##### 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, 2002

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                               
|(Address of principal executive offices)               (Zip Code)        

(818) 882-0883




(Registrants telephone number, including area code)





(Former Address)


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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

|              |  |  |            | 
|------------- |  |  | ---------- | 
|Common Shares |  |  | 10,076,000 | 





---

TABLE OF CONTENTS



|                                                                                      |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Condensed Balance Sheets                                                             
|Condensed Statements of Operations                                                   
|Condensed Statement of Shareholders Equity                                          
|Condensed Statements of Cash Flows                                                   
|Managements Discussion and Analysis of Financial Condition and Results of Operations
|SIGNATURES                                                                           
|Exhibit Index                                                                        
|EXHIBIT 99.1                                                                         



---



##### Table of Contents






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

|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |            |            |           |            | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------- | -------------------------- | ---------- | ------------ | ---------- | ---------- | ---------- | --------- | ---------- | 
|                                     |                                                                                                                          |                                            |                           |                            |            | December 31, |            | March 31, 
|                                     |                                                                                                                          |                                            |                           |                            |            | 2002         |            | 2002      
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|ASSETS                              
|Current Assets:                      |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     | Cash                                                                                                                     |                                            | $                         | 1,538,000                  |            |              | $          | 520,000    |           
|                                     | Accounts receivable, less allowance for
doubtful accounts of $107,000 at
December 31, 2002 and $76,000 at
March 31, 2002 |                                            |                           | 2,825,000                  |            |              |            | 2,333,000  |           
|                                     | Income taxes refundable                                                                                                  |                                            |                           |                           |            |              |            | 995,000    |           
|                                     | Inventories (Note 2)                                                                                                     |                                            |                           | 5,178,000                  |            |              |            | 5,284,000  |           
|                                     | Prepaid expenses                                                                                                         |                                            |                           | 770,000                    |            |              |            | 315,000    |           
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     |                                                                                                                          |                                            |                           | Total current assets       |            |              | 10,311,000 |            |            |           | 9,447,000  | 
|Property and equipment, at cost      |                                                                                                                          |                                            | 6,166,000                 |                            |            |              | 5,972,000  |           
|                                     | Less accumulated depreciation                                                                                            |                                            |                           | 4,817,000                  |            |              |            | 4,320,000  |           
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     |                                                                                                                          |                                            |                           | Net property and equipment |            |              | 1,349,000  |            |            |           | 1,652,000  | 
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|Other assets, net                    |                                                                                                                          |                                            | 1,156,000                 |                            |            |              | 1,224,000  |           
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     |                                                                                                                          |                                            |                           | Total assets               |            | $            | 12,816,000 |            |            | $         | 12,323,000 | 
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|LIABILITIES AND SHAREHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     | Accounts payable                                                                                                         |                                            | $                         | 780,000                    |            |              | $          | 777,000    |           
|                                     | Accrued expenses                                                                                                         |                                            |                           | 1,204,000                  |            |              |            | 1,169,000  |           
|                                     | Income taxes payable                                                                                                     |                                            |                           | 31,000                     |            |              |            | 4,000      |           
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     |                                                                                                                          |                                            | Total current liabilities |                            |            | 2,015,000    |            |            |            | 1,950,000 |           
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|Shareholders equity:                |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     | Common shares, $.01 par value, authorized
40,000,000 shares; 10,076,000 and 10,059,000
shares issued and outstanding     |                                            |                           | 13,117,000                 |            |              |            | 13,097,000 |           
|                                     | Accumulated deficit                                                                                                      |                                            |                           | (2,316,000                 | )          |              |            | (2,724,000 | )         
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     |                                                                                                                          | Total shareholders equity                 |                           |                            | 10,801,000 |              |            |            | 10,373,000 |          
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           
|                                     |                                                                                                                          | Total liabilities and shareholders equity |                           | $                          | 12,816,000 |              |            | $          | 12,323,000 |          
|                                     |                                                                                                                          |                                            |                           |                            |            |              |            |           

See accompanying notes to condensed financial statements.





