##### Table of Contents



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: December 31, 2003

Commission file number: 1-12214

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

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(818) 882-0883

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---

(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 ISSURES:

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

|              |  |  |            | 
|------------- |  |  | ---------- | 
|Common Shares |  |  | 10,091,000 | 





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TABLE OF CONTENTS



|                                                                                      |                                          |                                                                 |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------------------- |  |  |  |  |  | 
|                                                                                      |                                          | Condensed Balance Sheets                                       
|                                                                                      |                                          | Condensed Statements of Operations For the three months        
|                                                                                      |                                          | Condensed Statements of Operations For the nine months         
|                                                                                      |                                          | Condensed Statement of Shareholders Equity For the nine months
|                                                                                      |                                          | Condensed Statements of Cash Flows                             
|Managements Discussion and Analysis of Financial Condition and Results of Operations
|Part II                                                                              
|                                                                                      | Item 6. Exhibits and Reports on Form 8-K
|                                                                                      | Item 9. None                            
|SIGNATURES                                                                           
|EXHIBIT 31.1                                                                         
|EXHIBIT 31.2                                                                         
|EXHIBIT 32                                                                           



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CHAD THERAPEUTICS, INC.
Condensed Balance Sheets
December 31, 2003 and March 31, 2003
(Unaudited)

|                                     |                                                                                                                          |  |           |                                            |   |              |            |            |   |   |            | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ |  | --------- | ------------------------------------------ | - | ------------ | ---------- | ---------- | - | - | ---------- | 
|                                     |                                                                                                                          |  |           |                                            |   | December 31, |            | March 31, 
|                                     |                                                                                                                          |  |           |                                            |   | 2003         |            | 2003      
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|ASSETS                               |                                                                                                                          |  |           |                                            |   |              |            |           
|Current Assets:                      |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     | Cash                                                                                                                     |  | $         | 1,374,000                                  |   |              | $          | 1,596,000  |  
|                                     | Accounts receivable, less allowance for
doubtful accounts of $93,000 at
December 31, 2003 and $112,000 at
March 31, 2003 |  |           | 3,004,000                                  |   |              |            | 2,517,000  |  
|                                     | Income taxes refundable                                                                                                  |  |           | 4,000                                      |   |              |            | 4,000      |  
|                                     | Inventories (Note 2)                                                                                                     |  |           | 5,713,000                                  |   |              |            | 5,511,000  |  
|                                     | Prepaid Expenses                                                                                                         |  |           | 377,000                                    |   |              |            | 601,000    |  
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     |                                                                                                                          |  |           | Total current assets                       |   |              | 10,472,000 |            |   |   | 10,229,000 | 
|Property and equipment, at cost      |                                                                                                                          |  | 6,450,000 |                                            |   |              | 6,215,000  |           
|                                     | Less accumulated depreciation                                                                                            |  |           | 5,328,000                                  |   |              |            | 4,979,000  |  
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     |                                                                                                                          |  |           | Net property and equipment                 |   |              | 1,122,000  |            |   |   | 1,236,000  | 
|Other assets, net                    |                                                                                                                          |  | 737,000   |                                            |   |              | 640,000    |           
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     |                                                                                                                          |  |           | Total assets                               |   | $            | 12,331,000 |            |   | $ | 12,105,000 | 
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                          |  |           |                                            |   |              |            |           
|Current liabilities:                 |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     | Accounts payable                                                                                                         |  | $         | 353,000                                    |   |              | $          | 741,000    |  
|                                     | Accrued expenses                                                                                                         |  |           | 1,006,000                                  |   |              |            | 1,263,000  |  
|                                     | Income taxes payable                                                                                                     |  |           | 35,000                                     |   |              |            | 1,000      |  
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     |                                                                                                                          |  |           | Total current liabilities                  |   |              | 1,394,000  |            |   |   | 2,005,000  | 
|Shareholders equity:                |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     | Common shares, $.01 par value, authorized
40,000,000 shares; 10,091,000 and 10,076,000
shares issued and outstanding     |  |           | 13,302,000                                 |   |              |            | 13,257,000 |  
|                                     | Accumulated deficit                                                                                                      |  |           | (2,365,000                                 | ) |              |            | (3,157,000 | )
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     |                                                                                                                          |  |           | Total shareholders equity                 |   |              | 10,937,000 |            |   |   | 10,100,000 | 
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           
|                                     |                                                                                                                          |  |           | Total liabilities and shareholders equity |   | $            | 12,331,000 |            |   | $ | 12,105,000 | 
|                                     |                                                                                                                          |  |           |                                            |   |              |            |           

