##### 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: June 30, 2002

Commission file number: 0-11363

CHAD THERAPEUTICS, INC.

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(Exact name of registrant as specified in its charter)




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



21622 Plummer Street, Chatsworth, CA 91311

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(Address of principal executive offices) (Zip Code)


(818) 882-0883

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(Registrants telephone number, including area code)








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(Former Address)


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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Shares                      10,068,000





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TABLE OF CONTENTS



|           |  |                                             |  |  |  |  |  | 
|---------- |  | ------------------------------------------- |  |  |  |  |  | 
|           |  | Condensed Balance Sheets                   
|           |  | Condensed Statements of Operations         
|           |  | Condensed Statement of Shareholders Equity
|           |  | Condensed Statements of Cash Flows         
|SIGNATURES



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##### Table of Contents






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

|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |           |            | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------------------------------------------ | ---------- | --------- | ---------- | --------- | ---------- | --------- | ---------- | 
|                                     |                                                                                                                      |                               |                                            |            | June 30,  |            | March 31,
|                                     |                                                                                                                      |                               |                                            |            | 2002      |            | 2002     
|                                     |                                                                                                                      |                               |                                            |            |           |            |          
|                                    
|ASSETS                              
|                                    
|Current Assets:                      |                                                                                                                      |                               |                                            |            |           |            |           |           
|                                     | Cash                                                                                                                 |                               | $                                          | 549,000    |           |            | $         | 520,000    |          
|                                     | Accounts receivable, less allowance for
doubtful accounts of $89,000 at
June 30, 2002 and $76,000 at
March 31, 2002  |                               |                                            | 2,619,000  |           |            |           | 2,333,000  |          
|                                     | Income taxes refundable                                                                                              |                               |                                            | 995,000    |           |            |           | 995,000    |          
|                                     | Inventories (Note 2)                                                                                                 |                               |                                            | 5,509,000  |           |            |           | 5,284,000  |          
|                                     | Prepaid expenses                                                                                                     |                               |                                            | 323,000    |           |            |           | 315,000    |          
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|                                     |                                                                                                                      |                               | Total current assets                       |            |           | 9,995,000  |           |            |           | 9,447,000  | 
|Property and equipment, at cost      |                                                                                                                      |                               | 6,037,000                                  |            |           |            | 5,972,000 |           
|                                     |                                                                                                                      | Less accumulated depreciation |                                            |            | 4,489,000 |            |           |            | 4,320,000 |           
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|                                     |                                                                                                                      |                               | Net property and equipment                 |            |           | 1,548,000  |           |            |           | 1,652,000  | 
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|Other assets, net                    |                                                                                                                      |                               | 1,184,000                                  |            |           |            | 1,224,000 |           
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|                                     |                                                                                                                      |                               | Total assets                               |            | $         | 12,727,000 |           |            | $         | 12,323,000 | 
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY
|                                    
|Current liabilities:                 |                                                                                                                      |                               |                                            |            |           |            |           |           
|                                     | Accounts payable                                                                                                     |                               | $                                          | 815,000    |           |            | $         | 777,000    |          
|                                     | Accrued expenses                                                                                                     |                               |                                            | 1,345,000  |           |            |           | 1,169,000  |          
|                                     | Income taxes payable                                                                                                 |                               |                                            | 7,000      |           |            |           | 4,000      |          
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|                                     |                                                                                                                      |                               | Total current liabilities                  |            |           | 2,167,000  |           |            |           | 1,950,000  | 
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|Shareholders equity:                |                                                                                                                      |                               |                                            |            |           |            |           |           
|                                     | Common shares, $.01 par value, authorized
40,000,000 shares; 10,068,000 and 10,059,000
shares issued and outstanding |                               |                                            | 13,106,000 |           |            |           | 13,097,000 |          
|                                     | Accumulated deficit                                                                                                  |                               |                                            | (2,546,000 | )         |            |           | (2,724,000 | )        
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|                                     |                                                                                                                      |                               | Total shareholders equity                 |            |           | 10,560,000 |           |            |           | 10,373,000 | 
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          
|                                     |                                                                                                                      |                               | Total liabilities and shareholders equity |            | $         | 12,727,000 |           |            | $         | 12,323,000 | 
|                                     |                                                                                                                      |                               |                                            |            |           |            |           |            |          