---



##### Table of Contents






CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the three months ended December 31, 2002 and 2001
(Unaudited)

|                    |                                     |                              |           |           |                    |            |           |           |           |            | 
|------------------- | ----------------------------------- | ---------------------------- | --------- | --------- | ------------------ | ---------- | --------- | --------- | --------- | ---------- | 
|                    |                                     |                              |           |           | Three Months Ended
|                    |                                     |                              |           |           | December 31       
|                    |                                     |                              |           |           |                   
|                    |                                     |                              |           |           | 2002               |            | 2001     
|                    |                                     |                              |           |           |                    |            |          
|Net sales           |                                     | $                            | 4,931,000 |           |                    | $          | 4,669,000 |          
|Cost of sales       |                                     |                              | 2,790,000 |           |                    |            | 2,817,000 |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Gross profit                 |           |           | 2,141,000          |            |           |           | 1,852,000 |           
|Costs and expenses: |                                     |                              |           |           |                    |            |           |          
|                    | Selling, general and administrative |                              |           | 1,690,000 |                    |            |           | 1,582,000 |          
|                    | Research and development            |                              |           | 207,000   |                    |            |           | 200,000   |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Total costs and expenses     |           |           | 1,897,000          |            |           |           | 1,782,000 |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Operating income             |           |           | 244,000            |            |           |           | 70,000    |           
|                    | Other income  interest income, net |                              |           | 6,000     |                    |            |           | 12,000    |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Earnings before income taxes |           |           | 250,000            |            |           |           | 82,000    |           
|Income tax expense  |                                     |                              | 22,000    |           |                    |            | 1,000     |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Net earnings                 |           | $         | 228,000            |            |           | $         | 81,000    |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Basic earnings per share     |           | $         | .02                |            |           | $         | .01       |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Diluted earnings per share   |           | $         | .02                |            |           | $         | .01       |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Weighted shares outstanding: |           |           |                    |            |           |           |           |           
|                    |                                     |                              | Basic     |           |                    | 10,073,000 |           |           |           | 10,053,000 | 
|                    |                                     |                              | Diluted   |           |                    | 10,364,000 |           |           |           | 10,738,000 | 
|                    |                                     |                              |           |           |                    |            |           |          

See accompanying notes to condensed financial statements.





---



##### Table of Contents



CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the nine months ended December 31, 2002 and 2001
(Unaudited)

|                    |                                     |                              |                          |           |                   |            |            |           |         |            | 
|------------------- | ----------------------------------- | ---------------------------- | ------------------------ | --------- | ----------------- | ---------- | ---------- | --------- | ------- | ---------- | 
|                    |                                     |                              |                          |           | Nine Months Ended
|                    |                                     |                              |                          |           | December 31      
|                    |                                     |                              |                          |           |                  
|                    |                                     |                              |                          |           | 2002              |            | 2001      
|                    |                                     |                              |                          |           |                   |            |           
|Net sales           |                                     | $                            | 14,657,000               |           |                   | $          | 14,622,000 |          
|Cost of sales       |                                     |                              | 8,308,000                |           |                   |            | 9,172,000  |          
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     |                              | Gross profit             |           |                   | 6,349,000  |            |           |         | 5,450,000  | 
|Costs and expenses: |                                     |                              |                          |           |                   |            |            |          
|                    | Selling, general and administrative |                              |                          | 5,223,000 |                   |            |            | 4,723,000 |        
|                    | Research and development            |                              |                          | 695,000   |                   |            |            | 605,000   |        
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     |                              | Total costs and expenses |           |                   | 5,918,000  |            |           |         | 5,328,000  | 
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     |                              | Operating income         |           |                   | 431,000    |            |           |         | 122,000    | 
|                    | Other income  interest income, net |                              |                          | 15,000    |                   |            |            | 43,000    |        
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     | Earnings before income taxes |                          |           | 446,000           |            |            |           | 165,000 |           
|Income tax expense  |                                     |                              | 38,000                   |           |                   |            | 4,000      |          
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     | Net earnings                 |                          | $         | 408,000           |            |            | $         | 161,000 |           
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     | Basic earnings per share     |                          | $         | .04               |            |            | $         | .02     |           
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     | Diluted earnings per share   |                          | $         | .04               |            |            | $         | .02     |           
|                    |                                     |                              |                          |           |                   |            |            |          
|                    |                                     | Weighted shares outstanding: |                          |           |                   |            |            |           |         |           
|                    |                                     |                              | Basic                    |           |                   | 10,070,000 |            |           |         | 10,053,000 | 
|                    |                                     |                              | Diluted                  |           |                   | 10,398,000 |            |           |         | 10,473,000 | 
|                    |                                     |                              |                          |           |                   |            |            |          

See accompanying notes to condensed financial statements.





