<PAGE>   1
                                    FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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


     For Quarter Ended: December 31, 1997

     Commission file number:  0-11363


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

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

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

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


              ----------------------------------------------------
                                (Former Address)


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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

                    Common Shares           9,958,070


<PAGE>   2
                             CHAD THERAPEUTICS, INC.
                                 Balance Sheets
                      December 31, 1997 and March 31, 1997


                                     ASSETS


<TABLE>
<CAPTION>
                                                      December 31,         March 31,
                                                         1997                1997
                                                      ------------        ------------
                                                      (Unaudited)
<S>                                                   <C>                 <C>         
Current assets:
   Cash                                               $  2,414,000        $  2,289,000
   Accounts receivable, less allowance for
     doubtful accounts of $114,000 at
     December 31, 1997, and $107,000 at
     March 31, 1997                                      1,646,000           2,329,000
   Inventories (Note 2)                                  6,616,000           6,063,000
   Income taxes refundable                                 169,000             527,000
   Prepaid expenses                                        520,000             172,000
   Deferred income taxes                                   356,000             356,000
                                                      ------------        ------------

     Total current assets                               11,721,000          11,736,000


Property and equipment, at cost                          4,932,000           3,844,000
   Less accumulated depreciation                         1,119,000             717,000
                                                      ------------        ------------

     Net property and equipment                          3,813,000           3,127,000
                                                      ------------        ------------

Notes receivable                                           124,000                --
                                                      ------------        ------------

Other assets, net                                        1,323,000             998,000
                                                      ------------        ------------

     Total assets                                     $ 16,981,000        $ 15,861,000
                                                      ============        ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                   $    559,000        $    344,000
   Accrued expenses                                        581,000             407,000
                                                      ------------        ------------

     Total current liabilities                           1,140,000             751,000
                                                      ------------        ------------

Shareholders' equity:
 Common shares, $.01 par value, authorized
  40,000,000 shares; 9,958,000 and 9,951,000
  shares issued and outstanding                         12,868,000          12,834,000
 Retained earnings                                       3,115,000           2,308,000
                                                      ------------        ------------
                                                        15,983,000          15,142,000
 Less treasury shares at cost, 21,000 and
  3,000 shares                                            (142,000)            (32,000)
                                                      ------------        ------------

     Net shareholders' equity                           15,841,000          15,110,000
                                                      ------------        ------------

     Total liabilities and shareholders' equity       $ 16,981,000        $ 15,861,000
                                                      ============        ============
</TABLE>


See accompanying notes to financial statements.


<PAGE>   3
                             CHAD THERAPEUTICS, INC.
                             Statements of Earnings
              For the nine months ended December 31, 1997 and 1996
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                         Nine Months Ended
                                                   -----------------------------
                                                      1997              1996
                                                   -----------       -----------
<S>                                                <C>               <C>        
Net sales                                          $13,052,000       $21,084,000
Cost of sales                                        6,529,000         9,073,000
                                                   -----------       -----------

        Gross profit                                 6,523,000        12,011,000

Costs and expenses:
   Selling, general and administrative               4,804,000         4,183,000
   Research and development                            499,000           697,000
                                                   -----------       -----------

        Total costs and expenses                     5,303,000         4,880,000
                                                   -----------       -----------

        Operating income                             1,220,000         7,131,000

   Other income:
        Interest income                                112,000            89,000
        Other                                           17,000              --
                                                   -----------       -----------

        Total other income                             129,000            89,000
                                                   -----------       -----------

        Earnings before income taxes                 1,349,000         7,220,000

Income taxes                                           542,000         2,887,000
                                                   -----------       -----------

        Net earnings                               $   807,000       $ 4,333,000
                                                   ===========       ===========


           Basic earnings per share (Note 3)       $       .08       $       .44
                                                   ===========       ===========


        Diluted earnings per share                 $       .08       $       .42
                                                   ===========       ===========
</TABLE>


See accompanying notes to financial statements.