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.
Condensed Statements of Operations
For the three months ended June 30, 2002 and 2001
(Unaudited)

|                    |                                     |                              |           |           |                    |            |           |           |           |            | 
|------------------- | ----------------------------------- | ---------------------------- | --------- | --------- | ------------------ | ---------- | --------- | --------- | --------- | ---------- | 
|                    |                                     |                              |           |           | Three Months Ended
|                    |                                     |                              |           |           | June 30           
|                    |                                     |                              |           |           |                   
|                    |                                     |                              |           |           | 2002               |            | 2001     
|                    |                                     |                              |           |           |                    |            |          
|Net sales           |                                     | $                            | 4,963,000 |           |                    | $          | 4,847,000 |          
|Cost of sales       |                                     |                              | 2,812,000 |           |                    |            | 3,121,000 |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Gross profit                 |           |           | 2,151,000          |            |           |           | 1,726,000 |           
|Costs and expenses: |                                     |                              |           |           |                    |            |           |          
|                    | Selling, general and administrative |                              |           | 1,711,000 |                    |            |           | 1,521,000 |          
|                    | Research and development            |                              |           | 263,000   |                    |            |           | 205,000   |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Total costs and expenses     |           |           | 1,974,000          |            |           |           | 1,726,000 |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Operating income             |           |           | 177,000            |            |           |           |          |           
|                    | Other income  interest income, net |                              |           | 4,000     |                    |            |           | 14,000    |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Earnings before income taxes |           |           | 181,000            |            |           |           | 14,000    |           
|Income tax expense  |                                     |                              | 3,000     |           |                    |            | 1,000     |          
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Net earnings                 |           | $         | 178,000            |            |           | $         | 13,000    |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Basic earnings per share     |           | $         | .02                |            |           | $         | .00       |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Diluted earnings per share   |           | $         | .02                |            |           | $         | .00       |           
|                    |                                     |                              |           |           |                    |            |           |          
|                    |                                     | Weighted shares outstanding: |           |           |                    |            |           |           |           |           
|                    |                                     |                              | Basic     |           |                    | 10,068,000 |           |           |           | 10,052,000 | 
|                    |                                     |                              | Diluted   |           |                    | 10,429,000 |           |           |           | 10,270,000 | 
|                    |                                     |                              |           |           |                    |            |           |          

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.
Condensed Statement of Shareholders Equity
For the three months ended June 30, 2002
(Unaudited)

|                          |  |               |            |             |  |         |            |  |  |   |            |  
|------------------------- |  | ------------- | ---------- | ----------- |  | ------- | ---------- |  |  | - | ---------- | -
|                          |  | Common Shares |            | Accumulated
|                          |  | Shares        |            | Amount      |  | Deficit
|                          |  |               |            |             |  |        
|Balance at
March 31, 2002 |  |               | 10,059,000 |             |  | $       | 13,097,000 |  |  | $ | (2,724,000 | )
|Exercise of stock options |  |               | 9,000      |             |  |         | 9,000      |  |  |   |           |  
|Net earnings              |  |               |           |             |  |         |           |  |  |   | 178,000    |  
|                          |  |               |            |             |  |         |            |  |  |   |            |  
|Balance at
June 30, 2002  |  |               | 10,068,000 |             |  | $       | 13,106,000 |  |  | $ | (2,546,000 | )
|                          |  |               |            |             |  |         |            |  |  |   |            |  

See accompanying notes to condensed financial statements.