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the three months ended December 31, 2003 and 2002
(Unaudited)

|                    |                                     |                              |           |           |                    |            |           |           |           |            | 
|------------------- | ----------------------------------- | ---------------------------- | --------- | --------- | ------------------ | ---------- | --------- | --------- | --------- | ---------- | 
|                    |                                     |                              |           |           | Three Months Ended
|                    |                                     |                              |           |           | December 31,      
|                    |                                     |                              |           |           |                   
|                    |                                     |                              |           |           | 2003               |            | 2002     
|                    |                                     |                              |           |           |                    |            |          
|Net Sales           |                                     | $                            | 5,237,000 |           |                    | $          | 4,980,000 |          
|Cost of Sales       |                                     |                              | 2,890,000 |           |                    |            | 2,848,000 |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Gross profit                 |           |           | 2,347,000          |            |           |           | 2,132,000 |           
|Costs and expenses: |                                     |                              |           |           |                    |            |           |          
|                    | Selling, general and administrative |                              |           | 1,587,000 |                    |            |           | 1,681,000 |          
|                    | Research and development            |                              |           | 343,000   |                    |            |           | 207,000   |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Total costs and expenses     |           |           | 1,930,000          |            |           |           | 1,888,000 |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Operating income             |           |           | 417,000            |            |           |           | 244,000   |           
|                    | Other Income                        |                              |           | 20,000    |                    |            |           | 6,000     |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Earnings before income taxes |           |           | 437,000            |            |           |           | 250,000   |           
|Income tax expense  |                                     |                              | 19,000    |           |                    |            | 22,000    |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Net earnings                 |           | $         | 418,000            |            |           | $         | 228,000   |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Basic earnings per share     |           | $         | 0.04               |            |           | $         | 0.02      |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Diluted earnings per share   |           | $         | 0.04               |            |           | $         | 0.02      |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Weighted shares outstanding: |           |           |                    |            |           |           |           |           
|                    |                                     |                              | Basic     |           |                    | 10,088,000 |           |           |           | 10,073,000 | 
|                    |                                     |                              | Diluted   |           |                    | 10,401,000 |           |           |           | 10,364,000 | 

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the nine months ended December 31, 2003 and 2002
(Unaudited)

|                    |                                     |                              |            |           |                   |            |            |           |           |            | 
|------------------- | ----------------------------------- | ---------------------------- | ---------- | --------- | ----------------- | ---------- | ---------- | --------- | --------- | ---------- | 
|                    |                                     |                              |            |           | Nine Months Ended
|                    |                                     |                              |            |           | December 31,     
|                    |                                     |                              |            |           |                  
|                    |                                     |                              |            |           | 2003              |            | 2002      
|                    |                                     |                              |            |           |                   |            |           
|Net Sales           |                                     | $                            | 16,190,000 |           |                   | $          | 14,842,000 |          
|Cost of Sales       |                                     |                              | 8,959,000  |           |                   |            | 8,527,000  |          
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Gross profit                 |            |           | 7,231,000         |            |            |           | 6,315,000 |           
|Costs and expenses: |                                     |                              |            |           |                   |            |            |          
|                    | Selling, general and administrative |                              |            | 5,420,000 |                   |            |            | 5,189,000 |          
|                    | Research and development            |                              |            | 1,011,000 |                   |            |            | 695,000   |          
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Total costs and expenses     |            |           | 6,431,000         |            |            |           | 5,884,000 |           
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Operating income             |            |           | 800,000           |            |            |           | 431,000   |           
|                    | Other Income                        |                              |            | 29,000    |                   |            |            | 15,000    |          
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Earnings before income taxes |            |           | 829,000           |            |            |           | 446,000   |           
|Income tax expense  |                                     |                              | 37,000     |           |                   |            | 38,000     |          
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Net earnings                 |            | $         | 792,000           |            |            | $         | 408,000   |           
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Basic earnings per share     |            | $         | 0.08              |            |            | $         | 0.04      |           
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Diluted earnings per share   |            | $         | 0.08              |            |            | $         | 0.04      |           
|                    |                                     |                              |            |           |                   |            |            |          
|                    |                                     | Weighted shares outstanding: |            |           |                   |            |            |           |           |           
|                    |                                     |                              | Basic      |           |                   | 10,080,000 |            |           |           | 10,070,000 | 
|                    |                                     |                              | Diluted    |           |                   | 10,331,000 |            |           |           | 10,398,000 | 