<PAGE>   4
                             CHAD THERAPEUTICS, INC.
                             Statements of Earnings
              For the three months ended December 31, 1997 and 1996
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                  ------------------------------
                                                     1997               1996
                                                  -----------        -----------
<S>                                               <C>                <C>        
Net sales                                         $ 3,234,000        $ 5,955,000
Cost of sales                                       1,910,000          2,794,000
                                                  -----------        -----------

        Gross profit                                1,324,000          3,161,000

Costs and expenses:
   Selling, general and administrative              1,686,000          1,075,000
   Research and development                           176,000            284,000
                                                  -----------        -----------

        Total costs and expenses                    1,862,000          1,359,000
                                                  -----------        -----------

        Operating income (loss)                      (538,000)         1,802,000

   Other income:
        Interest income                                43,000             27,000
        Other                                          17,000               --
                                                  -----------        -----------

        Total other income                             60,000             27,000
                                                  -----------        -----------

        Earnings (loss) before income taxes          (478,000)         1,829,000

Income taxes (benefit)                               (192,000)           730,000
                                                  -----------        -----------

        Net earnings (loss)                       $  (286,000)       $ 1,099,000
                                                  ===========        ===========

        Basic earnings (loss) per
            share (Note 3)                        $      (.03)       $       .11
                                                  ===========        ===========


        Diluted earnings (loss) per share         $      (.03)       $       .11
                                                  ===========        ===========
</TABLE>


See accompanying notes to financial statements.


<PAGE>   5
                             CHAD THERAPEUTICS, INC.
                        Statement of Shareholders' Equity
                   For the nine months ended December 31, 1997
                                   (Unaudited)


<TABLE>
<CAPTION>
                                            Common Shares              
                                   -------------------------------          Retained           Treasury
                                      Shares             Amount             Earnings            Shares
                                   ------------       ------------        ------------       ------------
<S>                                <C>                <C>                 <C>                <C>          
Balance at
 March 31, 1997                       9,951,000       $ 12,834,000        $  2,308,000       $    (32,000)

Common shares repurchased                    --                 --                  --           (253,000)

Common shares issued for
 purchases under employee
 benefit plan                                --             (2,000)                 --            143,000

Compensation expense related
 to option grants                            --              5,000                  --                 --

Exercise of stock options                 7,000             31,000                  --                 --

Net earnings                                 --                 --             807,000                 --
                                   ------------       ------------        ------------       ------------

Balance at
 December 31, 1997                    9,958,000       $ 12,868,000        $  3,115,000       $   (142,000)
                                   ============       ============        ============       ============
</TABLE>


See accompanying notes to financial statements.


<PAGE>   6
                             CHAD THERAPEUTICS, INC.
                            Statements of Cash Flows
              For the nine months ended December 31, 1997 and 1996
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                    Nine Months Ended
                                                              ------------------------------
                                                                 1997               1996
                                                              -----------        -----------
<S>                                                           <C>                <C>        
Cash flows from operating activities:
   Net earnings                                               $   807,000        $ 4,333,000
   Adjustments to reconcile net earnings to
     net cash used in operating activities:
       Depreciation and amortization                              402,000            133,000
       Compensation expense related to option grants                5,000                 --
       Changes in assets and liabilities:
         Decrease (increase) in accounts receivable               683,000           (157,000)
         Decrease (increase) in inventories                      (553,000)        (2,039,000)
            Decrease (increase) in income taxes
                refundable                                        358,000           (418,000)
         Decrease (increase) in prepaid expenses                 (348,000)          (149,000)
         Decrease (increase) in other assets                     (325,000)          (642,000)
         Increase (decrease) in accounts payable                  215,000            320,000
         Increase (decrease) in accrued expenses                  174,000            294,000
            Increase (decrease) in income taxes payable                --           (180,000)
                                                              -----------        -----------

               Net cash provided by
               operating activities                             1,418,000          1,495,000
                                                              -----------        -----------

Cash flows from investing activities:
   Increase in marketable securities                                   --             28,000
   Capital expenditures                                        (1,088,000)        (2,458,000)
                                                              -----------        -----------

               Net cash (used in) investing
               activities                                      (1,088,000)        (2,430,000)
                                                              -----------        -----------

Cash flows from financing activities:
   Exercise of stock options                                       31,000            206,000
   Common shares repurchased                                     (253,000)           (32,000)
   Common shares issued                                           141,000             88,000
   Notes receivable issued                                       (130,000)                --
   Collections on notes receivable                                  6,000                 --
                                                              -----------        -----------

               Net cash provided by (used in)
               financing activities                              (205,000)           262,000
                                                              -----------        -----------


Net increase (decrease) in cash                                   125,000           (673,000)

Cash beginning of period                                        2,289,000          1,809,000
                                                              -----------        -----------

Cash end of period                                            $ 2,414,000        $ 1,136,000
                                                              ===========        ===========
</TABLE>


See accompanying notes to financial statements.