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CHAD THERAPEUTICS, INC.
Condensed Statements of Cash Flows
For the three months ended June 30, 2002 and 2001
(Unaudited)

|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |          |         |  
|------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------- | --------------------------------------------------- | ------- | ------------------ | --------- | ------- | ------- | -------- | ------- | -
|                                      |                                                                                     |                                                         |                                             |                                                     |         | Three Months Ended
|                                      |                                                                                     |                                                         |                                             |                                                     |         | June 30           
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                   
|                                      |                                                                                     |                                                         |                                             |                                                     |         | 2002               |           | 2001   
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |        
|Cash flows from operating activities: |                                                                                     |                                                         |                                             |                                                     |         |                    |           |        
|                                      | Net earnings                                                                        |                                                         | $                                           | 178,000                                             |         |                    | $         | 13,000  |        
|                                      | Adjustments to reconcile net earnings to
net cash provided by operating activities: |                                                         |                                             |                                                     |         |                    |           |         |        
|                                      |                                                                                     | Depreciation and amortization of property and
equipment |                                             |                                                     | 169,000 |                    |           |         | 204,000 |         
|                                      |                                                                                     | Amortization of intangibles                             |                                             |                                                     | 27,000  |                    |           |         | 30,000  |         
|                                      |                                                                                     | Changes in assets and liabilities:                      |                                             |                                                     |         |                    |           |         |         |         
|                                      |                                                                                     |                                                         | Decrease (increase) in accounts receivable  |                                                     |         | (286,000           | )         |         |         | (859,000 | )      
|                                      |                                                                                     |                                                         | Decrease (increase) in inventories          |                                                     |         | (225,000           | )         |         |         | 427,000  |        
|                                      |                                                                                     |                                                         | Decrease (increase) in prepaid expenses     |                                                     |         | (8,000             | )         |         |         | 34,000   |        
|                                      |                                                                                     |                                                         | Decrease (increase) in other assets         |                                                     |         | 13,000             |           |         |         | 26,000   |        
|                                      |                                                                                     |                                                         | Increase (decrease) in accounts payable     |                                                     |         | 38,000             |           |         |         | 593,000  |        
|                                      |                                                                                     |                                                         | Increase (decrease) in accrued expenses     |                                                     |         | 176,000            |           |         |         | 175,000  |        
|                                      |                                                                                     |                                                         | Increase (decrease) in income taxes payable |                                                     |         | 3,000              |           |         |         | (3,000   | )      
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |         
|                                      |                                                                                     |                                                         |                                             | Net cash provided by (used in)
operating activities |         |                    | 85,000    |         |         |          | 640,000 |  
|Cash flows from investing activities: |                                                                                     |                                                         |                                             |                                                     |         |                    |           |        
|                                      | Capital expenditures                                                                |                                                         |                                             | (65,000                                             | )       |                    |           | (76,000 | )      
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |         
|                                      |                                                                                     |                                                         |                                             | Net cash used in investing activities               |         |                    | (65,000   | )       |         |          | (76,000 | )
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |         
|Cash flows from financing activities: |                                                                                     |                                                         |                                             |                                                     |         |                    |           |        
|                                      | Exercise of stock options                                                           |                                                         |                                             | 9,000                                               |         |                    |           |        |        
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |         
|                                      |                                                                                     |                                                         |                                             | Net cash provided by financing activities           |         |                    | 9,000     |         |         |          |        |  
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |         
|Net increase (decrease) in cash       |                                                                                     |                                                         | 29,000                                      |                                                     |         |                    | 564,000   |        
|Cash beginning of period              |                                                                                     |                                                         | 520,000                                     |                                                     |         |                    | 1,059,000 |        
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |         
|Cash end of period                    |                                                                                     | $                                                       | 549,000                                     |                                                     |         | $                  | 1,623,000 |        
|                                      |                                                                                     |                                                         |                                             |                                                     |         |                    |           |         |         |         

See accompanying notes to condensed financial statements.





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

1. Interim Reporting

Chad Therapeutics, Inc. (the Company) is in the business of developing,
producing and marketing respiratory care devices designed to improve the
efficiency of oxygen delivery systems for home health care and hospital
treatment of patients suffering from pulmonary diseases.