---



##### Table of Contents






CHAD THERAPEUTICS, INC.
Condensed Statement of Shareholders Equity
For the nine months ended December 31, 2002
(Unaudited)

|                             |  |               |            |             |  |         |            |  |  |   |            |  
|---------------------------- |  | ------------- | ---------- | ----------- |  | ------- | ---------- |  |  | - | ---------- | -
|                             |  | Common Shares |            | Accumulated
|                             |  | Shares        |            | Amount      |  | Deficit
|                             |  |               |            |             |  |        
|Balance at
March 31, 2002    |  |               | 10,059,000 |             |  | $       | 13,097,000 |  |  | $ | (2,724,000 | )
|Exercise of stock options    |  |               | 17,000     |             |  |         | 20,000     |  |  |   |           |  
|Net earnings                 |  |               |           |             |  |         |           |  |  |   | 408,000    |  
|                             |  |               |            |             |  |         |            |  |  |   |            |  
|Balance at
December 31, 2002 |  |               | 10,076,000 |             |  | $       | 13,117,000 |  |  | $ | (2,316,000 | )
|                             |  |               |            |             |  |         |            |  |  |   |            |  

See accompanying notes to condensed financial statements.





---



##### Table of Contents






CHAD THERAPEUTICS, INC.
Condensed Statements of Cash Flows
For the nine months ended December 31, 2002 and 2001
(Unaudited)

|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |         |          |   |            |  
|------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------- | ------------------------- | ------------------------------------------------------- | -------- | ----------------- | --------- | ------- | -------- | - | ---------- | -
|                                      |                                                                                               |                      |                           |                                                         |          | Nine Months Ended
|                                      |                                                                                               |                      |                           |                                                         |          | December 31      
|                                      |                                                                                               |                      |                           |                                                         |          |                  
|                                      |                                                                                               |                      |                           |                                                         |          | 2002              |           | 2001   
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        
|Cash flows from operating activities: |                                                                                               |                      |                           |                                                         |          |                   |           |        
|                                      | Net earnings                                                                                  |                      | $                         | 408,000                                                 |          |                   | $         | 161,000 |         
|                                      | Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities: |                      |                           |                                                         |          |                   |           |         |         
|                                      |                                                                                               |                      |                           | Depreciation and amortization of property and
equipment |          |                   | 497,000   |         |          |   | 622,000    |  
|                                      |                                                                                               |                      |                           | Amortization of intangibles                             |          |                   | 83,000    |         |          |   | 86,000     |  
|                                      |                                                                                               |                      |                           | Changes in assets and liabilities:                      |          |                   |           |         |          |   |            |  
|                                      |                                                                                               |                      |                           | Decrease (increase) in accounts receivable              |          |                   | (492,000  | )       |          |   | (726,000   | )
|                                      |                                                                                               |                      |                           | Decrease (increase) in inventories                      |          |                   | 106,000   |         |          |   | (1,153,000 | )
|                                      |                                                                                               |                      |                           | Decrease (increase) in income taxes refundable          |          |                   | 995,000   |         |          |   |           |  
|                                      |                                                                                               |                      |                           | Decrease (increase) in prepaid expenses                 |          |                   | (455,000  | )       |          |   | 187,000    |  
|                                      |                                                                                               |                      |                           | Decrease (increase) in other assets                     |          |                   | (15,000   | )       |          |   | (1,000     | )
|                                      |                                                                                               |                      |                           | Increase (decrease) in accounts payable                 |          |                   | 3,000     |         |          |   | 678,000    |  
|                                      |                                                                                               |                      |                           | Increase (decrease) in accrued expenses                 |          |                   | 35,000    |         |          |   | (31,000    | )
|                                      |                                                                                               |                      |                           | Increase (decrease) in income taxes payable             |          |                   | 27,000    |         |          |   |           |  
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        
|                                      |                                                                                               |                      |                           | Net cash provided by (used in)
operating activities     |          |                   | 1,192,000 |         |          |   | (177,000   | )
|Cash flows from investing activities: |                                                                                               |                      |                           |                                                         |          |                   |           |        
|                                      |                                                                                               | Capital expenditures |                           |                                                         | (194,000 | )                 |           |         | (312,000 | )
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        
|                                      |                                                                                               |                      |                           | Net cash used in investing activities                   |          |                   | (194,000  | )       |          |   | (312,000   | )
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        
|Cash flows from financing activities: |                                                                                               |                      |                           |                                                         |          |                   |           |        
|                                      |                                                                                               |                      | Exercise of stock options |                                                         |          | 20,000            |           |         |          |  |           
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        
|                                      |                                                                                               |                      |                           | Net cash provided by financing activities               |          |                   | 20,000    |         |          |   |           |  
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        
|Net Increase (decrease) in cash       |                                                                                               |                      | 1,018,000                 |                                                         |          |                   | (489,000  | )      
|Cash beginning of period              |                                                                                               |                      | 520,000                   |                                                         |          |                   | 1,059,000 |        
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        
|Cash end of period                    |                                                                                               | $                    | 1,538,000                 |                                                         |          | $                 | 570,000   |        
|                                      |                                                                                               |                      |                           |                                                         |          |                   |           |        