<PAGE>   7
                             CHAD THERAPEUTICS, INC.
                                December 31, 1997
                                   (Unaudited)

1.  Interim Reporting

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

In the opinion of management, all adjustments necessary, which are of a normal
and recurring nature, to a fair statement of the results for the interim periods
presented have been made. The interim statements are condensed and do not
include some of the information necessary for a more complete understanding of
the financial data. Accordingly, your attention is directed to the footnote
disclosures found on pages 14, 15, 16 and 17 of the March 31, 1997, Annual
Report and particularly to Note 1 which includes a summary of significant
accounting policies.

2.  Inventories

Inventories at December 31, 1997, are summarized as follows:


<TABLE>
<S>                   <C>       
Finished goods        $1,206,000
Work-in-Process          852,000
Raw materials          4,558,000
                       ---------
                      $6,616,000
                      ==========
</TABLE>


3.  Net Earnings Per Common Share

Following is a reconciliation of the numerators and denominators used in the
calculation of basic and diluted net earnings (loss) per common share:


<TABLE>
<CAPTION>
                                             Nine Months Ended                   Three Months Ended
                                                 December 31                         December 31
                                      -------------------------------       --------------------------------
                                          1997               1996               1997                1996
                                      ------------       ------------       ------------        ------------
<S>                                   <C>                <C>                <C>                 <C>         
Basic net earnings per share:

Numerator - net earnings (loss)       $    807,000       $  4,333,000       $   (286,000)       $  1,099,000

Denominator - common shares
   outstanding                           9,952,000          9,731,000          9,955,000           9,935,000
                                      ------------       ------------       ------------        ------------

Basic net earnings (loss)
   per share                          $        .08       $        .44       $       (.03)       $        .11
                                      ============       ============       ============        ============

Diluted net earnings per share:

Numerator - net earnings (loss)       $    807,000       $  4,333,000         $ (286,000)         $1,099,000

Denominator:
   Common shares outstanding             9,952,000          9,731,000          9,955,000           9,935,000
   Common stock options                    277,000            662,000                 --             466,000
                                      ------------       ------------       ------------        ------------

                                        10,229,000         10,393,000          9,955,000          10,401,000
                                      ------------       ------------       ------------        ------------
Diluted net earnings (loss)
   per share                          $        .08       $        .42       $       (.03)       $        .11
                                      ============       ============       ============        ============
</TABLE>


Options to purchase 231,000 shares of common stock at prices ranging from
$11.125 to $13.471 per share were not included in the computation of diluted
earnings per share because the option price was greater than the average market
price of the common shares.


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

                                December 31, 1997

Results of Operations

Sales for the three and nine months ended December 31, 1997, de creased
$2,721,000 and $8,032,000 or 45.7% and 38.1%, respectively, from the prior
year's periods. There were no price increases during the periods presented.
While there have been limited price reductions, the decrease in sales relates
primarily to decreases in domestic unit sales of OXYMATIC conservers and OXYLITE
complete portable oxygen systems which are being affected by the current
marketing environment for home oxygen therapy discussed below.

Sales to foreign distributors represented 11% and 10% of total sales for the
nine month periods ended December 31, 1997 and 1996, respectively. Currently,
management expects a small increase in sales to foreign distributors during the
upcoming fiscal year and quarter to quarter sales will fluctuate depending on
the timing of shipments. In addition, all foreign sales are transacted in
dollars, thus quarter to quarter unit sales could be affected by foreign
currency fluctuations.

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

In addition, other changes in the health care delivery system including the
increase in the acceptance and utilization of managed care - have stimulated a
significant consolidation among home oxygen dealers. As major national and
regional home medical equipment chains attempt to secure managed care contracts
and improve their market position, they have expanded their distribution
networks through the acquisition of independent dealers in strategic areas.
Three major national chains presently account for approximately 25% of the
Company's domestic sales. Margins on these sales may be somewhat lower due to
quantity pricing. The Company's products, which allow homecare dealers to
provide cost efficient home oxygen therapy, are ideally suited for use in a
managed care environment and as a tool for dealers to increase revenues and
profits. To ensure continued awareness of the benefits of the Company's products
by chain headquarters personnel, a proactive marketing and communi cation
program is in effect with all of the major national chains.