See accompanying notes to the condensed financial statements.



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CHAD THERAPEUTICS, INC.
Condensed Statement of Shareholders Equity
For the nine months ended December 31, 2003
(Unaudited)

|                                                        |  |               |            |             |  |         |            |  |  |   |            |  
|------------------------------------------------------- |  | ------------- | ---------- | ----------- |  | ------- | ---------- |  |  | - | ---------- | -
|                                                        |  | Common Shares |            | Accumulated
|                                                        |  | Shares        |            | Amount      |  | Deficit
|                                                        |  |               |            |             |  |        
|Balance as of March 31, 2003                            |  |               | 10,076,000 |             |  | $       | 13,257,000 |  |  | $ | (3,157,000 | )
|Exercise of stock options                               |  |               | 15,000     |             |  |         | 22,000     |  |  |   |           |  
|Stock options granted as part of
technology acquisition |  |               |           |             |  |         | 23,000     |  |  |   |            |  
|Net earnings                                            |  |               |           |             |  |         |           |  |  |   | 792,000    |  
|                                                        |  |               |            |             |  |         |            |  |  |   |            |  
|Balance at December 31, 2003                            |  |               | 10,091,000 |             |  | $       | 13,302,000 |  |  | $ | (2,365,000 | )
|                                                        |  |               |            |             |  |         |            |  |  |   |            |  

See accompanying notes to consolidated financial statements.





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CHAD THERAPEUTICS, INC.
Condensed Statements of Cash Flows
For the nine months ended December 31, 2003 and 2002
(Unaudited)