See accompanying notes to condensed financial statements.





---



##### Table of Contents



CHAD THERAPEUTICS, INC.
December 31, 2002
(Unaudited)



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

|                |  |             |           |          |  |  |           | 
|--------------- |  | ----------- | --------- | -------- |  |  | --------- | 
|                |  | December 31 |           | March 31
|                |  |             |           |         
|Finished goods  |  | $           | 932,000   |          |  |  | 935,000   | 
|Work-in-process |  |             | 1,472,000 |          |  |  | 987,000   | 
|Raw materials   |  |             | 2,774,000 |          |  |  | 3,362,000 | 
|                |  |             |           |          |  |  |           | 
|                |  | $           | 5,178,000 |          |  |  | 5,284,000 | 
|                |  |             |           |          |  |  |           | 



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

|                                                       |                             |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |         |            | 
|------------------------------------------------------ | --------------------------- | ------------------------------------------ | ---------- | ------------------ | ---------- | ----------------- | ---------- | ------ | ---------- | ---- | ---------- | ------- | ---------- | - | ---------- | ------- | ---------- | 
|                                                       |                             |                                            |            | Three Months Ended |            | Nine Months Ended
|                                                       |                             |                                            |            | December 31        |            | December 31      
|                                                       |                             |                                            |            |                    |            |                  
|                                                       |                             |                                            |            | 2002               |            | 2001              |            | 2002   |            | 2001
|                                                       |                             |                                            |            |                    |            |                   |            |        |            |     
|Basic earnings per share:                              |                             |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |        
|Numerator-net earnings                                 |                             | $                                          | 228,000    |                    |            | $                 | 81,000     |        |            | $    | 408,000    |         |            | $ | 161,000    |        
|Denominator-weighted average
common shares outstanding |                             |                                            | 10,073,000 |                    |            |                   | 10,053,000 |        |            |      | 10,070,000 |         |            |   | 10,053,000 |        
|                                                       |                             |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |        
|                                                       | Basic earnings per share    |                                            | $          | .02                |            |                   | $          | .01    |            |      | $          | .04     |            |   | $          | .02     |           
|                                                       |                             |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |        
|                                                       | Diluted earnings per share: |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |         |           
|                                                       | Numerator-net earnings      |                                            | $          | 228,000            |            |                   | $          | 81,000 |            |      | $          | 408,000 |            |   | $          | 161,000 |           
|                                                       | Denominator:                |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |         |           
|                                                       |                             | Weighted average common
shares outstanding |            |                    | 10,073,000 |                   |            |        | 10,053,000 |      |            |         | 10,070,000 |   |            |         | 10,053,000 | 
|                                                       |                             | Dilutive effect of common
stock options    |            |                    | 291,000    |                   |            |        | 685,000    |      |            |         | 328,000    |   |            |         | 420,000    | 
|                                                       |                             |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |        
|                                                       |                             |                                            | 10,364,000 |                    |            |                   | 10,738,000 |        |            |      | 10,398,000 |         |            |   | 10,473,000 |        
|                                                       |                             |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |        
|                                                       | Diluted earnings per share  |                                            | $          | .02                |            |                   | $          | .01    |            |      | $          | .04     |            |   | $          | .02     |           
|                                                       |                             |                                            |            |                    |            |                   |            |        |            |      |            |         |            |   |            |        