The Company believes that its revenues at the end of fiscal 1997 and during the
nine months ended December 31, 1997, were affected by several factors. During
the nine months ended December 31, 1997, sales to national chain accounts
decreased as programs to convert patients to more acceptable ambulatory systems
in the previous year's quarter did not recur. In addition, sales to national
chain accounts as well as independent dealers have also been impacted by


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

                                December 31, 1997

Results of Operations (continued)

increased competitive factors and uncertainties regarding the size of potential
cuts in Medicare home oxygen reimbursement which were being discussed as part of
the Federal budget process. This process has now been finalized and a 25% cut in
home oxygen reimbursement went into effect January, 1998. The effects of managed
care and concerns over the severity of reimbursement cuts has, in many cases,
resulted in the provision of systems to patients that do not provide truly
ambulatory oxygen. Management believes these factors, including uncertainties as
to how home care providers will respond to the 25% cut, will continue to
adversely affect the Company's revenues from sales of oxygen conserving devices
for the foreseeable future.

Management also believes future revenues may be positively affected by sales of
a new product, the TOTAL O2(TM) Delivery System. The TOTAL O2 system provides
stationary oxygen for patients at home, portable oxygen including an oxygen
conserving device for ambulation and a safe and efficient mechanism for filling
portable oxygen cylinders. This should provide home care dealers with a means to
deal with the reimbursement cuts discussed above by reducing their monthly cost
of servicing patients while at the same time providing a higher quality of
service through maximum ambulatory capability. The Company received clearance in
November to sell the new product from the Food and Drug Administration. To date
the Company has received orders for over 600 TOTAL O2 systems, including
approximately 200 systems for beta testing, and began shipping systems in late
January. The sales potential for the new system is significant as the average
selling price is anticipated to be approximately four times that of the OXYMATIC
and OXYLITE systems. No estimate can currently be made regarding the level of
success the Company may achieve with the TOTAL O2 system.

Cost of sales as a percent of net sales increased from 46.9% to 59.1% and from
43.0% to 50.0%, respectively, for the three and nine months ended December 31,
1997, as compared to the prior year's periods. The current periods have been
affected by higher fixed overhead costs associated with the Company's move to
new facilities in October, 1996, and decreased sales volume. In addition, the
periods ended December 31, 1997, have been affected by start-up costs associated
with preparations to manufacture the TOTAL O2 system. Management believes the
cost per unit should remain at or near current levels in future periods.

Selling, general and administrative expenditures increased from $1,075,000 to
$1,686,000 and from $4,183,000 to $4,804,000 for the three and nine months ended
December 31, 1996 and 1997, respec tively. This represents an increase as a
percentage of net sales from 18% to 52% and from 19.8% to 36.8%, respectively,
due to the decrease in sales volume and costs associated with preparing to bring
the Company's new TOTAL O2 system product to market. Research and development
expenses decreased by $198,000 for the nine months ended December 31, 1997, as
compared to the prior year's period. Currently, management expects research and
development costs to total approximately $850,000 in the fiscal year ended March
31,


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

                                December 31, 1997

Results of Operations (continued)

1998, on projects to enhance and expand the Company's product line. Research and
development expenses totaled $910,000 for the year ended March 31, 1997.

The Company had fully utilized its net operating loss carryforwards for Federal
income tax purposes and other tax credit carryforwards. Future years will
therefore be fully taxed and management estimates that the combined Federal and
California income tax rates will be approximately 40%, as compared to 40% in
1997 and 39.1% in 1996.

Financial Condition

At December 31, 1997, the Company had cash totaling $2,414,000 or 14% of total
assets, as compared to $2,289,000 (14%) at March 31, 1997. Net working capital
decreased from $10,985,000 at March 31, 1997, to $10,581,000 at December 31,
1997. Accounts receivable decreased $683,000 during the period ended December
31, 1997. 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 $553,000. This increase
relates primarily to raw materials purchased for the manufacture of the new
TOTAL O2 product line. The Company attempts to maintain sufficient inventories
to meet its customer needs as orders are received. Thus, future inventory and
related accounts payable levels will be impacted by the ability of the Company
to maintain its safety stock levels. If safety stock levels drop below target
amounts, then inventories in subsequent periods will increase more rapidly as
inventory balances are replenished.