|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |          |         |          |           |  
|------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------- | ----------------------------------------- | ------- | ----------------- | --------- | -------- | ------- | -------- | --------- | -
|                                      |                                                                                     |                                                         |                                             |                                           |         | Nine Months Ended
|                                      |                                                                                     |                                                         |                                             |                                           |         | December 31,     
|                                      |                                                                                     |                                                         |                                             |                                           |         |                  
|                                      |                                                                                     |                                                         |                                             |                                           |         | 2003              |           | 2002    
|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|Cash flows from operating activities: |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|                                      | Net earnings                                                                        |                                                         | $                                           | 792,000                                   |         |                   | $         | 408,000  |        
|                                      | Adjustments to reconcile net earnings to net cash
provided by operating activities: |                                                         |                                             |                                           |         |                   |           |          |        
|                                      |                                                                                     | Depreciation and amortization of property and
equipment |                                             |                                           | 349,000 |                   |           |          | 497,000 |         
|                                      |                                                                                     | Amortization of intangibles                             |                                             |                                           | 1,000   |                   |           |          | 83,000  |         
|                                      |                                                                                     | Changes in assets and liabilities:                      |                                             |                                           |         |                   |           |          |         |         
|                                      |                                                                                     |                                                         | Decrease (increase) in accounts receivable  |                                           |         | (487,000          | )         |          |         | (492,000 | )        
|                                      |                                                                                     |                                                         | Decrease (increase) in inventories          |                                           |         | (202,000          | )         |          |         | 106,000  |          
|                                      |                                                                                     |                                                         | Decrease (increase) income taxes refundable |                                           |         |                  |           |          |         | 995,000  |          
|                                      |                                                                                     |                                                         | Decrease (increase) in prepaid expenses     |                                           |         | 224,000           |           |          |         | (455,000 | )        
|                                      |                                                                                     |                                                         | Decrease (increase) in other assets         |                                           |         | (12,000           | )         |          |         | (15,000  | )        
|                                      |                                                                                     |                                                         | Increase (decrease) in accounts payable     |                                           |         | (388,000          | )         |          |         | 3,000    |          
|                                      |                                                                                     |                                                         | Increase (decrease) in accrued expenses     |                                           |         | (257,000          | )         |          |         | 35,000   |          
|                                      |                                                                                     |                                                         | Increase (decrease) in income taxes payable |                                           |         | 34,000            |           |          |         | 27,000   |          
|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|                                      |                                                                                     |                                                         |                                             | Net cash provided by operating activities |         |                   | 54,000    |          |         |          | 1,192,000 |  
|Cash flows from investing activities: |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|                                      | Additions to other assets                                                           |                                                         |                                             | (63,000                                   | )       |                   |           |          |        
|                                      | Capital expenditures                                                                |                                                         |                                             | (235,000                                  | )       |                   |           | (194,000 | )      
|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|                                      |                                                                                     |                                                         |                                             | Net cash used in investing activities     |         |                   | (298,000  | )        |         |          | (194,000  | )
|Cash flows from financing activities: |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|                                      | Exercise of stock options                                                           |                                                         |                                             | 22,000                                    |         |                   |           | 20,000   |        
|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|                                      |                                                                                     |                                                         |                                             | Net cash provided by financing activities |         |                   | 22,000    |          |         |          | 20,000    |  
|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|Net increase (decrease) in cash       |                                                                                     |                                                         | (222,000                                    | )                                         |         |                   | 1,018,000 |         
|Cash beginning of period              |                                                                                     |                                                         | 1,596,000                                   |                                           |         |                   | 520,000   |         
|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |         
|Cash end of period                    |                                                                                     | $                                                       | 1,374,000                                   |                                           |         | $                 | 1,538,000 |         
|                                      |                                                                                     |                                                         |                                             |                                           |         |                   |           |         

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.
December 31, 2003
(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 three and nine
month periods ended December 31, 2003, are not necessarily indicative of the
results expected for the year ended March 31, 2004. 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, 2003, Annual
Report and particularly to Note 1 which includes a summary of significant
accounting policies.
|  
|2. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | Inventories in 2003 are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                |  |             |           |          |  |   |           | 
|--------------- |  | ----------- | --------- | -------- |  | - | --------- | 
|                |  | December 31 |           | March 31
|                |  |             |           |         
|Finished goods  |  | $           | 949,000   |          |  | $ | 1,245,000 | 
|Work-in-process |  |             | 1,565,000 |          |  |   | 1,382,000 | 
|Raw materials   |  |             | 3,199,000 |          |  |   | 2,884,000 | 
|                |  |             |           |          |  |   |           | 
|                |  | $           | 5,713,000 |          |  | $ | 5,511,000 | 
|                |  |             |           |          |  |   |           | 





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CHAD THERAPEUTICS, INC.
December 31, 2003
(Unaudited)



|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 |            | Nine Months Ended
|                            |                                                        |                                            |            |                    |            |                  
|                            |                                                        |                                            |            | 2003               |            | 2002              |            | 2003       |            | 2002
|                            |                                                        |                                            |            |                    |            |                   |            |            |            |     
|Basic earnings per share:   |                                                        |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |           
|                            | Numerator-net earnings                                 |                                            | $          | 418,000            |            |                   | $          | 228,000    |            |      | $          | 792,000    |            |   | $          | 408,000    |           
|                            | Denominator-weighted average
common shares outstanding |                                            |            | 10,088,000         |            |                   |            | 10,073,000 |            |      |            | 10,080,000 |            |   |            | 10,070,000 |           
|                            |                                                        |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |           
|Basic earnings per share    |                                                        | $                                          | 0.04       |                    |            | $                 | 0.02       |            |            | $    | 0.08       |            |            | $ | 0.04       |           
|                            |                                                        |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |           
|Diluted earnings per share: |                                                        |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |           
|                            | Numerator-net earnings                                 |                                            | $          | 418,000            |            |                   | $          | 228,000    |            |      | $          | 792,000    |            |   | $          | 408,000    |           
|                            | Denominator:                                           |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |            |           
|                            |                                                        | Weighted average common shares
outstanding |            |                    | 10,088,000 |                   |            |            | 10,073,000 |      |            |            | 10,080,000 |   |            |            | 10,070,000 | 
|                            |                                                        | Diluted effect of common stock
options     |            |                    | 313,000    |                   |            |            | 291,000    |      |            |            | 251,000    |   |            |            | 328,000    | 
|                            |                                                        |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |           
|                            |                                                        |                                            | 10,401,000 |                    |            |                   | 10,364,000 |            |            |      | 10,331,000 |            |            |   | 10,398,000 |           
|                            |                                                        |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |           
|Diluted earnings per share  |                                                        | $                                          | 0.04       |                    |            | $                 | 0.02       |            |            | $    | 0.08       |            |            | $ | 0.04       |           
|                            |                                                        |                                            |            |                    |            |                   |            |            |            |      |            |            |            |   |            |           