---



##### Table of Contents



CHAD THERAPEUTICS, INC.
December 31, 2002
(Unaudited)



|3. |  | Earnings Per Common Share (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Options to purchase 551,000 shares of common stock at prices ranging from
$2.75 to $13.47 per share and 447,000 shares of common stock at prices
ranging from $3.14 to $13.47 per share were not included in the computation
of diluted earnings per share for the three and nine month periods ended
December 31, 2002 and 2001, respectively, because their effect would have
been anti-dilutive.                                                                                                                                                                                                                                                                                                             
|  
|4. |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Income taxes for the nine month period ended December 31, 2002, relate
primarily to state income taxes which are provided for at an effective rate
of 8.5%. The Company has federal and California net operating loss
carryforwards of $423,000 and $2,640,000, respectively, against which a full
valuation allowance has been recorded. In September, 2002, the state of
California enacted legislation that suspends the utilization of net
operating loss carryforwards during tax years starting 2002 and 2003,
effective retroactively back to January 1, 2002. As a result, the Company
will be unable to use its California net operating loss carryforwards until
the tax year beginning April 1, 2004.
|  
|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      
|                    |  |                    |           |                  
|                    |  | 2002               |           | 2001              |  | 2002 |           | 2001
|                    |  |                    |           |                   |  |      |           |     
|United States       |  | $                  | 4,726,000 |                   |  | $    | 4,446,000 |      |  | $ | 13,987,000 |  |  | $ | 13,575,000 | 
|Canada              |  |                    | 70,000    |                   |  |      | 38,000    |      |  |   | 175,000    |  |  |   | 233,000    | 
|Germany             |  |                    | 21,000    |                   |  |      | 12,000    |      |  |   | 39,000     |  |  |   | 346,000    | 
|Japan               |  |                    | 49,000    |                   |  |      | 113,000   |      |  |   | 166,000    |  |  |   | 236,000    | 
|All other countries |  |                    | 65,000    |                   |  |      | 60,000    |      |  |   | 290,000    |  |  |   | 232,000    | 
|                    |  |                    |           |                   |  |      |           |      |  |   |            |  |  |   |            | 
|                    |  | $                  | 4,931,000 |                   |  | $    | 4,669,000 |      |  | $ | 14,657,000 |  |  | $ | 14,622,000 | 
|                    |  |                    |           |                   |  |      |           |      |  |   |            |  |  |   |            | 



| |  | All long-lived assets are located in the United States.                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Sales of OXYMATIC® conservers and OXYLITE® systems accounted for 75% and
60% of
the Companys sales for the nine-month periods ended December 31, 2002 and
2001, respectively.





---



##### Table of Contents






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

December 31, 2002

Overview

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

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

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



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

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





---



##### Table of Contents



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

December 31, 2002

Results of Operations

Sales for the three and nine month periods ended December 31, 2002 increased by
$262,000 (5.6%) and $35,000 (0.2%), respectively, as compared to the three and
nine month periods ended December 31, 2001. Sales for the three and nine month
periods ended December 31, 2001 increased by $1,912,000 (69.4%) and $5,766,000
(65.1%), respectively, from the comparable periods ended December 31, 2000.
During the last two years, the Company has experienced a significant increase
in sales of its conservers, primarily as a result of the introduction of the
OXYMATIC 400 series conservers. Domestic unit sales of conservers for the nine
months ended December 31, 2002 increased 43% over the comparable period from
the prior year; the increase in revenues from conserver sales for the period
was 26% due to price reductions and the impact of national chain contract
pricing (see below). In July 2002, the Company began sales of its first
pneumatic conserver; generally, pneumatic conservers have a lower average
selling price than electronic conservers. The continuing increase in conserver
sales was offset in 2002 by lower sales of the TOTAL O2 system, due in large
part to the loss of a significant customer which was acquired by another
company in October, 2001 (see below).

Sales to foreign distributors represented 7% and 5% of total sales for the nine
months ended December 31, 2002 and 2001, respectively. Currently, management
expects an increase in sales to foreign distributors during the upcoming twelve
months, however, quarter-to-quarter sales may fluctuate depending on the timing
of shipments. All foreign sales are denominated in US dollars, except Canada.