In the opinion of management, all adjustments necessary, which are of a
normal and recurring nature, for a fair presentation of the results for the
interim periods presented have been made. The results for the three-month
period ended June 30, 2002, are not necessarily indicative of the results
expected for the year ended March 31, 2003. The interim statements are
condensed and do not include some of the information necessary for a more
complete understanding of the financial data. Accordingly, your attention
is directed to the footnote disclosures found in the March 31, 2002, Annual
Report and particularly to Note 1 which includes a summary of significant
accounting policies.

2. Inventories

Inventories in 2002, are summarized as follows:

|                |  |         |           |          |  |  |           | 
|--------------- |  | ------- | --------- | -------- |  |  | --------- | 
|                |  | June 30 |           | March 31
|                |  |         |           |         
|Finished goods  |  | $       | 1,117,000 |          |  |  | 935,000   | 
|Work-in-process |  |         | 1,413,000 |          |  |  | 987,000   | 
|Raw materials   |  |         | 2,979,000 |          |  |  | 3,362,000 | 
|                |  |         |           |          |  |  |           | 
|                |  | $       | 5,509,000 |          |  |  | 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
|                                                       |  |   | June 30           
|                                                       |  |   |                   
|                                                       |  |   | 2002               |  | 2001
|                                                       |  |   |                    |  |     
|Basic earnings per share:                              |  |   |                    |  |      |   |            | 
|Numerator-net earnings                                 |  | $ | 178,000            |  |      | $ | 13,000     | 
|Denominator-weighted average
common shares outstanding |  |   | 10,068,000         |  |      |   | 10,052,000 | 
|                                                       |  |   |                    |  |      |   |            | 
|Basic earnings per share                               |  | $ | .02                |  |      | $ | .00        | 
|                                                       |  |   |                    |  |      |   |            | 





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

3. Earnings Per Common Share (contd)

Diluted
earnings per share:

|                           |                                            |   |            |            |  |   |            |            | 
|-------------------------- | ------------------------------------------ | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                          
|Numerator-net earnings     |                                            | $ | 178,000    |            |  | $ | 13,000     |           
|Denominator:               |                                            |   |            |            |  |   |            |           
|                           | Weighted average common
shares outstanding |   |            | 10,068,000 |  |   |            | 10,052,000 | 
|                           | Dilutive effect of common
stock options    |   |            | 361,000    |  |   |            | 218,000    | 
|                           |                                            |   |            |            |  |   |            |           
|                           |                                            |   | 10,429,000 |            |  |   | 10,270,000 |           
|                           |                                            |   |            |            |  |   |            |           
|Diluted earnings per share |                                            | $ | .02        |            |  | $ | .00        |           
|                           |                                            |   |            |            |  |   |            |           

Options to purchase 466,000 shares of common stock at prices ranging from
$3.35 to $13.47 per share and 483,000 shares of common stock at prices
ranging from $1.83 to $13.47 per share were not included in the computation
of diluted earnings per share for the three month periods ended June 30,
2002 and 2001, respectively, because their effect would have been
anti-dilutive.

4. Income Taxes

Income taxes for the period ended June 30, 2002, relate to minimum state
income taxes due for the period. The Company has federal and California net
operating loss carryforwards of $680,000 and $2,647,000, respectively,
against which a full valuation allowance has been recorded.

5. Geographic Information

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

|                    |  |   |                    |  |      |   |           |  | 
|------------------- |  | - | ------------------ |  | ---- | - | --------- |  | 
|                    |  |   | Three Months Ended
|                    |  |   | June 30           
|                    |  |   |                   
|                    |  |   | 2002               |  | 2001
|                    |  |   |                    |  |     
|United States       |  | $ | 4,732,000          |  |      | $ | 4,296,000 | 
|Germany             |  |   | 13,000             |  |      |   | 309,000   | 
|Japan               |  |   | 51,000             |  |      |   | 71,000    | 
|All other countries |  |   | 167,000            |  |      |   | 171,000   | 
|                    |  |   |                    |  |      |   |           | 
|                    |  | $ | 4,963,000          |  |      | $ | 4,847,000 | 
|                    |  |   |                    |  |      |   |           | 

All long-lived assets are located in the United States.