|   |  | Options to purchase 395,000 shares of common stock at prices ranging from
$2.39 to $13.47 per share and 551,000 shares of common stock at prices
ranging from $2.75 to $13.47 were not included in the computation of diluted
earnings per share for the three and nine month periods ended December 31,
2003 and 2002, respectively, because their effect would have been
anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|4. |  | Income Tax Expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Income tax expense for the three and nine month periods ended December 31,
2003, relate primarily to state income taxes which are provided for at an
effective rate of 4.5%. The Company has California net operating loss
carryforwards of $2,785,000, 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, 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. The
company also has manufacturing tax credit carryforwards of $46,000 available
to offset future California taxable income.





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CHAD THERAPEUTICS, INC.
December 31, 2003
(Unaudited)



|5. |  | Geographic Information                                                                                               
|-- |  | ---------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company has one reportable operating segment. Geographic information
regarding the Companys sales is as follows:

|                    |  |                    |           |                   |  |      |           |      |  |   |            |  |  |   |            | 
|------------------- |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | ---------- |  |  | - | ---------- | 
|                    |  | Three Months Ended |           | Nine Months Ended
|                    |  | December 31,       |           | December 31,     
|                    |  |                    |           |                  
|                    |  | 2003               |           | 2002              |  | 2003 |           | 2002
|                    |  |                    |           |                   |  |      |           |     
|United States       |  | $                  | 4,977,000 |                   |  | $    | 4,775,000 |      |  | $ | 15,471,000 |  |  | $ | 14,172,000 | 
|Canada              |  |                    | 67,000    |                   |  |      | 70,000    |      |  |   | 213,000    |  |  |   | 175,000    | 
|Germany             |  |                    | 7,000     |                   |  |      | 21,000    |      |  |   | 52,000     |  |  |   | 39,000     | 
|Japan               |  |                    | 123,000   |                   |  |      | 49,000    |      |  |   | 178,000    |  |  |   | 166,000    | 
|All other countries |  |                    | 63,000    |                   |  |      | 65,000    |      |  |   | 276,000    |  |  |   | 290,000    | 
|                    |  |                    |           |                   |  |      |           |      |  |   |            |  |  |   |            | 
|                    |  | $                  | 5,237,000 |                   |  | $    | 4,980,000 |      |  | $ | 16,190,000 |  |  | $ | 14,842,000 | 
|                    |  |                    |           |                   |  |      |           |      |  |   |            |  |  |   |            | 



|   |  | All long-lived assets are located in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Sales of OXYMATIC® and CYPRESS OXYPneumatic® conservers systems accounted for
78% and 74% of the Companys sales for the nine month periods ended December
31, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                    
|  
|6. |  | Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. The Company has
also adopted the pro forma disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
which permits entities to provide pro forma net income and pro forma net
earnings per share disclosures as if the fair-value-based method defined in
SFAS 123 had been applied.