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

In addition, other changes in the health care delivery system, including the
increase in the acceptance and utilization of managed care, have stimulated a
significant consolidation among home oxygen dealers. As major national and
regional home medical equipment chains attempt to secure managed care
contracts and improve their market position, they have expanded their
distribution networks through the acquisition of independent dealers in
strategic areas. Four major national chains accounted for approximately 55%
and 34% of the Companys domestic sales for the nine month periods ended
December 31, 2002 and 2001, respectively. One chain accounted for 27% and 19%
of sales in the nine month periods ended December 31, 2002 and 2001,
respectively, and one other chain accounted for 14% of sales in the December
2002 nine month period. On July 31, 2002, a national chain accounting for less
than 10% of sales in 2002 filed a Plan of Reorganization under Chapter 11 of
the United States Bankruptcy Code (the Plan). While the initial Plan
proposes that the unsecured creditors be paid in full over a three year term
with interest, no assurance can be given that the Plan as filed will be
approved or that the payments will be made as proposed under the Plan. This
chain is currently indebted to the Company for approximately $245,000. In
addition, it is too early to determine what impact, if any, this reorganization
proceeding will have on future sales by the Company to this chain. Margins on
sales to national chains are generally lower due to quantity
pricing. In certain





---



##### Table of Contents



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

December 31, 2002

Results of Operations (contd)

instances, consolidation has resulted in reduced purchases as the former
independent provider complies with the chains purchasing policies. To
ensure continued awareness of the benefits of the Companys products
by chain head-quarters personnel, a proactive marketing and communication
program is in effect with all of the major national chains.

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

The TOTAL O2 system provides stationary oxygen for patients at home, portable
oxygen, including an oxygen conserving device for ambulation and a safe and
efficient mechanism for filling portable oxygen cylinders. This should provide
home care dealers with means to reduce their monthly cost of servicing patients
while at the same time providing a higher quality of service by maximizing
ambulatory capability. The Company received clearance in November 1997, to
sell this product from the Food and Drug Administration. Initial sales of the
TOTAL O2 system were adversely affected by several factors, including the
overall home oxygen market climate as well as start-up manufacturing and
related supplier quality issues. The Company has taken a number of steps to
resolve the manufacturing and supplier issues, however, further progress in
this regard will be required before the TOTAL O2 system can realize its full
market potential. In October 2001, a customer that was purchasing
significant numbers of TOTAL O2 systems was acquired by a national chain that
has discontinued those purchases, which has been a major factor in the decline
in TOTAL O2 system sales in the current year. No estimates can currently be
made regarding the level of success the Company may achieve with the TOTAL O2
system. The Company has approximately $971,000 in unamortized license fees
related to the TOTAL O2 system. This asset is subject to the review discussed
in Significant Accounting Policies  Intangible and Long-Lived Assets. In the
event that the carrying value of this asset was determined to be impaired, a
portion or all of the asset would be written off. While no assurances can be
given, management currently believes that with the steps being taken to resolve





---



##### Table of Contents



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

December 31, 2002

Results of Operations (contd)

the manufacturing and supplier issues discussed above, that cash flows from
future sales of the TOTAL O2 system should be sufficient to cover the
carrying amount of this asset. Management will continue to monitor TOTAL O2
sales to determine if the remaining value in the capitalized license fee will
be recoverable. For information that may affect the outcome of forward-looking
statements made in this paragraph about the TOTAL O2 systems, see Outlook:
Issues and Risks  New Products.

Cost of sales as a percent of net sales decreased from 60.3% to 56.6% and from
80.1% to 60.3% for the three-month periods ended December 31, 2002 and 2001 and
decreased from 62.7% to 56.7% and from 77.7% to 62.7% for the nine month
periods ended December 31, 2002 and 2001, respectively, as compared to the
prior years periods. Both periods were primarily affected by increased sales
volume while the periods ended December 31, 2002 were also affected by the
product mix as the TOTAL O2 system has a lower gross profit margin than
conservers.

