (used in)
               financing activities                       91,000      (197,000)
                                                      ----------    ----------

Net increase (decrease) in cash                         (599,000)      865,000

Cash beginning of period                               1,579,000     2,289,000
                                                      ----------    ----------

Cash end of period                                   $   980,000   $ 3,154,000
                                                      ==========    ==========



See accompanying notes to financial statements.



<PAGE>   6
                             CHAD THERAPEUTICS, INC.
                                  JUNE 30, 1998
                                   (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, to a fair statement of the results for the
    interim periods presented have been made. 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 on pages 14, 15, 16 and 17 of the
    March 31, 1998, Annual Report and particularly to Note 1 which includes a
    summary of significant accounting policies.

2.  INVENTORIES

    Inventories at June 30, 1998, are summarized as follows:

                    Finished goods                     $1,561,000
                    Work-in-process                       986,000
                    Raw materials                       5,950,000
                                                        ---------
                                                       $8,497,000
                                                        =========
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
                                                    June 30
                                                 1998         1997
                                                 ----         ----
    Basic earnings per share:

    Numerator - net earnings                  $   107,000  $   804,000
    Denominator - common shares
     outstanding                               10,010,000    9,951,000
                                               ----------   ----------

    Basic earnings per share                  $       .01  $       .08
                                               ==========   ==========

    Diluted earnings per share:

    Numerator - net earnings                  $   107,000  $   804,000
    Denominator:
     Common shares outstanding                 10,010,000    9,951,000
     Common stock options                         116,000      236,000
                                               ----------   ----------

                                               10,126,000   10,187,000
                                               ----------   ----------

    Diluted earnings per share                $       .01  $       .08
                                               ==========   ==========





<PAGE>   7
                             CHAD THERAPEUTICS, INC.
                                  JUNE 30, 1998
                                   (Unaudited)

3.  EARNINGS PER COMMON SHARE (CONT'D)

    Options to purchase 442,000 shares of common stock at prices ranging from
    $6.688 to $13.471 per share were not included in the computation of diluted
    earnings per share because the option price was greater than the average
    market price of the common shares.

4.  COMPREHENSIVE INCOME

    The financial Accounting Standards Board issued Statement No. 130, Reporting
    Comprehensive Income ("SFAS 130"), in June, 1997. SFAS 130 establishes
    standards for reporting and display of comprehensive income and its
    components in financial statements. SFAS No. 130 is effective for fiscal
    years beginning after December 15, 1997. The Company adopted SFAS No. 130 on
    April 1, 1998. Comprehensive income is the change in equity of a business
    enterprise during a period from transactions and all other events and
    circumstances from nonowner sources. Other comprehensive income includes
    foreign currency items, minimum pension liability adjustments and unrealized
    gains and losses on certain investments in debt and equity securities. The
    Company did not have components of other comprehensive income during the
    three-month periods ended June 30, 1998 and 1997. As a result, comprehensive
    income is the same as the net income for the three-month periods ended June
    30, 1998 and 1997.

5.  INCOME TAXES

    Income taxes have been provided for at an effective combined Federal and
    California rate of approximately 40% for all periods presented.




<PAGE>   8
                             CHAD THERAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

RESULTS OF OPERATIONS

Sales for the three months ended June 30, 1998, decreased $1,231,000 or 22.7%
from the prior year's period. There were no price changes during 1997. While
there have been limited price reductions in 1998, the decrease in sales relates
primarily to decreases in domestic unit sales in 1998 of OXYMATIC conservers and
OXYLITE complete portable oxygen systems which are being affected by the current
marketing environment for home oxygen therapy discussed below.

Sales to foreign distributors represented 14% and 9% of total sales for the
periods ended June 30, 1998 and 1997, respectively. Currently, management
expects an increase in sales to foreign distributors during the upcoming fiscal
year and quarter to quarter sales will fluctuate depending on the timing of
shipments. In addition, all foreign sales are transacted in US dollars, thus
annual unit sales could be affected by foreign currency fluctuations.