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CHAD THERAPEUTICS, INC.
December 31, 2003
(Unaudited)



| |  | The Company applies Accounting Principles Board Opinion No. 25 in accounting
for the Plan and no compensation expense has been recognized for its stock
options in the accompanying financial statements. The following table
illustrates the effect on net earnings and earnings per share if the Company
had applied the fair value recognition provision of FASB Statement No. 123,
Accounting for Stock Based Compensation, to stock-based employee
compensation:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                            |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | -------- | -
|                                                                                                                                            |  | Three Months Ended |         | Nine Months Ended
|                                                                                                                                            |  | December 31,       |         | December 31,     
|                                                                                                                                            |  |                    |         |                  
|                                                                                                                                            |  | 2003               |         | 2002              |  | 2003 |         | 2002
|                                                                                                                                            |  |                    |         |                   |  |      |         |     
|Net earnings, as reported                                                                                                                   |  | $                  | 418,000 |                   |  | $    | 228,000 |      |  | $ | 792,000 |   |  | $ | 408,000  |  
|Deduct: Total stock based employee
compensation expense determined under
fair value-based method for all awards, net
of related tax effects |  |                    | (18,000 | )                 |  |      | (36,000 | )    |  |   | (77,000 | ) |  |   | (110,000 | )
|                                                                                                                                            |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |          |  
|Pro forma net income (loss)                                                                                                                 |  | $                  | 400,000 |                   |  | $    | 192,000 |      |  | $ | 715,000 |   |  | $ | 298,000  |  
|Earnings per share:                                                                                                                         |  |                    |         |                   |  |      |         |      |  |   |         |   |  |   |          |  
|Basic  as reported                                                                                                                         |  | $                  | 0.04    |                   |  | $    | 0.02    |      |  | $ | 0.08    |   |  | $ | 0.02     |  
|Basic  pro forma                                                                                                                           |  |                    | 0.04    |                   |  |      | 0.02    |      |  |   | 0.07    |   |  |   | 0.03     |  
|Diluted  as reported                                                                                                                       |  |                    | 0.04    |                   |  |      | 0.02    |      |  |   | 0.08    |   |  |   | 0.02     |  
|Diluted  proforma                                                                                                                          |  | $                  | 0.04    |                   |  | $    | 0.02    |      |  | $ | 0.07    |   |  | $ | 0.03     |  





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##### Table of Contents






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

December 31, 2003

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 and continues to be significantly affected 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, have contributed to a more competitive
market for the Companys products, as devices that were less expensive but
which provided lower oxygen savings (or, in some cases, did not truly provide
ambulatory oxygen) have achieved some level of success.

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, oxygen conserving devices, such as the
Companys products, have also grown in popularity due to their ability to
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. Major national and
regional home medical equipment chains have continued to expand their
distribution networks through the acquisition of independent dealers in
strategic areas. Margins on sales to national chains are generally lower due
to quantity pricing and management anticipates continued downward pressure on
its average selling price. Four major national chains accounted for
approximately 49% and 52% of the Companys net sales, for the nine month
periods ended December 31, 2003 and 2002, respectively. One chain accounted
for 26% of sales in the nine month periods ended December 31, 2003 and 2002,
respectively and one other chain accounted for 15% and 13% of sales in the nine
month periods ended December 31, 2003 and 2002, respectively.

The Company believes that 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
adversely affected sales during the three years ending March 31, 2001. To
combat the erosion in sales of the oxygen conserver product line, the Company
developed and introduced 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





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

December 31, 2003

shipments beginning that month. The SEQUOIA OXYMATIC 300 series conservers
began shipping in December 2001, and the Company began shipment of 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 and reestablish the
Company as a leader in the conserver market.

In 1998, the Company introduced the TOTAL O2 system, which provides stationary
oxygen for patients at home, portable oxygen, including an oxygen conserving
device for ambulatory use, and a safe and efficient mechanism for filling
portable oxygen cylinders in the home. This provides home care dealers with a
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 from the Food and Drug
Administration to sell this product. 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 and now believes the success of this product will be dependent
on the healthcare communitys acceptance of this technology and willingness to
substitute a higher capital acquisition cost for lower operating costs. While
the Company will continue its efforts to promote this product, based on current
sales levels, the Company wrote off the unamortized license fees related to the
TOTAL O2 system in March 2003.