Management believes funds derived from operations should be adequate to meet the
Company's present cash requirements. However, should the Company achieve rapid
market penetration with the new TOTAL O2 product line it may need additional
funds on a short term basis. While the Company does not have any established
external sources of funds management believes such funds would be available to
the Company. The Company expects capital expenditures during the next twelve
months to be approximately $750,000. On June 30, 1994, the Company announced
that the Board of Directors had authorized stock repurchases of its common
shares in privately negotiated transac tions for a minimum of 10,000 shares.
While the Company made no stock repurchases during the nine month period ended
December 31, 1997, the Company may make additional stock repurchases pursuant to
the Board of Directors authorization in the future. In addition, the Board has
authorized the Company to purchase shares of the Company's common stock in open
market transactions. During the nine months ended December 31, 1997, the Company
purchased approximately 35,000 shares at a cost of $253,000, however, the number
of shares which may be purchased under these programs in the future can not be
predicted at this time. The Company does not provide post employment retirement
benefits.


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

                                December 31, 1997

Newly Issued Accounting Standards

The Financial Accounting Standards Board issued Statement No. 128, "Earnings Per
Share" ("FAS 128"), in February 1997. FAS 128 is effective for both interim and
annual periods ending after December 15, 1997. The Company adopted FAS 128 in
the third quarter of 1998. FAS 128 requires the presentation of "Basic" earnings
per share which represents income available to common shareholders divided by
the weighted average number of common shares outstanding for the period. A dual
presentation of "Diluted" earnings per share is also required. The adoption of
FAS 128 did not have a material impact on the Company's financial position or
results of operations.

The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"), in June 1997. FAS 130 establishes standards
for reporting and display of comprehensive income and its components in
financial statements. FAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. The Company will adopt FAS 130 in the first
quarter of the fiscal year ending March 31, 1999. Management believes that the
adoption of FAS 130 will not have a material impact on the Company's financial
position or results of operations.

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

Outlook:  Issues & Risks

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


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

                                December 31, 1997

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.

The Company's future growth in the near term will depend in significant part
upon the commercial success of the TOTAL O2 Delivery System. The success of this
new product will depend upon the health care community's perception of the
systems capabilities, clinical efficacy and benefit to patients. In addition,
prospective sales will be impacted by the degree of acceptance it achieves among
home oxygen dealers and patients requiring supplementary oxygen. As with the
introduction of any new product, the Company's ability to successfully promote
the TOTAL O2 Delivery System cannot be assessed at this time.

Consolidation of Home Care Industry

The home health care industry is undergoing significant consolida tion. As a
result, the market for the Company's products is increasingly influenced by
major national chains. Three major national chains presently account for 25% of
the Company's domestic sales. Future sales may be increasingly dependent on a
limited number of customers which may have an impact on margins due to quantity
pricing.

Competition

Chad's success over the past several years has drawn new competition to vie for
a share of the home oxygen market. These new competitors include both small and
very large companies. 1998, on projects to enhance and expand the Company's
product line. 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 price products which do not
provide oxygen conserving capabilities comparable to the Company's products and
no assurance can be given that increased competition in the home oxygen market
will not continue to have an adverse affect on the Company's operations.

Rapid Technological Change

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


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

                                December 31, 1997

Potential Changes in Administration of Health Care

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

Federal law has altered the payment rates available to providers of Medicare
services in various ways during the last several years. Congress has passed
legislation which would reduce Medicare spending. It cannot be predicted how
changes in reimbursement levels will affect the home oxygen industry and there
can be no assurance that such changes will not have an adverse effect on the
Company's business.

Patents and Trademarks

The Company pursues a policy of obtaining patents for appropriate inventions
related to products marketed or manufactured by the Company. The Company
considers the patentability of its products to be significant to the success of
the Company. To the extent that the products marketed by the Company do not
receive patent protec tion, competitors may be able to manufacture and market
substan tially similar products. Such competition could have an adverse impact
upon the Company's business.

Products Liability

The nature of the Company's business subjects it to potential legal actions
asserting that the Company is liable for damages for product liability claims.
Although the Company maintains products liability insurance in an amount which
it believes to be customary in the industry, there is no assurance that this
insurance will be 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 of Third Party Component Products

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


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

                                December 31, 1997

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 reported earnings and financial position.

Additional Risk Factors

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


<PAGE>   15
                                   SIGNATURES

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


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



     Date     2/12/98           /S/ Charles R. Adams
                                -----------------------
                                Charles R. Adams
                                Chief Executive Officer


     Date     2/12/98           /S/ Earl L. Yager
                                -----------------------
                                Earl L. Yager
                                Senior Vice President, Chief
                                Financial Officer and Secretary