Sales of OXYMATIC® conservers and OXYLITE® systems accounted for 73% and
53% of the Companys sales for the three-month
periods ended June 30, 2002 and 2001, respectively.





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

June 30, 2002

Overview

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

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

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



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

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





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

June 30, 2002

Results of Operations

Sales for the three months ended June 30, 2002 and 2001, increased $116,000
(2.4%) and $1,882,000 (63.5%), respectively, as compared to the prior year
periods. The increase in sales in 2002 and 2001 is primarily a result of sales
of the new OXYMATIC 400 series conservers. Domestic unit sales of conservers
for the three months ended June 30, 2002, increased 56% as compared to a dollar
increase of 43% due to price reductions and the impact of national chain
contract pricing (see below). The increase in conserver sales in 2002 was
offset, in part, by lower sales of the TOTAL O2 system (see below).

Sales to foreign distributors represented 5% and 11% of total sales for the
three months ended June 30, 2002 and 2001, respectively. Currently, management
expects an increase in sales to foreign distributors during the upcoming twelve
months, however, quarter-to-quarter sales may fluctuate depending on the timing
of shipments. All foreign sales are denominated in US dollars, except Canada.

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

In addition, other changes in the health care delivery system, including the
increase in the acceptance and utilization of managed care, have stimulated a
significant consolidation among home oxygen dealers. As major national and
regional home medical equipment chains attempt to secure managed care contracts
and improve their market position, they have expanded their distribution
networks through the acquisition of independent dealers in strategic areas.
Four major national chains accounted for approximately 52% and 34% of the
Companys domestic sales for the three-month periods ended June 30, 2002 and
2001, respectively. One chain accounted for 25% and 17% of sales in 2002 and
2001, respectively, and one other chain accounted for 14% of sales in 2002. On
July 31, 2002, a national chain accounting for less than 10% of sales in 2002
filed a Plan of Reorganization under Chapter 11 of the United States Bankruptcy
Code (the Plan). While the initial Plan proposes that the unsecured
creditors be paid in full over a three year term with interest, no assurance
can be given that the Plan as filed will be approved or that the payments will
be made as proposed under the Plan. This chain is currently indebted to the
Company for approximately $260,000. In addition, it is too early to determine
what impact, if any, this reorganization proceeding will have on future sales
by the Company to this chain. Margins on sales to national chains are
generally lower due to quantity pricing. In certain instances, consolidation
has resulted in reduced purchases as the former independent provider
complies with the chains purchasing policies. To ensure continued
awareness of the benefits of the Companys products by chain head-





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##### Table of Contents



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

June 30, 2002

Results of Operations (contd)

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.

Management also believes that, based on its experience in the home oxygen
industry, future revenues may be positively affected by sales of the TOTAL O2
Delivery System. The TOTAL O2 system provides stationary oxygen for patients
at home, portable oxygen, including an oxygen conserving device for ambulation
and a safe and efficient mechanism for filling portable oxygen cylinders. This
should provide home care dealers with 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. No estimates can currently be made
regarding the level of success the Company may achieve





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

June 30, 2002

Results of Operations (Contd)

with the TOTAL O2 system. 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 64.4% to 56.7% and from
76.7% to 64.4% for the three-month periods ended June 30, 2002 and 2001,
respectively, as compared to the prior years periods. Both periods were
primarily affected by increased
sales volume while 2002 was also affected by the product mix as the TOTAL O2
system has a lower gross profit margin than conservers.

Selling, general and administrative expenditures increased from $1,521,000 (31%
of sales) to $1,711,000 (34% of sales) and from $1,281,000 (43% of sales) to
$1,521,000 (31% of sales) for the three-month periods ended June 30, 2002 and
2001, respectively. The increases are primarily the result of variable selling
expenses that fluctuate directly with sales volume. The Companys cost
reduction efforts over the past two years, including reductions in personnel,
should align staffing and operating expenses more closely with current sales
expectations, but will be offset to some extent by commissions paid to the
Companys field sales force of manufacturers representatives. Research and
development expenses increased by $58,000 and $64,000 for the three-month
periods ended June 30, 2002 and 2001, as compared to the prior years periods.
Currently, management expects research and development expenditures to total
approximately $1,000,000 in the fiscal year ended March 31, 2003, on projects
to enhance and expand the Companys product line. Interest income decreased
$10,000 for the period ended June 30, 2002, as compared to the prior year due
to generally lower cash balances than in the prior year and lower interest
rates in the current year.