During the past two years, the Company has recovered substantial market share
in the conserver market and is using that platform to spearhead its growth
strategy for the future, which includes the following:



| |  | Development of additional oxygen conserver models, such as 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 an ongoing emphasis on
improving the performance of component suppliers; and                                                                                                                                                                                                                   
| 
| |  | An effort to expand the Companys product lines and improve existing
products through the investment in and development of new
technologies, such as proprietary sensor technology and control
software licensed in January of 2003. These new technologies will
provide the Company with an opportunity to expand its oxygen conserver
product lines and potentially enter the high-growth sleep disorder
market.

While the turnaround measures of the past two years have had a positive impact
and management believes the current growth strategy 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 respiratory care devices. For





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##### Table of Contents



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

December 31, 2003

information that may affect the outcome of forward-looking statements in this
Overview regarding the Companys business strategy and its introduction of new
products, see Outlook: Issues and Risks  New Products, Consolidation of Home
Care Industry, Competition, Rapid Technological Change, and Potential Changes
in the Administration of Health Care, beginning on page 16 of this Report.

Results of Operations

Three and nine month periods ended December 2003 compared to three and nine
month periods ended December 2002

Sales for the three month period ended December 31, 2003 increased by $257,000
(5.2%) compared to the three month period ended December 31, 2002. Sales for
the nine month period ended December 31, 2003 increased by $1,348,000 (9.1%)
compared to the nine month period ended December 31, 2002. The primary driver
of the Companys increase in sales has been the significant growth in sales of
its conservers, largely as a result of the introduction of the OXYMATIC 400
series conservers and CYPRESS OXYPneumatic conserver. Management believes that
the performance features of these conservers have enabled the Company to
recapture significant market share. Domestic unit sales of conservers for the
three months ended December 31, 2003, increased 14% and 21%, respectively,
over the prior year, while the increase in domestic revenues from conserver
sales was 8% and 14% for the three and nine month periods. This resulted from
price reductions, the impact of national chain contract pricing (see above),
and the generally lower pricing for pneumatic conservers in the marketplace.

Sales to foreign distributors represented 5% and 4% of total sales for the
three months ended December 31, 2003 and 2002, respectively and 4% of total
sales for the nine months ended December 31, 2003 and 2002. 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, with the exception of Canada, are denominated in
US dollars. Sales in Canada represent less than 2% of total sales.

Cost of sales as a percent of net sales decreased from 57.2% to 55.2% for the
three months ended December 31, 2003 as compared to the same period in the
prior year. Cost of sales decreased from 57.5% to 55.3% of net sales for the
nine months ended December 31, 2003 as compared to the same period in the prior
year. This was a result of increased sales volume and the change in the
product mix, as the TOTAL O2 system has a lower gross profit margin than
conservers.

Selling, general and administrative expenditures decreased from 33.8% to 30.3%
of net sales for the three months ended December 31, 2003, as compared to the
same period in the prior year. Selling, general and administrative expenses
decreased from 35.0% to 33.5% of net sales for the nine months ended December
31, 2003 as compared to the same period in the prior year. The Companys cost
reduction efforts over the past two years have helped align staffing and
operating expenses more closely with current sales expectations, but were
offset to some extent by commissions paid to the Companys field





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##### Table of Contents



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

December 31, 2003

sales force of manufacturers representatives. Research and development
expenses increased by $136,000 and $316,000 for the three and nine month
periods ended December 31, 2003 as compared to the same periods in the prior
year. Currently, management expects research and development expenditures to
total approximately $1,430,000 in the fiscal year ending March 31, 2004, on
projects to enhance and expand the Companys product line.

On July 31, 2002, a national chain accounting for less than 10% of sales in
2003 filed a Plan of Reorganization under Chapter 11 of the United States
Bankruptcy Code (the Plan). The Plan provided for full repayment to the
Company, and the Bankruptcy Court has approved the Plan. Payments to the
unsecured creditors commenced on July 1, 2003. No assurance can be given that
all of the payments will be made as proposed under the Plan. As of December
31, 2003, this chain was indebted to the Company for approximately $89,000.

At December 31, 2003, the Company had fully utilized its net operating loss
carrybacks and federal net operating loss carry forwards and had approximately
$2,785,000 in California net operating loss carryforwards. As a result of the
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 additional taxable income. In December 2002, 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. The Company has manufacturing tax credit carryforwards of $46,000
available to offset future California taxable income.