The current procedure for reimbursement by Medicare for home oxygen services
provides 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.
Three major national chains accounted for approxi mately 22% and 23% of the
Company's domestic sales for the periods ended June 30, 1998 and 1997,
respectively. Margins on these sales may be somewhat lower due to quantity
pricing. In some instances consolidation has resulted in reduced purchases as
the former independent provider complies with the chain's purchasing policies.
The Company's products, which allow homecare dealers to provide cost efficient
home oxygen therapy, are ideally suited for use in a managed care environment
and as a tool



<PAGE>   9
                             CHAD THERAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

RESULTS OF OPERATIONS (cont'd)

for dealers to increase revenues and profits. To ensure continued awareness of
the benefits of the Company's products by chain headquarters personnel, a
proactive marketing and communication program is in effect with all of the major
national chains.

The Company believes that its revenues at the end of fiscal 1997 and during the
year ended March 31, 1998, were affected by several factors. During the year
ended March 31, 1998, management believes sales to national chain accounts
decreased as programs to convert patients to more acceptable ambulatory systems
in the previous year did not recur. In addition, sales to national chain
accounts as well as independent dealers have also been impacted by increased
competitive factors and uncertainties regarding the size of potential cuts in
Medicare home oxygen reim bursement which were being discussed as part of the
Federal budget process. This process has now been finalized and a 25% cut in
home oxygen reimbursement went into effect January, 1998. The effects of managed
care and concerns over the severity of reimbursement cuts has, in many cases,
resulted in the provision of systems to patients that do not provide truly
ambulatory oxygen. Management believes these factors, including uncertainties as
to how home care providers will respond to the 25% cut, may continue to
adversely affect the Company's revenues from sales of oxygen conserving devices
for the foreseeable future. However, during the quarter ended June 30, 1998,
sales of these products increased 25% over the previous quarter.

Management also believes future revenues may be positively affected by sales of
a new product, the TOTAL O2(TM) Delivery System. 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 a means to
deal with the reimbursement cuts discussed above by reducing 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 the new product from the Food and Drug Administration.
The Company began shipping TOTAL O2 systems in January and realized
approximately $218,000 in sales during the quarter ended June 30, 1998. The
sales potential for the new system is significant as the average selling price
is approximately four times that of the OXYMATIC and OXYLITE systems. No
estimate can currently be made regarding the level of success the Company may
achieve with the TOTAL O2 system. For information which may


<PAGE>   10
                             CHAD THERAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

RESULTS OF OPERATIONS (cont'd)

affect the outcome of forward looking statements made in this paragraph see 
Outlook: Issues and Risks - New Product.

Cost of sales as a percent of net sales increased from 45.0% to 53.8% for the
period ended June 30, 1998, as compared to the prior year's period. Both periods
have been affected by higher fixed overhead costs associated with the Company's
move to new facilities in October, 1996. In addition, the period ended June 30,
1998, has been affected by decreased sales volume and start-up costs associated
with the manufacture of the TOTAL O2 system. Management believes the gross
margins should remain at or decline slightly from current levels in the future
periods as TOTAL O2 system sales increase.

Selling, general and administrative expenditures increased slightly from
$1,537,000 to $1,571,000 for the periods ended June 30, 1998. The Company does
not anticipate a decrease in these expenses in the coming years. Research and
development expenses increased by $75,000 for the period ended June 30, 1998, as
compared to the prior year's period. Currently, management expects research and
development expenditures to total approximately $800,000 in the fiscal year
ended March 31, 1999, on projects to enhance and expand the Company's product
line.

FINANCIAL CONDITION

At June 30, 1998, the Company had cash totaling $980,000 or 5% of total assets,
as compared to $1,579,000 (9%) at March 31, 1998. Net working capital increased
from $10,704,000 at March 31, 1998, to $11,070,000 at June 30, 1998. Accounts
receivable increased $330,000 during the period ended June 30, 1998. 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 $1,364,000. This increase relates primarily
to raw materials purchased for the manufacture of the new TOTAL O2 product line.
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.

Management believes funds derived from operations should be adequate to meet the
Company's present cash requirements.


<PAGE>   11
                             CHAD THERAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

FINANCIAL CONDITION (cont'd)

However, should the company achieve rapid market penetra tion with the new TOTAL
O2 product line it may need addi tional funds on a short term basis. The Company
has entered into an agreement with its bank to provide a line of credit for up
to $2,000,000 if such funds are necessary for expansion of the TOTAL O2 product
line. The Company expects capital expenditures during the next twelve months to
be approximately $750,000.