At June 30, 2002, the Company had fully utilized its net operating loss
carrybacks and had approximately $680,000 and $2,647,000 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.

Financial Condition

At June 30, 2002, the Company had cash totaling $549,000 or 4% of total assets,
as compared to $520,000 (5% of total assets) at March 31, 2002. Net
working capital increased from $7,497,000 at March 31, 2002 to $7,828,000 at
June 30, 2002. Accounts





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

June 30, 2002

Financial Condition (Contd)

receivable increased $286,000 during the period ended June 30, 2002, due to the
increase in sales. For information regarding the reorganization proceedings of
one of our customers please see the discussion in Results of Operations.
Future increases or decreases in accounts receivable will generally coincide
with sales volume fluctuations and the timing of shipments to foreign
customers. During the same period, inventories increased $225,000. This
increase relates primarily to purchase of raw materials to keep up with
increasing sales demand. The Company attempts to maintain sufficient
inventories to meet its customer needs as orders are received. Thus, future
inventory and related accounts payable levels will be impacted by the ability
of the Company to maintain its safety stock levels. If safety stock levels
drop below target amounts, then inventories in subsequent periods will increase
more rapidly as inventory balances are replenished. Currently, inventory
balances are generally near safety stock levels.

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

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

Significant Accounting Policies

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





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

June 30, 2002

Significant Accounting Policies (Contd)

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

Inventories  the Company provides a reserve against inventories for excess and
slow moving items. The amount of the reserve is based on an analysis of
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.





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

June 30, 2002

New Products

The Companys future growth in the near term will depend in significant part
upon its ability to successfully introduce new products. In recent years, the
Company has introduced the OXYMATIC 400 series, Sequoia and CYPRESS
OXYPneumatic conservers, the TOTAL O2 Delivery System and the Company is
currently developing additional new products. The success of these products
will depend upon the health care communitys perception of such products
capabilities, clinical efficacy and benefit to patients as well as
obtaining timely regulatory approval. In addition, prospective sales will be
impacted by the degree of acceptance achieved among home oxygen dealers and
patients requiring supplementary oxygen. As with any product, 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 52% of the
Companys domestic sales during the three-month period ended June 30, 2002.
For information regarding the reorganization proceedings of one of our
customers please see the discussion in Results of Operations. Future sales
may be increasingly dependent on a limited number of customers, which may have
an impact on margins due to quantity pricing.

Competition

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

Rapid Technological Change

The health care industry is characterized by rapid technological change. The
Companys products may become obsolete as a result of new developments. The
Companys ability to remain competitive will depend to a large extent upon
its ability to anticipate and stay





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

June 30, 2002

Rapid Technological Change (Contd)

abreast of new technological developments related to oxygen therapy. The
Company has limited internal research and development capabilities.
Historically, the Company has contracted with outside parties to develop new
products. Some of the Companys competitors have substantially greater funds
and facilities to pursue research and development of new products and
technologies for oxygen therapy.

Potential Changes in Administration of Health Care

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

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 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.





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

June 30, 2002

Availability and Reliability of Third Party Component Products

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

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.

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.





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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.





| | CHAD THERAPEUTICS, INC.
               (Registrant)
| | ---------------------------------------------------





|     |  |         |  |                                                                             
|---- |  | ------- |  | ----------------------------------------------------------------------------
|Date |  | 8/07/02 |  | /S/  Thomas E. Jones                                                        
|     |  |         |  | Thomas E. Jones
Chief Executive Officer                                     
|    
|    
|Date |  | 8/07/02 |  | /S/  Earl L. Yager                                                          
|     |  |         |  | Earl L. Yager
Chief Operating Officer,
Chief Financial Officer and
Secretary