Financial Condition

At December 31, 2003, the Company had cash totaling $1,374,000 or 11.1% of
total assets, as compared to $1,596,000 (13.2% of total assets) at March 31,
2003. Net working capital increased from $8,224,000 at March 31, 2003 to
$9,078,000 at December 31, 2003. Net accounts receivable increased $487,000
during the nine month period ended December 31, 2003, 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 $202,000. 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. For the
nine month period ended December 31, 2002, cash flow from operations were
augmented by $995,000 in income tax refunds.





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

December 31, 2003

The Company depends upon its cash flow from operations to meet its capital
requirements. Management believes cash balances and funds derived from
operations should be adequate to meet the Companys near and long term cash
requirements given the recent recovery of market share of 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. The Company has no established lines of
credit or other arrangements in place to obtain working capital and no
assurance 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 $1,430,000.

The Company does not have any debt and is not subject to any covenants or
contractual restrictions limiting its operations. 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 of America 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
uncollectible are 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 the
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





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

December 31, 2003

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

The report contains forward-looking statements, which reflect the Companys
current views with respect to future events and financial performance. These
forward-loooking statements are subject to certain risks and uncertainties,
which may cause actual operating results to differ materially form 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, the SEQUOIA and CYPRESS
OXYPneumatic conservers, and the TOTAL O2 Delivery System; the Company is
currently developing additional new products. The success of the Companys
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 for new products. 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, the Companys ability to successfully promote 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 49% of the
Companys net sales during the period ended December 31, 2003. Future sales
may be increasingly dependent upon a





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##### Table of Contents



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

December 31, 2003

limited number of customers, which may reduce our average selling price due to
quantity pricing.

For information regarding the reorganization proceedings of one our customers,
please see the discussion in Results of Operations.

Competition

Chads success in the early 1990s has drawn 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 that 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 such bills have
been introduced in Congress, including various proposals for competitive
bidding, 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.

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. In November of 2003, Congress
enacted the Medicare Improvement and Modernization Act, which will cause changes
and reductions in home oxygen reimbursement over the next several years. These
changes in reimbursement will cause increased downward pressure on the average
selling price of the Companys products.





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

December 31, 2003

Protection of Intellectual Property Rights

The Company pursues a policy of
protecting its intellectual property 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 it 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 cots 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. From time to time, the Company has experienced
problems with the reliability of components produced by third party suppliers.
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.

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 October 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Live Assets, which
addresses financial accounting and reporting for the impairment of 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. During 2003, the Company wrote-





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

December 31, 2003

off the remaining unamortized balance of an intangible license fee asset in the
amount of $934,000 in accordance with Statement No. 144.

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 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.

In November 2002, the FASB issued Interpretation Number 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. It also clarifies that the guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for interim and annual periods after December 15, 2002. We adopted
FIN 45 effective January 1, 2003 and the adoption of FIN 45 did not have a
material impact on the Companys financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure requirements
apply to all companies for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of SFAS No. 148 did not have a material impact on the Companys
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 December 31, 2003 (the Evaluation
Date). Such evaluation was conducted under the supervision and with the
participation of the





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

December 31, 2003

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 control over financial reporting that occurred during the
Companys most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.




Part II




Item 6. Exhibits and Reports on Form 8-K

(a) 31.1 Certification pursuant to Section 302 of Sarbanes-Oxley for CEO
(b) 31.2 Certification pursuant to Section 302 of Sarbane-Oxley for CFO
(c) 32 Certification pursuant to 18 U.S.C Section 1350

Reports on Form 8-K:




Item 9. None





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##### Table of Contents






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 2/12/04 |  | /S/ Thomas E. Jones                             
|             |  |                                                 
|             |  | Thomas E. Jones                                 
|             |  | Chairman and Chief Executive Officer            
|             |  |                                                 
|Date 2/12/04 |  | /S/ Earl L. Yager                               
|             |  |                                                 
|             |  | Earl L. Yager                                   
|             |  | President, Chief Financial Officer and Secretary