On June 30, 1994, the Company announced that the Board of Directors had
authorized stock repurchases of its common shares in privately negotiated
transactions for a minimum of 10,000 shares. While the Company made no stock
repur chases during the period ended June 30, 1998, the Company may make
additional stock repurchases pursuant to the Board of Directors authorization in
the future. In addition, the Board has authorized the Company to purchase shares
of the Company's common stock in open market transactions. No purchases were
made during the period ended June 30, 1998, and the Company purchased
approximately 38,000 shares at a cost of $285,000 during the period ended June
30, 1997, however, the number of shares which may be purchased under these
programs in the future can not be predicted at this time. The Company does not
provide post employment retirement benefits.

YEAR 2000

Management has initiated an enterprise-wide program to prepare the Company's,
its customers and its suppliers computer systems and applications for the year
2000. The Company expects to incur internal staff costs as well as consulting
and other expenses related to infrastructure and facilities enhancements
necessary to prepare the systems for the year 2000. The cost of testing and
conversion of system applications is expected to be minimal. A signifi cant
proportion of these costs are not likely to be incremental costs to the Company,
but rather will represent the redeployment of existing information technology
resources.

NEWLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130", in June, 1997. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in
financial statements. FAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. The Company has adopted FAS 130 in the
quarter ended


<PAGE>   12
                             CHAD THERAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

NEWLY ISSUED ACCOUNTING STANDARDS (cont'd)

June 30, 1998. The adoption of FAS 130 did not have a material impact on the
Company's financial position or results of operations.

The Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131") in June,
1997. FAS 131 establishes standards for the way public business enter prises are
to report information about operating segments in annual financial statements
and requires enterprises to report selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major custom ers. It replaces the "industry segment" concept of FAS No. 14,
"Financial Reporting for Segments of a Business Enterprise", with a "management
approach" concept as to basis for identifying reportable segments. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will adopt FAS 131 in the annual financial statements of the
fiscal year ending March 31, 1999. Management believes the adoption of FAS 131
will not have a material impact on the Company's financial position or results
of operations.

OUTLOOK:  ISSUES & RISKS

This quarterly 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 prod ucts, 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 PRODUCT

The Company's future growth in the near term will depend in significant part
upon the commercial success of the TOTAL


<PAGE>   13
                             CHAD THERAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

NEW PRODUCT (cont'd)

O2 Delivery System. The success of this new product will depend upon the health
care community's perception of the system's capabilities, clinical efficacy and
benefit to patients. In addition, prospective sales will be impacted by the
degree of acceptance it achieves among home oxygen dealers and patients
requiring supplementary oxygen. As with the introduction of any new product, the
Company's ability to successfully promote the TOTAL O2 Delivery System cannot be
assessed 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. Three major national chains presently account for 22% of
the Company's domestic sales. 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 over the past several years 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 which do not
provide oxygen conserving capabilities comparable to the Company's products. No
assurance can be given that increased competition in the home oxygen market will
not continue to 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.



<PAGE>   14
                             CHAD THERAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

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. There are wide
variations among these bills and proposals. Because of the uncertain state of
the health care proposals, it is not meaningful at this time to predict the
effect on the business of the Company if any of these proposals is enacted.

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
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.

PATENTS AND TRADEMARKS

The Company pursues a policy of obtaining patents for appropriate inventions
related to products marketed or manufactured by the Company. The Company
considers the patentability of 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 protec tion, competitors may be able to manufacture and
market substantially similar products. Such competition could have an adverse
impact upon the Company's business.

PRODUCTS 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 products liability insurance in an amount which
it believes to be customary in the industry, there is no assurance that this
insurance will be suffi cient 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 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 and the Company
expects to continue using outside firms for certain manufacturing


<PAGE>   15
                             CHAD THEAPEUTICS, INC.
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

                                  JUNE 30, 1998

AVAILABILITY OF THIRD PARTY COMPONENT PRODUCTS (cont'd)

processes for the foreseeable future. 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 arrange ments.
No assurance can be given, however, that the Company will not suffer a material
disruption in the supply of its products.

ACCOUNTING STANDARDS

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

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.




<PAGE>   16
                                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    08/03/98                         /S/ THOMAS E. JONES
                                              Thomas E. Jones
                                              Chief Executive Officer


     Date    08/03/98                         /S/ EARL L. YAGER
                                              Earl L. Yager
                                              Senior Vice President, Chief
                                              Financial Officer and Secretary