Selling, general and administrative expenditures increased from $1,582,000 (34%
of sales) to $1,690,000 (34% of sales) and from $1,268,000 (46% of sales) to
$1,582,000 (34% of sales) for the three-month periods ended December 31, 2002
and 2001 and increased from $4,723,000 (32% of sales) to $5,223,000 (36% of
sales) and from $3,817,000 (43% of sales) to $4,723,000 (32% of sales) for the
nine-month periods ended December 31, 2002 and 2001, respectively. The
increases are primarily the result of variable selling expenses that fluctuate
directly with sales volume and $165,000 in proxy contest expenses incurred
during the nine month period ended December 31, 2002. The Companys cost
reduction efforts over the past two years should align staffing and operating
expenses more closely with current sales expectations, but will be offset to
some extent by commissions paid to the Companys field sales force of
manufacturers representatives. Research and development expenses increased by
$7,000 and $90,000 for the three and nine month periods ended December 31,
2002, as compared to the prior years periods. Currently, management expects
research and development expenditures to total approximately $1,000,000 in
the fiscal year ending March 31, 2003, on projects to enhance and
expand the Companys product line. Interest income decreased $6,000 and
$28,000 for the three and nine month periods ended December 31, 2002,
respectively, as compared to the prior years periods due to generally lower
overall balances than in the prior year and lower interest rates in the current
year.

At December 31, 2002, the Company had fully utilized its net operating loss
carrybacks and had approximately $423,000 and $2,640,000 in Federal and
California net operating loss carryforwards, respectively. As a result of
valuation allowances placed on the net operating loss carryforwards and
deferred tax assets, these net operating loss carryforwards and deferred tax
assets will be available to offset future income tax expense when and if
the Company generates taxable income. In the fourth quarter of 2002, the
Company recorded an income tax benefit of $995,000 that resulted from recently
enacted federal income tax regulations extending the carryback periods for
operating losses incurred in 2002 and 2001. In September, 2002, the state of
California enacted legislation that suspends the utilization of net operating
loss carryforwards during tax years starting 2002 and 2003 effective
retroactively back to January 1, 2002. As a result, the Company will be unable
to use its California net operating loss carryforwards until the tax year
beginning April 1, 2004.





---



##### Table of Contents



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

December 31, 2002

Financial Condition

At December 31, 2002, the Company had cash totaling $1,538,000 or 12% of total
assets, as compared to $520,000 (5% of total assets) at March 31, 2002.
Net working capital increased from $7,497,000 at March 31, 2002 to $8,296,000
at December 31, 2002. Cash provided by and used in operations amounted to
$1,192,000 and $177,000 for the nine months ended December
31, 2002 and 2001, respectively. In the nine month period in 2002, the Company
had net earnings of $408,000 and recovered $997,000 related to income tax
refunds. The income tax refund is not expected to recur in future periods. In
2001, the Company had net earnings of $161,000. Operating cash was increased
by depreciation and amortization expense of $708,000, but this was offset by an
increase in inventories in the amount of $1,153,000. Accounts receivable
increased $492,000 during the period ended December 31, 2002, due to the
increase in sales and specifically the increase in sales to national chain
accounts. 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 decreased $106,000. 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.

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

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

Significant Accounting Policies

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





---



##### Table of Contents



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

December 31, 2002

Significant Accounting Policies (contd)

accounting policies and estimates that are most important in the portrayal of
the Companys financial condition and results.

Allowance for doubtful accounts  the Company provides a reserve against
receivables for estimated losses that may result from our customers inability
to pay. The amount of the reserve is based on an analysis of known
uncollectible accounts, aged receivables, historical losses and
credit-worthiness. Amounts later determined and specifically identified to
be uncollectable are
charged or written off against this reserve. The likelihood of material losses
is dependent on general economic conditions and numerous factors that affect
individual accounts.

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

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

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

Outlook: Issues & Risks

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

Dependence Upon a Single Product Line

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

New Products

The Companys future growth in the near term will depend in significant part
upon its ability to successfully introduce new products. In recent
years, the Company has introduced the





---



##### Table of Contents



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

December 31, 2002

New Products (contd)

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 these products will depend upon the health care
communitys perception of such products capabilities, clinical efficacy and
benefit to patients as well as obtaining timely regulatory approval. In
addition, prospective sales will be impacted by the degree of acceptance
achieved among home oxygen dealers and patients requiring supplementary oxygen.
As with any product, the Companys ability to successfully promote the
OXYMATIC 400, Sequoia and CYPRESS OXYPneumatic series conservers, the TOTAL O2
Delivery System and other new products cannot be determined at this time.

Consolidation of Home Care Industry

The home health care industry is undergoing significant consolidation. As a
result, the market for the Companys products is increasingly influenced by
major national chains. Four major national chains accounted for 55% of the
Companys domestic sales during the nine-month period ended December 31, 2002.
For information regarding the reorganization proceedings of one of our
customers please see the discussion in Results of Operations. Future sales
may be increasingly dependent on a limited number of customers, which may have
an impact on margins due to quantity pricing.

Competition

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

Rapid Technological Change

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





---



##### Table of Contents



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

December 31, 2002

Potential Changes in Administration of Health Care

A number of bills proposing to regulate, control or alter the method of
financing health care costs have been discussed and certain of such bills have
been introduced in Congress, 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.
Congress has passed legislation, which has reduced Medicare spending. It
cannot yet be predicted how future changes in reimbursement levels will
affect the home oxygen industry and there can be no assurance that such changes
will not have an adverse effect on the Companys business.

Protection of Intellectual Property Rights

The Company pursues a policy of protecting its intellectual property changes in
reimbursement levels will affect the home oxygen industry and there can be
rights through a combination of patents, trademarks, trade secret laws and
confidentiality agreements. The Company considers the protection of its
proprietary rights and the patentability of its products to be significant to
the success of the Company. To the extent that the products to be marketed by
the Company do not receive patent protection, competitors may be able to
manufacture and market substantially similar products. Such competition or
claims that the Companys products infringe the patent rights of others could
have an adverse impact upon the Companys business.

Product Liability

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

Availability and Reliability of Third Party Component Products

The Company tests and packages its products in its own facility. Some of its
other manufacturing processes are conducted by other firms; the Company
expects to continue using outside firms for certain manufacturing processes for
the foreseeable future and is thus dependent on the reliability and quality of
parts supplied by these firms. 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.





---



##### Table of Contents



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

December 31, 2002

Evaluation of Intangible Assets

The Company has approximately $971,000 in unamortized license fees related to
the TOTAL O2 system. This asset is subject to the review discussed in
Significant Accounting Policies  Intangible and Long-Lived Assets. In the
event that the carrying value of this asset was determined to be impaired, a
portion or all of the asset would be written off.

Accounting Standards

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

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

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

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

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 a 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, which we have adopted for
our condensed consolidated financial statements included in this Form 10-Q
Report. The initial recognition and initial measurement requirements of FIN 45
Table of Contents

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

December 31, 2002

are effective prospectively for guarantees issued or modified after December
31, 2002. The adoption of FIN 45 is not expected to 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 is not expected to 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 a date within 90 days prior to the
filing of this quarterly report on Form 10-Q (the Evaluation Date). Such
evaluation was conducted under the supervision and
with the participation of the Companys Chief Executive Officer (CEO) and its
Chief Financial Officer (CFO). Based upon such evaluation, the Companys CEO
and CFO have concluded that, as of the Evaluation Date, the Companys
disclosure controls and procedures were effective. There have been no
significant changes in the Companys internal controls or other factors that
could significantly affect these controls subsequent to the date of their most
recent evaluation.

PART II

Item 6. Exhibits and Reports on Form 8-K



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





---



##### 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 02/06/03 |  | /S/ Thomas E. Jones

 Thomas E. Jones
Chairman and Chief Executive Officer       
|              |  |                                                                                  
|Date 02/06/03 |  | /S/ Earl L. Yager

Earl L. Yager
President, Chief Financial Officer and
Secretary





---



##### Table of Contents



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



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



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



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



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

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

|                       |  |                                                                   
|---------------------- |  | ------------------------------------------------------------------
|Date: February 6, 2003 |  | /S/Thomas E. Jones                                                
|                       |  |                                                                   
|                       |  | Thomas E. Jones
Chief Executive Officer of CHAD Therapeutics, Inc.





---



##### Table of Contents



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



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



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



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



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

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

|                       |  |                                                                 
|---------------------- |  | ----------------------------------------------------------------
|Date: February 6, 2003 |  | /S/Earl L. Yager                                                
|                       |  |                                                                 
|                       |  | Earl L. Yager
Chief Financial Officer of CHAD Therapeutics, Inc.





---



##### Table of Contents






Exhibit Index

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